1. State of the Reinsurance Market Gary Blumsohn Arch Reinsurance Company GBlumsohn@archreco.com CAS Annual Meeting: Boston November 2002

3. Post-9/11 New Companies Allied World Arch Axis DaVinci Endurance Goshawk Montpelier Olympus Platinum

4. New Capital Raised Over $35 billion Both new and existing companies

5. Reductions in capital 9/11: $40B - $50B? Capacity exiting –Gerling –Overseas Partners –A&H markets for WC –Reliance, Legion & other fronts Stock market losses Reserve strengthening

6. More Reductions in Capital? Further reserve deficiencies? –Morgan Stanley: $120B (12/31/01) $55B asbestos $65B 1992-2001 AYs Mostly commercial lines –WCIRB: $12.6B deficiency in CA WC

7. Combined Ratio: Reinsurance vs. P/C Industry *First Quarter 2002 figures. Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

8. Source: RAA

9. Asbestos Source: A.M. Best, Insurance Information Institute.

10. In Sum…. An industry in turmoil

11. But, more favorably… Rates up virtually across the board –Compounding of higher primary and higher reinsurance rates –Large differences by line

12. Emerging Trouble? What are loss trends? –D&O –Med Mal Re-emergence of inflation? Low interest rates

14. Real returns after CPI now 0.8% - long- term average = 2.2% Real returns after medical CPI now negative for first time in nearly a decade

15. Thought Experiment WTC + Asbestos = $110 billion Let’s guess that today, half would find its way to domestic reinsurers = $55 billion. Gross WP for US Reinsurers in 2002 ≈ $40 - $50 billion

16. Thought Experiment (cont.) If average profit margin = x, how many years to earn back losses?

17. “Unexpected” Losses Asbestos & WTC were “unexpected” –Any reason to think the frequency of “unexpected” losses will diminish? –Expect the unexpected!

18. The Blame Game 1988 Where was George? 2002 Where were the Actuaries???

19. More Blame More actuaries in reinsurance in 1990’s than ever before. –Correlation isn’t causation, but… Did we get too tied up worrying about risk loads, DFA, variability, correlations, and other cool stuff?

20. “Skurnick’s Theorem” It’s the mean, stupid!