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Catastrophe Management – An Evolving Strategy Personal Lines Perspective

Catastrophe Management – An Evolving Strategy Personal Lines Perspective. November 15, 2006 Rob Hair Senior State Manager, Allstate Insurance Company. Agenda. Formulating a Strategy Catastrophe Management Tactics Public/Private Challenges Organizational Challenges.

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Catastrophe Management – An Evolving Strategy Personal Lines Perspective

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  1. Catastrophe Management – An Evolving Strategy Personal Lines Perspective November 15, 2006 Rob Hair Senior State Manager, Allstate Insurance Company

  2. Agenda • Formulating a Strategy • Catastrophe Management Tactics • Public/Private Challenges • Organizational Challenges

  3. Potential Considerations for a Catastrophe Management Strategy • Risk Tolerance • Rating Agency Requirements • Impairment/Solvency • Return on Capital • Efficiency & Stability of Strategy • Volatility of Returns

  4. Setting a Catastrophe Management Strategy Allstate’s catastrophe risk management strategy is intended to provide our shareholders an acceptable return on the risks assumed in our property business and to reduce variability of earnings, while providing protection to our customers. Source: 8/18/2006 Allstate 8-K

  5. Executing a Catastrophe Management Strategy • Underwriting • Risk Transfer • Legislative/Regulatory

  6. Executing a Catastrophe Management StrategyUnderwriting • Appropriate Rate Level • Rate Segmentation • New Business Limitations • Property Inspections (New and Renewal) • Mitigation Device Requirements • Residual Markets • Expanded Markets • Coverage Changes • Non-Renewals

  7. Executing a Catastrophe Management StrategyRisk Transfer Reinsurance and Capital Markets • Fills immediate need • Capacity and stability • Credit security • Ability to reflect cost in pricing

  8. Allstate’s Reinsurance Strategy Has Evolved 2005 Reinsurance Program 2006 Reinsurance Program AK AK NH NH ME ME WA WA VT VT ND ND MT MT MN MN RI RI MA MA WI WI OR OR NY NY ID ID SD SD CT CT MI MI WY WY NJ NJ PA PA IA IA DE DE OH OH CA CA NE NE IN IN NV NV IL IL WV WV VA VA UT CO UT CO MD MD KS KS KY KY MO MO DC DC NC NC TN TN OK OK AZ AZ SC SC HI HI AR AR NM NM MS MS GA GA AL AL TX LA LA TX FL FL No Reinsurance Annual Aggregate cover only Separate state contracts Separate state contracts underlie Annual Aggregate cover South-East contract underlies Annual Aggregate cover Separate contract not included in Annual Aggregate cover

  9. Growing Reliance on Risk Transfer What Changed? • Exposure is increasing in risk prone areas • Climatological influences - frequency and severity of storms • Rating agency models • Need for quick action

  10. Rating Agencies • Rating agencies have increased their capital requirements to maintain the same rating A.M. Best 2005 introduced a new cat risk stress test 2006 toughened the stress test S&P Introduced a 1 in 250 annual aggregate PML in capital adequacy Model Moody’s Introduced a risk adjusted capital model

  11. Executing a Catastrophe Management StrategyLegislative/Regulatory - Finding Common Ground - Communication Challenges - Long term vs. short term results

  12. Organizational Challenges • Alignment (cultural change) • Structure • Doing the Work

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