1. Reserving for Self-Insureds Leon Palmer – United Technologies Corporation Director, Risk Management leon.palmer@utc.com Casualty Actuarial Society September 12, 2005 1:30 PM – 3:00 PM Boston, Massachusetts

2. Page 2 Agenda United Technologies Corporation Retention Philosophy Risk Management Customers Deliverables Complexities – 2 Examples How to improve

3. Page 3 UNITED TECHNOLOGIES Holding company structure °> $40 B Sales °> 60% Sales outside US °> 15% Sales are US & Foreign military 6 major companies Each > $2 B Sales °Pratt & Whitney, Carrier, Otis, Sikorsky, Hamilton Sundstrand, UTC Fire & Security Multi-industry °Aerospace, construction, security (not low risk industries) Acquisitive

4. Page 4 Hazard Risk – Retention Philosophy Retain risk commensurate with EPS, cash flow and balance sheet strength… °Maximize internal loss funding tools °Transfer cat risk exposures Self –insured reserving is key to philosophy!

5. Page 5 Team

6. Page 6 Very dependent on high quality self insured reserves… Accuracy Timeliness Continuous improvement process (ACE) Communication °Reports & data °Verbal °Internal & external customers

7. Page 7 Deliverables - all lines, all businesses Plan – Current year Plan – 3 Years Re-estimate of all open prior years (30 years) Captive reserve reviews – 3 captives Bankrupt insurer and ‘scheme’ analyses ‘Monitoring’ vs Plan – quarterly Ad hoc °Drill down on spikes/trends °Manufacturing re-alignments & plant closings °M&A purchase support – pre acquisition °M&A – Purchase Accounting adjustments – post acquisition

8. Page 8 Customers #’s of groups ControllerX 7 PlanningX 7 Health and SafetyX 7 LegalX 7 Internal AuditX 1 Business DevelopmentX 7 Risk ManagementX 1 °Make vs. buy support °Benchmarking Finance Committee – BoDX 1 External AuditorsX 1 DCAAX 4 SEC – SARBOXX 1 (at least 44 groups)

9. Page 9 Business Development - Example Target > $2 B annual revenues Global UK headquartered Professional Risk Management staff Major broker firm, insurers, audit firm Large losses in claim history Financially ‘challenged’

10. Page 10 Business Development - Example Individual case reserving by Legal and RM No “IBNR” Diluted “Incurred” reserving GAAP/UTC estimated shortfall > $20M 2 years later Original estimates still look good Local acquired entities still not ‘accepting’ Self-insured culture - slow to implement

11. Page 11 Government Contracting - Example Hamilton Sundstrand & DCAA - WC 2 inch thick book 15 page ‘summary’ Every actuarial method ‘known to man’ 8 Sections to book Every year discussion Industrial vs. Aerospace Weighting of methodologies 2003 review; same thing but….

12. Page 12 Government Contracting - Example ‘show me…’....... 1998 1,074 1,526 1,891 2,215........

13. Page 13 How do we improve Use quality processes and tools! Annual review of processes and customer feedback Deloitte –actuarial firm Risk Management Data providers Customers Process ‘maps Identify ‘turn backs’ Conduct ‘root cause analyses’ Implement ‘permanent fixes’ Repeat each year!