THE FARMERS GROUP, INC.

                              DISCRETIONARY

                       MANAGEMENT INCENTIVE PROGRAM

                                   FOR

                           EXCEPTIONAL PERFORMANCE


                                                December 1996








                                 TABLE OF CONTENTS
                                 -----------------

INTRODUCTION                                                             1

Eligibility                                                              1

Effective Date                                                           2

Selection Criteria                                                       2

Award Amounts                                                            3

Nomination, Selection and Review Process                                 3

Evaluation Guidelines                                                    4


<PAGE>   1

                             INTRODUCTION

Farmers Group, Inc. and the Auto, Fire and Truck Exchanges are dedicated to
excellence.  Our continued success and future growth depends on this
commitment.  Within our organization, there are strong performers in key
positions who have both the opportunity and the ability to impact our business
in a truly exceptional way over and above their normal job requirements.
This opportunity may not occur every year but when it does, we want to reward
those who excel.

To help ensure these superior performers are properly rewarded for their
extraordinary contributions, the company established a Discretionary
Management Incentive Program.  This program is separate from all other Farmers
incentive compensation programs.  Nomination does not guarantee that an award
will be given.  Also, people not nominated by their department head may be
included.  However, we believe that those people who give an extraordinary
effort should have the opportunity to be considered for special recognition
and compensation.

This Discretionary Management Incentive Program guide outlines the plan
provisions, eligibility and nomination criteria.  

Publishing of the administrative procedure for the Discretionary Management
Incentive Program does not guarantee the continuation of the program.  The
program is completely discretionary and may be modified or terminated by
Farmers Group, Inc. management.  The Chief Executive Officer/Chairman of the
Board is the final authority concerning the interpretation of this program.


Purpose

The Discretionary Management Incentive Program is designed to:

     provide a special financial reward for superior performance over and
     above normal job responsibilities in a given calendar year by selected
     eligible employees, and 
     motivate other employees to seek and retain jobs within the functional
     areas designated for plan participation.


Eligibility

Individuals whose salary grades are listed below are considered eligible
nominees for purposes of this program.  

     All employees in SG 39 or above
     All employees in SG 4B or 4C 

The specific individuals eligible for nomination may change each year due to
changes in job classification or salary grade.  Individuals eligible for the
Investments Incentive Program are not eligible for participation in this
program.

<PAGE>   2

Effective Date

The program operates on a calendar year basis.  Awards are normally distributed
in April following the performance year.  While it is expected that awards will
be made each year, there is no requirement that any awards must be made for any
given year.

Officers must submit their nominations to the Chief Executive Officer by the
last day of February following the performance calendar year.


Selection Criteria

Satisfying the title or salary grade eligibility criteria does not
automatically guarantee a nomination.  However, employees who meet the title
or salary grade criteria should be encouraged to strive for nomination.

The intent of this program is to recognize the top performers in a calendar
year.  A "top performer" would be defined as an individual who clearly
demonstrates initiative and competence in executing tasks over and above the
expectations of his or her position.  While we expect high quality performance
from all individuals at this level, recipients of the discretionary bonus
distinguish themselves by displaying innovative approaches to their jobs that
result in notable accomplishments and achievements, clearly over and above
normal job responsibilities, which lead to improvements in profitability,
productivity and/or quality of service provided to our customers, agency force
and/or employees.

Due to the nature of this program, no individual should be nominated for the
same achievement in consecutive years.  If a project is incomplete at the end of
the year, then that project should not be used to support a nomination.  Results
can only be measured after a project has been completed and successfully
implemented.

The nominee would normally be the single individual in a department who
clearly demonstrated superior initiative and performance over and above
normal job requirements or expectations for the award year.  If an Officer
believes there is more than one top performer in a department, the Officer
may then nominate another individual.  Multiple nominations must be ranked in
preference order.  Since there is no guarantee that a nominee will receive a
bonus, order of preference may become very important in the selection process.

Corporate Legal and Claims Litigation are considered separate departments for
purposes of this program.

Farmers New World Life and Ohio State Life are considered separate operations
for the purposes of this program.

It is important to remember that while the program is discretionary, and
nomination does not guarantee an award, each functional area should benefit
considerably by promoting the program to eligible employees.

<PAGE>   3

Award Amounts

Each Nominee who is selected for an award may receive from 10% up to 40% of
his or her base annual salary in the year for which the award relates.
Pro rata awards may be granted to those who attain eligibility during the
award year.  Nominators are requested to recommend an award percentage for
individual nominees.  Final award amounts, however, will be determined by the
Chief Executive Officer after reviewing all nominations with the Discretionary
Management Incentive Advisory Committee.  This Committee will include the Vice
President of Human Resources, and other members as appointed by the Chief
Executive Officer.
                                                                         
The award pool is determined annually and reported by the Chief Executive
Officer to the Compensation Committee of the Board of Directors in May.  

The pool will be negatively affected by adverse changes in the Exchange
Surplus up to the maximum of 20% bonus pool as otherwise determined.  A
target cumulative five year change in surplus shall be calculated by
determining the surplus required to maintain the previous year's five year
weighted average.  Any shortfall shall be multiplied by the percentage under
target.  That amount shall be deducted from the DMIP pool.  The same
guidelines apply to the Executive Incentive Program.  Any reduction to the
pool will be done annually prior to award distribution.


Nomination, Selection and Review Process


EIP Officers
------------

All EIP Officers (including Life Companies) are responsible for identifying
appropriate candidates from among their eligible employees.  If an officer
nominates more than one person, the nominees must be listed in order of
preference.

The best qualified individual should be nominated regardless of whether he/she
has been nominated or received an award in previous years.  Some individuals
may not be in a position every year to win an award because of the nature of
their work or the possibility that a special project, etc., may take longer
than a year to complete.  They also may be too new in the position to excel
over and above normal job duties.


FGI Board of Directors Annual Review
------------------------------------

Nominations should be sent to the Chief Executive Officer who has final
selection authority.

The Chief Executive Officer reports annually to the Compensation Committee of
the Board of Directors at the May meeting.  The report includes the awards
made for the previous twelve months and reviews the maximum anticipated
cost of the program for the current year performance.

<PAGE>   4


Evaluation Guidelines 
---------------------

To leverage the value of this program within each functional area, it is useful
to plan ahead.  The following tips may be helpful:

     Identify all employees who satisfy the title or salary grade eligibility
     criteria.

     Communicate the program to all eligible employees.  Explain that this is
     a very difficult award to win; that it takes exceptional performance over
     and above what is expected; and that all nominees are ranked by
     contribution level in the review process based on the nominating data
     submitted.

     Encourage employees to strive for nomination.  Be careful to explain that
     multiple nominations in a given category will be listed in preference
     order and that a nomination does not guarantee an award.

     Explain the types of performance that are considered to be superior.
     Emphasize that everyone's eligibility is subject to annual review and
     that the discretionary nature of the program gives everyone a new
     opportunity each year.

     Take time to periodically document exceptional performance patterns.
     This will make it easier to make a fair decision about who should be
     nominated, and to write a strong nomination paper.

     Try to limit nominations to include only the top performer(s).  After the
     award selections have been made, meet with nominees who do not receive an
     award.  Explain that they were nominated and did not receive an award,
     Advise them why they were nominated and express your appreciation for
     their contribution even though they did not receive a discretionary award.
  
Questions about the program or suggestions that will make it more effective
should be directed to the Vice President of Human Resources.