2014 U.S. Industry Report: Retail

Transcription

1 2014 U.S. Industry Report: Retail Risk. Reinsurance. Human Resources.

2 Retail Industry Report 2014 Aon Risk Solutions

3 Table of Contents Introduction... 3 Executive Summary Risk Insights... 6 Top 10 Risks... 6 Risk Preparedness for the Top 10 Risks... 7 Losses Associated With Top 10 Risks... 8 Top Five Risks Projected 3 Years From Now... 9 Identification and Assessment of Major Risks... 9 External Drivers Strengthening Risk Management Client Insights Priorities in Choice of Insurer Desired Market Changes Risk Management Department Retentions/Deductibles Limits Global Programs Use of Captives Market Insights Coverage Terms and Conditions Carrier/Marketplace Participation Financial Insights Methodology, Notes and Disclaimers Aon at a Glance Key Contacts Retail Industry Report 2014

4 Retail Industry Report

5 Introduction In recent years the retail sector has faced many challenges all of which have changed the way companies must view and prioritize their resources in response to risk. Since the complexity of risk expands at an ever-increasing pace, the demands for up-to-date information and a constant stream of innovative solutions escalates. As the leading global provider of risk management services, insurance and reinsurance brokerage, and human capital consulting, Aon is proud to provide our clients with the most innovative solutions and the most informative risk insights and data available. Aon s 2014 Retail Industry Report provides comprehensive, industry specific data on key issues and concerns. These findings allow organizations to benchmark their risk management and risk financing practices against those of their peers and help identify practices or approaches that may improve the effectiveness of their own risk management strategies. If you have any comments or questions about the survey, or wish to discuss the findings further, please contact your Aon account executive. Best regards, Madeline H. Serpico Managing Director National Retail Practice Leader Aon Risk Solutions lynn.serpico@aon.com MaryAnne Burke Managing Director Deputy Retail Practice Leader Aon Risk Solutions maryanne.burke@aon.com Retail Industry Report

6 Executive Summary Organizational sustainability in the retail industry demands proactive understanding and management of risk. In the current fast-changing economic, legal and regulatory landscape, the risk profiles of retail companies evolve quickly. Recent challenges caused by the slow economic recovery, property losses and network security breaches remind us that threats to organizations increasingly come from all directions and in many different forms and the ability to manage these risks is key to survival and success. As part of our efforts to help companies stay abreast of emerging issues and learn what their peers are doing to manage risks and capture opportunities, Aon has compiled this report, which contains some detailed facts and figures retail sector. The report is comprised of four main components: Risk insights include top 10 risks faced, reported readiness, losses related to risks, how organizations are identifying and assessing risks, and external drivers affecting risk management. Client insights include priorities in choice of insurer, desired market changes, risk management departments, retentions, limits, global programs and use of captives. Market insights include discussions of marketplace and coverage terms and conditions. Financial insights include analyses of market environment for the retail sector. Key Findings Risk Insights Greatest risks The two greatest risks indicated by respondents to Aon s 2013 Global Risk Management Survey are increasing competition and economic slowdown. Risk preparedness for the top 10 risks The retail industry s overall preparedness for the top 10 risks has declined from 79 percent in 2011 to 60 percent in Respondents rate failure to attract or retain top talent as the least prepared, at 21 percent Losses associated with top risks For the retail industry, increasing competition tops the list of risks with the most losses in the past 12 months, at 79 percent. Projected greatest risks In 2016, Retail survey respondents point to economic slowdown/slow recovery as a number one risk concern. Identification and assessment of major risks When it comes to risk identification and assessment, the most frequently used method is senior management judgment and experience, at 59 and 64 percent respectively. In practice, retail industry companies typically utilize a combination of the above methods. External drivers strengthening risk management Economic volatility remains the most important external drivers strengthening risk management for the retail industry. Retail Industry Report

7 Client Insights Priorities in choice of insurer For the first time, claims service & settlement is cited as the top criterion in an organization s choice of insurers, replacing value for money, which topped the list in for retail companies in the prior survey. Desired market change Surveyed retail organizations are looking for increased ability to recognize internal risk management through lower premiums, broader coverage/better terms and conditions, and more flexibility for the insurance market. Risk management department Sixty-seven percent of retail respondents indicate that they have a formal risk management department. Among those, 67 percent say their risk management department reports to the CFO/ Finance. In the case where no formal risk management department exists, 36 percent say their CFO handles risk management. Retentions/deductibles Overall, the majority of retailers have not changed their retentions compared to their prior policy period. Umbrella/excess liability limits The average limit purchased by surveyed retail companies is USD 129 million. The highest limit purchased stands at USD 500 million, while the lowest limit purchased is USD 15 million. Directors & Officers liability limits - Similar to umbrella/excess liability, in general directors and officers liability limits purchased by publicly traded retail companies is in direct proportion to a company s revenue size. The highest limit purchased was USD 500 million, while the lowest limit purchased was USD 3 million. Global programs When retailers operating in more than one country are asked how they purchase/control their insurance programs, 62 percent indicate that their corporate headquarters controls procurement of all of their global and local insurance programs while 28 percent say their corporate headquarters purchases some lines and leaves local offices to handle other lines. Among the global policies that organizations have purchased, the most common types indicated are related to general liability, including public/product liability, property damage/business interruption and auto liability. Use of captives Thirteen percent of retail companies surveyed report having an active captive or Protected Cell Company (PCC) with nine percent also indicating a plan to create a new or additional captive or PCC in the next three years. The most common coverages currently underwritten are property and general/third party liability. Market Insights Coverage terms and conditions Overall, the majority of retail respondents indicate that the terms and conditions for all surveyed lines of coverage remain unchanged to improving, in comparison with programs in prior years. The coverage line that has experienced the most improvement in coverage terms is D&O liability at 29 percent. Financial Insights Financial insights Over the past 12 months, the share price of retail companies has generally outperformed Russell 3000 Index. If we compare employment numbers for the retail industry and the overall non-farm sectors in the same time period, we can see that retail companies have fared better than the overall non-farm sectors and that the employment situation for this sector is trending upward. In terms of annual revenue change, the Russell 3000 Index has outperformed the retail sector in seven of the last 12 quarters between Q3 10 and Q2 13. The average Consumer Confidence Index figure for 2013 (through August) stands at 72 percent. However, consumers short-term outlook is at its highest point since August If we examine the monthon-month percentage change figure, we will notice that retail sales (excluding auto) have been in positive territory for all but six months since Retail Industry Report

8 Risk Insights General Introduction In today s global environment, retail companies are facing increasingly complex challenges: supply chain disruption, a slow global economic recovery, food safety, rising employment related litigation, natural disasters, healthcare reform and network security breaches, all of which could potentially cause tremendous disruptions to a business and damage to its reputation. The stakes for the retail sector are high. With increased scrutiny on operating efficiencies and a need to constantly innovate in an omni-channel sales environment, it is critical to access accurate and timely information, and proactively address risk at every level of the organization. In this section of the report, we provide industry specific insight into: Top 10 Risks Risk Preparedness for the Top 10 Risks Losses Associated with Top 10 Risks Top Five Risks Projected 3 Years From Now Identification and Assessment of Major Risks External Drivers Strengthening Risk Management Top 10 Risks Respondents are provided a list of 50 risks and asked to select 10 that they believe to be the top risks facing their organizations. Increasing competition is now the number one risk for the retail sector, moving up from third in Ranked second on the list is economic slowdown, dropping from the top spot in Business interruption jumped from 11 th in 2011 to 4 th in Regulatory/legislative changes dropped from 5 th in 2011 to 8 th in This is not surprising considering the loss activity since our last report, most notably Superstorm Sandy. When we look at the top 10 risks as a whole, there is an undeniable interdependence among these risks for retail organizations. It is more important than ever for companies to embrace an enterprise-wide approach to managing risk and to optimize their strategy on a global basis so they can deliver value to their customers when they need it. Retail Top 10 Risks Rank Retail Top 10 Risks 1 Increasing competition 2 Economic slowdown 3 Damage to reputation/brand 4 Business interruption 4 Failure to innovate/meet customer needs 6 Distribution or supply chain failure 7 Technology failure/system failure 8 Regulatory/legislative changes 9 Failure to attract or retain top talent 9 Crime/Theft/Fraud/Employee Dishonesty Data Source: 2013 Global Risk Management Survey Where ranking numbers are duplicated that indicates a tie Retail Industry Report

9 Risk Preparedness for the Top 10 Risks Preparedness for risk is evidenced by having a plan in place to address the risk or having undertaken a formal review of that risk. Compared to the 2011 survey, overall preparedness for the top 10 risks has declined, from 79 percent to 60 percent. One possible explanation could be that the prolonged economic recovery has strained organizations resources, thus hampering their abilities to mitigate many of these risks. On the other hand, it can be interpreted that there is a growing risk awareness among surveyed companies, which had an inadvertent false confidence. They might have put in place plans to address the risks but discovered later that those plans were inadequate or unworkable. In other words, companies are becoming more knowledgeable and pragmatic in the understanding of their true exposure to risk. Top 10 Risks Reported Readiness Retail Increasing competition 77% 80% Economic slowdown 49% 84% Damage to reputation/ brand 61% 73% Business interruption 74% 92% Failure to innovate/meet customer needs 67% 76% Distribution or supply chain failure 59% 84% Technology failure/ system failure 76% 89% Regulatory/legislative changes 45% 64% Failure to attract or retain top talent 21% 72% Crime/Theft/Fraud/ Employee Dishonesty 68% 80% Data Source: 2013 Global Risk Management Survey Failure to attract or retain top talent and economic slowdown have experienced the greatest change in risk preparedness among the top 10 risks from 2011 to 2013 preparedness for failure to attract or retain top talent has declined by 51 percent and that for economic slowdown has declined by 35 percent. Retail respondents rank failure to attract or retain top talent as the least prepared, at 21 percent. The industry has high turnover among its hourly employees who often work at the store level. Recognizing that this is an essential component of the customer experience, many of our retail clients have identified improving this metric as an area of focus going forward. Retail Industry Report

10 Losses Associated With Top 10 Risks Among the top 10 risks, increasing competition is cited as causing the most losses in the past 12 months, at 79 percent. On an aggregated basis, the average percentage reported by the retail industry for losses related to the top 10 risks has increased, from 32 percent in 2011 to 47 percent in Compared to the 2011 results, eight out of the 10 top risks have experienced greater losses in the past 12 months. Top 10 Risks Reported Readiness Retail Increasing competition 54% 79% Economic slowdown 63% 87% Damage to reputation/ brand 0% 55% Business interruption 23% 48% Failure to innovate/meet customer needs 33% 48% Distribution or supply chain failure 16% 39% Technology failure/ system failure 11% 38% Regulatory/legislative changes 27% 36% Failure to attract or retain top talent 17% 34% Crime/Theft/Fraud/ Employee Dishonesty 34% 53% Data Source: 2013 Global Risk Management Survey Damage to reputation/brand and technology failure/system failure has experienced the greatest increases in losses, at 55 percent and 27 percent respectively. This validates the point made earlier in this report that the identified risks are all inter related and demand an enterprise wide approach. Reputation/ brand is a high value asset to any retailer and any of the identified risks could have a negative impact depending on an individual company s response to loss. Retail Industry Report

11 Top Five Risks Projected 3 Years From Now When asked to project the top 5 risk concerns in the next three years, retail survey respondents pointed to economic slowdown/slow recovery as a number one risk. This is not surprising considering the primary focus is to attract customers, create brand loyalty and to deliver value through the omni channel sales process. Top Five Risks Projected 3 Years From Now Rank Retail Projected 2016 Top 5 Risks 1 Economic slowdown/slow recovery 2 Increasing competition 3 Failure to innovate/meet customer needs 3 Regulatory/legislative changes 5 Failure to attract or retain top talent Data Source: 2013 Global Risk Management Survey Where ranking numbers are duplicated that indicates a tie Identification and Assessment of Major Risks In today s global environment, companies are facing increasingly complex challenges global economic volatility, extensive regulatory and compliance changes, rising litigation, and supply chain failures that could adversely affect businesses. To effectively manage risks, organizations must implement a comprehensive risk framework to identify, assess and address these evolving risk profiles. According to risk experts, the most comprehensive method for organizations to identify and assess their risks should be a structured enterprise wide risk identification and assessment process. Twenty-nine percent of retail survey respondents utilize this method to identify risks whereas only a little over a 25 percent use this process to assess their risk. In practice, most organizations utilize a combination of methods to identify and assess major risks facing their organizations. Senior management s intuition and experience is cited as the method most often used by surveyed organizations to identify major risks facing their organizations (59 percent), followed by risk information from other function-led processes. When it comes to risk assessment, the most frequently used method is senior management judgment and experience, at 64 percent. The second common methods are board and/ or management discussion of risk during annual planning, risk assessment or other processes and risk information from other function-led processes, cited by 29 percent of the respondents. Should organizations relying predominantly or exclusively on management experience and intuition for their major risk decisions be concerned? In today s fast evolving business environment, where the past may not always be the best predicator of the future, exclusive reliance on senior management s intuition and experience to identify and assess risks could result in a significant loss to an organization. Some of the reasons include: Risk identification based on experience tends to miss emerging or new risks. Risk identification based on intuition may not be consistent and may not be given credence by others. There may be a tendency toward risk aversion by managers with the view - better safe than sorry. On the contrary, the use of risk registers, quantitative analysis and an enterprise-wide approach to identifying and assessing risk is desirable, adding consistency to the process and enabling the organization to more effectively assess the potential impact of an identified risk on the organization so it can deploy appropriate resources for treatment. Retail Industry Report

12 As risks increase in complexity, retail companies must integrate intuition and experience with sophisticated analytics to make the most informed objective and predictive decisions. Identification of Major Risks Assessment of Major Risks Category Retail Category Retail Board and/or management discussion of risk during annual planning, risk assessment or other processes 43% Board and/or management discussion of risk during annual planning, risk assessment or other processes 29% Senior management judgment and experience 59% Senior management judgment and experience 64% Risk information from other function-led processes (e.g. internal audit, disclosure, compliance, etc.) 48% Risk information from other function-led processes (e.g. internal audit, disclosure, compliance, etc.) 29% Industry analysis, external reports 38% Structured enterprise-wide risk identification process 29% Other 2% Industry analysis, external reports 27% Structured enterprise-wide risk identification process 25% Other 0% External Drivers Strengthening Risk Management (past two years) Economic volatility and workforce issues are the most important external drivers strengthening risk management for the retail industry. Workforce issues had the largest increase in importance compared to 2011 survey. External Drivers Strengthening Risk Management (past two years) Retail All Industries Increased focus from regulators Economic volatility Political uncertainty Natural weather events Demand from investors for greater disclosure and accountability Pressure from customers Pressure from competitors Pressure from suppliers/vendors Workforce issues Large third party liability losses/litigation Risk events/black swan events Other 4% 4% 7% 9% 9% 7% 11% 13% 11% 12% 15% 15% 14% 18% 18% 16% 20% 20% 22% 24% 31% 34% 38% 47% Data Source: 2013 Global Risk Management Survey Retail Industry Report

13 Client Insights General Introduction The right knowledge at the right time can literally change the world. The retail industry has been capitalizing on timely information made available to consumers and enterprises alike for some time. Similarly, the value Aon offers through content is empowering clients with relevant and timely risk insights that can help them make better decisions. In this section, we provide industry-specific data and analyses into: Priorities in Choice of Insurer Desired Market Changes Risk Management Department Retentions/Deductibles Limits Global Programs Use of Captives Priorities in Choice of Insurer For the first time, claims service and settlement is cited as the top criterion in an organization s choice of insurers, replacing value for money/price, which topped the list in for retail companies in the prior survey. This pivotal change in priority is not totally unexpected, because 2011 was one of the largest loss years on record. Moreover, the insured losses in 2012 (which included Superstorm Sandy) also exceeded the global 10-year average. After all, the ultimate purpose of an insurance policy is the promise to pay for a covered loss. Relating to claims service and settlement is financial stability, which ranks second on the list, followed by value for money. This shows that concerns for pricing are still tempered by an interest in dealing with carriers who have the financial capacity to pay claims and who meet the financial security requirements expected of counter parties. Priorities in Choice of Insurer Priorities in choice of insurer 2013 Retail 2011 Retail Claims service 1 3 Financial stability/rating 2 2 Value for money/price 3 1 Industry experience 4 6 Capacity 5 7 Long-term relationship 6 8 Flexibility/innovation/ creativity 7 4 Ability to deliver a global program 8 10 Speed and quality of documentation 9 9 Risk control and engineering 10 N/A Data Source: 2013 Global Risk Management Survey Retail Industry Report

14 Desired Market Changes When asked what changes retail organizations would most like to see in the insurance market, the majority of respondents desire: More flexibility Recognition of investments in internal risk management efforts through lower premiums Broader coverage/better terms and conditions These clearly indicate that, as companies are facing increasingly broader and complex exposures, they are looking to their insurers for more flexible solutions to meet their business objectives. Desired Market Changes All Industries Retail Broader coverage/better terms and conditions Recognition of investments in internal risk management efforts through lower premiums 50% 52% 55% 66% Increased capacity 10% 26% More flexibility More sophisticated information technology (IT) systems 27% 38% 56% 66% Streamline/innovate underwriting process 10% 25% Improved documentation accuracy and timeliness 28% 39% More product innovation 18% 22% Other 2% 5% Data Source: 2013 Global Risk Management Survey Retail Industry Report

15 Risk Management Department Sixty percent of retail respondents say they have a formal risk management department. Among those, 67 percent indicate that their risk management department reports to the CFO/ Finance. In the case where no formal risk management department exists, 36 percent say their CFO handles risk management. Those with an in-house risk management department typically maintain a staff of one to five people. Formal Risk Management Department Retentions/Deductibles While the majority of organizations have not changed their retentions from the prior policy period, we do note an increase in retention levels across all the coverage lines surveyed. The retention increases are most likely the result of an organization s exposure to natural catastrophe risk, adverse loss experience and the desire to control premium spend in an increasing-rate environment. Similar to results in the prior survey, property has experienced the most changes in retention levels. Thirteen percent of respondents indicate an increase, while 16 percent note a decrease. Yes 60% No 40% Changes In Deductibles/Retentions Workers Compensation General Liability Department Staffing Auto/Motor Vechicle Liability Directors and Officers Liability Over 12 15% % Property % % Data Source: 2013 Global Risk Management Survey Lower Same Higher Data Source: 2013 Global Risk Management Survey Retail Industry Report

16 Limits Umbrella/Excess Liability When it comes to selecting the appropriate level of excess liability limits, organizations utilize many different methods. An optimal program design, characterized by broad coverage and efficient use of insurance funds, is driven by a number of factors: risk severity, risk mitigation measures already in place or under consideration, the regulatory environment in which companies operate, historical trend of loss activities, the insurance marketplace and appetite for risk. For umbrella/excess liability, the average limit purchased by surveyed retail companies is USD 129 million. The highest limit purchased stands at USD 500 million, while the lowest limit purchased is USD 15 million. The level of limits purchased by retail companies is in direct proportion to a company s revenue size. Eighty-four percent of all retail companies feel their umbrella/excess liability limits are adequate while 13 percent believe they should be lower. Three percent feel their limit should be higher. Revenue Minimum 1st Quartile Average Mode Median 3rd Quartile Maximum All $15,000,000 $75,000,000 $129,166,667 $100,000,000 $100,000,000 $75,000,000 $500,000,000 <$500M $15,000,000 $25,000,000 $48,750,000 $50,000,000 $50,000,000 $25,000,000 $100,000,000 $500M-$1B $25,000,000 $37,500,000 $57,142,857 $50,000,000 $50,000,000 $37,500,000 $100,000,000 $1B-$2B $25,000,000 $62,500,000 $80,000,000 $100,000,000 $75,000,000 $62,500,000 $150,000,000 $2B-$5B $25,000,000 $75,000,000 $97,916,667 $100,000,000 $100,000,000 $75,000,000 $200,000,000 $5B-$10B $75,000,000 $100,000,000 $156,250,000 $100,000,000 $125,000,000 $100,000,000 $300,000,000 $10B-$25B $100,000,000 $101,250,000 $205,500,000 $100,000,000 $150,000,000 $101,250,000 $500,000,000 Over $25B $200,000,000 $212,500,000 $291,666,667 $200,000,000 $275,000,000 $212,500,000 $400,000,000 Data Source: 2013 Global Risk Management Survey and other Aon proprietary databases Retail Industry Report

17 Directors and Officers Liability Similar to umbrella/excess liability, in general directors and officers liability limits purchased by publicly traded retail companies is in direct proportion to a company s revenue size. The highest limit purchased was USD 500 million, while the lowest limit purchased was USD 3 million. Based on the 2013 Aon s Global Risk Management Survey, 82 percent of all retail companies feel their D&O liability limits are adequate while 7 percent believe they should be higher and 11 percent feel they should be lower. Market Cap Minimum 1st Quartile Average Median 3rd Quartile Maximum $5M-$100M $3,000,000 $6,250,000 $22,166,667 $17,500,000 $36,250,000 $50,000,000 $100M-$250M $20,000,000 $25,000,000 $42,777,778 $45,000,000 $45,000,000 $75,000,000 $250M-$500M $10,000,000 $28,750,000 $34,166,667 $30,000,000 $40,000,000 $60,000,000 $500M-$1B $25,000,000 $38,750,000 $51,250,000 $50,000,000 $60,000,000 $100,000,000 $1B-$3B $45,000,000 $60,000,000 $86,428,571 $75,000,000 $85,000,000 $200,000,000 $3B-$6B $60,000,000 $93,750,000 $140,000,000 $127,500,000 $157,500,000 $300,000,000 $5B-$10B $50,000,000 $107,500,000 $139,583,333 $132,500,000 $162,500,000 $230,000,000 $10B-$50B $120,000,000 $150,000,000 $210,000,000 $187,500,000 $220,000,000 $500,000,000 Data Source: Aon Financial Services Group Database Retail Industry Report

18 Global Programs Globalization continues to be a consistent theme for companies pursuing improved operational results. As such, the need for risk management strategies to focus on larger geographic spread while addressing variations in regulatory controls, exposures, and options for optimal risk finance program designs has presented opportunities and challenges for multinational firms. Regulatory controls dictate how and what insurance coverage is to be procured along with what taxes or fees must be paid for risk transfer in a given geography. In addition, there has been some movement to review how risk transfer programs respond to a claim including how and where indemnities may be paid and what costs may be due. In addition to the regulatory controls that have always been present but perhaps better defined and enforced in recent years, market offerings have also changed. In some cases these changes create greater opportunity for multinational firms to align their risk finance structures to address country specific regulations. In other cases, offerings are more clearly defined relating to how, where, and on whose behalf a policy may, or may not respond. These market developments mean the buyer of insurance needs to consider how and what they may be purchasing because they may impact the performance and response of their risk finance programs. This will also enable them to select the best program structure to efficiently address their firm s risk management objectives. The 2013 survey aims to gauge how companies handle such challenges and opportunities relative to multinational risk management strategies and insurance. Retail respondents with operations in more than one country are asked how they purchase/control their insurance programs; 62 percent indicate their corporate headquarters controls procurement of all of their global and local insurance programs while 28 percent say their corporate headquarters purchases some lines and leaves local offices to handle others. Ten percent of surveyed retail companies allow each operation to buy their own insurance with no coordination from corporate headquarters. Global insurance purchasing habits Category Retail All Industries No, each operation buys its own insurance with no coordination from corporate headquarters Corporate headquarters controls some lines and leaves local office to purchase other lines Corporate headquarters controls procurement of ALL insurance programs (global/local) 10% 8% 28% 43% 62% 49% Among retail organizations that control procurement of insurance for cross-border operations from their corporate headquarters, 53 percent indicate they purchase programs which have global policies issued to parent and local policies issued to local operations and 32 percent indicate they use a combination of multiple methods. While it is encouraging to see that retail companies are in control of their global and local programs, the key words are coordination and central oversight. As retail companies increasingly rely on foreign vendors and resources, it becomes more important for them to take a holistic view of their risk finance strategies, ensuring global optimization of program cost and structure while addressing evolving compliance and regulatory concerns. Retail Industry Report

19 Global coordination and administration ensures consistency, transparency, security and ultimately peace of mind. Organizations with a centralized operating structure that can track and coordinate the procurement of all insurance programs (global/local) achieve the following benefits: Reducing total cost of risk Identifying coverage gaps or unnecessary retentions Maximizing local and global compliance Avoiding redundant coverage Global insurance buying patterns Category Retail All Industries Buy global policies issued to the parent with no local policies 5% 9% Buy programs which may include global policies issued to parent and local policies issued to local operations 53% 54% Buy local policies only 11% 6% Combination of two or more of above 32% 31% Among the global policies that organizations purchased, the most common types indicated in the survey are: General liability including public/product liability Property Auto / Motor Vehicle Liability Traditionally, most companies simply considered general liability including public/product liability as well as property damage/business interruption insurance for their global insurance purchase. Types of global insurance coverages purchased Category Retail All Industries General Liability/Public Liability 95% 86% Property (Property Damage and Business Interruption) 68% 78% Auto/Motor Vehicle Liability 37% 40% Workers Compensation/Employers Liability 32% 39% Directors & Officers Liability 32% 63% Marine/Ocean Cargo 26% 43% Crime 21% 32% Other 5% 9% Data Source: 2013 Global Risk Management Survey Retail Industry Report

20 Use of Captives Most captives are formed by companies in North America and Western Europe where risk management programs are most developed. Captive usage in other parts of the world is low, but emerging. Thirteen percent of retail companies surveyed report having an active captive or PCC with nine percent also indicating a plan to create a new or additional captive or PCC in the next three years. Only 6 percent of respondents report having a captive or PCC that is in run-off or dormant and 4 percent indicate a plan to close a captive in the next three years. Organizations with a Captive or PCC Category Retail All Industries Plan to create a new or additional captive or PCC in the next 3 years 9% 9% Currently have an active captive or PCC 13% 15% Have a captive that is dormant/run-off 6% 5% Do you plan to close a captive in the next 3 years 4% 4% Data Source: 2013 Global Risk Management Survey Of the retail companies that report having a captive or PCC, the most common coverages currently underwritten are property and general/third party liability. Retail Industry Report

21 Current and Future Coverage Underwritten Coverage Currently underwritten Continue/plan to underwrite same/ new risk in next five years Percentage of projected change Property (Property Damage and Business Interruption) 50% 44% -6% General/Third Party Liability 31% 38% 6% Auto Liability 25% 31% 6% Catastrophe 25% 25% 0% Credit/Trade Credit 25% 13% -13% Directors & Officers Liability 25% 25% 0% Employee Benefits (Excluding Health/Medical and Life) 25% 19% -6% Third-Party Business 25% 13% -13% Crime/Fidelity 19% 25% 6% Employers Liability/Workers Compensation 19% 13% -6% Health/Medical 19% 13% -6% Product Liability and Completed Operations 19% 13% -6% Warranty 19% 25% 6% Employment Practices Liability 13% 13% 0% Aviation 6% 6% 0% Cyber Liability/Network Liability 6% 13% 6% Life 6% 6% 0% Marine 6% 6% 0% Terrorism 6% 13% 6% Environmental/Pollution 0% 6% 6% Financial Products 0% 6% 6% Professional Indemnity/Errors and Omissions Liability 0% 0% 0% Owner Controlled Insurance Program/Contractor Controlled Insurance Program 0% 0% 0% Sub-contractor default insurance 0% 19% 19% Other 0% 0% 0% Data Source: 2013 Global Risk Management Survey. Retail Industry Report

22 Market Insights General Introduction Access to timely insights on policies, premiums and carriers allows retail clients to make faster and more accurate decisions while seeking to obtain the best coverage and rates. Aon has invested resources to develop the industry-leading research and platforms, ensuring that our clients have the data they need, when they need it. Findings by line of coverage include: Coverage Terms and Conditions Overall, the majority of retail respondents indicate that the terms and conditions for all surveyed lines of coverage remain unchanged to improving, in comparison with programs in prior years. The coverage line that has experienced the most improvement in coverage terms is D&O liability at 29 percent. Coverage Terms and Conditions Carrier/Marketplace Participation Changes in Coverage Workers Compensation/ Employers Liability General Liability/ Public Liability Auto/Motor Vehicle Liability Directors & Officers Liability Property Significant More Restricted Coverage Conditions Unchanged Policy Coverage Conditions Somewhat More Restricted Coverage Conditions Improved Policy Coverage Conditions Data Source: 2013 Global Risk Management Survey Retail Industry Report

23 Carrier/Marketplace Participation The exhibits shown below are based on information from Aon GRIP SM. Data shown in this section provides insights into carrier/marketplace participation for casualty/liability, automobile liability, workers compensation, financial lines and property. This data is based on Aon placements only. Top Carriers by Premium Volume U.S. (Alpha Order) Casualty/Liability Automobile Workers Compensation Financial Lines Property ACE AIG ACE ACE AIG AIG Mitsui Sumitomo AIG AIG FM Global Swiss Re NKSJ Arch Axis Liberty Mutual Travelers Travelers Liberty Mutual Chubb STARR XL Capital XL Capital Travelers Zurich Zurich Data Source: Aon Global Risk Insight Platform (Aon GRIP SM ) Common Reasons for Carriers Not Quoting Casualty/Liability Automobile Workers Compensation Financial Lines Property Pricing Pricing Class of Business Pricing Pricing Class of Business Underwriting Concerns Pricing Underwriting Concerns Underwriting Concerns Underwriting Concerns Class of Business Underwriting Concerns Class of Business Negative Prior Experience Terms and Conditions Loss Experience Capacity Terms and Conditions Data Source: Aon Global Risk Insight Platform (Aon GRIP SM ) Common Reasons for Rejecting a Carriers Quote Casualty/Liability Automobile Workers Compensation Financial Lines Property Inferior Pricing Inferior Pricing Inferior Pricing Inferior Pricing Inferior Pricing Incumbent Offer Accepted Incumbent Offer Accepted Incumbent Offer Accepted New Coverage Not Purchased Data Source: Aon Global Risk Insight Platform (Aon GRIP SM ) Retail Industry Report

24 Financial Insights Financial Insights Understanding current performance and perception of the future financial strength of a sector are important factors in any analysis. In this section, we provide brief insight into market environment for the retail sector. Industry Data Over the past 12 months, the share price of retail companies has generally outperformed Russell 3000 Index. If we compare employment numbers for the retail industry and the overall non-farm sectors in the same time period, we can see that retail companies have fared better than the overall non-farm sectors and that the employment situation for this sector is trending upward. In terms of annual revenue change, the Russell 3000 Index has outperformed the retail sector in seven of the last 12 quarters between Q3 10 and Q2 13. The average Consumer Confidence Index figure for 2013 (through August) stands at 72 percent. However, consumers shortterm outlook is at its highest point since August If we examine the month-on-month percentage change figure, we will notice that retail sales (excluding auto) have been in positive territory for all but six months since Share Price Performance Sep'12 Oct'12 Nov'12 Dec'12 Jan'13 Feb'13 Mar'13 Apr'13 May'13 Jun'13 Jul'13 Aug'13 Sep'13 Russell 3000 Retail and wholesale Data Source: Aon Global Risk Insight Platform (Aon GRIP SM ) Retail Industry Report

25 % Change in Annualized Employment 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Jul'13 May'13 Mar'13 Jan'13 Nov'12 Sep'12 Jul'12 May'12 Mar'12 Jan'12 Nov'11 Sep'11 Jul'11 May'11 Apr'11 Jan'11 Non Farm Payrolls Retail and Wholesale Retail and Wholesale Non Farm Payrolls Source: Bloomberg *Russell 3000 Companies Source: Bloomberg *Russell 3000 Companies % Change in Annualized Revenue 20% 15% 10% 5% 0% -5% -10% Q4 '13 (f) Q3 '13 (f) Q2 '13 Q1 '13 Q4 '12 Q3 '12 Q2 '12 Q1 '12 Q4 '11 Q3 '11 Q2 '11 Q1 '11 Q4 '10 Q3 '10 Russell 3000 Russell 3000 Retail and wholesale Revenure Retail and Wholesale Trade Revenue Source: Bloomberg *Russell 3000 Companies Consumer Confidence Index and Retail Sales (MoM%) CCI 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Aug'13 Apr'13 Dec'12 Aug'12 Apr'12 Dec'11 Aug'11 Apr'11 Dec'10 Aug'10 Apr'10 Dec'09 Aug'09 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% Retail Sales (Ex Auto) Consumer Consumer Confidence Confidence Index Index Retail Sales (ex-auto) MoM% Retail Sales (ex-auto) MoM% Source: Bloomberg *Russell 3000 Companies Retail Industry Report

26 Retail Industry Report

27 Methodology, Notes and Disclaimers This report is based on data from Aon s 2013 Global Risk Management Survey, Aon GRIP, Aon Financial Services Group and other proprietary databases Global Risk Management Survey retail trade data shown in this report is based on 56 global company responses. Breakdown of respondent base is a follows: Revenue Range % of Respondents < USD 1B 63% USD 1B USD 4.9B 25% USD 5B USD 9.9B 4% USD 10B USD 14.9B 4% USD 15B USD 24.9B 2% USD 25B+ 0% Cannot disclose 4% D&O information based on the Aon Financial Services Group database for retail is based on the S&P Sector Consumer Discretionary. Aon Global Risk Insight Platform (Aon GRIP SM ) is the world s leading global repository of global risk and insurance placement information. By providing fact-based insights into Aon s global premium flow, Aon GRIP helps identify the best placement option regardless of size, industry, coverage line or geography. The Web-accessible data produced by Aon GRIP helps Aon brokers evaluate which markets to approach with a placement and which carriers may provide the best value for clients. It also gives Aon brokers a leg up when it comes to negotiations, making sure every conversation is based on the most complete, most current set of facts. Bloomberg Data incorporated pursuant to license. Aon takes no responsibility as to the accuracy of any of the reported information. Along with the support of other Aon insurance and industry specialists, Aon Analytics collected and tabulated results, provided analysis and interpretation of findings and prepared this report. This report is furnished for informational purposes only. Do not distribute or copy. Aon has endeavored to confirm the correctness of the data and opinions expressed in this report, however, neither Aon nor its employees make any representation or warranty as to the accuracy or completeness of the data or opinions expressed herein. Aon has no liability to the recipient or any other party resulting from the use of, or reliance upon, the contents of this report. Copyright 2014 Aon Corporation. Retail Industry Report

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29 Aon Risk Solutions Aon at a Glance Aon plc (NYSE:AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 65,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world s best broker, best insurance intermediary, reinsurance intermediary, captives manager and best employee benefits consulting firm by multiple industry sources. Visit www. aon.com for more information on Aon and manchesterunited to learn about Aon s global partnership and shirt sponsorship with Manchester United. Based in Dublin, Ireland, the Aon Centre for Innovation and Analytics provides Aon colleagues and their clients around the globe fact-based market insights. As the owner of the Aon GRIP, one of the world s largest repositories of risk and insurance placement information, the Centre analyzes Aon s global premium flow to identify innovative new products and to provide Aon brokers insights as to which markets and which carriers provide the best value for clients. The Aon Centre for Innovation and Analytics Aon Global Risk Insight Platform (Aon GRIP SM ) is the world s leading global repository of global risk and insurance placement information. By providing factbased insights into Aon s global premium flow, Aon GRIP helps identify the best placement option regardless of size, industry, coverage line or geography. The Web-accessible data produced by Aon GRIP helps Aon brokers evaluate which markets to approach with a placement and which carriers may provide the best value for clients. It also gives Aon brokers a leg up when it comes to negotiations, making sure every conversation is based on the most complete, most current set of facts. Retail Industry Report

30 Key Contacts Retail Madeline H. Serpico Managing Director National Retail Practice Leader Aon Risk Solutions For Media and Press Inquires Cybil Rose Kemper Lesnick MaryAnne Burke Managing Director Deputy Retail Practice Leader Aon Risk Solutions Aon Centre for Innovation & Analytics Ltd George M. Zsolnay IV Analytics Manager Aon Centre for Innovation & Analytics Retail Industry Report

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32 Aon plc All rights reserved. The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Retail Industry Report 2014