1. 2008 International Conference Golden Opportunities or Fool’s Gold? November 5-7, 2008 San Francisco Aggregation and Clash: New Exposures, New Tools

2. MODERATOR: David Bradford, Executive Vice President & Editor-in-Chief, Advisen, Ltd. PANELISTS: Scott C. Belden, ACAS, Senior Vice President, Reinsurance, Travelers Companies, Inc. Daniel E. Greer, FCAS, MAAA, Senior Vice President, Aon Re Services Sean P. Whelan, Executive Vice President, Willis Re Aggregation and Clash: New Exposures, New Tools

3. Global Financial Crisis What Types of Lawsuits are Being Filed? –Will they survive motions to dismiss? Who is Being Sued? What Coverages are Involved? Is This One Clash Event or Multiple Events?

4. Subprime/Credit Crunch Suits Source: Advisen MSCAd 4% 5% 14% 31% 7% 6% 20% 4% 6% 3% Breach of contract ERISA class action Fraudulent trade practices Securities class action Securities fraud Shareholder derivative suit Underwriting malpractice Other malpractice Other securities related Other

5. Overview Types of “Clash” Events Classification Scheme Assessing, Monitoring, Modeling Capital Adequacy Implications Potential Risk Mitigants Clash Reinsurance: Evolution and Issues Legal Theories and Key Cases Q&A

6. Types of “Clash” Events Within a Policy, Multiple Related Events Single Event, Multiple Policies for a Single Insured Single Event, Multiple Insureds Multiple Events, Multiple Insureds – Widely Sold Service or Product is Found to be Faulty Extra-Contractual Obligations or Excess of Policy Limit judgments

7. Classification Scheme Number of Policies Number of Insureds 1 1 >1 1 Multiple lines Asset-liability Number of Events 12 or more A Runaway ALAE ECO XPL Related or “unrelated” BLimit Stacking New Technology New Standard or Faulty Product C “True Clash” (Also property cat) DEDE Pervasive Clash EventEconomic Downturn

8. Assessing And Monitoring Aggregations By “Clash” Type Know and Track Exposures* By: – Industry and/or profession – Operational focus of the business – Size of customer – Financial structure Public, Private, Partnership Leverage ratio – Geography * Exposures = Limits, attachment point, premiums, exposure bases

9. Know and Track Exposures* By: – Type of coverage (D&O ABC vs. Side A) – Occurrence or claims-made layers (pricing adequacy depends on accuracy of ILFs) – Aggregated attachments (pricing adequacy depends on accurate loss modeling) – How many more criteria may be relevant? * Exposures = Limits, attachment point, premiums, exposure bases Assessing And Monitoring Aggregations By “Clash” Type

10. Pricing for Clash Exposure Pricing Should Reflect Capital Requirement –More capital needed to add exposure to an area of concentration

11. Modeling Example Multiple Events On Single Policy (A2 Clash) –Aggregate limits cap exposure – by how much? –How much do aggregated SIRs / underlying limits add to the exposure ? –Pricing must contemplate this potential –Effect is compounded across a portfolio –Sensitive to underwriting in soft/hard market –Occurrence pricing models are not sufficient in a claims-made environment

12. Capital Adequacy Implications Typically Include Benefit of Lack of Correlation Where Assumed: –Among policies –Among lines –Between Premium risk and Reserve Risk –Between Asset and Liability Risk

13. Potential “Clash” Risk Mitigants Limits Management –Per policy as well as aggregations across exposure criteria Diversification vs. Correlation Reinsurance

14. Evolution of Clash Reinsurance: 1964 to 1985 Reinsurance Products Global Slip Per Risk Excess Proportional New Reinsurance Features Combined Property & Liability ECO Coverage Added (1978) Re-Defining Events Keene Triple Trigger Decision (asbestos) S&L Failures Continental Illinois Failure MGM Grand Fire

15. Evolution of Clash Reinsurance: 1986 to 2000 Reinsurance Products Clash Per Risk Excess Proportional Claims-made Clash (1987-1993) Aggregate Stop Loss - Finite New Reinsurance Features Modified event (1986) Sunset claim reporting limitations "Business Disaster" wording Reduced loss development period Re-Defining Events Undue familiarity claims Harassment/discrimination claims Montrose Chemical decision Subsidence/construction defect claims Phen Silicone breast implants FASB 113

16. Evolution of Clash Reinsurance: 2001 to 2007 Reinsurance Products Clash Per Risk Excess Proportional Aggregate Stop Loss - Finite New Reinsurance Features Price Increases Terror exclusion Limit warranties “Business Disaster" wording excluded Aggregation data required Finite risk reinsurance reexamined (2005) Re-Defining Events AOL Time Warner California energy crisis Enron/Worldcom/WTC Insurance bid rigging IPO laddering Mutual funds sales practices

17. Evolution of Clash Reinsurance: 2008 and Beyond Reinsurance Products Clash Per Risk Excess Proportional Aggregate Stop Loss – Structured Claims-made ASL - Traditional New Reinsurance Features Broad Definition of “Loss Occurrence” Specified Perils Approach Hybrid Approach Definition of “Sub-Prime” Price Increases? Re-Defining Events Sub-Prime Mortgages Credit/Liquidity Crisis Global Recession?

18. Reinsurance Issues Definitions of Coverage –Wording can be critical – test against database of historical events as well as prudent “what if” scenarios Pricing Post-event Reconstruction

19. Reinsurance Issues Reinsurance Structures Vary in Their Effectiveness of Protection: –Excess of loss will protect against severity impacts, but not frequency –Caps shift impact of extreme events back to cedant –Cat covers/ Aggregate Stop Loss can be most effective, but carry elevated capacity charges

20. Legal Theories and Key Cases Directors’ and Officers’ Liabilities Under ERISA –Post-Enron phenomenon –Ds & Os as functional fiduciaries –Misleading disclosures a breach of fiduciary duty under ERISA

21. Legal Theories and Key Cases “Aiding and Abetting” –Central Bank of Denver “Scheme Liability” –Stoneridge Investor reliance on secondary actors Newby v. Enron Push cases into state courts?

22. Pervasive Impact of Economy Impact on InsuranceLines Affected Unemployment Reduced incentive to return to work Workers Comp General Liability Inflation Reserves set based on lower assumptions Project cost overruns All long tail lines Surety Lower Asset Values Left side of balance sheet N/A - all Decreased Economic Activity Contractors can’t make ends meet Surety

23. Q & A

24. Many Thanks to David Bradford Scott C. Belden, ACAS Daniel Greer, FCAS, MAAA Sean P. Whelan