The document presents an overview of the 2007 insurance trends, financial performance, and challenges facing the property and casualty (P&C) insurance industry, focusing on issues such as underwriting gains, profitability, and product line dynamics. It highlights the cyclical nature of the industry, with varying market conditions influencing premium growth and profitability, alongside operational strategies for improving effectiveness. Additionally, it addresses emerging risks related to product liability and the impact of catastrophes on insured losses and overall market stability.

1. MapWorld 2007
Insurance Trends, Drivers and Issues
Presented by:
Steve Callahan
Senior Consultant
Robert E. Nolan Company
Helping Insurers Solve Business
Challenges Through
People, Process, and Technology
For Over 30 Years

2. Discussion Overview
 Introduction
 Framework
 Industry Financials
 Key Product Line Issues
 Operational Considerations: An Industry Survey
 Strategic Issues Facing The Industry

3. About the Robert E. Nolan Company
 Since 1973, have helped over 540 companies worldwide achieve results.
 We specialize in the insurance industry.
 Our core competencies are
– assisting clients to improve operational effectiveness,
– business process redesign,
– strategic alignment and
– business and technology integration.
 Our consultants average 20 years of industry specific experience.
 We use a participative approach and actively involve clients in every step.
 We are results-focused and strive to exceed client expectations.
 Client loyalty is among the very highest in the consulting industry.
 We are a member of the Association of Management Consulting Firms
– conforms with regulatory and legislative initiatives
– publicly committed to providing the highest quality of work.

4. P & C Clients - Partial List
Personal Lines Commercial Insurance
• Nationwide Insurance • CNA
• State Farm Insurance • Zurich
• Farmers Insurance • Citizens Insurance
• American Family • Liberty / Peerless
• American Express (P&C) • Liberty Insurance
• West Bend • Liberty / Wausau
Farm Insurance Specialty Lines
• Colorado Farm Bureau • Swiss-Re
• Kentucky Farm Bureau • Norcal
• Indiana Farm Bureau • Washington Casualty
• Michigan Farm Bureau • LAMMICO
• Country Companies • FM Global
• Sequoia Insurance
• Millers Insurance

5. Presentation
Framework

6. Things to Keep In Mind
 The industry is complex and very dynamic, constantly changing
– Financials, product mixes, consumer demographics and even geography
– Globalization of markets, competition and distribution shifts
– State and Federal regulatory influence, including taxation changes
– Capital availability and deployment
– Reinsurance, securitizations, captives and retention
 There are a vast assortment of tools available to aid success
– Risk based pricing
– Investment management
– Automated underwriting and rating engines
– Claims adjudication systems
– Risk Aggregation and book of business analysis
– Loss forecasting and response formulation
– Operational service speed and resource deployment techniques
– Catastrophe modeling and management
– Market assessment and segmentation
 What are your company’s strengths, and where would it benefit
from supplementing its toolset?

7. P/C Industry
Financials

8. Growth in Net Written Premiums 1970-2007F
25%
1975-78 1984-87 2001-04
20%
15%
10%
5%
0%
-5%
-10%
2006F
2007F
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Note: Shaded areas denote hard market periods.
Source: A.M. Best, Insurance Information Institute

9. P/C Industry Profitability 1975 – 2008F
25%
10 years 10 years 9 years Down?
20% 19%
17%
15% ?
15% 14%
12% 11% 12%
11% 9%
10% 9%
10% 9% 10%
9%
5% 6%
6%
2% 2% 5% 2%
0%
-1%
-5%
07F
08F
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
*2007-08 P/C insurer ROEs are I.I.I. estimates.
Source: Insurance Information Institute; ISO, A.M. Best.

10. Underwriting Gain (Loss) 1975-2006
35
30
25
20
15
10
5
$ Billions
0
-5
-10
-15
-20
-25
-30
-35
-40 Despite the 2006 underwriting profit,
-45 the cumulative underwriting deficit
-50 since 1975 is $419 billion.
-55
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
Source: A.M. Best, Insurance Information Institute

11. Comparison of Total Returns by Line
2006 YTD
4/2007
S/P 500 13.62% 4.66%
Life Insurers 16.24% 8.16%
Reinsurers 19.95% -1.44%
P/C 16.57% .08%
All Insurers 10.33% 2.84%
Multiline 9.53% .97%
Brokers .61% 8.23%
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute

12. Ultimate Risk: Insurer Impairment
1969 to 2003 to
Reason for Impairment 2005 2005
Deficient Loss Reserves/In-adequate Pricing 38.20% 62.80%
Rapid Growth 16.50% 8.60%
Alleged Fraud 8.60% 11.40%
Catastrophe Losses 6.50% 8.60%
Affiliate Problems 5.60% 8.60%
Investment Problems 7.30%
Misc. 9.20%
Sig. Change in Business 4.60%
Reinsurance Failure 3.50%
100.00% 100.00%
Dramatic shift of Deficient Loss Reserves and Inadequate Pricing
Counterbalanced by significant reduction in growth driven impairments

13. P/C Industry: The Cycle Repeats
 P/C Insurance Industry is strongly cyclical, characterized by
– periods of soft market conditions
• rates are stable or falling and insurance is readily available
• companies compete vigorously to increase market share
• profits diminish or vanish completely
• the capital needed to underwrite new business is depleted
– periods of hard market conditions
• competition is less intense
• underwriting standards become more stringent
• the supply of insurance is limited due to the depletion of capital
• rates rise, coverage more difficult to find and profits increase
– higher profits draws more capital into the marketplace
• leads to more competition and the inevitable down phase of the cycle
 Three decades, three hard markets, overall net premiums growth
• 7.7% (1975-1978), 10.0% (1984 to 1987) and 6.3% (2001 to 2004)

14. Financial Trend Implications
 Growth in Net Written Premiums may be marginal and on a down trend
– Forecast at under 2% for 2007 and 2008, slowing to rates prevalent in the 90’s
– Premium Growth: Approaching a Standstill
 Net Income After Taxes at an all time high in 2006 for P/C insurers
– 2006 shows a 145% improvement over 2005, continuing 4 year trend up
– Profit levels appear to be unsustainably high at this point, likely to turn
– Net Income: On the Cusp of a Down Cycle?
 Combined ratios at all time low in 2006, forecast increasing 2007 and 2008
– Even the 2008 forecast is below 100%, far below the 2001 peak of 116%
– Combined Ratios: Passing 100% as Premium Growth Flattens?
 Underwriting gain in 2006 was over $30 billion
– Still, the cumulative underwriting loss since 1975 is over $400 Billion
– Result of lack of CATs, tort system improvements and favorable loss levels
– Underwriting Profits: Infrequent and Unsustainable?
 P/C Financial Performance Synopsis - 2006, A Cyclical Peak

15. P/C Industry
Key Product Line Issues

16. Private Passenger Auto – The Cash Cow

17. Private Passenger Auto Combined Ratio
110 109.5
107.9
105 104.2
103.5
101.7 101.3 101.3
101.0 101.1
100 99.5
98.4
95.1
95 94.3
93.0
90
93 94 95 96 97 98 99 00 01 02 03 04 05 06F
Source: A.M. Best; Insurance Information Institute

18. Private Passenger Auto is
Enormous Part of Industry – Driving Profits
PPA Liability
20.5%
= 34.7%
$95.8B Of Market
PPA Coll/Comp
$66.4B 14.2%
$251.6B
All Commercial
Lines
53.9% $53.2B
Homeowners
11.4%
Source: A.M. Best; Insurance Information Institute, 2004 values

19. Private Passenger Auto Profitability 1992 - 2006E
18% Segmentation 17%
16%
should help 15%
14% sustain
14%
12% profitability
14% 13%
12%
12%
10% 11% 12% 10%
9%
8%
8%
6%
4%
4%
2%
2%
2%
0%
92 93 94 95 96 97 98 99 00 01 02 03 04 05E 06F
Source: NAIC; Insurance Information Institute

20. Private Passenger Auto Market
 Competitive marketplaces, safer cars, aggressive fraud-fighting and
innovative underwriting driving down the price of auto insurance.
– Savings vary by state based on degree of regulations impact on market
– Urban population, traffic density and cost of living also effect rate changes
– Other factors include tort liability, labor costs, theft rates and coverage limits
 Claims frequency decreased 3% to 5% 2006 vs 2005, impacting rates
– Modest increase in claims severity of only 2% to 4%
 Other key factors influencing decreases in premium include
– Fraud fighting successes decreasing false bodily injury claims
– Safer vehicles and roads
– Graduated licensing programs for teens
– Changing demographics with baby boomers in safest driving years
 Underwriting acumen is ultimate determinant of success
– Utilize a life-cycle approach to underwriting modeling all possible variables
– Incorporate credit scores, driving habits, demographics into rating models
Source: Insurance Information Institute.
Auto insurance premium expected to drop in 2007 for first time since 1999. December 2006.

21. Private Passenger Auto Market
Segmenting the Market and Modeling Risk
 Increase rating factors creating sophisticated underwriting models
– Expand number of price points used in risk assessment and modeling
– Integrate with new auto safety features tracking actual travel events
• Teen monitoring program in Wisconsin
• “Black box” accessories monitoring where, when, speed, braking, etc
– Integrating with geographic attributes to consumer utilization patterns
• Where they travel, areas crossed
• Parking locations for work and home and likely recreational choices
 Profit Focus: “Predictive Modeling” & “Segmentation”
– Create a rating system more accurate and therefore equitable to all
– Risk reliably mapped to price across a broad range of circumstances
– Optimize profits by effective risk profiling and rating

22. Product Liability – The Black Box of Unknowns

23. Product Liability – Uncertainty and Risk
Excess liability insurance:
 Most effective way to protect against potentially catastrophic financial
impact of product liability lawsuits
 Line of insurance has inherent and potentially extreme uncertainties.
According to one trade publication:
“Few insurers have the expertise and financial strength to underwrite
complex liability exposure long term. Some fall victim to financial
insolvency; others retreat after realizing the complexity and
magnitude of the losses.”
Takeaway:
There are immeasurable unexpected sources of product liability
exposures facing companies today that may or may not be within
pricing considerations.
Source: U.S. Chamber of Commerce. Products Liability: Emerging Exposures, Best Practices.
April 2006.

24. Product Liability – Some Emerging Issues
Lead paint
 resurfacing on a large scale and highly publicized
 state & city gov’ts have advanced a public nuisance cause of action
 could require manufacturers to pay billions abating existing lead paint conditions
Benzene
 wide array of products containing trace levels makes potential everywhere
 large awards already granted on gas refinery exposure and aircraft painter
Pharmaceuticals
 large single claimant cases and class actions like Vioxx continue
 damages typically for actual or anticipated injury and loss
 cost of defense alone can severely damage a firms balance sheet
Welding rods
 developing area of litigation with over 10,000 claims nationwide
 based on exposure to manganese fumes, causes neurological damage
Diacetyl
 workers who package butter flavored popcorn suffer alleged exposure
 four lawsuits with verdicts totaling 53 million, over 60 more filed
Source: U.S. Chamber of Commerce. Products Liability: Emerging Exposures, Best Practices.
April 2006.

25. Inflation Adjusted Tort Costs
Per Capita, 1950-2005
$1,000 Tort costs per
capita have $878 $897 $914 $880
$900 increased 817% $780
$800 since 1950 even $722
$700 after adjusting for
$600 inflation
$500 $444
$400 $340
$300
$199
$200
$96
$100
$0
50 60 70 80 90 00 02 03 04 05
Source: Tillinghast-Towers Perrin, 2006 Update on US Tort Cost Trends.

26. Market Impacts of Litigation on Insurable Risk
 Creates Another Layer of Uncertainty in a Very Difficulty Market
– Goal is to Compel Insurers to pay losses for risks not priced for
 Courts’ retroactively rewrite of long-standing contract terms &
conditions creates an unpredictable and unpriceable risk
– Juries awarding of massive punitive damages exacerbates risk
 Coverage will become more expensive, less available, more risky and
losses increasingly volatile
– What role can risk aggregation and concentration analysis play
– Can patterns depict fraud or probability
 BOTTOM LINE: Unknown and unidentified risks along with courts and
juries create nearly impossible environment

27. Catastrophes – The Pendulum of Risk

28. U.S. Insured Catastrophe Losses*
$ Billions
$100.0
$120 $100B CAT Year is coming
Question is not if, but when
$100
$61.9
$80
$60
$27.5
$26.5
$22.9
$40
$16.9
$12.9
$10.1
$9.2
$8.3
$8.3
$7.5
$7.4
$5.9
$5.5
$4.7
$4.6
$20
$2.7
$2.6
$0
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
20??
Source: Property Claims Service/ISO; Insurance Information Institute

29. Inflation-Adjusted U.S. Insured Catastrophe
Losses By Cause of Loss, 1986-2005¹
Wind/Hail/Flood Civil Disorders Water Damage
2.8% 0.4% 0.1%
Fire Tornadoes
Earthquakes
2.3% Utility Disruption 24.5%
6.7%
0.1%
Winter Storms
7.8% Tropical Cyclones,
Wind/Hail/Flood, and
Terrorism Earthquakes accounted
7.7% for 81.5% of CAT losses
from 1986-2005
Pattern analysis and risk
profiling helps in
All Tropical
managing exposure
Cyclones
47.5%
Source: Insurance Services Office (ISO)

30. U.S. Catastrophe Losses 2006:
States With Largest Losses ($ Millions)
$1,600 $1,500 Catastrophe losses in the following
five states totalled $4.5B, half the
$1,400 total losses for the year.
$1,200 What is profile of exposure by state?
$1,000 $878 $873
$800 $688
$601
$600
$400
$200
$0
Indiana Missouri Tennessee Texas Kansas
Source: ISO; Insurance Information Institute

31. Total Value of Insured
Coastal Exposure (2004, $ Billions)
Florida $1,937.3
New York $1,901.6
Texas $740.0
Massachusetts $662.4
New Jersey $505.8
Connecticut $404.9
Louisiana $209.3 Florida & New York lead the
S. Carolina $148.8 way for insured coastal property
Virginia $129.7 at more than $1.9 trillion each.
Maine $117.2
North Carolina $105.3
Alabama $75.9 Northeast state insured coastal
Georgia $73.0
Delaware $46.4
exposure totals $3.73 trillion.
New Hampshire $45.6
Mississippi $44.7
Rhode Island $43.8
Maryland $12.1
$0 $500 $1,000 $1,500 $2,000 $2,500
Source: AIR Worldwide

32. Nightmare Scenario: Insured Property
Losses for NJ/NY CAT 3/4 Storm
Insured Losses: $110B
Economic Losses: $200B+
Distribution of Insured Property
Losses by State ($ Billions)
$80 $70 Profiling of Risks
helps identify
$60 cumulative
exposures and risk
$40 $30 clusters
$20
$5 $4 $1
$0
NY NJ PA CT Other
Source: AIR Worldwide

33. Outlook for 2007 Hurricane Season:
85% Worse Than Average
Average 2005 2007F 2007F 4 Month
* Dec 2006 Apr 2007 Chg
Named Storms 9.6 28 14 17 +21%
Named Storm Days 49.1 115.5 70 85 +21%
Hurricanes 5.9 14 7 9 +29%
Hurricane Days 24.5 47.5 35 40 +14%
Intense Hurricanes 2.3 7 3 5 +66%
Intense Hurricane Days 5 7 8 11 +38%
Net Tropical Cyclone 100% 275% 140% 185% +29%
Activity
Source: Philip Klotzbach and Dr. William Gray, Colorado State University, April 3, 2007.

34. Number of Tornadoes,
1985 – 2006p
Over 1000 a Year On Average
1819
2,000
1,800
1424
1376
1,600
1345
1333
1297
1254
1234
1216
1173
1173
1,400
1148
1133
1132
1082
1071
1,200
941
856
1,000
765
702
684
656
800
600
400
200
0
06p
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
Source: US Dept. of Commerce, Storm Prediction Center, National Weather Service; Ins. Info. Inst.

35. Risk of Earthquakes
 The potential cost of earthquakes has been growing due to
– Increasing urban development in seismically active areas
– Vulnerability of older buildings, not upgraded to current building codes
 Earthquake insurance showed a 5.5% increase in 2005 vs. 2004
– Premiums rose to $1.67 billion in 2005 from $1.6 billion in 2004
– Wood structures benefit from lower rates than brick buildings
– Regions are graded on a scale of 1 to 5 for likelihood of quakes
 There are over 3 million earthquakes worldwide each year
– The vast majority of those are a magnitude 3.9 or lower
– More than 900 earthquakes measure 5.0 or higher each year
 Study of U.S. earthquake risk released by FEMA September 2000
– The study estimated losses could average $4.4 billion dollars a year
 Earthquakes were responsible for more fatalities in 2006 than any
other catastrophe with total insured damages $80 million
Source: Insurance Information Institute. Earthquakes: Risk and Insurance Issues. April 2007.

36. Modeling Earthquake Risks
 Science and engineering provides tools used to reduce their damage
– identify where likely to occur and what forces they will generate
 FEMA uses earthquake loss estimation tool called Hazards U.S. (HAZUS)
– Uses information about building stock, local geology, location and size of
potential earthquakes, economic data, and other information to estimate losses
 HAZUS is capable of using two separate geographic information systems
(MapInfo® and ArcView®)
– to map and display ground shaking, the pattern of building damage and
– demographic information about a community.
 HAZUS estimates, based on location and size of hypothetical earthquake
– the violence of ground shaking, the number of buildings damaged,
– the number of casualties, the amount of damage to transportation systems,
– disruption to the electrical and water utilities,
– the number of people displaced from their homes, and
– the estimated cost of repairing projected damage and other effects.
Source: Insurance Information Institute. Earthquakes: Risk and Insurance Issues. April 2007.

37. Terrorism – Our Debate with Uncle Sam

38. Terrorism Coverage Take-Up Rate
Continues to Rise
64%
59%
54%
44% 46% 44% 48% 47%
33%
26%
24%
03Q2 03Q3 03Q4 04Q1 04Q2 04Q3 04Q4 05Q1 05Q2 05Q3 05Q4
Source: Marketwatch: Terrorism Insurance 2006, Marsh, Inc.; Insurance Information Institute

39. Insurance Industry Retention Under TRIA ($ Billions)
Individual company retentions rise:
Extension
$35
• 17.5% in 2006,
$30 • 20% in 2007 $27.5
Above the retention, federal govt. pays: $25.0
$25 • 90% in 2006,
• 85% in 2007
$ Billions
$20
$15.0
$15 $12.5
$10.0
$10
$5
$0
Year 1 Year 2 Year 3 Year 4 Year 5
(2003) (2004) (2005) (2006) (2007)
Source: Insurance Information Institute

40. Robert E. Nolan Company
P/C Industry
Survey Findings

41. Top UW Priorities – Survey Findings
 Overriding priority is stick to the basics and avoid distractions
- Conventional underwriting levers are being used to drive improvements
- Improved practices through improved data, processes and skills
 Top operational priorities in rank order
1. Organic growth
2. Underwriting and general expense management
3. Customer service
4. New tool introduction
 Other findings of interest include
– Surprising lack of emphasis on acquisition of new tools
– Focus was on squeezing more out of existing IT investments
– Outsourcing not seen as a high priority to achieving expense savings
– Relatively low priority was placed on acquisitions by respondents

42. UW Near Term Focus – Survey Findings
 Better rate pursuit
 Maintaining accurate customer data
 Better risk evaluation tools
 Improved use of claims data in underwriting process
 Upgrading front-line underwriting skills
 Better use of existing automation
 Acquisition of new tools

43. Top Claims Priorities – Survey Findings
 Deliver on the promise of fast, fair, and hassle-free claims
– Personal Lines claims best reported directly so process begins immediately
– Commercial Lines, particularly WC, lend themselves to Internet reporting
– Executives believe these claims should be handled directly with the company
AGREE : 63% DISAGREE : 19% NEUTRAL : 18%
– Direct reporting and adjuster assignment can decrease time by two to six days
 Top operational priorities in rank order
1. Loss Costs Management
2. Loss Adjustment Expense Improvements
3. Customer satisfaction (quality and timeliness)
4. Severity (Frequency and Degree)
5. Reserving Accuracy
 Other findings of interest include
– the relatively high priority placed on traditional file reviews
– the need to better utilize existing technology
– having the fastest possible reporting, set-up, and initiation of claim is critical
– Customers to have the ability to contact them 24x7 any way customer chooses

44. Claims Near Term Focus – Survey Findings
 Tie for top 3 Areas of Improvements
1.Improved processes
2.Better hiring and training practices
3.Deployment of new technologies
 Better file reviews
 Full utilization of existing technology
 HR changes and processes for finding the right people
 Increased use of contact centers
 Centralizing / decentralizing personnel
 Increased use of outsourcing vendors

45. Other Survey Findings
 Capture the synergy of investments in people, process and technology
– Business process management is a high priority for achieving improvements
– Leveraging greater value from existing systems and technology investments
– Continued deployment of paperless processing
 Offshoring and outsourcing lower priorities
– 80% surveyed disagreed that contact centers will move offshore
– 92% surveyed disagreed with use of offshore processing for UW or issue
– General sense is both sourcing options have a way to go before being viable
for UW, insurance contact centers, or Claims
 Achieving full results from image-enabled processing realizable with
– Invest additional time and resources in redesigning processes first
– Increased dependence on rules engines and workflow systems require new
skills and a higher degree of collaboration between business units and IT
– Consistent rules, changes in staff roles, and new management processes

46. Strategic Issues
Facing The Industry

47. What are the “Big Issues”?
 Cat loss pricing, preparation and management (including Terrorism)
– Cat modeling and risk based pricing models
– Risk concentrations and risk portfolio management
– Retention and reinsurance
 Successfully Navigating a Soft Market
– Underwriting and Claims Discipline (consistency and quality)
– Expense management during low growth (continuous improvements)
– Investment selection and returns optimization
– Leveraging technology and operational efficiency (esp. with low growth)
 Shifting Demographics
– Customer segmentation and profitability targeting
– Differentiation and niche solutions
– Streamlined product development / rapid time to market
 Changing Distribution Dynamics
– Increased competition from alternatives (banks, brokers) and internationally
– Attrition rates of proven channels / sustaining channel strength

48. Questions?
Steve Callahan, ChFC, CLU, FLHC, FLMI/M
Senior Consultant
Robert E. Nolan Company
Management Consultants
Steve_Callahan@renolan.com
877-RENOLAN
www.renolan.com