Casualty Loss Reserve SeminarWashington, DCSeptember 17-18, 2008

Intl1: International Reserving IssuesStewart Mitchell

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Reserving from a London Market perspective

Agenda

►What is Lloyd's and the London Market?►Cultural observations on the London Market►Current reserving issues in the London Market►Impact of the softening market on reserving

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What is Lloyd’s?

Straw poll of Lloyd’s

What are your perceptions?

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What is Lloyd's?

Positive► 320 year history► Unrivalled promise to pay claims (1906 San

Francisco earthquake)

Negative► Opaque► Complex

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Lloyd’s (of London)

►17th century coffee shop►Market not a company►Landlord and regulator►Statistics

► 72 Syndicates, 46 Managing Agents► $14bn capacity ► 40% of income from the US

► 2nd largest surplus lines insurer► 5th largest global reinsurer

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What is the London Market?

The London insurance market is a collective term for the insurance companies, including Lloyd's of London, which issue policies out of London. It is a subscription market whereby a number of insurers may well participate in smaller individual shares on each policy. Each insurer's participation on that policy is a separate contract of insurance.

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Cultural observations on the London Market

►Subscription market – leader/follower

►Entrepreneurial vs One man band

►The underwriter was king

►‘Relationship’ underwriting and brokers

►The underwriter is still king

►‘Embeddedness’ of actuarial skills

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Current reserving issues in the London Market

►KRW►Subprime/credit crunch►Risk losses in first half of 2008►2008 Hurricane season

►Approaches to reserving:► Top down► Bottom up

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The insurance cycle

► Key reasons for cycle► Supply/demand► Not a perfect market► Large loss impacts and “pay-back”► Macro impacts e.g. recession► Relative attractiveness compared to other investments

Profits – top of cycleProfits – top of cycle Profits – top of cycle

Losses – bottom of cycle

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Impact of the softening market on reserving

Our recent survey highlighted:

► Underestimation of rate changes

► Price vs Terms & Conditions

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Underestimation of rate changes

73% respondents believe they will underestimate the softening of rates

► New business

► Not all business monitored

► Underwriter ‘optimism’

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Price vs Terms & Conditions

►competition on price to date

►competition on T&C going forward► deductibles► removal of exclusions

►monitoring the impact of changes in T&C

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Impact on reserving

Roll forward of loss picks leading to under-reserving?

► Rate MI under cooking true rate reductions

► Changes in T&C not being captured

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Any questions?

Casualty Loss Reserve SeminarWashington, DCSeptember 17-18, 2008

Thank you