AOC Aon Corp.

CHICAGO, Oct. 11 /PRNewswire-FirstCall/ -- All lines of insurance except personal auto have exhibited greater underwriting volatility than the one-year S&P 500 volatility for five years running, according to the Insurance Risk Study today released by Aon Re Global, a unit of Aon Corporation (NYSE:AOC). (Logo: http://www.newscom.com/cgi-bin/prnh/20041215/CGW049LOGO) For the C-suite and their risk managers, the risk-versus-return tradeoff is in an ever-moving cycle requiring constant rebalancing. Knowing when to retain risk, to transfer risk or to make investments in, for example, the S&P 500, can make the difference between creating high shareholder value vs. facing insolvent circumstances. "Insurance, if not managed appropriately, can bring higher risk and lower return than other major industries," said Stephen Mildenhall, executive vice president and chief actuary, Aon Re Services. "Knowing how to price risk adequately and carry appropriate amounts of risk on the books is at the crux of sound decision making for insurance companies." The annual study represents the industry's leading independent and theoretically sound assessment of underwriting risk parameters. This year the study was extended to include quantifications from select European and Asia-Pacific countries, including France, Germany, Greece, the United Kingdom, Australia and Japan. As underwriting volatility varies significantly across lines of insurance, the Insurance Risk Study also gives information on specific personal and commercial lines. The most volatile major line in the 15-year period of 1992 to 2006 was homeowners, which was significantly impacted by the 2004 and 2005 Atlantic hurricane seasons. Even excluding these catastrophe loss years, homeowners has a risk comparable to commercial auto insurance. Other high volatility lines include general liability, medical malpractice, and professional liability and D&O insurance. New to the Insurance Risk Study in 2007, Aon Re Global's price-to-book regression study helps explain how companies can create shareholder value through enterprise risk management (ERM). The findings show that a consistent stream of earnings is strongly correlated with a higher price-to-book ratio. Insurance companies can use the results as a valuation tool in future calculations and as a measure of the cost of capital. "Enterprise risk management is especially important in today's volatile and softening global insurance environment, so any opportunity to illuminate and help mitigate risk is a win for our clients," Mildenhall said. Aon Re Global's Insurance Risk Study examines risk from non-diversifiable risk sources, including changing market rate adequacy, unexpected frequency and severity trends, weather-related losses, legal reforms and court decisions, the level of economic activity and other macroeconomic factors, offering insight on risk from reserve development. Reserve development in long-tailed liability lines has produced upwards revisions in estimated volatility since 2001, as they are booked closer to ultimate each year. For example, the estimate of volatility for other liability claims-made increased from 27 to 41 percent between 2001 and 2006. The study also looks at the relationship between specific lines of insurance and the underwriting cycle. Researchers found that volatility for most lines is substantially increased by the pricing cycle. Market cycle driven loss ratio correlation between lines increases risk by up to 50 percent and reduces the normal benefits of underwriting diversification. Impact of Pricing Cycle on Insurance Risk Line Impact of Pricing Cycle Reinsurance - Liability 81% Other Liability - Claims-Made 64% Workers' Compensation 49% Medical Malpractice - Claims-Made 45% Special Liability 40% Other Liability - Occurrence 39% Commercial Auto 37% Commercial Multi Peril 23% Homeowners 13% Private Passenger Auto 6% "Today, rating agencies, regulators and investors are demanding that insurers provide detailed assessments of their risk profile and quantification of their economic capital," Mildenhall said. "This study gives insurers the objective, data-driven underwriting volatility benchmarks they need to address the pressure of providing better risk disclosure, enterprise risk management, economic capital assessment and capital allocation figures." With the help of this study, underwriters and actuaries can quantify systemic or parameter risk -- the major component of underwriting volatility for large books of business -- for more than 20 major lines of insurance. Using the Aon Re Global Insurance Risk Study in combination with existing industry and proprietary severity curves, premium volumes and limit and attachment profiles, Aon Re and company actuaries can assess the volatility of their business using the same metrics as catastrophe models. Understanding systemic risk factors helps companies measure their total portfolio underwriting risk -- a key component of calibrating Solvency II and enterprise risk management analyses. The Insurance Risk Study applies sophisticated techniques from risk theory to six years of NAIC Annual Statement data for 1,984 individual U.S. groups and companies. The database, covering all 21 Schedule P lines of business, contains more than 880,000 records of individual company observations. Aon Re Global introduced the Insurance Risk Study in 2003, and the next update, including data from 2007 annual statements, will be available in July 2008. About Aon Re Global Aon Re Global, the world's leading and most preferred reinsurance intermediary, provides clients with integrated capital solutions and services through a world-class network of experts in more than 35 countries. Clients are better able to differentiate and meet their business objectives with Aon Re Global's best-in-class treaty and facultative reinsurance placement services, capital markets expertise, and relevant analytics and technical expertise, including catastrophe management, actuarial, and rating agency counsel. Aon Re Global was named best reinsurance broker in 2007 and 2006 by readers of Business Insurance, in 2007 by readers of US Insurer and in 2006 by readers of Reinsurance. About Aon Corporation Aon Corporation (http://www.aon.com/) is a leading provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting, and specialty insurance underwriting. There are 43,000 employees working in Aon's 500 offices in more than 120 countries. Backed by broad resources, industry knowledge and technical resources, Aon professionals help a wide range of clients develop effective risk management and workforce productivity solutions. This press release contains certain statements related to future results, or states our intentions, beliefs and expectations or predictions for the future which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from either historical or anticipated results depending on a variety of factors. Potential factors that could impact results include: general economic conditions in different countries in which we do business around the world, changes in global equity and fixed income markets that could affect the return on invested assets, fluctuations in exchange and interest rates that could influence revenue and expense, rating agency actions that could affect our ability to borrow funds, funding of our various pension plans, changes in the competitive environment, our ability to implement restructuring initiatives and other initiatives intended to yield cost savings, our ability to successfully execute strategic options for our Combined Insurance subsidiary, the impact of current, pending and future regulatory and legislative actions that affect our ability to market and sell, and be reimbursed at current levels for, our Sterling subsidiary's Medicare Advantage health plans, changes in commercial property and casualty markets and commercial premium rates that could impact revenues, changes in revenues and earnings due to the elimination of contingent commissions, other uncertainties surrounding a new compensation model, the impact of investigations brought by state attorneys general, state insurance regulators, federal prosecutors, and federal regulators, the impact of class actions and individual lawsuits including client class actions, securities class actions, derivative actions, ERISA class actions, the impact of the analysis of practices relating to stock options, the cost of resolution of other contingent liabilities and loss contingencies, and the difference in ultimate paid claims in our underwriting companies from actuarial estimates. Further information concerning the Company and its business, including factors that potentially could materially affect the Company's financial results, is contained in the Company's filings with the Securities and Exchange Commission. Media Contacts CHICAGO NEW YORK Rahsaan Johnson Deidre Campbell 312.381.2684 212.373.6025 http://www.newscom.com/cgi-bin/prnh/20041215/CGW049LOGO http://photoarchive.ap.org/ DATASOURCE: Aon Corporation CONTACT: Chicago, Rahsaan Johnson of Aon Corporation, +1-312-381-2684, ; or New York, Deidre Campbell, +1-212-373-6025, , for Aon Corporation Web site: http://www.aon.com/

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