1. 1 Casualty Actuarial Society Loss Reserve Seminar Chicago Marriott Chicago, Illinois ALLAN R. NEIS, FCAS, MAAA September 8-9, 2003 Closing the Books

2. CASUALTY LOSS RESERVE SEMINAR September 8-9, 2003 Month-End Process Friday Night Premium System Closes Claim System Closes Saturday Morning Month-End Databases Start their update Saturday Evening Feeds to the General Ledger Begin Sunday Afternoon General Ledger Postings are Complete Downstream Databases Start their Updates Sunday Evening Month-End Reports are Produced

3. CASUALTY LOSS RESERVE SEMINAR September 8-9, 2003 AFTER RESERVE BALANCES ARE POSTED, SOME QUESTIONS WE FACE!  IS THE FINAL BALANCE WHAT YOU EXPECTED?  WILL THE STATE OF OHIO THINK BALANCE IS NOT ENOUGH?  OUTSIDE AUDITORS WILL QUESTION THE ADEQUACY!  IRS THINKS THE BALANCE IS OVERSTATED (10%)  GENERAL MANAGERS - AMOUNT IS TOO HIGH!  WON’T GET A BONUS BECAUSE OF THE INFLATED RESERVES  CANNOT CHARGE COMPETITIVE RATES SINCE THE INCCURRED LOSSES ARE OVERSTATED  ANALYSTS - IS THE COMPANY MANAGING RESULTS?  HIDING PROFITS  INFLATING THE BOTTOM LINE

4. OK, Worthy General Managers, Would you Like your reserves increased Or do you just want them to go up?… Ha! I just like asking that.

5. CASUALTY LOSS RESERVE SEMINAR September 8-9, 2003 PROGRESSIVE RESERVE BALANCES ARE SET PRIMARILY USING – AVERAGE RESERVES (CASE) – FACTORS APPLIED TO HISTORIC EARNED PREMIUM (IBNR)

6. CASUALTY LOSS RESERVE SEMINAR September 8-9, 2003 PROGRESSIVE CASE RESERVES l AVERAGE RESERVES VARY BY AGE OF CLAIM DIFFER BY POLICY LIMIT GROUPS ADJUSTED MONTHLY FOR EXPECTED INFLATION ADJUSTER ESTIMATES ARE USED IF GREATER THAN THRESHHOLD ADJUSTER ESTIMATES ARE INFLATED BY A FACTOR TO COVER CASE DEVELOPMENT IN LAYER ABOVE THRESHOLD (ANCR) l AVERAGE RESERVES ARE ADJUSTED MONTHLY FOR EXPECTED INFLATION

7. CASUALTY LOSS RESERVE SEMINAR September 8-9, 2003 PROGRESSIVE IBNR l BOOKED TO GENERAL LEDGER FROM THE RESERVE DATABASE l ESTABLISED AS % OF EARNED PREMIUM BY AGE l IBNR IS GENERALLY CARRIED FOR THREE TO FOUR ACCIDENT YEARS l LAE IBNR IS SET AS A % OF LOSS IBNR

8. CASUALTY LOSS RESERVE SEMINAR September 8-9, 2003 PROGRESSIVE AVERAGE RESERVES AND IBNR FACTORS MAY VARY BY A COMBINATION OF : COMPANY STATE REGION WITHIN STATE PRODUCT (AUTO, MOTORCYCLES, COMMERCIAL AUTO VEHICLE, ETC.) COVERAGE (BI, PD, ETC.) LIMIT THE CASE TABLE IN THE CLAIM SYSTEM INCLUDES APPROXIMATELY 3,000 LINES THE IBNR TABLE INCLUDES APPROXIMATELY 2000 LINES THE CASE AND IBNR TABLES ARE UPDATED MONTHLY WITH VALUES FROM THE RESERVE REVIEW SPREADSHEETS

9. CASUALTY LOSS RESERVE SEMINAR September 8-9, 2003 PROGRESSIVE ALLOCATION OF RESERVE BALANCES TO PROFIT CENTERS l HAPPENS AS A RESULT OF ROLLING UP THE DETAIL l CASE RESERVES (AVERAGES) ARE AT THE CLAIMANT LEVEL l IBNR IS CALCULATED AT A PREMIUM SUMMARY LEVEL (CO., ST., REGION WITHIN STATE, PRODUCT, LINE COVERAGE, LIMIT GROUP)

10. CASUALTY LOSS RESERVE SEMINAR September 8-9, 2003 PROGRESSIVE’S RESERVE REVIEWS CONDUCTED ON SEGMENTS THAT SUPPORT INCOME STATEMENT FOR GENERAL MANAGERS THE SEGMENTS ARE LARGE ENOUGH TO BE CREDIBLE, BUT ARE ALSO HOMOGENEOUS - PROVIDING MORE ACCURACY OVERALL A SEGMENT’S SCOPE ALLOWS PROCESS CHANGES (CLAIMS) WITHIN A REGION/STATE TO BE REFLECTED IN THE NEEDED RESERVE LEVEL INDICATIONS

11. CASUALTY LOSS RESERVE SEMINAR September 8-9, 2003 PROGRESSIVE RESERVE REVIEWS (CONTINUED) GENERATE OVERAL NEEDS USING ACCIDENT PERIOD DATA CASE RESERVE INDICATIONS USING RECORD PERIOD DATA IBNR INDICATIONS USING ACCIDENT WITHIN RECORD PERIOD DATA RECONCILIATIONS OF THE INDICATIONS ABOVE MULTIPLE SEGMENT RESERVE REVIEWS ALLOW INPUT TO PRICING ON OVERALL TRENDS CHANGES IN RESERVE IMPACTS ON INCOME STATEMENT TO BE DRIVEN BY PROCESSES AND EXPERIENCE WITHIN EACH PROFIT CENTER

12. CASUALTY LOSS RESERVE SEMINAR September 8-9, 2003 PROGRESSIVE ACTUARIAL REPORT l COMPLETED AFTER YEAR END CLOSE l AT COMPANY LEVEL AND GENERALLY AT THE ANNUAL STATEMENT LINE OF BUSINESS l INCLUDES INDICATION OF NEEDED RESERVES NET OF REINSURANCE l ISSUES REGARDING INDICATED ADEQUACY MAY ARISE WHEN MORE THAN ONE COMPANY IS WRITING IN A STATE WHICH IS THEIR PRIMARY STATE.

13. CASUALTY LOSS RESERVE SEMINAR September 8-9, 2003 PROGRESSIVE’S ADVANTAGE PRIMARILY PRIVATE PASSENGER AUTO l CASE RESERVES MAKE UP 80-85% OF LOSS RESERVES l LAE RESERVES ARE APPROXIMATELY 15% OF TOTAL LIABLITY l POLICY LIMITS ARE LOW ENOUGH TO LIMIT DEVELOPMENT IN EXTREME TAIL l COMPARATIVELY HIGH FREQUENCY, LOW SEVERITY ALLOWS EASY ROLL UP TO VARIOUS PROFIT CENTERS

14. CASUALTY LOSS RESERVE SEMINAR September 8-9, 2003 AT PROGRESSIVE  RESERVES ARE OPENLY DISCUSSED AT ALL LEVELS OF MANAGEMENT  REPORTED ON IN THE “ANNUAL REPORT”  “REPORT ON RESERVING PRACTICES” IS AVAILABLE ON WEBSITE “PROGRESSIVE.COM”  RESERVES ARE NOT SET BY MANAGEMENT, THEY ARE SET BY THE CORPORATE ACTUARY