Terror Tragedy Turmoil The Insurance Industry Responds

Terror, Tragedy & Turmoil The Insurance Industry Responds CPCU I-Day 2002 Scottsdale, AZ November 20, 2002 Robert P. Hartwig, Ph. D. , CPCU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 346 -5520 Fax: (212) 732 -1916 bobh@iii. org www. iii. org

Insurance Industry’s Axis of Evil Terrorism Toxic Mold? Trial Lawyers Tycoons

Terror, Tragedy & Turmoil: Insurers’ Axis of Evil • Terror Ø ‘Traditional’ Terrorism and repercussions of 9/11 Ø Economic Terrorism = Trial Lawyers • Tragedy Ø Corporate Governance Ø Civil Justice System Run Amok Ø Lies & Misinformation Spread by Industry Critics • Turmoil Ø Ø Ø Mold Credit Investments Profitability Pricing Underwriting

PROFITABILITY

Highlights: Property/Casualty First-Half 2002 ($ Millions) 2002 2001 Change Net Written Prem. 182, 434 162, 855 +12. 0% Loss & LAE 134, 336 129, 301 +3. 9% Net UW Gain (Loss) (11, 285) (18, 781) -39. 9% Net Inv. Income 17, 831 18, 749 -4. 9% Net Income (a. t. ) 4, 639 2, 789 +66. 3 Surplus* Combined Ratio *Comparison with year-end 2001; 282, 871 289, 649 105. 0 111. 1 -2. 3% -6. 1 pts.

P/C Net Income After Taxes 1991 -2002 ($ Millions) 2001 was the first year ever with a full year net loss 2002 First Half ROE = 3. 3% *I. I. I. estimate based on first half 2002 data. Sources: A. M. Best, ISO, Insurance Information Institute.

ROE: Financial Services Industry Segments, 1987– 2001 Source: Insurance Information Institute; Fortune

ROE vs. Cost of Capital: US Non-Life 1991 – 2002* US P/C insurers have missed their cost of capital by an average 6. 7 points since 1991 Source: The Geneva Association, Ins. Information Inst. 9. 5. pts 14. 6 pts There is an enormous gap between the industry’s cost of capital and its rate of return

2000 Return on Equity: Southwest States PP Auto 2000 Source: NAIC, Insurance Information Institute

2000 Return on Equity: Southwest States HO 2000 Source: NAIC, Insurance Information Institute

Impact of Recession on P/C Premiums and Profitability (1970 -2001) *GAAP return on equity, adjusted for inflation; Bank data 1952 -2001; Div. Fin. 1987 -2001 Source: Insurance Information Institute

UNDERWRITING PERFORMANCE

Growth in Net Premiums Written (All P/C Lines) 2000: 5. 1% 2001: 8. 1% 2002: 12. 0(est. ) The underwriting cycle went AWOL in the 1990 s. It’s Back! *Estimate based on first half 2002 results. Source: A. M. Best, Insurance Information Institute

P/C Industry Combined Ratio 2001 = 115. 7 Combined Ratios 2002 E = 105. 0* 1970 s: 100. 3 1980 s: 109. 2 1990 s: 107. 7 2000 s: 110. 4 *Based on first half 2002 results Sources: A. M. Best; III

Combined Ratio: Reinsurance vs. P/C Industry 2001’s combined ratio was the worst-ever for reinsurers *First Half 2002 figures. Source: A. M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

$ Billions Underwriting Gain (Loss) 1975 -2002* P-C insurers paid $53 billion more in claims & expenses than they collected in premiums in 2001 *Annualized estimate based on first half 2002 data. Source: A. M. Best, Insurance Information Institute

World’s Most Dangerous Lines of Insurance (Combined Ratio + 1 Std. Deviation) 407. 3 Source: Insurance Information Institute, calculated from A. M. Best combined ratio data.

12% After Tax ROE Requires Underwriting Profit Accident Year Combined Ratio P: S 90. 0% 92. 5 % 95. 0 % 97. 5 % 100. 0 % 102. 5 % 105. 0 % 107. 5 % 110. 0 % 112. 5 % 100 % 13. 0 % 11. 5 % 10. 1 % 8. 6 % 7. 1 % 5. 6 % 4. 1 % 2. 6 % 1. 1 % -0. 4 % 110 % 14. 0 % 12. 4 % 10. 7 % 9. 1 % 7. 5 % 5. 8 % 4. 2 % 2. . 5 % 0. 9 % -0. 7 % 120 % 15. 0 % 13. 2 % 11. 4 % 9. 6 % 7. 8 % 6. 1 % 4. 3 % 2. 5 % 0. 7 % -1. 1 % 130 % 16. 0% 14. 0 % 12. 1 % 10. 2 % 8. 2 % 6. 3 % 4. 4 % 2. . 4 % 0. 5 % -1. 5 % 140 % 16. 9 % 14. 9 % 12. 8 % 10. 7 % 8. 6 % 6. 5 % 4. 4 % 2. 4 % 0. 3 % -1. 8 % 150 % 17. 9 % 15. 7 % 13. 5 % 11. 2 % 9. 0 % 6. 8 % 4. 5 % 2. 3 % 0. 1 % -2. 2 % 160 % 18. 9 % 16. 5 % 14. 1 % 11. 8 % 9. 4 % 7. 0 % 4. 6 % 2. 2 % -0. 2 % -2. 5 % 170 % 19. 9 % 17. 3 % 14. 8 % 12. 3 % 9. 8 % 7. 2 % 4. 7 % 2. 2 % -0. 4 % -2. 9 % 180 % 20. 9 % 18. 2 % 15. 5 % 12. 8 % 10. 1 % 7. 5 % 4. 8 % 2. 1 % -0. 6 % -3. 3 % 190 % 21. 8 % 19. 0 % 16. 2 % 13. 3 % 10. 5 % 7. 7 % 4. 9 % 2. 0 % -0. 8 % -3. 6 % 200 % 22. 8 % 19. 8 % 16. 9 % 13. 9 % 10. 9 % 7. 9 % 4. 9 % 2. 0 % -1. 0 % -4. 0 % 225 % 25. 3 % 21. 9 % 18. 6 % 15. 2 % 11. 9 % 8. 5 % 5. 2 % 1. 8 % -1. 5 % -4. 9 % 250 % 27. 7 % 24. 0 % 20. 3 % 16. 5 % 12. 8 % 9. 1 % 5. 4 % 1. 7 % -2. 1 % -5. 8 % Source: Dowling & Partners

U. S. Insured Catastrophe Losses $ Billions CAT Losses for 2001 Set a Record • 20 events (lowest since 1969) • 1. 5 million claims • 9/11: $20. 3 B = 51, 000 claims *Estimate through October 2002. Note: 2001 figure includes $20. 3 B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Source: Property Claims Service, Insurance Information Institute

Med Claim Costs Rising Sharply Health care inflation is affecting the cost of medical care, no matter what system it is delivered through Source: NCCI; William M. Mercer, Insurance Information Institute.

Reserve Deficiency, by Line (AY 1992 -2001, as of 12/01) Estimated Deficiency Total Excluding A&E: $64 Billion A&E Deficiency: $55 Billion Total Including A&E: $120 Billion *Occurrence and claims made Source: Morgan Stanley

Outlook for Personal Lines: 2002 - 2004 PERSONAL AUTO 97 98 99 00 01 Sources: A. M. Best, Conning & Co. 02 E HOMEOWNERS 03 F 04 F 97 98 99 00 01 02 E 03 F 04 F

Outlook for Commercial Lines: 2002 - 2004 Sources: A. M. Best, Conning & Co.

Arizona Direct Loss Ratio Trends, Selected Lines Auto, WC: Headed in the wrong direction? Source: NAIC, Insurance Information Institute

Key Auto Insurance Stats for AZ 1997 vs. 2002* +3. 1% +34. 1% +30. 9% +1. 2% * Average for 4 quarters ending with the second quarter of 2002. Source: Insurance Services Office, Insurance Information Institute

Key Auto Insurance Stats for US 1997 vs. 2002* +11. 0% +35. 0% +21. 3% +18. 7% +19. 5% * Average for 4 quarters ending with the second quarter of 2002. Source: Insurance Services Office, Insurance Information Institute

Crime: Returning as a Cost Driver? Increases in auto theft and robbery will add pressure to the cost of auto and homeowners insurance Source: FBI; Insurance Information Institute.

RESTORE & REBUILD DESTROYED CAPACITY

Policyholder Surplus: 1975 -2002* Surplus Peaked at $336. 3 Billion in 1999 • Surplus decreased 8. 7% in 2001 to $289. 6 Billion. (US$) Billions • Surplus fell 2. 3% in the 1 st half of 2002 • Surplus is now lower than at year-end 1997. “Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations *As of June 30, 2002 Source: A. M. Best, Insurance Information Institute

Capital Raising by P/C Insurers Since September 11, 2001* Capital Raising by P/C Insurers Since 9/11 Totals $53. 2 B $27. 9 Billion $25. 4 Billion 14 Pending 40 Completed *As of September 13, 2002. Source: Morgan Stanley, Insurance Information Institute. 38 Pending 33 Completed

Capital Myth: P/C Insurers Have $300 Billion to Pay Terrorism Claims Total PHS = $298. 2 B as of 6/30/01 = $282. 9 B as of 6/30/02 Only 33% of industry surplus backs up “target” lines *”Target” Commercial includes: Comm property, liability and workers comp; Surplus must also back-up on non-terrorist related property/liability and WC claims Source: Insurance Information Institute

RATIONALIZE PRICING

Average Price Change of Personal Lines Renewals *III estimates Source: Conning, III

Average Expenditures on Auto Insurance: US vs. AZ Countrywide auto insurance are expected to rise 8 -10% in 2003 *Insurance Information Institute Estimates/Forecasts Source: NAIC, Insurance Information Institute

Average Expenditures on Homeowners Ins. : US vs. AZ Average HO expenditures are expected to rise by 8 -10% in 2003 *III Estimates Source: NAIC, Insurance Information Institute

Source: Insurance Information Institute calculations based on data from National Association of Realtors, NAIC. HO Expenditure as % of Sales Price Median Home Sales Price Homeowners Insurance Expenditure as a % of Median Home Price*

Cost of Risk per $1, 000 of Revenues: 1990 -2002 E • Cost of risk to corporations fell 42% between 1992 and 2000 • Estimated 15% increase in 2001, 30% in 2002 • About half of 2002 increase due to 9/11 Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates.

CIAB Rate Survey Third Quarter 2002 Rate Increases By Line of Business No Change Up 1 -10% 10 -20% 20 -30% 30 -50% 50%-100% >100% Comm. Auto 6% 18% 37% 24% 12% 0% 0% Workers Comp 9% 16% 27% 23% 13% 2% 0% General Liability 8% 13% 38% 28% 9% 1% 0% Comm. Umbrella 4% 9% 12% 27% 11% 5% D&O 4% 9% 21% 16% 18% 16% 3% Comm. Property 8% 9% 30% 23% 21% 5% 0% Business Interr. 13% 17% 31% 20% 6% 2% 0% Surety Bonds 16% 13% 17% 20% 2% 0% 1% Med Mal 5% 3% 5% 6% 17% 11% Source: Council of Insurance Agents and Brokers 19%

Rate On Line Index (1989=100) Prices rising, limits falling: ROL up significantly Source: Guy Carpenter * III Estimate

Commercial Lines Net Written Premium as % of GDP Commercial insurance premiums as a % of GDP fell 35% between 1988 and 2000 and remains far below late 1980’s levels Sources: Insurance Information Institute, calculated from U. S. Bureau of Economic Analysis and A. M. Best data.

INVESTMENT PERFORMANCE

(US$) Billions Net Investment Income Investment income in 2002 is expected to fall 5% due primarily to historically low interest rates Facts 1997 Peak = $41. 5 B 2000= $40. 7 B 2001 = $37. 7 B 2002 E = $35. 8 B Source: A. M. Best, Insurance Information Institute

Interest Rates: Lower Than They’ve Been in Decades 1. 2. Historically low interest rates are the primary driver behind lower investment yields. Nevertheless, overall insurer investment performance outpaces all major market indices and almost every major category of mutual fund. 66% of the industry’s invested assets are in bonds *Average for week ending November 1, 2002. Source: Board of Governors, Federal Reserve System; Insurance Information Institute

Total Returns for Large Company Stocks: 1970 -2002* Headed for 3 rd consecutive year of decline for stocks Last happened 1939 -1941 Stocks account for just 21% of p/c insurer investments *As of November 15, 2002. Source: Ibbotson Associates, Insurance Information Institute

P/C Industry Investments, by Type (as of Dec. 31, 2001) Common stock accounts for about 1/5 of invested assets Bond Holdings, by Type Industrial & Misc. 32. 5% Special Revenue 30. 5% Governments 18. 0% States/Terr/Other 15. 4% Public Utilities 3. 1% Parents/Subs/Affiliates 0. 5% Source: A. M. Best, Insurance Information Institute

Investment Gain, by Segment* Investment returns have shrunk, but are still important. “Heavy Lifting” must be done through underwriting & pricing Investment gains returning to pre-bubble levels *As a % of net earned premium. Investment gains consists primarily of interest, dividends and realized capital gains and losses. Source: A. M. Best; Insurance Information Institute estimate

Property/Casualty Insurance Industry Investment Gain* Investment gains are returning to “pre-bubble” levels *Investment gains consists primarily of interest, stock dividends and realized capital gains and losses. Source: Insurance Services Office; Insurance Information Institute estimate

Accounting Problems are Getting Many Companies into Trouble • Enron was tip of an iceberg • Major implications for insurers (p/c and life)

Financial Restatements Filed The number of financial restatements is rising even thought the number of publicly traded companies is falling. *Approximate Sources: Huron Consulting Group

KEEP WALL STREET HAPPY

P/C Performance Volatile, but Better than S&P 500 Lately *Through November 15, 2002. Source: SNL Securities, Insurance Information Institute

Insurer Stocks: Outperforming the S&P 500 Total Return 2002 YTD Through October 25, 2002 Source: SNL Securities, Insurance Information Institute

CONSOLIDATION

Insurance Mergers and Acquisitions Number of M&As was down 39. 4% during the first half of 2002 vs. first half 2001. Value of deals was down 80. 8%. None of the top deals were in the P/C sector Source: Compiled from Conning & Company reports. 1998: 565 deals valued at $165. 4 B

RESTORE ORDER TO THE COURTS

TORT-ure • • • • Asbestos “Toxic” Mold Lead Arsenic Treated Lumber Construction Defects Guns Genetically Modified Foods (Corn) Nursing Homes/Med Mal Pharmaceuticals & Medical Devices Security exposures (workplace violence, post-9/11 issues) What’s Next? Slavery Sept. 11? ?

Average Jury Awards 1994 vs. 2000 Source: Jury Verdict Research; Insurance Information Institute.

Cost of U. S. Tort System ($ Billions) Tort costs consumed 2. 0% of GDP annually on average since 1990, expected to rise to 2. 4% of GDP by 2005! Tort costs equaled $636 person in 2000! Expected to rise to $1, 000 by 2005 Source: Tillinghast-Towers Perrin; Insurance Information Institute estimates for 2001/2002 assume tort costs equal to 2% of GDP. 2005 forecasts from Tillinghast.

2001 Top Ten Verdicts Value Issue State $3 Billion Tobacco California $1 Billion Land Contamination Louisiana $480 Million Private Airplane Crash Florida $312. 8 Million Nursing Home Texas $ 256 Million Police Auto Crash Colorado $116 Million Intellectual Property Theft Virginia $114. 9 Million Medical Malpractice New York $108. 2 Million Inheritance Dispute Texas $107. 8 Million Medical Malpractice New York $94. 5 Million Real Estate California Source: Lawyers. Weekly USA, January 2002.

Commercial Lines Tort Costs ($ Billions) Billions Total $85. 4 Billion Total $22. 0 Billion Source: Tillinghast-Towers Perrin

Where the Tort Dollar Goes (2000) Tort System is extremely inefficient: Only 20% of the tort dollar compensates victims for economic losses At least 58% of every tort dollar never reaches the victim Source: Tillinghast-Towers Perrin

EXAMPLES Medical Malpractice Asbestos “Toxic” Mold

Medical Malpractice Combined Ratio Trial lawyers have destroyed commercial viability of med mal. The future holds: Increased mutualization Local market collapses HC Providers seeking govt. protection Source: AM Best

Who Will Pay for the US Asbestos Mess? Estimated Total US Settlements & Expenses = $200 billion $78 billion $60 billion $62 billion Source: Tillinghast-Towers Perrin; Insurance Information Institute

Non-Malignant Asbestos Claimants File Most Claims, Get Most $$$ DISTRIBUTION OF CLAIMS ALLOCATION OF COMPENSATION 1991 -2000 Source: RAND, Tillinghast-Towers Perrin

MOLD Great Pyramid of Mold Source: Insurance Information Institute

U. S. : Documented Toxic Mold Suits 1, 000 Cases 5, 000 Cases 2, 000 Cases Source: www. toxlaw. com; Guy Carpenter

TX: Mold Claim Frequency* (# claims per 1, 000 policyholders) The frequency of mold claims rose 1, 286% between 2000: I and 2001: IV Source: Texas Department of Insurance; Insurance Information Institute estimates.

TX : Average Cost per Policyholder Due to Mold (per year) Texas “Mold Tax”: Up to $444 per Policyholder per Year The average cost per policyholder increased 1, 805% between 2000: I and 2001: III Source: Texas Department of Insurance; Insurance Information Institute estimates.

TX: Average Cost Per Mold Claim* The average cost of mold claims rose number of mold claims rose 152% between 2000: I and 2001: II *Includes loss and loss adjustment expenses. Source: Texas Department of Insurance; Insurance Information Institute estimates.

TX: Cumulative Total Losses from Mold Claims* $ Millions Mold claim costs rose 560% in 2001 vs. 2000 *Includes loss and loss adjustment expenses. Source: Texas Department of Insurance; Insurance Information Institute estimates.

Source: New York Times Magazine, August 12, 2001

“Heeeeeeere’s Stachy…” Mold Goes Hollywood • Ed Mc. Mahon filed $20 million suit against insurer & mold remediation contractor • Says mold sickened him, his wife and staff • Says mold killed Muffin the family dog • Alleges breach of contract, negligence and intentional infliction of emotional distress • Nearly 100 articles between April 10 and May 17, 2002! “Ed Mc. Mahon Sues Over Toxic Mold Invasion, ” -USA Today, April 11, 2002

Source: New York Daily News, September 10, 2001

Media & Trial Lawyers: Fanning the Flames of Fear • A contractor, wears a special suit as she checks for mold in the floor of a house in Flour Bluff, TX. Mold is becoming a concern for area homeowners. • Piece of air conditioning duct board from a house infested with mold. Air conditioning reduces humidity and makes it harder for mold to grow, but increased use of paper products in homes, coupled with sealing of buildings for energy efficiency, encourages mold growth. Air conditioners then help to spread the spores. The family has sued their insurance company for money to clean and rebuild the house. Source: Corpus Christi Caller Times

Media & Trial Lawyers: Fanning the Flames of Fear • Source: Corpus Christi Caller Times • This woman blames mold growing in her Flour Bluff, TX, house for some of her family's ailments. A suit against their insurance company goes to trial Nov. 5. • A family believes the mold in their home was causing nosebleeds and respiratory problems for their children. They now live in a hotel room.

Gimme Me A Break!! A man points to mold growth on the tiles of his bathroom. Mold is able to grow as long as it has a cellulose-based food source and water. Source: Corpus Christi Caller Times

Ever Hear of This?

USE OF CREDIT INFORMATION IN INSURANCE

Why Insurers Use Credit Information in Insurance Underwriting 1. There is a strong correlation between credit standing and loss ratios in both auto and homeowners insurance. 2. There is a distinct and consistent decline in relative loss ratios (which are a function of both claim frequency and cost) as credit standing improves. 3. The relationship between credit standing and relative loss ratios is statistically irrefutable. 4. The odds that such a relationship does not exist in a given random sample of policyholders are usually between 500, 1, 000 or even 10, 000 to one. Source: Insurance Information Institute.

Age of Drivers Involved in Auto Accidents, 2000 Interpretation: Drivers age 16 -20 are 2 to 3 times more likely to be involved in auto accidents. Should this be ignored with better, more experienced drivers subsidizing teenagers? OF COURSE NOT! Source: National Highway Traffic Safety Administration, Traffic Safety Facts 2000.

Major Auto Company Analysis of Credit and Loss Ratio* Interpretation: Those with poorest credit scores generated losses more than double that of those with the best scores *Average loss ratios for new auto policies written over a 3 -year period.

Example (cont’d): Credit Discount Can Save $100 s per Year* • Credit discount lowered annual premium by 14. 7% Total Annual Savings from Discounts: $820 • Policyholder saved nearly $300 $154 • Credit was single largest discount • Opponents of credit will force people to pay more for coverage $296 $174 *Annualized savings based on semi-annual data from example Source: Insurance Information Institute

Consequences of Banning Use of Credit in Insurance Underwriting Banning the use of credit information will: • • • Force good drivers and responsible homeowners to subsidize those with poor loss histories by hundreds of millions of dollars each year. Decrease incentives to drive safely Decrease incentives to properly maintain cars and homes Force insurers to rely on less accurate types of information, such as DMV records. Make non-standard risks more difficult to place Increase size of residual market pools/plans

What You Might Not Know About Insurance Scoring 1. Insurers have been using credit since early 1990 s Ø Credit has been used in commercial insurance for decades 2. Insurance scores do not use the following information: Ø Ethnicity Nationality Religion Age Ø Gender. Marital Status Familial Status Income Ø Address Handicap 3. Insurance scoring is revenue neutral 4. Increased use of credit information is a fact of life in the 21 st century (Why? : Works for trust-based relationships) Ø Loans Leases Rentals Insurance Ø Utilities Background Checks Empl. Screening Ø NEXT: Preferred airport screening for frequent fliers Source: Insurance Information Institute

Average Credit Score by Income Group Interpretation: Credit score is not significantly correlated with income Source: American Insurance Association. Sample of 470, 470 policyholders

Intuition Behind Insurance Scoring* 1. Personal Responsibility Ø Responsibility is a personality trait that carries over into many aspects of a person’s life Ø It is intuitive and reasonable to believe that the responsibility required to prudently manage one’s finances is associated with other types of responsible and prudent behaviors, for example: Proper maintenance of homes and automobiles Safe operation of cars 2. Stability Ø It is intuitive and reasonable to believe that financially stable individuals are like to exhibit stability in many other aspects of their lives. 3. Stress/Distraction Ø Financial stress could lead to stress, distractions or other behaviors that produce more losses (e. g. , deferral of car/home maintenance). *This list is neither exhaustive nor is it intended to characterize the behavior of any specific individual. Source: Insurance Information Institute

THE CHALLENGE OF TERRORISM

Sept. 11 Industry Loss Estimates ($ Billions) Consensus Insured Losses Estimate: $40. 2 B Source: Insurance Information Institute

Insured Loss Estimates (updated through September 13, 2002) Top 20 Groups (pre-tax, net of reinsurance, $ millions) NOTES: *Includes $474 mil for American Re **Includes $289 mil for Converium ***Insurer is bankrupt Source: Morgan Stanley, Insurance Information Institute as of September 13, 2002.

10 Costliest Disasters in U. S. History (by insured loss, 2001 $) $ Billions *Estimate includes propertyand business interruption losses as well as liability, workers comp, life, aviation and other coverages. Source: Insurance Services Office, Insurance Information Institute.

Top 5 Costliest Terrorist Attacks (by insured property loss*) $ Millions, Adjusted to 2001 Price Level Oklahoma City bombing in 1995 cost insurers $145 million, killed 166, 467 injured 9/11/01 4/24/93 6/15/96 2/26/93 4/10/92 3, 056 Killed 1 Killed 0 Killed 6 Killed 3 Killed 4, 000 Injured 54 Injured 228 Injured 725 Injured 91 Injured *Includes business interruption and aviation hull losses. Source: Swiss Re; Insurance Information Institute.

Industry Losses Under Proposed Federal Backstop Using 9/11 Scenario Total Ind. Loss: $10. 875 B $2. 0 B Industry Co-Share $14. 25 B $1. 75 B Industry Co-Share $19. 675 B $0. 925 B Industry Co-Share $0. 125 B Industry Co-Share Assumes $30 B Commercial Prop & WC Loss, $125 B “At Risk” Commercial DPW Source: Insurance Information Institute.

Rating Factors for Terrorism* Property Rating Factors • Iconic/Trophy Structures • Easy-access/public structures • Structures with govt/mil association • Risks whose destruction would severely impact public (e. g. , utilities, infrastructure, transport, energy, etc. ) • Risks proximate to any of the above vulnerable to collateral damage. Workers Comp Rating Factors • All of those for property, plus: • Buildings with high concentrations of workers (e. g. , office towers) • Businesses in certain industries attractive to terrorists (e. g. , chemical, energy, haz. materials, sports/entertainment, aviation) • Nuclear, Bio, Chem. exposure *Sample factors. List is not exhaustive and underwriting practices and philosophy will vary by insurer. Source: Willis, Insurance Information Institute

IMPLICATIONS OF 2002 MID-TERM ELECTIONS

Election Presentation Outline • • • On balance, results favorable to insurance industry Chance for Tort Reform Asbestos Reform Federal Med Mal Tort Legislations War: Probability enhanced—increases uncertainty Investment Impact Unclear Ø Corp governance still unresolved (e. g. , no SEC head) Ø Big budget deficits could bring higher interest rates as econ recovers • Fed vs. State Reg: Likely No Action • Tax Issues (e. g. , corporate income tax, tax havens)? ?

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