Correlation Risk in the Correlation Risk in the Post-Enron World Post-Enron World

Professional Liability Professional Liability ExecuSummit ExecuSummit

September 21, 2004September 21, 2004

Chris DucaChris Duca Navigators ProNavigators Pro

September 21, 2004September 21, 2004New YorkNew York

Large Growing MarketplaceLarge Growing Marketplace

621,000 Private Firms w/ > 20 Employees621,000 Private Firms w/ > 20 Employees

12,000 Publicly Traded Corporations12,000 Publicly Traded Corporations

94.5 Million Employees 94.5 Million Employees (82% of U.S. Work (82% of U.S. Work Force)Force)

Large Fragmented MarketLarge Fragmented Market

Management LiabilityManagement Liability $6.5 Billion$6.5 Billion Professional Liability Professional Liability $2.0 Billion$2.0 Billion 40% of firms w/ 40% of firms w/ > 20 employees> 20 employees 55% of U.S. workforce55% of U.S. workforce w/ >20 employeesw/ >20 employees

Service Industry Sectors

27%

18%

12%

8%

6%

6%

6%

17%

Healthcare

Professions

Tech/IT

Finance

Real Estate

Media/Ent.

Education

Misc

Multiple Product StrategyMultiple Product Strategy

Lower Risk through Product Diversification Lower Risk through Product Diversification Lower Risk through Industry DiversificationLower Risk through Industry Diversification Broaden and Deepen Business and Broker Broaden and Deepen Business and Broker

RelationshipsRelationships Cross Sell Marketing and Lower Acquisition Cost Cross Sell Marketing and Lower Acquisition Cost

of Clientof Client Strengthen Market Position Strengthen Market Position Service the Market and Client Service the Market and Client (“Outside In”)(“Outside In”)

What is Correlation Risk?What is Correlation Risk?

“ “Efforts to lower risk through product and Efforts to lower risk through product and industry diversification fail and result in the industry diversification fail and result in the aggregation of exposure.”aggregation of exposure.”

New ExposuresNew Exposures

Professional Liability Professional Liability

- Accountants, Lawyers, Banks,- Accountants, Lawyers, Banks,

Investment Banks Investment Banks

Management LiabilityManagement Liability

- D&O, Fidelity, Fiduciary, EPL- D&O, Fidelity, Fiduciary, EPL

Investing PublicInvesting Public

$7 Trillion in Investor $7 Trillion in Investor LossesLosses

Corporate Governance Corporate Governance FailuresFailures

Democratization (<50%)Democratization (<50%) Higher VolatilityHigher Volatility Tech Bubble BurstTech Bubble Burst Accounting RestatementsAccounting Restatements IPO Laddering LitigationIPO Laddering Litigation

Securities Laws Securities Laws

Sarbanes Oxley Act of 2002Sarbanes Oxley Act of 2002 Securities Act of 1933Securities Act of 1933 Securities Exchange Act of 1934Securities Exchange Act of 1934 Primary Violator LiabilityPrimary Violator Liability ““Aiding and Abetting” LiabilityAiding and Abetting” Liability

ClaimantsClaimants

SEC SEC State Attorney GeneralState Attorney General ShareholdersShareholders CreditorsCreditors Bankruptcy TrusteesBankruptcy Trustees

Legal Landscape Legal Landscape

SEC Wells NoticeSEC Wells Notice SEC Litigation SEC Litigation Attorney General LawsuitAttorney General Lawsuit Class Action Securities LawsuitClass Action Securities Lawsuit Bankruptcy Trustee LawsuitBankruptcy Trustee Lawsuit

Regulatory ActionsRegulatory Actions

SarBox (Rule 404) SarBox (Rule 404) ImplementationImplementation

Aiding & Abetting Aiding & Abetting LiabilityLiability

Well’s NoticeWell’s Notice DOJ and SECDOJ and SEC State Attorney State Attorney

GeneralGeneral

Securities Class ActionsSecurities Class Actions

Central Bank Case of DenverCentral Bank Case of Denver

Supreme Court DecisionSupreme Court Decision

Second Circuit “bright line” testSecond Circuit “bright line” test Tenth Circuit substantial participation test”Tenth Circuit substantial participation test” Fifth Circuit “Fifth Circuit “SEC approach to liability test”SEC approach to liability test”

(Judge Harmon Enron Decision)(Judge Harmon Enron Decision)

Legal TrendsLegal Trends

Active Plaintiff’s BarActive Plaintiff’s Bar Fewer DismissalsFewer Dismissals Whistleblower FactorWhistleblower Factor Regulatory ActionRegulatory Action Corporate Corporate

GovernanceGovernance

Service Provider Client ProfileService Provider Client Profile

Industry SectorIndustry Sector ExecutionExecution Financial FlexibilityFinancial Flexibility Stock VolatilityStock Volatility Market CapitalizationMarket Capitalization Corporate GovernanceCorporate Governance

D&O Liability D&O Liability

Compliance with SarbOx / SROsCompliance with SarbOx / SROs Independent Board / CommitteesIndependent Board / Committees IntegrityIntegrity Corporate CultureCorporate Culture Robust Internal ControlsRobust Internal Controls Disclosure / TransparencyDisclosure / Transparency ExecutionExecution

Uncertainty IncreasesUncertainty Increases Risk Aversion Risk Aversion

““While change itself is certain, what form it While change itself is certain, what form it takes is uncertain.”takes is uncertain.”

“…“…as we move forward we realize how as we move forward we realize how much we don’t understand.”much we don’t understand.”

- Alan Greenspan – - Alan Greenspan – Federal Reserve ChairmanFederal Reserve Chairman

November 14, 2003November 14, 2003

Insurance Demand IncreasesInsurance Demand Increases

““Insurance deals with the problem by spreading Insurance deals with the problem by spreading risk and converting potentially large unknown risk and converting potentially large unknown costs into a steady stream of known insurance costs into a steady stream of known insurance premiums that facilitates the forward planning so premiums that facilitates the forward planning so essential to an effective business operation.”essential to an effective business operation.”

Alan Greenspan – Federal Reserve ChairmanAlan Greenspan – Federal Reserve Chairman

October 17, 2001 October 17, 2001

Key Issues for InsurersKey Issues for Insurers

Risk Tolerance / AvoidanceRisk Tolerance / Avoidance Underwriting ReviewUnderwriting Review Complex Claims HandlingComplex Claims Handling Stress Test Portfolio / Use of CopulasStress Test Portfolio / Use of Copulas Underwriting Scope of CoverageUnderwriting Scope of Coverage Financial ManagementFinancial Management

SummarySummary

New Emerging Exposures for Service New Emerging Exposures for Service FirmsFirms

Changing Legal EnvironmentChanging Legal Environment Market Demand for Insurance SolutionsMarket Demand for Insurance Solutions Insurers Evaluating Correlation RiskInsurers Evaluating Correlation Risk Risk Management, Mitigation or Risk Management, Mitigation or

Avoidance? Avoidance?

Q&A?Q&A?