1st View. 1 July Page

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1 1st View 1 July 2011 Page

2 TABLE OF CONTENTS RENEWALS 1 July 2011 Introduction 3 Property Territory and Comments 4 Rates 5 Pricing Trend Graphs 6 Casualty Territory and Comments 7 Rates 8 Specialties Line of Business and Comments 9 Rates1 0 U.S. Workers Compensation Comments Capital Markets Comments 1st View This thrice yearly publication delivers the very first view on current market conditions to our readers. In addition to real-time Event Reports, our clients receive our news brief, The Daily Willis ReView, periodic newsletters, white papers and other reports. Willis Re Global resources, local delivery For over 100 years, Willis Re has proudly served its clients, helping them obtain better value solutions and make better reinsurance decisions. As one of the world s premier global reinsurance brokers, with 40 locations worldwide, Willis Re provides local service with the full backing of an integrated global reinsurance broker. Copyright 2011 Willis Limited / Willis Re Inc. All rights reserved: No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, whether electronic, mechanical, photocopying, recording, or otherwise, without the permission of Willis Limited / Willis Re Inc. Some information contained in this report may be compiled from third party sources we consider to be reliable; however, we do not guarantee and are not responsible for the accuracy of such. This report is for general guidance only, is not intended to be relied upon, and action based on or in connection with anything contained herein should not be taken without first obtaining specific advice. The views expressed in this report are not necessarily those of the Willis Group. Willis Limited / Willis Re Inc. accepts no responsibility for the content or quality of any third party websites to which we refer. Willis Limited, a Lloyd s broker is authorized and regulated by the Financial Services Authority. Page

3 Mixed Messages The reinsurance market remains in a state of uncertainty regarding its short-term future direction, but what is clear is that any turn in the market pricing cycle is unlikely to follow historic patterns. More sophisticated capital management techniques and greater transparency over profitable market niches are driving fragmentation of the cycle into territory- and class-specific cycles. The 2nd quarter of 2011 has not offered any respite to the global reinsurance industry from the exceptional run of natural catastrophe losses, starting in February 2010 with the Chile Earthquake. Unusual weather patterns in the 2nd quarter of 2011 spawned an unprecedented number of major tornadoes in the U.S. and a third earthquake loss in Christchurch, New Zealand. Natural catastrophe losses now total in the region of U.S. $86 billion in insured losses and U.S. $48 billion of reinsured losses over the last 16 months. An additional challenge has arrived in the form of changes to some of the widely-used catastrophe models for U.S. windstorm, and buyers, reinsurers and rating agencies have had to start taking this into account. Updates to the major European catastrophe models are being released in July, adding to a considerable workload for all parties as they seek to understand the impact of model change on their capital management and performance strategies. Fortunately, in the face of these challenges, the capital base of the global reinsurance industry remains ample, though the average natural catastrophe loss for reinsurers in the 1st quarter of 2011 is in the region of 10% of their shareholders funds at the end of December To offset these losses, share buy backs have been scaled back. U.S. $1.2 billion of new capital has entered the industry, either through sidecars or fresh equity, as some reinsurers start to position themselves for a possible market turn. Similarly, a number of collateralized capacity providers whose existing capital has been called following the 1st quarter losses, have been able to raise fresh funds. Given all the variations in loss experience, model change, exposure change, structure change, capacity demand and geographical scope, it is not easy to generalize about rate changes. The reinsurance market as a whole has reacted reasonably logically with a differentiated approach driven on a case-by-case basis. Outside of natural catastrophe classes, we clearly see this differentiation with Property risk excess of loss pricing movements driven by individual experience and a continued softness in longer tail Casualty classes, notwithstanding concerns over inflation and stubbornly low interest rates. Merger and acquisition activity has picked up. A number of deals have been announced, with the most notable being the recent Transatlantic Re / Allied World merger and the market is rife with speculation about other potential deals. While many of the proposed transactions may make sound commercial sense, shareholders may not be so enamored as a number of the proposed deals are being executed at below book value, which may place additional pressure on incumbent managers. With the market in a state of limbo, many reinsurers are facing the likelihood of a poor underwriting result for This is leading a number of senior managers to openly discuss the combination of circumstances required to turn the market. Excess capital is generally held to be the key reason for the current market softness, so any event, either on the underwriting or asset side which reduces excess capital, will be critical. Into this category fits concerns over a major natural catastrophe or potentially, a more damaging series of medium-sized catastrophes, as well as a financial downturn or contagion arising from European debt issues. Others speculate that in the absence of clarity around the final implementation terms of Solvency II and the impact of the equivalence regime in markets outside Europe, it is premature to discuss market overcapitalization, since the new capital requirements have not yet been adequately defined. Peter C. Hearn Chairman, Willis Re 1 July 2011 Page 3

4 Property territory and comments Australia Property pro rata event limits have come under significant pressure to reduce following substantial loss activity Property risk excess of loss pricing has increased driven by exposure growth and loss activity Catastrophe pricing for Australian-only portfolios has been very diverse, driven by loss activity, exposure growth (both organic and changes in inuring structures) and portfolio composition New Zealand companies are seeing large increases driven by losses from the Christchurch earthquakes Some second tier reinsurers have completely withdrawn their capacity from the Australasian market following the recent loss activity Caribbean Catastrophe excess of loss pricing on modest upward trend since April Overall capacity remains strong Concern continues about local rate environment which remains competitive China It was widely anticipated that rates could harden following the catastrophic events in Australia, New Zealand and Japan, however the impact on pricing for China is lower than expected Capacity from the Middle East, Eastern Europe and Asia has replaced some of the traditional reinsurance participants Pricing on earthquake-exposed layers has firmed with less upward pricing pressure on non-earthquake-exposed layers Latin America Still adequate capacity available for Latin America although some mid-range reinsurers may be approaching their aggregate limit in certain territories Catastrophe pricing is static, with no real price reductions and any increases have been modest Large events outside the region have kept Chilean catastrophe excess of loss renewal prices at similar levels to last year (following the February 2010 earthquake) Risk excess of loss capacity is readily available although placements of loss-hit programs have been more challenging Proportional capacity is at similar levels to last year and remains very limited in terms of new capacity where the treaty does not have an event limit (e.g., Colombia) Mexico Capacity for Mexican catastrophe excess of loss business remains plentiful Considerable detailed analysis is being carried out on the flood portion of Hydrometeorological perils Wide variations in portfolio composition among insurers are driving major differences in program limit structures, especially at the lower end of programs Middle East Treaty renewals are seeing modest rate increases Loss hit treaties are subject to significant pricing review Regional reinsurers catastrophe Retrocession capacities are decreasing primarily due to economic reasons Peru There still appears to be plenty of catastrophe excess of loss capacity available for Peru Most local per risk capacity is placed non-proportionally. There is capacity readily available at correct technical pricing Good use is made of the facultative market in order to balance and protect net retentions Page 4

5 South Africa Pro rata commissions remain flat Risk excess of loss pricing based on loss experience Catastrophe excess of loss pricing based on aggregate movement, but on average up by 5% Capacity on pro rata is flat U.S. Florida Wide variation of quotes received from reinsurers was driven by model weighting and specific dependence on retrocession coverage A number of factors influenced individual program pricing, which varied by carrier including geographic scope of carrier (Florida-specific or multi-zone Southeast); extent of RMS v11 model change, including secondary modifiers; competitiveness of prior program pricing; perception of credit quality of carrier and capacity demand on the market U.S. Nationwide New capacity was scarce and more expensive than renewal capacity, in particular for peak wind placements on nationwide accounts Percentage rate changes varied by layer with existing top layers in peak zones most heavily impacted; this was driven by increased cost of capital pressures due to international catastrophe losses, more expensive retrocessional costs and most noticeably, from increases in modeled losses for U.S. wind Wide variation of quotes received driven by reinsurers applying different weighting for the new catastrophe models versus the old Client differentiation is key, with reinsurers offering more favorable pricing and capacity for the best-in-class companies Rates TERRITORY Pro rata commission Property rates Risk loss free Page 5 Risk loss hit % change Catastrophe loss free % change Catastrophe loss hit % change Australia 0% to -2% +10% +30% +5% +30% Caribbean 0% -5% Varies +5% +10% China N/A 0% to -10% Varies 0% to +5% N/A Mexico 0% 0% to -5% +2% to +5% 0% to +3% N/A Middle East 0% +10% +20% +10% +25% New Zealand 0% to -2% +10% +30% +50% +150% Peru N/A 0% to -5% +5% to +7.5% +3% N/A South Africa 0% 0% +5% to +10% 0% +5% to +10% U.S. Florida 0% to -5% 0% to -10% N/A -5% to +15% N/A U.S. Nationwide 0% to -7.5% 0% to +5% 0% to +10% +5% to +15% +10% to +20%

6 Property catastrophe pricing trends The charts on this page display Estimated Year-to-Year Property catastrophe rate movement, using 1990 and 100 as a baseline Australia Caribbean Mexico United States Nationwide Page

7 Casualty territory and comments Australia Major reinsurers put upward pressure on rates with their initial quotations, but ultimately most placements were renewed as expiring There remains abundant capacity with an appetite for all lines of Casualty business No new exclusions being applied by reinsurers. Buyers were able to obtain some concessions from reinsurers when requests were supported with an appropriate business case Caribbean Motor Capacity plentiful Primary competition strong Global Professional Liability Non-U.S.-exposed Directors & Officers business remains highly competitive, rates softening with cedants obliged to offer mutli-year insurance policies Recession-exposed Errors & Omissions rates softening notwithstanding loss experience driven by plentiful new capacity and despite concerns over continued latent loss emergence Non-recession-exposed Errors & Omissions lines experiencing increased competition driven by universal desire to diversify Reinsurance capacity generally stable with some new entrants and cedants generally seeking to maintain current retentions and structures South Africa General Liability / Employers Liability / Professional Liability Plenty of excess of loss capacity Very limited proportional capacity Excess of loss pricing is flat on average Page 7

8 U.S. Motor Capacity is stable Loss frequency has been been low due to safety and economic factors U.S. General Liability Reinsurance capacity is stable but not readily deployed on new programs Clash programs featured stable rates on line Exposed excess of loss rates were largely unchanged Ceding commissions on quota share, cessions excess and surplus share were largely unchanged U.S. Professional Liability Insurance price reductions continue, especially for commercial Directors & Officers business and results have benefited from a lack of loss severity, although Financial Institution business is also enjoying rate reductions notwithstanding recent loss activity Errors & Omissions insurance pricing continuing to decline albeit generally at a slower pace in most segments Reinsurance market capacity and terms remain stable for well-managed clients Significant interest among ceding companies in excess of loss and systemic clash reinsurance structures Interest in consolidating placements into global treaties among cedants Ceding companies showing little appetite to increase retentions and to preserve capacity, given market conditions Rates TERRITORY Pro rata commission Casualty rates XL No loss emergence XL With loss emergence Australia N/A 0% 0% Caribbean Auto / Motor 0% -3% Varies Global Professional Liability -1% to +1% -2% to -5% +5% South Africa GL/EL/PL 0% 0% +5% to +10% U.S. Auto / Motor 0% 0% 0% U.S. General Liability 0% 0% +5% U.S. Professional Liability -1% to +1% 0% +5% to +10% Page 8

9 Specialties line of business and comments Engineering Global Pricing on original business remains flat with continued pressure on terms in certain territories Engineering portfolios have registered little exposure to the natural catastrophe losses of Q1, 2011 New reinsurance capacity entering the Engineering market supporting increased capacity and improved treaty terms Improving economic outlook for the Construction Industry is leading to new business opportunities Healthcare United States Since January renewals, there has been little change in the frequency or severity of claims There has been little change in the Mutual / Commercial rating environment The biggest competition facing commercial and mutual Medical Professional Liability writers continues to be the migration of their insureds into self-insured captives This migration is exacerbated by the vertical and horizontal integration currently underway in the U.S. healthcare industry and is potentially encouraging more M&A activity Captives still presuming a continuation of the current favorable claims climate and are pricing accordingly, but more established and experienced writers, due to historical lessons, are pricing more cautiously Life, Accident & Health United States Three new excess medical markets emerged in 2011 Competitive rate environment continues for high excess accounts Page 9

10 Marine London / Global accounts, including Energy, are all paying rate increases A few Energy-exposed programs have been renewed with increased capacity to cover the accumulation between physical damage and liability Offshore Energy capacity is now becoming scarce for new covers Retentions remain at a similar level to 2010 No shortage of capacity for traditional Marine business Pricing of non-energy-exposed business remains flat Non-Marine Retrocession Post the losses in Japan and New Zealand Non-Marine Retrocession pricing increased by 10% to 25% at 1st April 2011 Post Q1 losses, a number of premium escalation clauses were inserted, particularly with regards to the Japan earthquake loss Some new / additional capacity entered the Non-Marine Retrocession market especially selling second event covers Capacity is coming into the market via sidecars, refinancing of collateralized markets and the creation of new focused asset funds Personal Accident / Life Catastrophe Market capacity remains high for the accident segment Rates have started to level as a result of global events Increasing nuclear, chemical, biological and radiation rates are an issue to monitor as capacity tightens Political Risk Global Continual improvement and redundancy in original loss reserves from 2007 and 2008 years of account Reinsurers are likely to seek pricing increases should the current Middle East, North Africa situation deteriorate significantly; clients who have little or no Libyan exposure are likely to seek reductions to their overall reinsurance spend A large number of reserves and advices are being established for Libyan exposures, although it is too early to tell full extent of impact Increased reinsurance capacity available from both existing and new reinsurers, although leading capacity remains relatively limited Capacity remains for both pro rata and excess of loss programs and reinsurance pricing remains stable, although some established lead markets are pushing for increases, as their aggregate capacity becomes limited. Newer markets remain more commercial but are reluctant to challenge lead / quoting reinsurer Rates TERRITORY Pro rata commission Specialty rates Risk loss free Page 10 Risk loss hit Catastrophe loss free Catastrophe loss hit Engineering Global +1% -5% +2% -10% 0% Life, Accident & Health U.S. N/A 0% to +10% +10% to +25% N/A M/A Marine including Energy 0% 0% to +25% +25% to +50% 0% to +25% +25% to +50% Marine excluding Energy 0% 0% to +20% 0% to +20% 0% to +20% 0% to +20% Non-Marine Retro 0% 0% +5% to +10% +5% to +10% +10% to +25% Personal Accident / Life Catastrophe N/A 0% to -10% 0% to +5% 0% to -10% N/A

11 U.S. Workers Compensation Primary market Both pricing and payrolls have stabilized in the primary market. Historically, insurers have benefited 2-3% each year from wage rate increases. This inflationary factor helped inflate premium rates. Today we are experiencing some increase in payrolls but wage rates are not increasing. Quota Share Reinsurers must overcome their concern about high industry loss ratios, making it a challenging market for quota shares. Working Layers This is defined as including single life coverage, generally below the $10 million attachment point level. Select reinsurers have become more conservative in their pricing; however, overall this market segment remains fairly stable. Catastrophe Layers Reinsurance coverage requiring two or more lives in the same loss occurrence. Any spillover effects from the tightening property catastrophe market are barely noticeable. The softening in this market appears to have stopped; pricing has firmed but not hardened. There are no capacity shortages. Capital Markets Reduction in Q2 new issuance activity following robust Q1 Investors focused on loss development from Tohoku earthquake, which caused a total loss to Zenkyoren s $300 million Muteki Ltd. bond U.S. tornado activity has caused some mark-to-market losses Investors especially receptive to new deals excluding first event U.S. hurricane risk Market participants continue to adapt to changes in RMS U.S. hurricane model Q3 is traditionally quiet for new issues but with trading around any catastrophe events Mergers & Acquisition market activity has increased recently Such activity is expected to continue to be strong Lloyd s consolidation is a clear theme in the London market Page 11

12 Global and local reinsurance Willis Re employs reinsurance experts worldwide. Drawing on this highly professional resource, and backed by all the expertise of the wider Willis Group, we offer you every solution you look for in a top tier reinsurance advisor, one that has comprehensive capabilities, with on-the-ground presence and local understanding. Whether your operations are global, national or local, Willis Re can help you make better reinsurance decisions, access worldwide markets, negotiate optimum terms and boost your business performance. How can we help? To find out how we can offer you an extra depth of service combined with extra flexibility, simply contact us. Begin by visiting our website at or calling your local office. Willis Re The Willis Building 51 Lime Street London EC3M 7DQ Tel: +44 (0) Fax: +44 (0) Willis Re Inc. One World Financial Center 200 Liberty Street 3rd Floor New York, NY Tel: +1 (212) Media Inquiries Ingrid Booth Willis Group Communications The Willis Building 51 Lime Street London EC3M 7DQ Tel: +44 (0) boothi@willis.com Page 12