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Marketplace realities 2013

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Willis Marketplace Realities Spring Update 2013 • 4/13

MARKETPLACE REALITIES 2013SPRING UPDATE TABLE OF CONTENTS

n Introduction 1

MAJOR PRODUCT LINESn Property 4n Casualty 5n Workers’ Compensation 6n Auto 7n Employee Benefits 8

PROFESSIONAL LIABILITY LINESn Cyber Risk 9n Directors & Officers 10n Employment Practices Liability 11n Errors & Omissions 12n Fidelity 13n Fiduciary 14n Health Care Professional 15

SPECIALTY LINES n Aerospace 16n Construction 17n Energy – Downstream & Upstream 18n Environmental 19n Kidnap & Ransom (SCR) 20n Marine 21n Political Risk 22n Surety 23n Terrorism 24n Trade Credit 25

We also invite readers to visit the Videos & Publications page of www.willis.com, where youwill find many other articles and studies of immediate and enduring value to risk managers,financial executives and corporate governance stewards of every stripe.

Marketplace Realities is updated semi-annually.

EDITORIAL STAFF Eric Joost | Matt Keeping | Jonathan Fried

Copyright © 2013Willis North America, Inc.All rights reserved.

http://www.willis.com/What_We_Think/

1 Willis Marketplace Realities Spring Update 2013 • 4/13

INTRoDUCTIoN

CLAIMS AND THE LAw of SMALL NUMbERS

The law of large numbers says, in so many words,that the more data you have, the easier it is todetermine averages and confirm predictions.That’s the law that underpins our industry.That’s what makes underwriting work: withenough data, insurers can estimate losses,which allows them to set premiums.Industry observers often debate whetherinsurers set premiums at sustainablelevels, but the evidence of the last fewyears seems clear enough. The systemworks.

While the world has suffered a stringof mega disasters from Australia,Japan and Thailand to the denselypopulated beaches around New YorkCity, our industry’s foresight andcapitalization have been sufficient,and rates have calmly stayed withinpredictable and benign ranges. Somehardening for CAT-prone risks hasbeen predicted. Some hardening forCAT-prone risks has occurred.Otherwise, markets remain largely stablewith moderate price rises, and ourmessage in the 2013 spring update of

Marketplace Realities continues along thelines of our predictions last fall.

With that stability in mind, we thought we would in this introduction look at another, lesspredictable aspect of our business: claims. Claims are why we are here. Claims provide the

resilience that is the ultimate reason for buying insurance.

MARkETPLACE REALITIES 2013SPRINg UPDATE

CLAIM TRENDS: Casualty Highlights

n Staff turnover is an issue amongcarriers/TPAs

n TPA consolidation/mergersn The liability impact of more frequent mega

natural disasters due to climate changen Use of technology in claim process –

Predictive modeling, decision-makingtools, apps that support claim process

n Increased claims for Cyber liabilityn Telecommuting for claim operations

Joe Picone

Chief Claim Officer

Willis North America

CLAIM TRENDS: Property Highlights

n More visibility of legal counsel beingutilized by insurers

n Less reliance on adjusters for coverageopinions and interpretations

n Increased use by insurers of outsideconsultants to determine scope and valueof loss

n Noticeable efforts by insurers to issueadvance payments

David Passman

National Director

National Property Claims



Claims are by their nature unique, small-number events. Theyclearly reveal the specifics of each situation: what the loss is, whatcaused the loss, what the policy says about such losses and how the

adjustment process proceeds.

Claims mirror the harsh variability and complexity ofreality. Two competing companies of similar size insimilar locations may have very different futures ifone is 12 feet above sea level and the other is 20 feetabove sea level, and a tidal surge reaches 18 feet.

Smaller numbers don’t imply that we are unableto make useful generalizations. We asked ourleading claim experts in the Property,Casualty, Construction and Environmentallines to identify trends. The highlightsexcerpted here offer snapshots of thecomplexity of the claim world, as loss events,industry, governmental and social trends,and the realities of the marketplace interactand reverberate.

Joe Picone, our Chief Claim Officer, seesrising costs but declining claim frequency inWorkers’ Compensation. Our Propertyclaim leader, Dave Passman, notes a growinguse of lawyers and consultants in claimresolution, and at the same time, increases inadvance payments on claims. Likewise in D&Oclaims, Ken Ross identifies forces leaningopposite ways: some claim trends are risingwhile overall claim frequency seems to be falling.Robin Kelleher marks certain areas for increased

environmental claim activity. On the Constructionside, Frank Armstrong points out the crucial state-to-

state differences because of the importance of state lawin the process. “It’s a moving target,” he writes. That

comment could go for every sector we scanned.

CLAIM TRENDS: workers’

Compensation (wC) Highlights

n Medical costs and rates climbing, driven bylong tail of pharmacy treatment, obesity,an aging workforce and Medicare/Medicaidobligations under the Medicare SecondaryPayer Act

n Claim frequency down, including long-termclaim frequency, due to ergonomicimprovements coupled with workers notreporting claims during recession

n Monitoring social media usage by injuredworkers to investigate potentiallyfraudulent WC claims

Joe Picone

Chief Claim Officer


CLAIM TRENDS: D&o Highlights

n Reduction in frequency and severity oftraditional D&O securities class actionsand financial credit crisis claims; possibleoverall reduction in the total number ofD&O claims, except Consumer Non-Cyclical

n Increase in M&A, regulatory and derivativeclaims, especially Merger Objection claims

n Significant decline in reverse-merger suitsinvolving Chinese companies

n Dodd-Frank’s bounty program may triggerincrease in whistleblower claims

n Claim frequency may also rise due toincrease in anti-corruption enforcement inthe U.S. and abroad

n Enhanced cross-border cooperation withthe Justice Department and SEC could stirclaim activity

n For foreign firms, may see an increase inmulti-jurisdictional claims post-Morrison v.

National Australia Bank

kenneth w. Ross

FINEX Claims & Legal Group Leader



As risk advisers and claim advocates, it has long been our intentionto apply as many of the large-number predictive tools to thesmaller-number claim world as possible. We do that today, with

increasingly sophisticated tools for analyzing your loss data.We do it through the Willis Quality Index, which aggregatesdata on claim handling by each carrier based on the directexperience of our brokers, client service experts andclients. We also do it through WillPLACE, our client-centered placement tool that captures the prioritythat clients place on claim service when theyevaluate insurers in the marketplace.

The theme of our 2013 edition of MarketplaceRealities is “a group of one.” That is ultimatelythe number that matters. That is the numberof organizations that you – and we – are mostconcerned with at the end of the day. One.Your organization.

Eric Joost

Chief ExecutiveWillis North America Specialties

CLAIM TRENDS: Environmental Highlights

n Carriers strictly applying the Reportingand Cooperation conditions in policies

n Rising mold claims for real estate ownersand school districts

n Increase in storage tank claims as clientsupgrade their facilities and systems

n Real estate developer claims due topollution conditions uncovered duringconstruction

Robin kelliher

Willis Environmental


CLAIM TRENDS: Construction Highlights

n Growing frequency and severity in NewYork Labor Law claims

n Increase in severity of construction defectclaims (CD), including some uptick inconstruction related product class action;increased coverage litigation on CD,particularly in western states

n Non-standard terms creating claimfriction, especially in CD claims

n Rise in insured vs. insured litigation underwrap-up programs, again, particularly inwestern states.

n Increased demand and planning for greenbuildings may produce claims related toLEED certification, energy savings, etc.

n Expanding use of Building InformationModeling (BIM) may yield related PL claims

frank Armstrong

National Director, Construction Claims



MArkeTplAce reAliTies 2013

spring updATe properTy

n Until October 30, insurers saw 2012 as a year of recovery, when they would reverse the results of 2011 – a year thathit insurers with combined loss ratios in excess of 100% due to losses totaling nearly $120B (second all-time to 2005).n Then Superstorm Sandy hit the metropolitan New York/New Jersey/Connecticut area, and $25B later,

Sandy entered the books as the second most damaging named storm to hit the U.S., despite falling short ofthe Category 1 hurricane threshold when it struck land as a post-tropical cyclone.n At the annual Monte Carlo reinsurance conference in September 2012, most reinsurance executives

voiced expectations that 2013 would bring reinsurance rate reductions. Superstorm Sandy temperedthose thoughts, even though few insurers hit their treaty protection – unlike 2011 when reinsurerssustained multiple blows.n Even with Sandy, Property losses totaled $65B in 2012, a 44% improvement over 2011’s

total, and the P&C insurance market saw policyholder surplus increase from $550B in

2011 to $570B in 2012. The market was well capitalized to absorb 2012 losses.

n Capacity remains abundant in 2013, even for CAT perils. No new capacity has come into themarket this year but neither have we seen contraction.

n The reinsurance market is flat so far in 2013, helping smooth the way for insurers,

and we expect benign conditions to continue.

n Underwriting was impacted by Sandy.l Insurers are reviewing definitions of Named Storm and Flood. In some cases, insurers are

moving storm surge from the Named Storm definition and including it under Flood. l Insurers are expanding the northern boundary of the Named Storm territory

from Virginia to Maine.

l When insurance programs are written via a single insurer policy, many insurers arereviewing the Flood limit and High Hazard Flood limit, especially in the Northeast (i.e., Zone A or V), frequently reducing the limit and increasing the deductible at renewal.

l The pricing for Flood coverage in the Northeast is increasing, but the increases are notconsistent across the board.

l After Sandy, many insurers were caught by surprise, with numerous policies providinglarge limits ($100M or more) and low deductibles ($100,000). This situation is beingamended even if the account did not experience a loss from Sandy.

* Except for accounts affected by Sandy , especially those accounts where Flood limits are being reduced on renewal and Flood limitsneed to be restructured.

conTAcT

David Finnis National Property Practice Leader

Willis North America404 302 3848

[email protected]

Type of AccounT

Non-CAT -5% to flat*

CAT Flat to +5%*


mARkETPLACE REALITIES 2013

SPRINg UPDATE

CASUALTY

PRImARY & ExCESS

n ISO�has�introduced�a�new�CGL�form,�effective�April�2013,�which�contains�minor�coverage

modifications�related�to�liquor�liability�and�electronic�data�processing�exclusions�that�slightly

broaden�coverage.

n Changes to the way the policy limits respond in additional insured situations will make contract reviewmore complicated for insureds with respect to how primary and umbrella/XS limit requirements arespecified in the contract as well as how other insurance contract language tracks with the new form.n Carriers�are�pushing�for�moderate�rate�increases�generally�for�primary�and�umbrella/XS

placements,�largely�due�to�the�sustained�low�interest�rate�environment.�There�is�no

shortage�of�capacity�in�the�Casualty�market,�however,�and�that�will�keep�the�marketplace

competitive.

n While�the�market�has�not�deteriorated�significantly�in�the�last�few�months,�rates�are�on

average�about�4-5%�higher�at�renewal,�with�construction�and�real�estate�industry�risks

generally�running�slightly�higher�than�that.

CONTACT

Pam FerrandinoCasualty Practice Leader, Placement NA212 915 [email protected]

PRICE PREDICTION

+2% to +10%


MARKETPlACE REAlITIES 2013

SPRINg UPDATE WORKERS’ COMPENSATION

n We are seeing indications that frequency may be starting to creep up. We have not definitively

identified a driver but candidates include the impact of economic conditions on employment

opportunities, hiring of new or less experienced workers, the aging work force and consideration of

how changes introduced by the Affordable Care Act will impact Workers’ Comp.

n The change in the experience mod calculation introduced by NCCI and adopted by most states

this year may impact insureds, with increasing frequency leading to higher mods. Surprisingly,

the changes in mod calculations are affecting larger Workers’ Comp programs as well as

middle market risks.

n California continues to be a challenging Workers’ Comp venue due to perceived rate inadequaciesand benefit increases.

n Monoline Worker’s Comp is becoming still more difficult to place, with limited capacity in the market.n New York Workers’ Comp assessments are still the highest in the U.S. at 18.8% of

modified standard premium, down from 20.2% last year. Options such as the NY State

Insurance Fund and self-insurance offer ways to save some money on assessments but

they come with trade-offs. As the New York Second Injury fund continues in run-off, it

remains to be seen whether the assessment level made up of other components as

well will also decline in the future.

CONTACT


PRICE PREDICTIONS

+2.5% to +10%, up to +20% in California


MARkETPLACE REALITIES 2013

SPRINg uPDATE AuTO LIAbILITy

n For the past year, primary Auto retentions have been pushed up for insureds with large fleets, difficult

auto exposures such as heavy trucks, and unfavorable historical loss experience.

n Although the use of safety technology is favorably impacting the loss experience of many large Auto risks, therisk transfer markets are slow to reflect these investments in their pricing.n Some of largest umbrella underwriters as asking for higher attachment points or simply

walking away from accounts.

n Over the past six months, we have seen a stronger demand for Auto buffer products to bridge theprimary limits and the umbrella attachment.

CONTACT


PRICE PREDICTIONS

+2% to +10%


mARkETPlACE REAlITIES 2013

SPRINg UPDATE EmPlOyEE BENEfITS

n Employers are focused on the elements of the federal health care reform law that will go into effect in the nextfew years, in particular, guidance implementing the employer pay or play excise tax.

n Many employers are finding that it will cost less than they anticipated to avoid all or the largest part of thepay or play excise tax by offering relatively low-value coverage to additional employees and chargingrelatively high contributions. We anticipate that insurers will offer products that facilitate these strategies.n Many employers fear they will have insufficient time to prepare for provisions becoming

effective in 2014 as government agencies have been slow to provide guidance with crucial

details on implementation.

n The pay or play excise tax is triggered by a state-based health insurance exchange issuing acertification regarding a full-time employee’s coverage. Questions about whether insuranceexchanges will be operating by January 1, 2014 are creating additional uncertainty.n The cost of insurance continues to rise, as insurers pass down the costs of

compliance, as well as various fees. For example, we anticipate that the transitional

reinsurance fee becoming effective for 2014 will add 1⁄2-1% to cost.

n Cost increase estimates for the coming year vary from 5% to over 10%. Providers are askingcarriers for improved payment terms, placing further pressure on costs.

n Employers continue to take aggressive steps to stem the rising costs of health care:l Shifting costs to employeesl Adopting self-insurance optionsl Offering consumer-directed plans of various types including high-deductible health plans

that support contributions to health savings accounts (HSAs)l Considering private health insurance exchange models

n Cost containment efforts may be driven in part by the Cadillac plan excise tax due to takeeffect in 2018. This 40% excise tax will apply to the excess value of an employee’s healthbenefits above certain thresholds. Concerns about increased enrollment due to thecombined effect of the employer and individual pay or play excise taxes may also be drivingcost containment efforts.

n The correlation between improving employee health and reducing health care costs issustaining interest and employer investments in wellness programs.

n Employer efforts to offer competitive total reward programs remain thwarted by economic pressures.n Many health care providers are starting to offer their own health programs either alone or in

partnership with insurance carriers. Accountable care organizations, which are focused on thedelivery side of health care reform, will provide employers with more choices in providinghealth care benefits to employees. Understanding ACOs and how employers can benefit fromthem will be a complex process.

n It appears that health care reform has not yet stopped employers from providing benefits to theiremployees.

CONTACT

Elizabeth E. Vollmar, JD National Legal & Research Group

Willis Human Capital Practice314 854 [email protected]

PRICE PREDICTIONS

+8% to +10%


MARkETPlACE REAlITIES 2013

SPRINg UPDATE CybER RISk

n The market for stand-alone Cyber policies remains competitive, with renewal rates from -2% to +5%.

With increased losses, a few markets are looking for slight increases over expiring premiums. n First-time buyers will find a competitive environment, though new markets on excess placements are

starting to read the losses and price for the primary.n In 2012, more than 2,600 breaches were reported in the U.S. – roughly seven per day – a new

record high, according to Risk Based Security’s 2012 Data Breach QuickView. They fell into three maincategories: l Human error: 12% (327 incidents)l Hacking: 59% (1,817 incidents)l Theft/rogue employees: 18% (477 incidents)n Individuals’ names, passwords and email addresses were exposed in nearly 45% of reported

incidents – more than enough data for cyber criminals to use in committing identity fraud.n More stringent privacy laws in the U.S., Europe and other countries have multinational

corporations addressing Cyber risk enterprise-wide, although implementation of the EU DataRegulation could be pushed off to 2015 or later. n Several markets have revised their policies, bringing in more robust data breach response

services and other enhancements.n A few carriers are introducing Cyber policies in overseas markets.n More markets are putting up excess limits, building capacity for large placements, while

competition is driving down excess pricing.n All markets will provide Social Media Liability protection under the Internet Media or

Multimedia Insuring Agreement under a Cyber policy.n Insureds that buy Errors & Omissions (E&O) policies are often able to add Cyber risk by

endorsement. Exceptions include financial institutions and health care organizations. n Cloud computing is becoming a bigger concern for corporations outsourcing critical

applications to cloud service providers. Contractual indemnifications are important.Underwriters are reviewing.

n Regulatory fines and penalties have been assessed following data breaches and underwritershave paid the fines.

CONTACT

Geoffrey K. AllenNational E&O and eRisk Practice Leader

212 915 [email protected]

PRICE PREDICTIONS

Renewals -2% to +5%

First-Time Buyers Competitive



SPRINg UPDATE

DIRECTORS & OffICERS(D&O)

n The price-firming momentum for primary D&O placements will continue throughout 2013.Flatrenewals and decreases with current insurers have been few and far between, with any significant change inexposure (market cap increase or decrease) driving the primary markets to look for higher rate increases. n Most markets are holding the line on pricing and are even willing to lose accounts and end long-

term relationships; but non-incumbent carriers may be more competitive – at least this year. n On excess, flat to lower single-digit increases can help keep total premiums down.

n Coverage terms and conditions generally tend to still be competitive.One major carrier hasrewritten the playbook with its new primary form, which will encourage the tailoring of coveragewhile streamlining policy language and adding flexibility on claim notifications.n Capacity remains constant, with no new entrants in the marketplace for commercial (non-

financial) risks. Capacity for financial services firms remains stable. As the impact of LIBORclaims on D&O coverage unfolds, we will continue to monitor coverage outcomes.

n Private companies and nonprofits are seeing rate increases as well, especially in the

health care sector.An increase in competitive health care capacity has yet to reverse thisupward pressure. Home-owner/condominium associations are another difficult class ofbusiness with some markets exiting or dramatically increasing premiums.

n For private company D&O, one major market plans to incentivize firms with price

savings if they accept restricted coverage. Those who elect the option may lose all

or a significant amount of coverage for D&O claims.

n The most significant product changes are in the area of investigations. Limited coverage isavailable for individual directors and officers, but rarely for corporate entities.

n Limited Foreign Corrupt Practices Act (FCPA) coverage is available, but pricing is still high. n Another major trend is the continued expansion of global D&O programs

incorporating local placements (where non-admitted coverage is not permitted).n Lead A-Side D&O carriers continue looking for ways to differentiate their product offerings.

Bermuda carriers are often the incubators of change.n M&A-related D&O exposures are likely to continue fueling a push for higher, separate

deductibles/retentions. n While most financial crisis D&O claims may be behind us, the impact of the sequestration on

private and public firms, especially those that count on the U.S. government as a majorcustomer or funding source, is uncertain.

CONTACT

Ann LongmoreD&O Product Leader


PRICE PREDICTIONSOverall Flat to +10%

Public Company - Primary Flat to +15% on primary

Public Company - Excess -5% to +5% on excess, including Side A

Private Companies Flat to +15%; Financial services: to +20%

Nonprofit Entities Flat to +5%, health care to +10%



SPRINg UPDATE

EmPlOymENT PRACTICES lIAbIlITy (EPl)

n Price increases in the D&O marketplace are creeping into EPL placements in 2013.

n In spite of recent favorable case law, the lingering effects of the financial crisis continue to produce

class and collective actions arising from the workplace, and this trend is expected to continue in 2013.

n Some carriers are refusing to underwrite firms domiciled in certain counties in California, due to adverseclaim experience.n The government continues to ramp up its enforcement efforts through the EEOC and the DOL, leading

to more government-initiated litigation over workplace issues.n Capacity overall remains abundant though there are no new entrants into the marketplace. n Carriers in the U.S., Bermuda and London are likely to offer competitive terms on larger risks while

London continues to be a prime competitor for middle market accounts. Bermuda continues tooffer competitive pricing with broad coverage, including punitive damages for larger companieswith 5,000+ employees.n The good news for Fortune 500 and equivalently sized firms is coverage is available

in Bermuda and London for wage-and-hour claims, including back wages, liquidated

and punitive damages, defense costs and plaintiffs’ legal fees. Those currently

applying loss control techniques will be especially welcome.

n Significant EPL claims are being brought outside the U.S. and this is expected to continueinto 2013. While the frequency is low, the severity is beginning to attract adverse attentionfrom carriers.

n An ongoing trend is policy wording addressing new social media exposures.

CONTACT

Ann LongmoreEPL Product Leader212 915 7994

[email protected]

PRICE PREDICTIONS

Overall Flat to +10%

Large Global Companies Flat to +10% on primary, +5% on excess layers

Mid-Size to Large Domestic Firms Flat to +10% on primary, +5% on excess layers

Private and Nonprofit Entities Flat to +15%

Smaller Employers (< 200 Employees) +5% to +15%



SPRINg UPDATE

ERRORS & OMISSIONS(E&O)

n The E&O market is slowly turning from the soft marketplace of the last few years, though not as quickly as mostinsurers would like. For the first quarter of 2013, we saw pressure for increases in the 5% range with some

carriers seeking increases up to 10%. In the remainder of 2013, however, we expect that the upward

pressure will be offset by competition and new carriers in the market, which will keep increases in

the 0-3% range.

n The market is starting to divide. Insurers with the larger market shares are increasing their efforts tomove prices up and in some instances are walking away from heated competition rather than follow theprice down.n Where risks are generic, we are seeing less upward pressure on rates, especially when there are no

significant revenue increases or claims. n For unique risks where the number of lead markets is limited to large established players,

we are seeing some increases in premium up to 5%, even when there are no losses.

n For the excess markets, we have seen more competition and rates have been flat.n Wording enhancements are a key dimension of competition and are still available, but the

opportunity to widen policies is narrowing. Insurers will continue to add or enhance options toinclude Network Security and/or Privacy Liability coverage.

n Most insurers are standing firm on deductibles rather than use these as a

competitive tool.

n Accounts with poor loss experience are facing significant price and deductible increases.n On select accounts with good loss experience or a significantly improved risk

control regimen, competition is often robust, with some insureds attaining

decreases in the 5% range.

n Competition will remain generally strong for the middle market through 2013.

n New entrants continue to enter the market and some insurers are expanding theirunderwriting teams.

n Authorized global E&O limits are approximately $700M. Typical insureds should be able tobuy from $350M to $400M. Recently, insurers have begun closely managing their capacityand often reducing the size of their capacity commitments.

CONTACT

Geoffrey K. Allen | National E&O and eRisk Practice Leader | 212 915 7951 | [email protected]

PRICE PREDICTIONS

Good Loss Experience +0-3% or more

Poor Loss Experience +10 to +25%

0

100

200

300

400

500

600

700

800

2009 2010 2011 2012 (est.) 2013 (pred.)

$M

illion

s

E&O CAPACITY



SPRINg UPDATE FIDElITy

n The Fidelity market shows signs of settling into a period of flat renewals, particularly for insureds

that experienced a rate increase in their prior renewal.

n Capacity remains strong, and while several of the leading long-term markets would likely prefer

prices to continue rising, they are challenged by newer entrants, particularly in the mid-sized

client space.

n Breadth of coverage remains stable, with one notable change: the firming up of policy languagesurrounding underwriters’ intent to not cover losses involving the theft of confidential information orindirect or consequential losses. The impetus for the clarifying language stems from a recent appellatecourt decision (Retail Ventures, Inc. v. Nat’l Union Fire Ins. Co., 691 F.3d 821 (6th Cir. 2012) that aplaintiff’s Crime policy could be interpreted to cover the theft of confidential information and theensuing expenses, such as credit monitoring, usually associated with Cyber insurance.n The markets serving financial institutions continue to be challenged to modernize both the

Financial Institution Bond language and coverage, particularly regarding technology and thecomputer systems insuring agreements. Several markets have taken the message to heart andhave developed new language. n The rise in the frequency of Crime claims appears to have leveled off, but frequency

and severity are still at levels higher than the underwriting community would like.

While loss scenarios involving theft are endless, several recurring schemes include:l Vendor Fraud – Midlevel manager submits bogus invoices for goods or services that were

never providedl Wire Fraud – Employee or officer responsible for bookkeeping, banking records or any

position involving the payment of bills or movement of funds, wires money to their ownaccount

l Agent Fraud – The theft of funds or property by an outside individual or entity acting onbehalf of the insured (investment adviser, fiduciary for pension funds, payroll processors,etc.); coverage for such exposures is not standard under the policy and must be requested.

l Inventory Theft – Employee theft of highly marketable inventory or materials (technologymanufacturers and wholesalers and pharmaceutical companies are frequent targets)

CONTACT

Stephen LeggettNational Fidelity Product Leader


PRICE PREDICTIONS

Overall Flat to +5%



SPRINg uPDATE FIDuCIARy

n The price firming momentum we are seeing in D&O placements is migrating to Fiduciary placements

in 2013. Any increase or decrease in plan assets now leads to immediate requests for rate increases.

n The number one premium rating factor, other than assets and funding levels, continues to be the level ofemployer securities in employee pension and benefit plans (such as 401(k) plans).n Capacity remains constant, with no new entrants into the marketplace.n The good news is that one market is willing to consider multi-year deals.

n Uncertainty about the national health care agenda and potential changes in the definition of fiduciaryin the health care context present significant concerns not yet reflected in the marketplace.

n The migration of recent D&O coverage enhancements into Fiduciary policies is expected

to continue throughout 2013.This can include affirmation wording relating to (presumptive)indemnification and advancement of defense costs as well as expanded coverage for investigations.n A coverage clarification (occasionally contested by some markets) relates to settlor liability.n ERISA tagalong litigation, including Fair Labor Standards Act (FLSA)-related activity,

continues, and suits involving cash balance plans are still making their way through the courts.n Class certification in ERISA cases, especially in potential class actions involving 401(k) plans,

has been strongly impacted by the 2011 Dukes v. Wal-Mart employment decision by the U.S.Supreme Court.

n With M&A activity heating up, ERISA fiduciary claims may well follow.

CONTACT

Ann LongmoreFiduciary Product Leader


PRICE PREDICTIONS

Overall Flat to +15%

Companies with large concentrations of

their stock in employee benefit plansFlat to +15% on primary, flat on excess layers

Companies without company stock in

their plansFlat to +5% , flat on excess layers

ESOP-owned firms 10% to +15%

Private and Nonprofit entities +10% to +15%


MARKETPLACE REALITIES 2013SPRING UPDATE HEALTH CARE PROFESSIONAL

n The Health Care Professional Liability (HPL) market will remain soft through the first half of 2013,with flat renewals typical and rate reductions up to low single digits – and sometimes more foraccounts with good loss experience. Limits purchased, program structure and attachment points are allimportant factors in driving HPL pricing at renewal. n Certain long-term care risks may see slightly higher increases due to shifts in the legal environment thathave led to large losses.n The number of jumbo malpractice verdicts (above $25M) over the last two years is

troubling and must be watched closely but has had no affect on pricing to date.n Obstetric and pediatric cases continue to be volatile and difficult to defend.n Loss frequency remains at historically low levels (with perhaps a slight uptick). Severity hasmoderated and is actuarially predictable. The HPL industry combined ratio may be creepingup closer to 100 but this line of insurance remains very profitable.

n Health Care Reform (PPACA), upheld by the U.S. Supreme Court, will shape malpractice riskand underwriter response, as many health care organizations prepare for the PPACAimplementation and/or move to clinical integration by acquiring or aligning with physicianpractices and creating contractual relationships with other providers to form networks.

n Merger and acquisition activity by hospitals and hospital systems remains very high.n Many buyers may need to adjust terms and conditions to address cyber-related issues,executive risks, inter-related provider contractual liability, errors and omissions forutilization and other administrative exposures, and a new world of pay-for-performance andfinancial risk.

n Consolidation of insurers in the HPL industry continues, particularly among the physicianinsurers.

n “Integrated occurrences” (i.e., related acts or batch coverage) remain an issue for manyinsurers.

n Despite a few recent court decisions overturning damage caps, we see no clear trend towardsoverturning malpractice reform legislation. Some state courts have recently upheld reformlaws or enacted enhancements to existing reform laws.

n Rapidly expanding use of electronic medical records may present significant liabilityexposure while potentially reducing claims by encouraging better communication.

CONTACT

Marcia RichardsonKnowledge ManagerWillis North America Health Care Practice615 872 3319

[email protected]

PRICE PREDICTIONSOverall Flat to -5%



SPRINg UPDATE AIRlINE/AEROSPACE

n Downward rating trends continue, despite airline exposure growth. Rates are now falling in the double

digits.Where exposures are contracting, rates are not rising to compensate and premium levels are falling.n Unprecedented airline loss performance and abundant capacity should continue the premium

reductions for the foreseeable future.

n Market appetite for airline risks varies significantly by sector and geography, resulting in differentrenewal results.n Economies of scale will continue to improve results for the largest programs.n The Aerospace sector continues to see softening market conditions. n Corporate Aviation continues to see competition driving down premium volumes and bringing

improvements in coverage. n Excess capacity is available across all sectors but is not being fully utilized. New entrants added

relatively small amounts of capacity to this already competitive sector.n Industry and program consolidation in all sectors continues to erode premium levels. n Airline losses over the last two years are excellent and well below the sector’s five-year average.

No financially catastrophic losses have occurred for several years.

CONTACTS

Steve DoyleChief Commercial OfficerWillis Aerospace+44 203 124 7208

[email protected]

Garrett HanrahanPresident, Willis Global Aerospace

Chief Executive Officer, Global Aerospace Americas +1 972 715 6390

[email protected]

PRICE PREDICTIONS

Airline

n Premium

n Rates

n Exposures

-5% to -15%Flat to -25%-10% to +20%

Aerospace Flat to -5%

Corporate Aviation -5% to -15%



SPRINg UPDATE CONSTRUCTION

n The U.S. experienced an increase in construction activity in Q4 2012, which has continued into 2013.

Rates for Property and Casualty continue to trend upward, although ample carrier capacity and

competition prevent this from turning into a classic hard market. Incumbent carriers continue to push forrate increases. Guaranteed cost programs (policies without retentions) and excess Liability continue toexperience the highest rate increases.n The biggest recent change in the marketplace is that underwriters are now analyzing flood language to

determine if a storm surge from a Sandy-like event would fall under Named Storm or Flood. Underwritersare also extending the area that includes Named Storm Tier-One counties north of Virginia.n Controlled Insurance Programs (CIPs)

l The standard market for owner- or contractor-controlled insurance programs (CIPs)

has expanded once again and underwriters continue their enthusiasm for the best

opportunities.

l The recent spike in multi-family construction is attracting the attention of the standard marketas well as the excess and surplus (E&S) lines carriers. The standard market is looking for ways tolimit this exposure within their portfolios, while the E&S market is looking to take advantage ofthe wave of new GL-only project opportunities. Terms and conditions are challenging, withpremium costs up to 2% or more of project cost depending on the limits and coverage.n Property – Many clients are experiencing increases of up to 10% – higher in some

areas, such as the Northeast, due to the carrier losses associated with Superstorm

Sandy.Flat renewals are considered a good result. n General Liability – Construction defect exposures and various state litigation trends

continue to create volatility. At the same time a number of carriers are underwriting this line,which tempers the rate increases most say are needed.

n Workers’ Compensation – Continuing the trend we saw in 2012, rate increases are averagingup to 10%, and more in some states.

n Excess/Umbrella Liability – Most renewals are subject to increases. Rates trended 7-12%higher last year on average and we expect rate pressure to continue in 2013.

n Auto Liability – Renewals are stable. Most 1/1 renewals were flat or +5%. Carriers oftenadjust Auto rates to offset rate movement in other lines of coverages.

n Builders Risk – The Builders Risk market continues to be very competitive and capacity is stillrobust with domestic, European and Bermuda markets. Superstorm Sandy has reduced CATcapacity in some geographical areas for some markets.

n Professional Liability – The A/E/C market continues to pursue rate increases on renewals andis also reevaluating SIR levels as appropriate (particularly for larger firms). However, withcompetition and good experience we are typically seeing flat rates. Some classes of business suchas structural and geotech continue to be difficult classes with limited options.

PRICE PREDICTIONS

General Liability +3% to +10%

Excess Liability +7% to +12%

Workers’ Compensation +3% to +10% (state-by-state increases could be higher)

Builders Risk Flat to +10%, higher in high catastrophe areas

Controlled Insurance Program

(CIP)

Primary and excess rates remain flat with significant variationdepending on job size, type of work and location

CONTACTTim McGinnis | SVP, Willis Americas, National Construction Practice | 972 715 5263 | [email protected]



SPRINg UPDATE ENERgy

DOWNSTREAM

n Market conditions remain relatively stable, as capacity is flat so far in 2013 – although

additional capacity can now be secured from major players such as AIG and Berkshire Hathaway.

n However, the run of losses in this sector continued through 2012.n 2013 has started out badly, with two major losses already.

n Rating levels remain at their lowest in over 20 years, leaving markets in a dilemma as to

whether they should raise prices and see market share diminish, or maintain existing rates

and produce poor results for the long term.

n A package approach to upstream business may gain traction as alternatives melt away.n The marketplace has seen no new major entrants – but no major withdrawals either.n Insurers are adjusting global models to focus on key regions.n Policy wordings and deductible levels are all stable.

UPSTREAM

n Overall capacity levels have reached the $5B mark, although realistic capacity remains at2012 levels ($4B).

n The softening process we saw in Q4 2012 was interrupted by a tougher than

expected reinsurance renewal season at January 1.

n The benign 2012 hurricane season for the energy sector increased premium income

with no losses – we expect this to fuel a softening later in the year.

n Available data indicates that most upstream insurers have made a profit on all yearsunaffected by Gulf of Mexico windstorm losses.

n The marketplace may produce alternatives to Lloyd’s-led programs. n We are seeing increased focus on natural catastrophe areas outside the Gulf, e.g., the

South China Sea and Timor Sea.

n Insurers remain cautious on Loss of Production Income cover.n Policy wordings and deductible levels are all stable.

CONTACT

Robin SomervilleGlobal Communications Director

+44 20 3124 [email protected]

PRICE PREDICTIONS

Stable market, but modest reductions now being achieved moving forward into Q2

PRICE PREDICTIONS

Stable market, but modest reductions possible moving forward into Q2



SPRINg UPDATE ENvIRONmENTAl

n The ultimate impact of recent natural disasters on pollution underwriters’ profit margins is yet to be

determined. However, with the wide swath of business segments now purchasing environmental

coverage, the exposure to loss from these catastrophes will very likely result in increased claims.

n Many markets are looking to international opportunities to fuel growth, and buyers will find locally-admitted environmental coverage options generally available with these carriers.n Competitive terms and pricing continue with respect to the base coverage forms for

Contractors Pollution Liability and site-specific Pollution Legal Liability insurance. However,

prices are up slightly for select risks and product lines, particularly Underground Storage

Tanks and Combined Pollution/General Liability products.

n Certain product lines continue to move toward commoditization (e.g., Contractors PollutionLiability), while others are being “re-underwritten” by some carriers. Some products, such asCleanup Cost Cap, have become extremely difficult to procure. However, a few carriers haveindicated they are considering offering this coverage again. Some risks remain quite difficult totransfer at all, such as underground storage tanks more than 15-20 years old.n With capacity plentiful, many insureds are implementing layered program

structures.Ten years ago, a handful of environmental insurers had single-policy capacities of$50M to $100M. Today, very few have more than $25M.

n Long-term policies are less available for operational exposures. One- to three-year terms arepreferred. Ten-year terms are still available for project-specific applications and forhistorical protection, which is important for transactional placements. In some cases,Contractors Pollution Liability project terms plus completed operations coverage may stillbe available for total periods of as long as 15 to 17 years.

CONTACT

Rich SheldonEnvironmental Practice Leader


PRICE PREDICTIONS

Contractors Pollution Liability -10% to Flat%

Pollution Legal Liability (including combined GL/PLL) -25% to Flat%

Combined GL/PLL Flat to +25%

Environmental Professional Liability (including CPL) -5% to +15%

Financial Assurance Instruments (USTs, Closure,Performance Bonds)

Flat to +10%

Cleanup Cost Cap +10% to +20% (if available)



SPRINg UPDATE

SPECIAl

CONTINgENCy RISkS

n Insurers are evaluating with greater scrutiny exposures across the Maghreb and Sahel regions of

North Africa in the wake of the mass hostage taking and subsequent siege at the In Amenas gas facility in Algeriain January 2013 and a recent wave of kidnaps by Islamic fundamentalists as retaliation for the French ledoperations in Mali.n Rates in the U.S. Special Contingency Risks (Kidnap & Ransom) market remain stable, and

premiums will continue to be higher for companies with significant exposures in Latin

America, Africa and the Middle East.

n Mexico, Venezuela, Nigeria, Pakistan, Afghanistan, Philippines, Iraq and Somalia continue to be theareas of primary concern, as do several more recent hotspots for kidnapping, including Mali,Mauritania, Niger, Sudan, Malaysia and Kenya.n The risk of political evacuations caused by political upheaval remains high in places such as the

Middle East, and carriers remain cautious in their approach to Emergency Political Repatriationand Relocation coverage. Limits are commonly reduced and certain North African and MiddleEastern countries are frequently excluded.n Somali piracy remains a problem, despite the declining number of successful vessel

hijacks. Underwriting of exposures in impacted waters is still cautious. A significant

increase in the number of pirate attacks in the Gulf of Guinea has led insurers to

rate exposures in these waters more punitively.

n Buyers with exposures in the U.S. and low-risk overseas locations can expect flat renewals.

CONTACTS

Richard ScurrellSpecial Contingency Risks +44 207 088 9121

[email protected]

Matthew ReynoldsSpecial Contingency Risks212 915 8780

[email protected]

Concetta EspositoSpecial Contingency Risks


PRICE PREDICTIONS

Flat to +10%


Marine

n As with many sectors within the Global insurance industry, Marine continues to have high levels of

capacity with the resultant stability in pricing and coverage levels.

n Cargo – A poor underwriting year has meant significant changes to the reinsurance programs, both inmonetary terms and increases in retention. Increased capacity at Lloyd’s has prevented underwriters fromimposing increases, thus making a potential hardening less likely. We have seen notable hardening of rateson certain classes of Cargo, although overall the market remains relatively flat.n Hull – 2012 will be remembered as the year that produced the single largest hull loss to date with the

Costa Concordia. Many believed that this would be a tipping point in the marketplace, with ratesrising across the board. In fact, with more than $1.5B of capacity and continued new entrants, themarket has remained flat.n Ports/Terminals/Shipyards –The predominantly land-based Ports/Terminals and Shipyards

have a unique combination of liability insurance often written by Marine insurers and propertywhich may fall into both the Marine and Non-Marine sector. It is likely that we shall see ahardening of the property facet of that portfolio due primarily to the effects of Superstorm Sandylast year. n Protection & Indemnity –This is one area, certainly within the Mutual P&I world, that has

seen an uptick in premium charges and retention levels. The very nature of this part of themarine industry sees global losses pooled to drive a hardening collective field of insurers.

n Liability/Casualty –Due to the blurred line between the Marine and Energy insurers thereremains a rather black cloud gathering over the Macondo incident in 2010. A recent ruling inthe U.S. Court of Appeals in New Orleans went against the liability insurers who issued apolicy for Transocean, the owner and operator of the Deepwater Horizon drilling rig. It ruledthat BP can be considered an additional insured under the policy with overall limits of$750M. It’s not over yet but this could lead to changes in how risks and exposures arecalculated in the complex relationships that prevail in the Gulf of Mexico.

cOntact

Chris BhattGlobal Sales Director, Global Specialties – Marine +44 20 3124 6560

[email protected]

price predictiOns

Hull market remains flat with modest increases on other Marine lines.

Marketplace realities 2013

spring Update


MARKETPLACE REALITIES 2013

SPRINg UPDATE POLITICAL RISK

n Political risks are rising due to:l Economic tensions in Europe and China

l Escalating violence in Syria and political instability in Libya and Egyptl Questions surrounding the post-Chavez era in Venezuela, i.e., the removal of U.S. officials from the

country and the new government’s attitude towards foreign investorsl Russia’s regulatory system posing significant risks for international investors, including

expropriation of assets and limitations on participation in areas deemed to be of significance tonational security

l A worsening climate for foreign investors in Latin America’s energy sector, e.g., Brazil’sgovernment announcing a plan to cut electricity prices and U.S. oil giant Chevron’s assets beingfrozen in Argentina and Ecuador as a result of indigenous Ecuadoreans and others seeking tocollect a multi-billion judgment against Chevronl An increase in high levels of corruption and political interference, combined with a lack

of rule of law and respect for property rights in Argentina, Guinea, Libya and Russial Bolivian nationalization of Spain’s largest utility, Iberdrola, and revocation of mining

licenses from a subsidiary of Glencorel Algerian government being accused by of damaging a foreign direct investment in the

country’s largest mobile operatorl Coca-Cola announcing that political instability and civil strife in Russia and Nigeria could

have a negative impact on its financial results. Pepsi had similar comments regarding itsRussian investment

n In 2013, we anticipate several trends:

l New entrants to the Political Risk markets which will increase available capacity.

l Increased capacity in the market will cause slight downward pressure on

premium rates.

n U.S. companies continue to insure potential losses arising from host governments (e.g.,China) imposing foreign exchange remittance restrictions that prevent payment ofdividends or repayment of loans involving foreign subsidiaries.

CONTACTS

John Lavelle North America Political Risk Practice Leader


PRICE PREDICTIONS

Slightly decreasing



SPRINg uPDATE SuRETy

n The top line revenue for the Surety industry has been shrinking in recent years. This trend is a clear reflection ofthe continued slow economic activity and challenging construction marketplace, with tight margins and intensecompetition. The reduction in public works contracts, where bonding is mandatory, has clearly had an impact onthe industry’s results.n In the face of declining revenues, competition has increased in the upper end of the construction market

where there is a greater need for capacity due to mega projects. This has been the most profitablesegment of the contract Surety market, where contractors have stronger balance sheets, diversificationand staying power. This increase in competition in the Surety market has placed some

downward pressure on rates and softened underwriting terms and conditions.

n New competitors continue to enter the Surety market with an expectation of higher returns thantraditional P&C lines. In the last two years, seven sureties have started up operations.

n Capacity is also being directed to the commercial Surety side of the business, which has

been experiencing strong profitability and low loss ratios. This has attracted a number

of new entrants and has resulted in softer terms, conditions and pricing in this segment.

n As expected, the Surety industry loss ratio continued to increase in 2012 but there is no reasonto panic. The increase in losses is a frequency issue primarily emanating from smaller generalcontractors and specialty subcontractors. It is not one of severity. As a result, the overall

industry continues to be profitable and stable with more than ample capacity.

n We expect 2013 to be similar to 2012. The Surety industry will struggle to grow and

some sureties may be forced to aggressively pursue new business, which in turn

may place pressure on rates, terms and conditions.Notable loss frequency (notseverity) will continue to be a key trend for the industry. Ongoing loss activity may impactthe results of regional or start-up sureties and may cause some of them to change theirunderwriting strategy or rethink their commitment to the Surety marketplace altogether.

CONTACT

Sean McGroartySurety LeaderNational Construction Practice212 915 8194

[email protected]

PRICE PREDICTIONS

Moderate fluctuations within an overall softening market


MArkeTPlAce reAliTies 2013

sPriNg UPDATe TerrOrisM

n The uncertain future of the Terrorism Risk Insurance Protection Reauthorization Act (TRIPRA), set to

expire in 2014, has led to the appearance of sunset clauses and has begun to impact 2013 Property and

Builders Risk renewals.

n Renewal legislation, proposed in early 2013, has not yet garnered significant Capitol Hill support, anindicator that a tough fight may be ahead for those favoring the program’s continuation.n Companies are increasingly exploring the long-term Terrorism coverage options available

through the alternative and stand-alone Terrorism insurance markets.

n Stand-alone Terrorism capacity is available at an estimated maximum of $2.5B per risk, thoughlimits are significantly lower in the highly aggregated, major metropolitan areas of New York,Chicago and San Francisco (Tier One areas).

n New entrants into the Terrorism marketplace continue to provide a competitive

environment for most buyers without Tier One exposures.

n The increasing availability and sophistication of deterministic terrorism modeling has added anew dynamic to the validation of risk transfer and retention assumptions.

n The increasing potential for cyber terrorist attacks and the questions of ensuing liability haveraised interest in pursuing SAFETY Act certification for network security systems and providers.

n Coverage for Nuclear, Biological, Chemical and Radiological (NBCR) Terrorism eventsremains limited due to high cost and limited available capacity (estimated at $150M per risk).

n Captives remain an efficient risk transfer tool to address otherwise uninsurable Terrorismrisks, including NBCR and Cyber Terrorism.

cONTAcTs

Wendy A. Peters Justin A. ConwayTerrorism Practice Leader Terrorism Practice National Resource

610 254 7288 312 288 [email protected] [email protected]

Price PreDicTiON

Flat to +5%

0

500

1,000

1,500

2,000

2,500

2004 2006 2008 2010 2012 2013

$Millions

TERRORISM CAPACITYProperty Terrorism PV

NCBR


MARKETPLACE REALITIES 2013SPRING UPDATE TRADE CREDIT

n While many of the world’s economies are recovering, the lingering European recession continues to threatenworldwide financial stability.n Despite the trouble in Europe, Trade Credit insurance rates remain stable.n The economic troubles are evidenced by capacity limitations in many sectors both domestically

and abroad. Capacity for particularly risky individual buyer credits, especially in the retail sector, isbecoming scarce. n Attractive premium rates are still available for corporations wishing to transfer the risk of non-

payment of receivables.n Market conditions have remained relatively unchanged for desirable sectors over the past few

years. In general, we expect the marketplace to remain favorable for insureds in 2013. n As in 2012, the potential for European default contagion continues to loom. Such a shock would

likely create a swift and sharp increase in premium rates and an equally sharp contraction inavailable capacity.

n Reinsurance capacity remains plentiful for Trade Credit markets. n Current claim activity is down in terms of frequency and severity with the exception of

Southern Europe, where we see growth in both. We expect claim activity to continue togrow in Europe due to the recession, as well as in Asia and Latin America should wesee a sharp decline in demand for key commodities.Domestically, we expect a flat trendin both claim frequency and severity.

CONTACTS

Damion Walker | West Coast | 949 930 1776 | [email protected] Ettien | East Coast | 212 915 7960 | [email protected]

Tom Raspanti | East Coast | 212 915 7838 | [email protected] De La Cruz | West Coast | 213 607 6282 | [email protected]

Scott Pales | Midwest | 312 288 7735 | [email protected]

PRICE PREDICTIONSFlat to +5%

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