2004 Hurricane SeasonRecap and Observations

May 2005 CAS Meeting

Proprietary & Confidential

Agenda

Section 1 2004 Hurricane Recap

Section 2 Reinsurance Observations

Section 3 Catastrophe Model Observations

1

2004 Hurricane Recap

Proprietary & Confidential

2004 Hurricane Season

Source: Impact Forecasting

2

Proprietary & Confidential

Source: Impact Forecasting

Hurricane Path Discussion 1995 - 2003

3

Proprietary & Confidential

Source: Impact Forecasting

Hurricane Path Discussion 2004

4

Proprietary & Confidential

Charley 7.475

Frances 4.595

Ivan 7.110

Jeanne 3.655

22.835

ISO Property Claim Service Loss Estimates$Billions

5

Proprietary & Confidential

PCS Loss Estimates and Return Periods

Charley 7.475 7 - 8

Frances 4.595 4 - 5

Ivan 7.110 6 - 7

Jeanne 3.655 3 - 4

22.835 20 - 25

6

Proprietary & Confidential

Florida PCS$Millions: Total Personal Lines Commercial Lines Auto

Hurricane Charley 7,430 4,400 2,750 280Hurricane Frances 4,275 2,900 1,250 125Hurricane Ivan 4,300 2,900 1,250 150Hurricane Jeanne 2,785 2,100 605 80

18,790 12,300 5,855 635

Florida Stakeholders$Millions: Industry Total FHCF CPIC Insurers Retained

Hurricane Charley 7,430 1,700 925 3,815Hurricane Frances 4,275 806 288 2,728Hurricane Ivan 4,300 237 230 2,405Hurricane Jeanne 2,785 309 369 2,678

18,790 2,560 1,813 11,626

FHCF payments do not sum to total because insurers will max out on FHCF recoveries

Florida Detail

FHCF Payment threshold: $4.5 - $4.9 Billion Per Occurrence

7

Proprietary & Confidential 8

Catastrophe Loss as Percent of Property Premium

1992 - 2004 2004

Countrywide: 18.8% Countrywide: 27.0%

Reinsurance Observations

Proprietary & Confidential

Reinsurance Observations

2004 hurricane events

Excess capacity mitigated rate pressure

Did not drive reinsurance pricing

If there were unmodeled (or not well modeled) losses, experience rating influenced pricing

Reinsurers continue to

Re-evaluate degree of uncertainty around model output

Monitor Florida regulatory developments for impact on exposure to reinsurance layers (“regulatory surge”, deductible issue, FHCF structure, etc.)

Cedents are now more interested in

Understanding and reinsuring aggregate PML’s

Reducing traditional coverage restrictions (i.e. Aon’s efforts to expand hours clause, reduce co-participations, etc.)

9

Proprietary & Confidential

2005 Reinsurance Rate and Security Observations

Reinsurer pricing models will reflect cat model changes (likely to be in 2006) Excess capacity is driving rates down Significant pockets of restless capital remain – and new capacity continues

to arrive Better rated Lloyd’s market is aggressive

Aon’s leadership in restructuring this market to be more transparent and efficient

Generally led pricing in early 2005 Spiral issues have been reduced Questions remain about long-term discipline and ongoing profitability

Cedants more focused on security quality Especially anticipated quality following catastrophic event Want assistance in measuring reinsurer’s capacity to respond to multiple

large catastrophe events

10

Catastrophe Model Observations

Proprietary & Confidential

Summary of Hurricane Loss Estimates

Event/Portfolio Data Points

Est

imat

ed L

oss

/ A

ctu

al L

oss

Und

ere

stim

atio

nO

vere

stim

atio

nModel A

Model C

0

0.5

1

1.5

2

2.5

3

0 20 40 60 80 100

Model B

11

Average Estimated Loss/ Actual Loss

Model A 54%

Model B 78%

Model C 98%

Hurricane Loss Estimates Based on Post Event Catastrophe Model Analysis

Proprietary & Confidential

Catastrophe Model Observations

Multi-model analysis provided value

Demand surge happens, based on aggregate losses

Age of building and building codes matter

More refinement is needed in commercial occupancies, e.g. golf courses

Quality, completeness and vintage of exposure data are important

Losses occur at low wind speeds

Unmodeled losses – Flood,Contingent BI, Mold, Off-Site Power interruption

Accuracy of post-event estimates vs. actual loss is not necessarily a test of accuracy of risk estimates (PML evaluation)

Review of 2004 losses still underway – changes if any to damage functions in 2006

12

Proprietary & Confidential

Anticipated Model Changes

Information still being gathered and analyzed

2005 model updates will be adjusted for frequency and other items

Some changes will be deferred to 2006 (damage functions, etc.)

Lower return period loss estimates

Demand surge

Revised damageability ratios at lower windspeeds

Revised damageability ratios for select construction types

Year of construction

Secondary building characteristics

Upper levels of reinsurance coverage not tested

Possible lack of independence of events

13

Proprietary & Confidential

FHCF Change Legislation

FHCF Retention drop down on third largest and smaller events

Industry basis - $4.5 billion to $1.5 billion

Loss events ordered on individual company basis

Actuarial rates for CPIC in Monroe County if reasonable competition does not exist – an experiment

OIR to study standard rating territories by 1/15/2006

OIR to study standard policy forms by 1/15/2006

State may ask companies to report exposure and loss data for development of public hurricane model

OIR and Consumer Advocate to have access to models used in support of rate filings

More, including sinkhole provisions

14