Presentation to CARE Conference Boston, MA June 15th, 2000

1. Presentation to CARE Conference Boston, MA June 15th, 2000

2. Overview • What models are there? • What are they good for? • What aren’t they good for? • Four examples of model-inspired reinsurance structures • Pitfalls 1

3. Using Cat Models • What models do we use? • EQECat • US Wind • US Quake • World Cat • RMS • IRAS 3.7 • 4.1 being tested • AIR • Catrader • CLASIC • Dames & Moore • Tempest Re proprietary 2

4. What models do we use? 3

5. What are they good for? • Underwriting/Pricing • Consulting with clients • Portfolio/Capital Management 1 4

6. Underwriting with Cat Models • Which perils are best suited to models? • Hurricane • Earthquake • Flood • Extra tropical storm 5

7. Underwriting with Cat Models • Which perils or issues are not? • Winter storm • Tornado/Hail • Freeze • Fire - Brush & Fire Following • Volcanic eruption • Riots, etc • Business Interruption • “Cross territorial” clash • “Non landfall” events (Floyd) 1 6

8. How do we use them? • Assess the data • Run the models simultaneously • Collate the output • Evaluate on differences • LOB • Data • Region • Peril • Cat Management credit 7

9. Loss Pick 8

10. Loss Pick 9

11. Pricing ROE = (Price*.9-0.11)/0.45+.04 ROL of 17.75% would produce sufficient ROE (15%) 10

12. Limit Example • Florida • Coverage to attach at a defined PML - e.g. 30 years • Limit to track 100 year PML • Price is simply a ROL applied to calculated limit ($40mm) 11

13. Limit Example • Florida • Limit and retention drop due to decrease in exposure • ROL now applied to a limit of $25mm excess $15mm • No more exposed than before, just lower down in dollar terms 12

14. Limit Example • Florida • Now limit has increased beyond year one • $62mm excess $38mm 13

15. Limit Example • Florida • Limit is usually capped ($65mm) 14

16. Limit Example • Florida • Even if 100 year pml is higher than $65mm excess $46mm • Results in more retained net 15

17. Limit Example • Florida • For Florida covers, a major complication is FHCF • Cover becomes a “Wrap” around FHCF • Warrant a minimum FHCF cover amount 16

18. Pricing Example • California Earthquake • Start up Residential EQ writer • Only needs limit as exposed on a month-to-month basis • Calculation: • Rate*(250 yr PML - attachment)*(GU Loss*probability)/10.5 17

19. Swap Example • Trade limit of coverage at pre-agreed EL • Requires transparent modeling • Like perils, or even diverse perils • Florida wind for Japan wind • Capital efficient • Could charge loss cost, or identical premium • Real benefit is release of capital 18

20. Structure Example • Models are not credible for some perils • Occurrence structure (hours clause) is not best suited to all perils • Not all clients fit into a model-designed solution • Examples • Other Wind • Winter Weather 19

21. Structure Example • Client wanted all ww claims to be classified as one occurrence - models can’t do that • Occurrence definition for cat cover would need to be broadened • Strip out ww claims & simulate trended historical experience • Add in other perils on more traditional hours clauses, using models • Capital selection is tricky 20

22. Pitfalls • Blocking and tackling is still required • Coverage A only Unicede • Exposure base as of when? • Commercial exposures are the same as Personal Line exposures • Event Set is incomplete • Model myopia 21

23. Pitfalls 250 Yr PML 22

24. Pitfalls 250 Yr PML 22

25. Conclusion • The old way of underwriting is no good 23

26. Conclusion • The old way of underwriting is no good • Models know best 23

27. Conclusion • The old way of underwriting is no good • Models know best • Models don’t know everything 23

28. Presentation to CARE Conference Boston, MA June 15th, 2000