Willis Re-View

Transcription

1 Willis Re-View

2 Index Aerospace 13 Algeria 5 Australia 5, 14 Bermuda Caribbean 5,10 Casualty 5-9, Catastrophe Modeling Chile 10 China 5 Colombia 5, 10 Eastern Europe 5 Engineering 6, 18 France 6, 11 Germany 6, 11, 14 Global Combined 6 Healthcare 19 Hong Kong 6 Indonesia 6 Ireland 6 Italy & Southern Europe 7 Japan 7 Korea 7 Life Accident & Health 20 Marine 9, Mexico 7, 11 Morocco 7 Motor 15 Nordic 7 Philippines 7 Professional Liability 16, 23 Property 5-9, Regulation 32 Retrocession 11, 26 Security 33 Spain 8 Surety 27 Taiwan 8 Trade Credit, Political Risk & Bond 28 Turkey 8, 12 UK 8, 12, US 8-9, 12, Venezuela 9, 12 Vietnam 9 Willis Integrated Solutions 30 Workers Compensation 9, 31 Contact Us To discuss any of the issues raised in this report please contact the Willis Re Associates as shown throughout the document or: James Byng Regional Director, Willis Re Tel: +44 (0) james.byng@willis.com Alternatively you can contact Willis Re's marketing department by General enquiries: lucy.gilchrist@willis.com Press enquiries: helen.davis@willis.com willisre.com Copyright 2004 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. Contents Please click on boxes below to take you to the respective sections Our Re-View 3 Global Rates Re-View 4-9 Graphical Re-View Class Re-View Regulatory Re-View 32 Security Re-View 33 Bermuda Special Re-View Modeling Re-View

3 Our Re-View Foreword these claims did influence reinsurers' attitude to pricing, and expectations of wholesale price reductions were quickly dampened for loss hit programs which saw increased rates. There were, however, signs of price weakening in other sectors of the market. There is nothing like a major loss or series of losses to concentrate the minds of Reinsurers will be remembered for a long time as the year in which not one but four major hurricanes made landfall on the south-eastern seaboard of the United States. However, the impact of natural catastrophes losses has been more recently highlighted by the sad events arising from the Indian Ocean tsunamis. Whilst the potential affect on the property catastrophe markets is likely to be restricted owing to the lack of penetration by the regional insurance markets, significant losses from Personal Accident and Marine policies may be expected. Ultimately though, this disaster will be remembered for the devastating loss of life and destruction of peoples homes and livelihoods. The reinsurance world is familiar with disaster, but all of us are shocked by this event and our hearts go out to the millions of people tragically affected. Estimates of the total damage put the cost of claims arising from the four US events at about the same as hurricane Andrew in 1992, with most reinsurers reporting trading losses in the third quarter as a consequence. The year will also be remembered for the typhoon activity which caused widespread damage in Japan and more recently the Philippines. However memories will concentrate on the frequency of these events rather than the severity, which means that ceding companies retained significant proportions of these losses. However, Whilst the current year's trading will be affected, the capital and reserves of the reinsurance market should not be severely impacted. Security continues to be a critical factor in the choice of reinsurer panel and we have seen an increase in the use of the capital markets where fully collateralized placements are available. The demand for this type of placement will only increase in the coming years. The terrorism peril also persists as a topic of discussion. Although the future of TRIA remains unclear, to date this uncertainty has not caused significant dislocation in the market, and terrorism cover is generally more available than in the preceding twelve months. It should be noted that reinsurers have recognized the heightened exposure management mechanisms that have been adopted by many cedants. The casualty market has maintained discipline, and terms and conditions continue to favor reinsurers. In the UK market, the Courts Act has created much debate about its impact on future claims settlements, particularly those involving regular payments. The 'specialty' areas have had a mixed renewal season - on the marine, London market and retrocessional side the season started very late as cedants attempted to calculate their losses from the US hurricanes whilst on the aerospace side a continued absence of losses put rates under pressure. The following report contains commentaries by our class line experts and provides a global review on the business just renewed. Foreword by Grahame Millwater, Chairman and Chief Executive Officer, Willis Re 3

4 Global Rates Re-View Overview The impact on rates for the 1st January Renewal has been much more influenced by local and regional loss events than has sometimes been the case. The most significant catastrophe events to have occurred during 2004 have been the US/Caribbean hurricanes, the Japanese typhoons and the recent tragic events occurring as a result of the tsunamis in the Indian Ocean. Overall, these events have not had a significant impact on global pricing, but have clearly changed the pricing in respect of those regions specifically affected; for example, in the US, the number of national/international US ceding companies whose catastrophe programmes have incurred losses from the hurricane activity is small. However, the affect on regional carriers and specifically those with a Florida bias has been significant. Therefore, the graph shown on page 12 does not reflect the fact that loss hit contracts have had their prices loaded by up to 20% and those without losses have continued to enjoy price reductions of up to 10%. It is also not yet clear what the affect on certain Florida specific programmes will be, since many of these do not renew until 1st July, Regarding the Japanese typhoon losses, the affect of these will also not be known until after the 1st April, 2005 renewals, although the losses suffered by most Japanese ceding companies will undoubtedly have some affect on windstorm pricing. If the segmental affect on pricing referred to above continues, the extent of pricing change for specific ceding companies will be a reflection of their own losses. Whilst the frequency of events in both the US and Japan is unusual, the severity of these events was such that ceding companies retained a significant proportion of these losses and did not transfer them to the reinsurance market Clearly, it is too early to comment with any accuracy on the impact the Indian Ocean tsunamis will have on pricing, but yet again, it is likely to be regional in nature. At this stage, it seems likely that, in addition to limited property losses, the Personal Accident market could be affected by losses to the travel policies of the many tourists who were staying in the region. Unlike the aftermath of either Hurricane Andrew or the World Trade Centre events, loss free catastrophe pricing has not been affected on an overall basis. Whilst the frequency of events in both the US and Japan is unusual, the severity of these events was such that ceding companies retained a significant proportion of these losses and did not transfer them to the reinsurance market. The trend noted during the last year of a softening market has not been arrested. Many regions have seen a reduction in pricing of up to 15-20% with the majority of regions showing reductions of between 0-10%. However, loss hit programs have suffered rate increases. Please find within this section a table of rate movements and some territorial catastrophe graphs (for renewals). While the information provided in the tables covers a wide number of territories, there are some areas at the time of this document going to press that due to the lateness of market negotiations, are still in the midst of placement. The graphs (pages 10-12) relate to overall property catastrophe excess of loss pricing movements based upon a base for the index of 100 in

5 Global Rates Re-View Territories A E Territory / *Class Property Casualty General Comments Pro Rata Risk Loss free Risk Loss hit Cat Loss free Cat Loss hit Pro Rata XL Loss free XL Loss hit Algeria Commissions and capacity as expiry As expiry +25% to +35% -5% to -10% - Stable Slight increase Hot Topics 1. Less capacity purchased 2. Shift from pro rata to XOL Australia Pro rata terms holding up subject to loss experience. PC's are available. No debate on event limits. Enough capacity Pricing remains loss driven Pricing remains loss driven 0 to -10% No Movement -5% Rate Unchanged Hot Topics (Property) 1. Downgrade clause - where markets are looking for a fixed rating trigger as opposed to a 'downgrade' trigger Hot Topics (Casualty) 2. Unlimited (Third Party - threat of R/I withdrawal) 3. Potential establishment of long-term care scheme 4. Threat of increased treaty retentions Caribbean Reduced commissions on loss affected deals Flat 0 to +10% Flat to +10% +20% to + 30% Stable treaty terms Flat Loss driven Hot Topics (Property) 1. Some R/I s looking to link commission with original rates but with very limited success Hot Topics (Casualty) 2. Barbados - Third Party Bodily Injury unlimited removed by local government China Stable to +7% as a function of results -10% to -15% Stable -15% to -20% Stable to +5% Hot Topics 1. Competition forcing original rates down 2. Increasing transparency 3. XOL programs hit by August typhoon Colombia -10% Hot Topics 1. Not accepting elements of the Special Termination Clause (i.e. minimum rating, change of management, war) 2. Increased demand for catastrophe modeling 5 Eastern Europe 0 to -5% -10% to -15% -10% -10% to -15% Stable treaty terms Flat Flat Hot Topics 1. Fire only (excluding natural perils) has ceded excellent loss ratios. Natural perils exclusion causes heavy catastrophe XOL costs 2. Poland - trend to move from proportional to XOL

6 Global Rates Re-View Territories E I Territory / *Class Property Casualty General Comments Pro Rata Risk Loss free Risk Loss hit Cat Loss free Cat Loss hit Pro Rata XL Loss free XL Loss hit *Engineering Commisions and capacity as expiry Stable Hot Topics 1. Cedants looking to source Risks Attaching XOL covers 2. Cedants looking at economic viability of proportional verses XOL treaty cover 3. Request for Cyber cover 4. Pressure on overall deductions for proportional business 5. Termination clauses with regard to downgrade triggers France Stable -5% to -10% +20% -5% to -10% GTP: Stable Motor:+50% to +100% Hot Topics 1. Motor prices going up dramatically due to past under reserving and increased awards 2. GAREAT (state managed pool) - extension of terrorism cover to small property risks has been an issue Germany Flat -10% +10% -5% to -15% Flat Flat 0 to +15% Hot Topics 1. Rate reductions of property XOL protections 2. Limitations on number of reinstatements on GTPL 3. MTPL Euro50m limitation 4. Rating of reinsurers's with Solvency II on horizon 5. Rate reductions in original motor business Global Comb. (Exc. US) - -5 to -10% 0 to -5% Rates have softened less on programs requiring over $1bn capacity Hong Kong Indonesia Stable to -5% Terms even more restrictive for poor performers -10% -10% Stable to +5% +5% -15% -20% -5% - -15% -10% 0 to +5% Hot Topics 1. Major R/I's appeared hungry for premium 2. Abundant capacity Abundant capacity for all XOL placements 6 Ireland As expiry -15% -5% +10% Hot Topics 1. Terrorism - good demand driving price 2. Establishment of Personal Injury Assessment Board - aim to reduce costs 3. Engineering XOL rates remain stable

7 Global Rates Re-View Territories I P Territory / *Class Property Casualty General Comments Pro Rata Risk Loss free Risk Loss hit Cat Loss free Cat Loss hit Pro Rata XL Loss free XL Loss hit Italy/Southern Europe Japan (See hot topics) Commission increased 0% to -10% 0 to +5% -5% to -15% 1. Unexpected capacity available in motor third party liability 2. Less capacity for general third party liability 3. Commission stable for renewed proportional treaties. 1. Small decrease in motor third party liability 2. General third party liability 0 to +10% 0 to +10% Comments 1. Continental markets more aggressive on both P&C 2. London and Bermuda markets less supportive than expected 3. Very late final terms in whole Southern Europe 4. Catastrophe limitations on pro rata treaties continue, but more relaxed 5. Many cedant's still want reinsurers to write lines across all programs Hot Topics 1. Typhoon Songda loss increasing 2. Ceding companies investigating sideways covers 3. Possible regulatory impact on purchasing decisions Korea Squeeze on capacity/new restrictions imposed As expiry +25% to +35% -5% to -10% - Stable Stable Property - Buyers trend to XL Mexico -10% -5% Hot Topics 1. Not accepting elements of the Special Termination Clause (i.e. minimum rating, change of management, war) 2. Increased demand for catastrophe modeling Morocco Nordic Commissions and capacity as expiry Commissions stable or improved As expiry 0 to -5% +25% to +35% 0 to +10% -5% to -10% -5% to -15% Same to +10% - Stable -10% Slight increase Hot Topics 1. Less capacity purchased 2. Shift from pro rata to XOL 7 Philippines As expiry -10% to -15% +20% -15% to -20% As expiry -5% to -10% Hot Topics 1. Pro rata capacity expanding without minimum rate requirements 2. All quotes subject no loss from Typhoon Nanmadol (DOL 3/12/04). Review clauses on all quotes 3. Review clauses on aggregate movement. Half-yearly reports

8 Global Rates Re-View Territories P U Territory / *Class Property Casualty General Comments Pro Rata Risk Loss free Risk Loss hit Cat Loss free Cat Loss hit Pro Rata XL Loss free XL Loss hit Spain As expiry Flat. Slight reduction from new entrants Flat. Slight reduction from new entrants As expiry As expiry 0 to +10% Hot Topics 1. Solvency II 2. Unlimited Motor cover to end in the next year or so Taiwan See general comments -10% to -30% -20% to -30% Hot Topics (Property Pro Rata) 1. Average treaty capacity is increased by 20% 2. Average reinsurance commission is increased by 2.5 points (eg. from 35% to 37.5%) 3. Co-insurance clause is stable or more relaxed 4. Reinsured's retention is stable or increased 5. Natural Perils are still removed from treaty for most of companies 6. Event Limit is stable/slightly increased for companies which can cover natural perils in the treaty. Turkey As expiry -12.5% No experience -15% to -20% No experience UK Flat 0 to -5% 0 to +5% to +10% 0 to -5% Motor: As expiry GL: As expiry PI: As expiry 0 to +10% 0 to -5% Flat +10% plus +10% plus +10% plus Hot Topics (Property) 1. Downgrade Clauses 2. No side agreements/letters 3. R/I Security *US (P&C) 0 to -5% 0 to -10% +10% to +15% 0 to -10% +15% to +20% Ceding commissions likely to increase modestly, no more than 1% or 2% on average -5% to -10% +5% to +10% Hot Topics (Casualty) 4. Courts Act 5. Commutation options 6. R/I Security Hot Topics (Property) 1. Extension of TRIA 2. Florida marketplace post-hurricane losses 3. Original rate levels - will the trend continue? 4. Mold concerns 5. Counter party credit risk 8 Hot Topics (Casualty) 6. Extension of TRIA 7. R/I s Security

9 Global Rates Re-View Territories U Z Territory / *Class Property Casualty General Comments Pro Rata Risk Loss free Risk Loss hit Cat Loss free Cat Loss hit Pro Rata XL Loss free XL Loss hit 8. Price competition as respects new capacity vs legacy companies 9. Bermuda capacity for casualty business 10 R/I s willingness to pay vs ability to pay *US (Marine) R/I's taking more calculated approach on pro rata. R/I's not looking to expand pro rata writings. 0 to -5% 0 to +5% Flat +10% Hot Topics 1. Office of Foreign Asset Control (OFAC) 2. Terrorism 3. Evaluation of catastrophe exposures *US (Prof Liab) Rates on original premiums down by 15% to 20%. R/I ceding commissions increased marginally upwards. -15% to - 20% Flat to modest increase. No real hits in the business though. Hot Topics 1. Softening D&O rates 2. Accountants Professional 3. Sarbanes Oxley Part II 4. Struggle with clash exposures (D&O, E&O, Fiduciary liability *US (WC) See general comments Rating overall 1. Working layers rates flat or slight decrease 2. Cat layers - ROLs decreasing by 10% to 15% Venezuela Vietnam See general comments -5% +20% -10% to -15% -40% As expiry As expiry Hot Topics 1. Not accepting elements of the Special Termination Clause (i.e. minimum rating, change of management,war) 2. Increased demand for catastrophe modeling 3. Market now accepts the local Strikes Riot and Civil commotion clause Hot Topics 1. Pro rata commissions not coming under pressure. Commissions are as expiry and terms and conditions loosening slightly. Cession limits expanding 2. Total asbestos exclusion 3. Claims Co-op clause on XOL 9

10 Graphical Re-View Cat graphs A C These graphs relate to overall property catastrophe excess of loss pricing movements based upon a base for the index of 100 in 1990 Australia Chile Caribbean Colombia 10

11 Graphical Re-View Cat graphs D R These graphs relate to overall property catastrophe excess of loss pricing movements based upon a base for the index of 100 in 1990 France Mexico Germany Retrocession 11

12 Graphical Re-View Cat graphs S Z These graphs relate to overall property catastrophe excess of loss pricing movements based upon a base for the index of 100 in 1990 Turkey US UK Venezuela 12

13 Class Re-View Aerospace richard.sowerby@willis.com The A380, the new aircraft that is due to come on stream in 2006, is designed to carry passengers. This is expected to lead to either the requirement for increased liability limits or the requirement to purchase specific excess liability coverage. Low loss activity is characterising the sector; with the last major loss being the American Airlines (Queens) disaster three years ago Primary aviation insurers are restricted from writing the AV52 cover, the third party liability war risk, in the original policy. Therefore this is prompting the exploration of reinsurance as an alternative. New Aviation operations in the market for 2005 include Aspen Re, Sirius White Mountains and Glacier Re. Nick Brown's departure from AIG to join Global Aerospace has also impacted the Aviation market. We have seen rate reductions during the final quarter of 2004 in the region of 10-15% (in cases where there is evident reduction in exposure or where the previous year s program was more expensive than the normal market level, we have seen reductions of up to 20%+). This has been due to a combination of factors; first and foremost the continued low loss activity within the aviation sector, together with overcapacity in the reinsurance market and the desire to maintain market share. In addition, the majority of the world's airlines renew in the final quarter, and the November renewals have shown reductions in rate of between 10% and 15%, although the decrease in actual premium is less due to increased fleet values and higher passenger levels. Reinsurance reductions have, to an extent, also been driven by this factor. The reduction in rates in the airline market, together with the trend of the reinsurance renewals in the final quarter, have led to reinsurance rates falling at 1/1/05 by around 15%. With regard to proportional reinsurance, due to the absence of major losses over the last three years, clients are continuing to maintain higher shares and therefore the need for proportional reinsurance is reduced. It is also evident that, when opportunities do arise, clients continue to be strict with regard to the security they will accept. In the absence of any significant change in the market landscape, such as losses or capacity reductions, we can foresee a similar pattern to 2004, with, in all probability, further reductions in the final quarter. There may be a time whether it be in 2005 or 2006, when the reinsurance market may stabilise at the insistence of capacity providers in particular, but currently market forces are the prevalent factor. There may be a time whether it be in 2005 or 2006, when the reinsurance market may stabilise at the insistence of capacity providers in particular, but currently market forces are the prevalent factor. 13

14 Class Re-View Casualty (International) General and Employers' Liability nick.goulder@willis.com Casualty business in general, insofar as it is exposed to bodily injury risk in the UK, faces the same implications from the Courts Act as will be described in our next section on Motor Initial introduction of Commutation Clauses has met with mixed responses. Sufficient support is evident to ensure the development of this structural improvement (see note below). There have also been moves to transfer all decision-making capability relating to Pharmaceutical risks out from treaty reinsurance acceptances and into facultative markets. This process has been active for some time now but is moving closer to being fully standard practice. Our perception is that rates on general casualty business are generally renewing with rate reductions of between 5-10%. This might seem counterintuitive given that most motor accounts are showing increases of around 10% - 15% plus (subject to the regional variations mentioned in the Motor section), but it is probably explained in reinsurers' minds by the fact that original rates for casualty are holding more steady than they are for motor, combined with the reality that social inflation continues to be lower in General Third Party and Employers Liability than it is in Motor. In Germany prices are stable but the provision of unlimited free reinstatements is under pressure. Some covers are moving to a limited reinstatement basis, usually free but sometimes paid. In Australia, following extensive State based Tort reform, insurers are being encouraged to pass savings on to original insureds and we have witnessed small premium savings now being tabled. Proportionate liability is now a feature for professional lines which should have the effect of reducing the vertical cost of certain losses although at the same time increasing slightly the risk of a clash loss for an insurer. The medical malpractice sector continues to see challenges following UMP's emergence from provisional liquidation. The sector has recently seen premium discounting nationally which is now the subject of an enquiry by the Federal Government. Pricing for most casualty accounts is stable with small reductions available for loss free accounts where there is significant reinsurer appetite. Security requirements do have an influence on reinsurance pricing. We expect to see broader progress with the Willis Re initiative to introduce an optional commutation clause on to casualty reinsurance contracts. This has been pioneered this renewal season with the intention of permitting reinsurers to trigger commutation at preagreed terms should relationships with, or confidence in, any of their reinsurers suffer a downturn for any reason. As the market starts to become aware of the advantages of this type of modification of the long term relationships between the parties, we expect its uptake to become more widespread. In Australia, we anticipate a continued favourable environment for both reinsurers and insurers alike. Tort reform may reduce claims cost and frequency although this will have a limited impact on large claims where the future care component is significant. Pricing for most casualty accounts is stable with small reductions available for loss free accounts where there is significant reinsurer appetite. Security requirements do have an influence on reinsurance pricing 14

15 Class Re-View Casualty (International) Motor mark.cole@willis.com Within the UK, the Courts Act is the main hot topic for the motor renewal season. From 2005, UK courts will be able to impose awards which involve continuing regular payments for the lifetime of a plaintiff. This new open-ended commitment is rightly exercising insurers' and reinsurers' minds. There are two general contexts where this will impact the relationship between insurers and reinsurers: pricing and policy language. Willis has been driving the debate on pricing by the construction of our own actuarial models. We have been largely successful in refuting the original contention of two leading reinsurers that this change in legislation justifies a comprehensive increase in reinsurance pricing. The reinsurance market's approach to the issue of policy language has been largely driven through IUA committees. Willis has serious reservations about the practical application and fairness of some of these proposed clauses and has successfully lobbied for a delay in their attachment to the renewing reinsurance programs while we seek solutions that are better tailored to the requirements of our clients. The motor market has seen a general drift upwards in reinsurance rates of around 10% for accounts with good claims records. Reinsurers have justified these general increases on the grounds of claims inflation and level-to-falling original rates, as well as the environment of uncertainty being created by the Courts Act. Accounts with poor loss records are seeing increases of much more than this. In Europe there are no major issues dominating this renewal season and even unlimited seems to be taking a back seat. However, in Germany, many insurers are beginning to question the appropriateness of the Euro 50m limit, particularly in light of the Wiehltalbrücke loss near Gummersbach (a fire following a collision between a car and a tanker causing structural damage to a bridge. The driver of the car was uninsured). Reinsurers are prepared to quote Euro 50m excess of 50m covers on a facultative basis while publicly local reinsurers supposedly resist such changes. Reinsurance rates in the Nordic area are flat following intense lobbying by reinsureds and their brokers. In Germany, some top layers are under pressure following the loss mentioned above but other layers are stable. In France rates are increasing significantly, sometimes by more than 50% following a market wide reappraisal of reserves. In Italy, improved original market conditions have prompted a renewed interest in buying and appetite for providing Quota Share capacity. In Australia, all State based motor bodily injury schemes are running well with favourable underlying results. The cost to the consumer in both New South Wales and Queensland has fallen over the past twelve months as a result of this. The provision of unlimited reinsurance coverage remains an issue with certain reinsurers having withdrawn from offering such cover or indicated the intention to withdraw. In New South Wales there is continuing debate over future care with the possibility that at some future date catastrophically injured persons may be removed from the scheme. Pricing is generally flat to 5% discount on a like for like basis. At some stage (hopefully in 2005) the reinsurance market will resolve its approach to the Courts Act. We believe that it will be, but it may be better that this is delayed until the first quarter of 2005, in order to avoid that an inappropriate compromise is pushed through during the renewal season. Beyond this, the first active uses of the Courts Act should give fairly quick feedback to all concerned as to just how serious a change lies ahead for the overall future of the UK Motor market. In Europe we anticipate some moves to harmonize the limits purchased by reinsureds in the new EU member states with those in western Europe. French insurers are coming under political pressure to decrease rates and it will be interesting to monitor developments in light of the reinsurance rate changes mentioned above. We expect further discussions with major reinsurers over the future of unlimited and in Germany the discussions on the adequacy of the Euro 50m limit are set to continue. As long as scheme design is not radically altered we anticipate continued favourable results and stable reinsurance pricing in 2005 in the Australian market. At some stage the reinsurance market will resolve its approach to the Courts Act. We believe that it will be, but it may be better that this is delayed until the first quarter of 2005, in order to avoid that an inappropriate compromise is pushed through during the renewal season 15

16 Class Re-View Casualty (International) Professional Lines grange.turner@willis.com Once again Professional Lines exhibit their historic tendency to strong pricing fluctuations. Original E&O markets are softening by 5% to 10%, while D&O is often conceding more, particularly for the larger global primaries Increasing original capacity is a key driving force for this There has been a significant movement of underwriters within the London Market There have been preliminary signs that multi-year transactions are being promoted once more Continuing trend for reinsurers to try to influence the original underwriting by broadening the exclusions of named risks and of occupational classes of exposure. Reinsurance markets are substantially content to renew at unchanged treaty terms, reflecting a willingness to follow original market movements. In the absence of a major new presence within the reinsurance market, pressures are broadly steady, although reinsurers have expressed concern at the slipping of primary levels. Buyers, as in other casualty lines, are re-emphasising their concerns as to the counterparty security risk. Unlike in Motor, where pricing pressures have combined with security concerns to lead some insurers to raise their retentions, there have been limited signs as yet within Professional Lines that the security concern is translating into increased retentions. D&O underwriters are continuing to focus on the US exposure within any risk. If anything, the same questions as before are being asked with increased frequency, which is encouraging. On the other hand, we are seeing underwriters drift away from earlier efforts to introduce co-insurance features in relation to securities entity cover, which, whilst being pragmatic and realistic, is nonetheless a step away from earlier more disciplined efforts. The awareness within direct writers of the systemic risk within their business is reaching new and reassuringly high levels. Indeed, we have seen more care at direct levels than for many years as to the need to balance a Professional Lines portfolio with a focus upon the mix of systemic risk exposures. This is an encouraging sign for the future. We anticipate a relatively steady and uneventful year. The modest rate of pricing slippage does not suggest major problems ahead. Reinsurers appear to be comfortable at current conditions. Barring unforeseen and dramatic problems, we would expect 2005 to be a year of consolidation for most parties. This field remains technically complex at all levels, from risk analysis and policy wording design all the way through to claims reserving, handling and settlement. Cases such as the Disney/Eisner/Ovitz suit are constantly demonstrating the fast-evolving nature of the D&O risk. The quality of market debate, whether in Europe, Australia or the U.K., has been consistently rising. We are optimistic that the stronger market fluctuations in this field will gradually soften into a more stable environment. We remain convinced that insurers interests are best served by reinsurance brokers with a proven record not just in placing these classes, but in understanding the technical complexities involved. 16

17 Class Re-View Casualty (US) george.venuto@willis.com Willingness of reinsurers to compete on price, especially as regards the new capacity versus legacy companies Reinsurer security, rating agency scrutiny/risk based capital ratings and their effect on treaty terms, i.e. special termination, security requirements and terms of trade Bermuda capacity and the apparent increase in appetite for casualty business and the potential impact or even downward pressure on rates Reinsurers' willingness to pay versus their ability to pay will remain a source of irritation for cedents and brokers Extension of TRIA The primary and reinsurance industries' results continued to improve in 2004, when compared to Both industry segments are expected to finish the year with combined ratios under 100%. Reinsurers continue to increase their reserves for the accident years 1997 through 2000, as they strive to restore balance sheet integrity. Margins for the ongoing market participants (primary and reinsurance) are, for the most part, considered adequate. Companies' balance sheets, while stronger, are by no means fully restored. With that said, the market appears to have peaked in 2004 and is now showing signs of softening. Reinsurers are probably looking at an overall rate level change for 2004 of flat to down slightly. Reinsurers are also reporting a softening in other terms and conditions, including more aggregate limits, more terrorism coverage, change in reinstatement provisions and loosening of exclusions, which do not necessarily find their way into the rate change monitors. Capacity remains stable and adequate; it is fair to say, with the possible exception of terrorism cover, there is ample capacity for most reinsurance products and the markets are struggling to fully utilize the capital base that currently exists in the market. Most of what we are hearing about 2005 are comments such as a stable marketplace an orderly softening, rate levels are trending downward and there is enough margin in the rates to support some reductions in the current price. Basically, we expect a continuation of the 2004 trends in Rates will continue to migrate lower and terms and conditions will be relaxed further. Reinsurance rates will be down 5% to 10%. Insurers and reinsurers will lose some of their current margin levels as loss trends outpace rate level changes in Reinsurers will still need to generate a meaningful underwriting profit in order to hit return on equity targets since interest rates continue in the low single digits throughout the 2005 underwriting year. At this point in time, most market observers predict the reinsurance market will continue to be disciplined in their underwriting. This prediction is predicated on the belief that the significant role that modeling and actuaries now play in the pricing process will keep underwriters from being too competitive with their prices. Another factor that will encourage restraint in 2005 is the legacy markets still need to shore up their reserves (accident years & asbestos) and this will continue to be an earnings drag for the legacy companies. Finally, it appears logical that some spill over from this year's active hurricane season will cause both old and new markets to resist drastic reductions in rates or terms and conditions. Even with some of the above restraints there are some factors that might actually accelerate the pace of softening in the casualty market. The pace of decline could quicken due to some or all of the following: There is some evidence that predominately property-oriented reinsurers are starting to show greater interest in casualty lines because the softening in the property market is perceived to be more pronounced than in the casualty lines at this point in time Reinsurers are facing lower or flat premium levels for 2005 compared to This will put pressure on some companies to be more aggressive on price so as to better sustain premium growth targets Increases in ceding company net retentions will create an even greater supply/under utilization of reinsurance capacity As structured reinsurance deals come under greater scrutiny or becomes less attractive, managements may decide to redeploy capital to the traditional risk transfer products further expanding supply and putting additional pressure on prices/terms and conditions. In summary, as we enter the 1/1/2005 renewal cycle we believe the market will continue to give back some rate and expand/loosen terms and conditions for most casualty clients. With that said, it is possible that, with the right alignment of market forces, we could see even greater downward pressure on rates and terms as 2005 matures. At this point in time, most market observers predict the reinsurance market will continue to be disciplined in their underwriting. This prediction is predicated on the belief that the significant role that modeling and actuaries now play in the pricing process will keep underwriters from being too competitive with their prices 17

18 Class Re-View Engineering (International) mike.quy@willis.com Risks attaching excess of loss covers Cedants reviewing economic viability of proportional verses excess of loss treaty cover Cyber cover Pressure on overall deductions for proportional business Termination clause special reference to downgrade triggers Both cedants and reinsurers have undertaken a period of consolidating their accounts and reinsurers appear now to be looking to further develop their business, with profitability being the key to their acceptance criteria. The Engineering market has remained disciplined throughout the renewal season with regards the scope of original / reinsurance cover, deductible / attachment levels. However, Machinery Breakdown business is under extreme pressure from the Property market, who are prepared to absorb it for little or no additional cost. There have been a number of new ventures started during the course of 2004 including Beazley, Catlin and Ascot; but reinsurance support has been selective for these respective ventures. Support and commitment to this class by senior management is further evidenced by the reforming of a new underwriting team at G E Insurance Solutions, after a number of the previous team left. Pressure has been put on reinsurance rates for excess of loss business supported by the fact that there have been no major engineering losses in the past 12 months. Whereas the pressure in the proportional treaty market has been driven by reinsurers who are working to tighter profitability margins. There is a continued move to build on and improve the already good cedant / reinsurer transparency. Underwriters are increasingly having to involve the use of actuaries, with less autonomy remaining with the underwriters (in certain companies). The state of the reinsurance market will undoubtedly make it attractive for new players and 2005 will see an increase in activity from reinsurers outside of the traditional engineering market, such as Bermuda. This will conflict with the existing markets who will be required to develop, but not at the expense of profitability not least of all proportional to offset the legacy of past results. It will be difficult for new ventures to attract reinsurance support, although this will be a function of what happens above with signs that the market is weakening, it will be more evident towards the latter part of 2005 whether the CAR and EAR market will maintain its stable position rather than follow the trend of the annually renewable classes i.e. Machinery Breakdown, Electronic; following the property cycle. There will be a continued move to refine slip language and wordings, to maintain the discipline that has been evident over recent years. There will be a continued move to refine slip language and wordings, to maintain the discipline that has been evident over recent years. 18

19 Class Re-View Healthcare (US) neil.morrell@willis.com The adequacy of base rate increases in relation to claims inflation The potential for and the effects of various tort reforms Predictability of severity increases Increases in extra contractual obligation exposures Whereas the 2004 renewal season was slow to start, with reinsurers all waiting to see the approach of their peers before acting themselves, 2005 has seen an increased confidence in pricing and capacity offerings. This has led to a quick renewal season. Mostly the renewals have been of reinsurance structures similar to 2004 and, provided underlying base rates are keeping track with claims inflation, rates are unchanged. However, there have been isolated incidents of dramatic improvements for some clients for whom reinsurers over-reacted during the hard market. Between 2002 and 2004 insurance companies dramatically tightened their portfolios in terms of risk selection, risk management, cover and pricing. Despite this reinsurers were often of the view that their clients were still 'not doing enough,' therefore reinsurance terms were adjusted to 'compensate' for perceived inadequacies in the reinsured portfolios. (For example they increased reinsurance rates where it was felt that base premiums were too low and imposed exclusions on the treaties in order to influence the underlying policy forms). The bulk of this portfolio re-engineering is complete and reinsurance structures are now primarily designed to cover the underlying portfolios rather than to alter them. One area of particular note is in relation to the limits of cover issued to doctors and hospitals. The reinsurers refused to keep supporting large vertical limits, which meant that the insurers could not offer as much protection as they had done in previous years. Higher excess limits remain difficult to place and reinsurers remain focused on balancing the exposure to premium volume ratio, however, the reductions seem to have ceased in There have been fewer medical malpractice start up companies seeking new treaties at 1st January 2005 and this maybe indicative of a primary medical malpractice capital sufficiency that was not evident between 2002 and Bermuda has continued to support healthcare reinsurance deals, but has not yet become a leading market in this sector. Where the treaty price is perceived as 'right' the placements become oversubscribed to the tune of 150% to 200%, so there is a surplus of capacity and therefore a slight softening in the market can be expected. On the other hand severity is still increasing, so the extent of any softening will depend on the interplay between margin requirements and perceived severity risk. Margin requirements themselves may reduce slightly during The market is confident that it is correctly pricing for claims frequency and once reinsurers have the same confidence in their severity modeling, logic would dictate that they would need less of a margin for error in their profit targets. With market dynamics like this it becomes even more important for the client to select a broking firm with the technical skills necessary to bring about the best possible solution. Market access is one thing, but understanding the way reinsurers model contracts and bringing this transparency to the client will become increasingly important in developing superior negotiation strategies. To get the best reinsurance deal it is necessary to understand all the 'rules of the game' in terms of the actuarial approach, margin requirements, breadth of cover available and the loss assumptions being used. Therefore, throughout 2005 and beyond more clients will migrate towards broking firms with established medical malpractice specialties as they see the advantages this brings. To get the best reinsurance deal it is necessary to understand all the 'rules of the game' in terms of the actuarial approach, margin requirements, breadth of cover available and the loss assumptions being used 19

20 Class Re-View Life Accident & Health dan.bolgar@willis.com Availability of capacity for NBC (Nuclear, Biological and Chemical contamination) cover improving, but still scarce. Market pricing is stabilizing, although consensus pricing can be difficult Influx of new capacity remains slow and insufficient to influence pricing. Life and Accident modeling continuing to evolve in territories where high resolution data is available (i.e. US). Increasing demands for improved transparency and resolution of data can cause difficulties for cedants. Obtaining the required level of data for modeling is also difficult. There is a need for some delegation of binding authority to clients for the simpler aggregation of risks for facultative capacity. Indian Ocean tsunamis The capacity for catastrophe reinsurance continues to increase steadily; this is driven by loss free programs, no repeat terrorist events in the western world post 9/11, no significant air losses since 2001 and the fact that reinsurers are seeking new sources of income and to diversify their book of business. The risk excess / per person market is still challenging, because most new entrants to the market have opted to focus on catastrophe business. Large Life and Accident writers are looking at buying larger and higher attaching catastrophe covers to replace existing smaller programs. Reinsurance buyers are also seriously considering the feasibility of obtaining NBC coverage. Some reinsurers are now prepared to allocate limited NBC aggregate to certain territories, either on a 'stand-alone' basis or as part of an overall program. More reinsurers are adopting flexible attitudes which might signify that the push for increased rates is slowing down. Price loadings to include NBC are generally high and vary considerably. Life and Accident modeling is continuing to evolve in territories where high resolution data is available (i.e. US) and there is a growing interest in modeling in other territories, but this can be met with skepticism due to the nature of the risk. Catastrophe modeling remains difficult due to fluid nature of the risk (people continually move) and insufficient loss data in certain territories. Single-site accumulation modeling is becoming more sophisticated. This will depend very much on any future loss activity or terrorist actions, as whilst the market has stabilized over the last 18 months, the common view is that we are only a minor event away from a return to 2002's post 9/11 capacity and price issues in this sector. The retro market is still widely unavailable. Data capture and transmission of this to reinsurance markets is significantly improved. There is a move towards the uniformity of certain clauses, such as NBC, Active War / Passive War and also an increasing interest in Possible Maximum Loss scenarios for NBC. The risk excess / per person market is still challenging because most new entrants to the market have opted to focus on catastrophe business. Large Life and Accident writers are looking at buying larger and higher attaching catastrophe covers to replace existing smaller programs Indian Ocean tsunamis footnote... At the time of finalizing this review, the scale of insured losses occurring as a result of the Indian Ocean Earthquake is yet to be fully understood. Therefore, the degree of impact that this catastrophic event will have upon the international Life, Accident and Health insurance and reinsurance markets is currently unknown. The effect of this event is likely to attract speculation and should be closely monitored. 20

21 Class Re-View Marine (International) jerry.ridge@willis.com Hurricane Ivan losses are far larger than were originally estimated Higher levels of security for reinsurers are being demanded by clients, such as a move to A rated away from A-. This has also been impacted by the security downgrade clause, which enables reinsurers to be removed from programs if their rating slips too far. Demise of smaller reinsurers through consolidation or lack of adequate security, therefore concentrating risks in the hands of the few. Typhoon losses will dampen any appetite for rate reduction in Asia CL Chemical, Biological, Bio-Chemical & Electromagnetic Weapons Exclusion Clause. Reinsurers have been seriously impacted by Hurricane Ivan. The energy loss, including business interruption losses, appears to be in the region of $2.5 billion. Of this sum, $1.5 billion is likely to be settled by the traditional marine reinsurance market, with the remaining $1 billion falling under insurers' own retention, oil companies' self-insured retentions and OIL. This claim has evolved from a hurricane path, which was not subject to the Lloyd's RDS analysis, and escalated into the largest ever marine/energy reinsurance claim. The marine reinsurance market was already adjusting to a downturn. The loss combined with some other substantial claims in the marine sector during 2004 has caused this move downwards to falter. Lossmaking layers are paying up (in line with loss cost analyses) and catastrophe layers with a loss are paying a little more. All other marine reinsurances are under pressure and the restructuring of program layering and consolidation of reinsurance purchasing has enabled savings for many reassureds. The weakening reinsurance market is a reflection of a Marine and Energy insurance market which is under heavy pressure on rates. Energy is falling from recent knee-jerk price increases; Hull is flat, but seeing rating pressure from some markets; Cargo is also seeing reductions; the Marine Liability sectors (including P&I) are stable. Proportional capacity remains rare and specialist, but there are clear signs that the good results of the past two or three years are causing reinsurers to improve the commission terms. For London market clients, the recent hurricane losses have forced them to re-examine their claims modeling. We are seeing some additional catastrophe cover being purchased as the perceived levels of comfort have been eroded. As always there is likely to be a trade off in the first layer(s), with clients increasing retentions or increasing their level of co-insurance. In Europe, the market appears to be holding firm on the back of unrelated claims and the hurricane losses. The Japanese renewals incept at April 1, so renewal negotiations have yet to begin in earnest. However, we would expect to see competition on XL pricing, both from London and overseas markets. The possible impact of typhoon losses will dampen any appetite for rate reductions. In Japan, we are likely to see further consolidation take place, with clients wishing to increase their retentions. However recent typhoon losses may cause them to review this position. For China, the market is very competitive, with clients seeking to purchase more reinsurance cover, particularly for shipbuilding risks and cargo. For London market clients, the recent hurricane losses have forced them to re-examine their claims modeling. We are seeing some additional catastrophe cover being purchased as the perceived levels of comfort have been eroded 21

22 Class Re-View Marine (US) leo.magrath@willis.com Office of Foreign Asset Control (OFAC), which regulates the lists of countries, individuals and companies that the US forbids trade with, such as Cuba and Iran Terrorism and the TRIA extension is an area that reinsurers are still evaluating Improved evaluation of catastrophe exposures necessary with regards to cargo and accumulations for both shore-side and vessels Given that the last softening in the market occurred quite rapidly, reinsurers view the peaking in market rates with more than a little trepidation. For the majority of marine reinsurers, the past few years have produced profitable results and underwriting, even with the advent of pricing models, this has been relatively straight-forward during the hardening market. Capacity for programs perceived to be adequately rated is ample, with over-subscriptions becoming the norm. Pricing models fluctuate widely due to a dearth of market level data available upon which to base pricing factors. As a result, reinsurers' pricing models vary from Property & Casualty pricing models which have been tweaked to adapt to marine business, to models which are based purely on marine data. Nonetheless, availability of data remains a critical issue. As a result of the number of catastrophe losses impacting the marine market over the course of the year, the methodology for evaluating catastrophe exposures is coming under heavy scrutiny. Buyers have become much more discerning in vetting acceptable reinsurance security, but we have not seen any evidence of security criteria impacting price or capacity. Special termination and securitization clauses are being introduced by large buyers who have these clauses on the Property & Casualty reinsurances. There have not been any meaningful new entrants into the market. But, existing markets have demonstrated a desire to increase shares but not at the sacrifice of pricing. Overall, the market has been fairly disciplined. While marine reinsurance is meaningful to some of the markets that write the class, relative to the overall reinsurance sector, it is very small. Post 9/11 senior management for the insurance industry more closely scrutinize all of their operations. In the US with the implementation of Sarbanes Oxley, this means not only being profitable, but demonstrating that underwriting is fundamentally sound and profitability can be sustained throughout the course of the underwriting cycle. Moreover, the pool of capable and talented marine reinsurance underwriters is severely limited; any potential new entrants into marine reinsurance would be hard pressed to lure an established underwriter away from their current employer. In an industry whose mantra is currently produce profits or perish, marine reinsurers are intent on maintaining the profitable status quo. For 2005 marine reinsurers will be faced with the same dilemma as their primary market counterparts; challenged with finding ways to grow while maintaining profitability. That said, we will likely see reinsurers remain steadfast on retention levels, fighting vigorously against cash reductions, more closely scrutinizing catastrophe exposures, all while offering increased shares. Will this ultimately translate into a softening in the marine reinsurance market in 2005? Its much too early to accurately gauge underwriter's resolve. For 2005 marine reinsurers will be faced with the same dilemma as their primary market counterparts; challenged with finding ways to grow while maintaining profitability. That said, we will likely see reinsurers remain steadfast on retention levels, fighting vigorously against cash reductions, more closely scrutinizing catastrophe exposures, all while offering increased shares 22

23 Class Re-View Professional Liability (US) sean.whelan@willis.com Softening D&O rates Accountants Professional, from bad to toxic Sarbanes Oxley Part II implementation proving to be a struggle Struggle with clash exposures of D&O, E&O, Fiduciary liability The market is generally bifurcated into Management Liability and Errors & Omissions segments. It should be further segmented into small account and large account business because of the differences in risk profile and distribution channels. Since much of the reinsurance business within the Management Liability segment is placed on a cessions-rated basis or a proportional basis, reinsurance pricing for the segment largely follows the original market. That is to say, there have generally been flat prices to modest price decreases for primary layers (first loss exposures) and sizable rate decreases for excess layers. The following table illustrates how the rate decreases on excess layers has been magnified since 2002: The competition and rate decreases for small to midsized Management Liability risks has been greater than exhibited in the table shown above. This is especially true for privately-held Management Liability risks. Some, but not all, reinsurers have shown a measure of restraint reducing, their support of insurers who endorse the most substantial price decreases exhibited in the Management Liability market over the past twelve months. Similar to the market for larger Management Liability business, the market for larger Errors & Omissions risks has remained firm on the pricing of primary layers and fallen significantly (and even more so) for pricing of excess layers. We have heard insurers comment that, where pricing for excess layers had been 85% to 90% of the underlying layer s pricing, they are now approaching as little as 60%. At the same time, we have seen increased interest from reinsurers to support Errors & Omissions business. This is perhaps a reaction to offset the reducing volume that several of these reinsurers are seeing on their portfolio of Management Liability business. For smaller risks, the business has been more loss ratio sensitive, and we do see some measure of increased competition, but none seeming to impugn the rate integrity of the portfolio of smaller Errors & Omissions risks. We estimate that there are at least $18 billion of unpaid Management Liability claims remaining from the inventory of claims over the past ten years. As the years move on, we anticipate that there will be further reserve increases by insurers and reinsurers alike to account for this sizable inventory; similar to what Converium went through during the Summer of The result of these reserve increases should put a further chill on the desire and ability of the limited pool of reinsurers willing to support larger publiclytraded Management Liability risks. It should also dampen these same reinsurers competitiveness on Errors & Omissions business. To the extent that there are sizable reserve increases (across the industry or within specific portfolios), it will be increasingly more difficult for market participants to demonstrate attractive returns on equity for the Professional Liability lines to their management. As a result, ceding companies who might otherwise consider increasing their retentions will have a difficult time rationalizing any increase until rates become more adequate. We see these effects taking hold sometime toward the latter half of 2005 or the beginning of For smaller risks, the business has been more loss ratio sensitive and we do see some measure of increased competition, but none seeming to impugn the rate integrity of the portfolio of smaller Errors & Omissions risks 23

24 Class Re-View Property (International) warren.neale@willis.com Credit Risk and Securitization Hazard Modeling validity tested Frequency rather than severity losses Segmentation of pricing to reflect loss experience Indian Ocean tsunamis 2004 has seen the reinsurance market continue to support the use of pro rata structures to accept per risk exposures. The reinsurance market seems to have been keen to maintain its premium income and therefore, where a pro rata treaty has yielded a sufficient margin, reinsurers have been prepared to maintain their shares. Where the margin has been eroded, they have reduced their shares or declined to participate at all. The following issues have remained important in the consideration of pro rata contracts during 2004: The use of non proportional structures to manage per risk exposures continued to grow in 2004 with a strong preference for this type of structure being shown by reinsurers. It is anticipated that there will be continued improvements in terms for 2005 for loss free programmes. Regarding catastrophe excess of loss, at Monte Carlo and Baden Baden the general consensus was for a flat or neutral renewal season. The effects of numerous hurricanes and typhoons were only expected to have a pricing impact locally on loss affected programmes and not on the global market. Willis believes that the reinsurance market has been saved from more significant losses owing to a preponderance of frequency losses rather than severity losses that have been a feature of both the Florida hurricanes and Japanese typhoons. In Japan, the six big Non Life companies will only recover from reinsurance an average of 13.6% of their total payouts from 2004 typhoon losses which are approximately 10 times as large as those for At the same time, the extent of the losses was not picked up by the various vendor models whose limitations have been exposed. Contingent Business Interruption Nuclear Risks Limitation on Natural Perils Exposures Indian Ocean tsunamis footnote... Whilst the recent Indian Ocean tsunamis have been tragic in terms of loss of life they are not expected, from early estimates, to generate significant financial loss to the international reinsurance property markets. As the rates for loss free excess of loss business show signs of continuing to soften, the reinsurance market will continue to offer support for pro rata capacity in We have already seens signs of a loosening of terms with the introduction of improved commission levels or the introduction of profit commissions for treaties that offer a suitable balance. There have also been some reductions in the size of event limits that have been introduced in recent years. Based on the comments above, one assumes that there are still good margins in the property reinsurance product and an acceptance by the sellers of capacity that, in order to meet their shareholders' ever growing demand for earnings, they must first of all participate in the market's products. Buyers on the other hand continue to be vexed by the credit risks they assume when they purchase a reinsurance contract and more are becoming uncomfortable with the traditional promise to pay contract based on the strength of counter parties' balance sheets. Recent forays into the traditional market by hedge funds offering fully collateralized capacity thus eliminating most, if not all, of the credit risk has created interest in the buyers and one can expect this area to gather momentum into 2005 and beyond. Therefore, and especially in the area of catastrophe excess of loss, it would appear that 2005 has, or will be, a surprise renewal to many. It would seem the reinsurers will have less money, relatively, in 2005 compared to 2004 to pay claims. In short, clients seemed to have achieved price reductions, even though the markets were demanding, and thereby asking for price stability. The above paradox occurs when there is a general oversupply of acceptable capacity, an ability to interpret hazard models in the most positive manner and the re-emergence of certain carriers who may have chosen to downsize in recent years, but who are looking to clients to allow them back into programs from The effects of this simply means that yet again economic forces prevail and whether it is catastrophe excess of loss, per risk excess of loss or even property proportional treaties, terms for renewal 2005 are generally better than expiring except where programs suffered significant losses. The current market conditions can still provide for attractive returns, however, only when applied to the right client/portfolio of business. In a market like this, risk selection and client/market knowledge are paramount to profitable underwriting. While this situation can provide for opportunity for experienced and skilled underwriters, it is also fraught with peril for naive and premium hungry underwriters Chris O'Kane Chief Executive Officer Aspen 24

25 Class Re-View Property (US) rod.thaler@willis.com Extension of TRIA (Terrorism Risk Insurance Act) The Florida marketplace in the post-hurricane loss environment Original rate levels, will the trend continue in 2005? Emergence of mold concerns Counter party credit risk Notwithstanding the hurricane losses earlier this year, there are segments of the Property marketplace that are enjoying very positive results. Specifically, the larger commercial and industrial accounts, which generally fared very well throughout the hurricane losses, are generating meaningful profit margins for reinsurers for the third consecutive year. In particular, Property rate levels are still reasonably close to the historical highs of 2002, and original deductible levels have not been pushed down to pre-september 11th levels. The combined effect of more adequate rate levels and higher deductible levels has been to sharply reduce loss frequency. From a reinsurance perspective, the strong results in the commercial property and industrial property segments has created sustained interest in Property pro rata treaties by leading reinsurers who have taken the time to audit ceding companies; to understand first hand that the property insurance market conditions have not deteriorated to unacceptable levels. By their increased use of actuaries, working with Willis to quantify the benefit of higher deductibles and rate levels, it has been possible to refute the nay sayers who began to proclaim the onset of the soft market prematurely. One consequence is that some reinsurers who began to retrench on property pro rata earlier in 2004 (or late 2003) can now only watch from the sidelines as other reinsurers are reaping the rewards of supporting property pro rata treaties in 2004, with the prospect for 2005 remaining very positive as well. From an excess of loss prospective, we have witnessed an improvement in the quantitative information utilized on Per Risk excess of loss programs. Willis Re now has the ability to sort our client's exposure profiles in different ways, achieving more transparency, looking more closely at exposure information to generate new exhibits that provide Excess of Loss reinsurers with a more quantifiable basis to re think their traditional rate-on-line approach to underwriting Per Risk Excess of Loss business. Despite the Property/Casualty industry's worst third quarter on record - with $21.3 billion of insured Property losses - the Property reinsurance market is expected to be level for January 1, 2005 renewals. Although the reinsurance market's share of these losses will not have a significant impact on full year results, there are several major catastrophe reinsurers who have sustained quite substantial losses. Their willingness to follow the softening market trend will be tested. Florida-domiciled insurers are expected to bear the brunt of price increases, while other carriers may experience premium decreases, with the greatest decreases being achieved on regional programs that are loss free. Depending upon favorable exposure analysis, it may be possible to achieve premium relief on large national programs that are loss free. Capacity for both Catastrophe and Per-Risk programs remains abundant, as many reinsurers look to maximize their capacity from a smaller group of clients. Other than special termination and funding requirements, there are no significant issues anticipated with respect to reinsurance placements for January 1, 2005 and beyond. On the Terrorism front, given the uncertainty regarding the extension of TRIA (Terrorism Risk Insurance Act), Willis Re has been instrumental in developing a Terrorism Option Cover to provide insurance companies with a cost effective way to reserve Terrorism capacity at a pre agreed price, in the event that TRIA is not renewed. Florida-domiciled insurers are expected to bear the brunt of price increases, while other carriers may experience premium decreases, with the greatest decreases being achieved on regional programs that are loss free. Depending upon favorable exposure analysis, it may be possible to achieve premium relief on large national programs that are loss free. 25

26 Class Re-View Retrocession steve.breen@willis.com Aggregate Industry Loss Warranty Covers Live Catastrophe Market Evolution Continued increased participation of Capital Markets/Hedge Funds into the Industry Loss Warranties market. Exiting Finite Covers The 2004 hurricane season has made insurance and reinsurance companies address the frequency issue of multiple storms hitting their retentions. Aggregate Industry Loss Warranties have been one of the ways to address the retention issues for our retrocession clients with contracts attaching after two to four events. The 2004 hurricane season also produced the most active and heavily traded live catastrophe market in recent years. Traditional reinsurers and hedge funds were buying and selling capacity for all four hurricanes with capacity being bought and sold in the USA and the Caribbean. We continue to see new capital market funds and existing funds offering substantial Industry Loss Warranty capacity due to the lack of new catastrophe bonds in the market and these funds needing to put their money to use elsewhere. The capacity being provided is in reinsurance form and the funds usually use a licensed company for the reinsurer paper and security. Due to the scrutiny regarding finite reinsurance contracts, some clients are unwinding contracts and either buying traditional retrocession or, if that is too expensive, looking to structure a retrocession program using Industry Loss Warranties at various industry trigger points. Updates to catastrophe models can impact the occurrence exceedance probabilities in certain territories and return periods. It is not uncommon to have significant differences among the models. If a reinsurer only licenses one model, they only see one view of results, which may impact market pricing for Industry Loss Warranties. We feel that because market pricing has remained stable, it may be advantageous for reinsurers to license multiple models. Use of multiple models could enable reinsurers to analyze several probabilities and price the ILWs more in line with where the market is trading. We have seen the arrival over the last few years of the hedge fund community entering our business and crossing over from the catastrophe bond world. To that extent we have seen recently the arrival of CIG Re in Bermuda who are a wholly owned subsidiary of the mammoth hedge fund Citadel, and we have seen HBK take a majority share in the newly formed reinsurance company Glacier Re. Also Lehman Re are coming back into the business as are Goldman Sachs, who have a reinsurance entity called Arrowhead Re. We have already seen Nephila Capital, Cooper Neff, Independent Re and many others on the fringes. So a very fluid market is attracting lots of capacity on an unencumbered basis. Due to the scrutiny regarding Finite reinsurance contracts, some clients are unwinding contracts and either buying traditional retrocession or, if that is too expensive, looking to structure a retrocession program using Industry Loss Warranties at various industry trigger points 26

27 Class Re-View Surety (US) parker_mr@willis.com Reinsurance capacity has increased and shows signs of further expansion. Reinsurers new to the market since 2001 have made an impact on the available reinsurance capacity. Rates are being driven by individual surety experience and changing exposures, with the better performing sureties seeing some rate relief. For the larger sureties, analytical capabilities have become increasingly important. Leading reinsurers insist on data by principal that allows them to exposure rate portfolios of business using the latest credit scoring techniques. Pressure to improve the extended discovery coverage currently provided under excess of loss structures will continue, given the inherent mismatch between the underlying exposure and excess of loss reinsurance capacity. Many of the largest reinsurance programs currently being marketed show that lead terms are stable and coverages are expanding compared to the hard market terms present during 2002 and The middle market contract book is the most competitive with ample reinsurance capacity, even though the results in this sector have deteriorated somewhat due to the increased competition. We expect the surety reinsurance market during 2005 will remain stable and possibly soften somewhat as reinsurers increase their capacity in this specialized business segment. Reinsurer results have improved dramatically over the last few years as losses have declined, responding to terms and conditions that are much more restrictive. Sophisticated credit and actuarial modeling tools will be refined and provide alternatives for sureties and reinsurers to better understand and quantify their exposures. Quantitative portfolio management techniques have allowed cedants and reinsurers to better measure and price surety risks. Consequently, the divide between reinsurance buyers' expectations and sellers' quotes has narrowed Roger Rossiter Senior Vice President Odyssey America Reinsurance Corporation 27

28 Class Re-View Trade Credit Political Risk & Bond (International) mark.jenkins@willis.com For reinsurers, 2003 and 2004 represent high points in the current cycle. Reinsurance capacity remains plentiful for short term business, despite a further reduction in the number of active markets. Insurers are under pressure to maintain profits in a difficult environment, without driving clients towards self-insurance. Market reaction to the admission to the European Union of new members, which were (and still are) a potential risk and source of income Pure political risk reinsurance capacity remains more scarce, on pro rata treaties loss ratios caps are being introduced and 2004 have been generally very profitable years for insurers and reinsurers alike, in the face of an economic situation which remains difficult. This provided a much needed respite after a period which saw an unprecedented number of players leaving the field in this sector of the reinsurance market. Once again a small number of players ceased underwriting reinsurance in the class during 2004, driven away by the onerous capital charge imposed by rating agencies, and the continuing pressure on accumulations on the market's peak risks. Despite this, capacity from the remaining markets is easily sufficient to meet the market's demand, and even the largest programs have been comfortably over-placed. After a few difficult years of renewal negotiations, pressure on reinsurance terms has eased for Indeed many credit treaties have performed well enough to allow increases in commission terms. These increases have had the effect of reducing reinsurers' margins by an average of about 10% compared to 2004, whilst still leaving those margins at acceptable levels. To a somewhat lesser extent, rate reductions have been obtained on per risk excess of loss programs. Market conditions on pure Political Risk treaties are not so easy, with considerably fewer reinsurers prepared to offer capacity. Nevertheless, at terms which remain largely unchanged, most placements have been successfully completed. Credit insurers continue to face the difficult task of charging clients a sufficient rate, whilst not pushing them towards the greatest competitor, self-insurance. Insurers are responding to this challenge by offering their clients a more wide-ranging debt advice and management service. They are now faced with the issue of how they charge for these various additional services, and which of them can be shared with reinsurers. In the European Union, export credit agencies are privatising parts of their operations, and setting up limited companies to allow them to continue to underwrite short-term business for countries of risk which are new members of the EU. They would otherwise be forbidden to write this business, since their state guarantee would provide them with an unfair competitive advantage. Willis Re has been actively marketing to develop new reinsurance capacity for Political Risks, and we believe that, with the encouragement of excellent recent results, we will see this emerge during Credit Insurers continue to face the difficult task of charging clients a sufficient rate, whilst not pushing them towards the greatest competitor, selfinsurance 28

29 Class Re-View Trade Credit Political Risk & Bond (US) these two classes as estimated trade flows from emerging markets now approach $2.0 trillion. rick.bowering@willis.com New reinsurance capacity remains scarce The Structured Trade Credit product line is expanding U.S. market is absorbing a substantial share of political risk premium that would otherwise be placed in London Lloyd's tenor (term of policy) is increasing from three to five years for trade related political risk Market dynamics remain stable for long term investment related political risk with the important company markets continuing to satisfy market demand. Barriers to entry remain high for this class with capital, underwriting expertise, and reinsurance support key factors for success. The market for trade related political risk remains competitive with new capacity, most noticeable at Lloyd's, actively competing for limited business with an expected downward spiral in pricing. Reinsurance capacity is especially difficult for this class at Lloyd's and many syndicates continue to hold a net account. Structured trade credit insurance is beginning to find acceptance with reinsurance markets on a limited scale. This class is distinguished from traditional trade credit by its closeness to the banking industry with pre and post financing of commodity exports to emerging markets the most common form of insurance. The insurance product is normally underwritten behind underlying documentary instruments such as letters of credit and other credit instruments. Political Risk (PRI) and Structured Trade Credit (STC) insurance rely on Foreign Direct Investment (FDI) and trade flows within and between emerging and industrialized nations. There is enormous potential for We expect both sectors to achieve sustained growth in 2005, but more so for STC. The attractiveness of STC as a marketable and profitable product line will attract competitors in 2005 but scarce reinsurance capacity will prove to be a barrier. The well capitalized and experienced company markets for political risk will continue to dominate the investment side of PRI, but will face increased competition from Lloyd's for trade related PRI. Reinsurance capacity will remain scarce but optimism exists that new capacity will be available with the 2005 renewals from the major markets; USA, Europe and Bermuda. The well capitalized and experienced company markets for political risk will continue to dominate the investment side of PRI, but will face increased competition from Lloyd's for trade related PRI 29

30 Class Re-View Willis Integrated Solutions mark.hvidsten@willis.com Increased interest of hedge funds in Insurance Risk Increased attention on use of finite and structured reinsurance Revival of RVI market driven by asset volatility and accounting change Risk transfer levels and simplicity of structures have been increasingly demanded by clients and markets have had to adjust to these changes driven by greater awareness of accounting implications. This has forced a much tighter analysis of the economics of structured deals within the accounting environment. Regulatory pressures are likely to reinforce these trends further. Further capacity is likely to be formed as the returns from the insurance sector are still perceived as relatively attractive. Glacier Re, an example of equity investments by hedge funds, and CIG Re are striking examples. An intriguing issue will be the further development of hedge fund interest in non-equity participation in insurance risk - a further development on the original cat bond and risk securitisation themes. Securitisation of other types of risk, such as life insurance, is likely to be a feature of The impact of the Spitzer enquiries on market dynamics, in particular the focus on the use of finite reinsurance, has led to increased vigilance in respect of such structures. In general there is an increased focus on the value that is added in the process of risk mitigation, through whatever means, and this will lead to a continued focus on the capital efficiencies of risk transfer techniques. The application of this thought process to reinsurance will become more pervasive in Continued focus on the capital efficiencies of risk transfer techniques 30

31 Class Re-View Workers Compensation (US) susan.fisch@willis.com Increases in medical severity which exceed the medical Consumer Price Index Continuing declines in frequency Monitoring of employee aggregations Obesity and its effect on both indemnity and medical trends Extension of TRIA Escalating cost of pharmaceuticals Adverse development from late 1990's Managing portfolio concentrations Rate levels on working layer programs (without a Maximum Any One Life provision) have remained flat. Although there is no shortage of markets that target these layers, medical severity trends and continued adverse development from the late 1990's have caused reinsurers to take a more cautious approach to loss picks. A number of clients have chosen to increase their working layer retentions in order to avoid dollar swapping and there is little interest in buying down retentions. However, reinsurers are offering more generous aggregate limits on layers attaching excess of $1 million and cedants can expect to get from $12 to $20 million in limit, usually a combination of free and paid reinstatements. On catastrophe programs global capacity is estimated to be $1 billion, spread among markets in the US, Bermuda, London and Europe. After hitting record levels at 1/1/02, rate-on-line pricing has decreased from 10-12% at each January and July renewal period. Even with the continued softening, many programs are heavily over-subscribed, sometimes as much as %. Markets are paying close attention to the quality of information regarding employee concentrations and the cedant's ability to track and monitor its aggregates. Many reinsurers have licensed commercial earthquake and terrorism models but are not using them for pricing purposes. In addition to the declining prices, markets are willing to consider enhanced coverages in order to secure their lines. Maximum Any One Life (MAOL) provisions have steadily increased and securing a $10 million MAOL is not difficult, especially on regional programs with no earthquake exposure. More favorable reinstatement limits are also obtainable, especially on the first catastrophe layer. On both working and catastrophe layers, noncertified terrorism coverage is routinely offered without a surcharge. There is generally a 10-15% surcharge for certified coverage and it is provided on a capped basis. NCB is typically excluded but can be placed on a stand-alone basis, although the cost is still quite high. We believe that the current global capacity of $1 billion will be stable unless there is a large catastrophe event. Many of the major catastrophe reinsurers were originally property reinsurers and began dedicating capital to the Workers Compensation catastrophe market following 9/11. Since then this segment has been written at a 0% loss ratio and reinsurers have valued the ability to diversity their portfolios. However, the occurrence of a large workers' compensation event, coupled with price slippage, might cause them to redeploy their capital into other lines of business. We also expect some catastrophe only' markets to begin investigating working layer programs in order to maximize/protect their catastrophe authorizations. The request for data, both on working and catastrophe layers, will continue to have a high priority. Reinsurers will be looking for historical individual large loss development on working layers and detailed street and building information to better identify and evaluate employee concentrations for both terrorism and natural hazards (earthquakes). Even more than ever the companies with the best data will get the most favorable terms. As the potential expiration of TRIA draws closer, reinsurer terrorism capacity is likely to be strained as demand increases while supply remains constant. The request for data, both on working and catastrophe layers, will continue to have a high priority. Reinsurers will be looking for historical individual large loss development on working layers and detailed street and building information to better identify and evaluate employee concentrations for both terrorism and natural hazards (earthquakes). Even more than ever the companies with the best data will get the most favorable terms 31

32 Regulatory Re-View Security Re-View Regulatory Re-View - Accounting & Regulation tim.thomas@willlis.com Sarbanes Oxley / Spitzer / Disclosure issues SEC / Wall Street Journal reaction to Finite Reinsurance International Financial Reporting Standards (IFRS) Progress on EU Directives - Solvency 2 and Reinsurance. Corporate Governance is undoubtedly the hottest topic at this year-end. Even without Eliot Spitzer's intervention, the Sarbanes Oxley legislation is now being seen to impose a significant compliance overhead for any insurer required to meet US SEC requirements. This has come to the fore at much the same time as insurance regulators around the world have been issuing regulations requiring the Boards of Directors of insurance companies to take formal responsibility for all aspects of risk management, and to document how this responsibility is delegated and monitored. There are two aspects of this of particular relevance to reinsurance buyers, namely: Documentation of how the reinsurance arrangements demonstrate compliance with the Board's risk management policy. The requirement for formal monitoring of the counterparty credit risk, within the reinsurance program The various subpoena's issued in the US by Eliot Spitzer, the SEC and various State insurance Commissioners, have caused the financial press to wake up to the ability of finite (re)insurance deals to cause major distortions to companies' balance sheets. Commentators are now calling for (even) greater disclosure, and the adverse publicity that the inevitable newspaper headlines have caused has led to a significant reduction in demand for such deals. In the UK, the FSA has introduced an enhanced solvency requirement, introducing the need for companies to model their capital at risk. Whilst this is intended to be a prototype for the likely requirements of EU Solvency II, this cannot yet be guaranteed. In Japan, the impact of regulatory changes is still not clear, but it is possible that the level of the windstorm reinsurance that is purchased may be influenced sees the start of compulsory reporting under International Financial Reporting Standards by all companies listed in the European Union. IFRS4 was issued in 2004, to set out the first stage of reporting of insurance contracts, which deals mainly with minimum standards of disclosure; however, these rules also prohibit provisions for possible claims under contracts that are not in existence at the reporting date, such as catastrophe and equalization provisions. Stage 2 of the international standard for reporting of insurance contracts is now under discussion by a subcommittee of insurance professionals, and is proving to be controversial. The original intention to mark liabilities to market involves abandoning the widely understood concepts of earned premiums and incurred claims, and replacing them with estimates of future cash flows, discounted at an appropriate rate, which is deemed to be a better fit with the other accounting standards. However, there is considerable opposition to this plan, and it is therefore unlikely that an agreed position will be reached for some time. These delays in Stage 2 of IFRS have caused the implementation timetable for the EU Solvency II project to slip as well, and this now appears to be several years away. Corporate Governance is undoubtedly the hottest topic at this year-end. Even without Eliot Spitzer's intervention, the Sarbanes Oxley legislation is now being seen to impose a significant compliance overhead for any insurer required to meet US SEC requirements 32

33 Regulatory Re-View Security Re-View Security Re-View Acceleration in client movement towards active management of reinsurance credit risk and recoverables Increased regulatory conditioning Will less choice lead to bigger accumulations? Rating agency reaction against A- credit cliff Increased use of downgrade clauses The reinsurance security headlines over the summer and autumn of 2004 rested largely with Converium. For the 3rd year in succession, a major reinsurance player suffered problems which resulted in the withdrawal of rating agency and market confidence, plunging them into the 'B' ranges, from whence it is a much slower upward climb and in comparison the 1/1 renewal season itself has been rather quiet. The autumn's major hurricanes and typhoons had little discernable impact on reinsurer security, despite the anticipated high total cost - some estimates are upwards of $40 billion. Those reinsurers specializing in catastrophe protections suffered big number losses, but their business philosophies remain intact. they operate how they're designed to operate, and their ratings have remained untouched. Whilst ratings for the majority of reinsurers are fairly stable, attention appears to have focused again on price. But this brings with it the concern about the pressure on companies to generate volume to satisfy their thirst for growth, whether internally or externally promoted. Whilst not necessarily causing immediate problems for any particular companies, there is certainly concern that it is drawing companies into areas of business not originally part of their business plans. It is an excellent reminder of best practice principles; the need to balance quality, spread and price when selecting long term reinsurance partners. From a financial strength rating perspective, the reinsurance sector is largely enjoying a period of relative stability. This is giving many clients the opportunity to focus inwardly and ensure that their own house is in order, revising and improving internal structures, processes, and documentation. We anticipate a continuing divergence between the Bermuda Class of 2001, and more established players, as the latter continue to be challenged by their legacy issues. The key is, have these reserves yet been properly articulated? There have been numerous instances where multiple attempts have been necessary, so there remains the potential for further revelations. Several market players have been vocal in their desire to better manage their long term exposures, for example through use of pro-active commutation strategies, and there is every expectation that this trend will intensify. Finally, we also expect to see continuing efforts by the rating agencies to improve and develop their models and assessment practices, as they seek to increase their relevance and support to the market. Several market players have been vocal in their desire to better manage their long term exposures, for example through use of pro-active commutation strategies, and there is every expectation that this trend will intensify 33

34 Special Re-View Bermuda Bermuda is now recognized as the leading captive domicile, a key provider of insurance products to large, global industrial and financial companies, and one of the top reinsurance markets in the world Development of Bermuda The Bermuda insurance and reinsurance market has developed over more than 30 years, starting with the captive industry in the 1970's then the excess liability insurance market in the 1980's and the large flow of capital in the early 1990's and latterly 2001 to create new reinsurance companies. The new, unencumbered financial capital and intellectual capital which was attracted to Bermuda has created a financial powerhouse for risk transfer. Bermuda is now recognized as the leading captive domicile, a key provider of insurance products to large, global industrial and financial companies, and one of the top reinsurance markets in the world The Bermuda reinsurance market is now viewed as one of the three key global reinsurance markets, to the point where of the top 35 global reinsurers, 11 are located in Bermuda, up from seven just two years ago. As U.S. and European reinsurers continue to deal with the legacy issues associated with the prior soft market, asbestos losses and investment meltdowns, the financial capacity of Bermuda's reinsurers has soared. The so called 'flight to quality' by reinsurance buyers is now more than ever necessitating a visit to Bermuda. The growth and enhanced market position are the result of the island's operating platform, which enables Bermuda companies to begin trading business quickly and allows them to operate with substantial competitive advantages over their U.S. and European competitors. These advantages include no income taxes and few restrictions as to how Bermuda companies can invest their assets and deploy capital, not to mention the island's close proximity to the largest insurance market in the world, the United States. These factors, along with the current favorable market conditions, have contributed to the robust financial performance of the Bermuda insurance and reinsurance market. For the first two quarters of 2004, strong earnings continued in the absence of a major catastrophe loss but this trend was rigorously tested in the 3rd quarter due to the four Florida Hurricanes. Based on provisional estimates of the total industry losses, the impact to the Bermuda market is likely to exceed $3 billion. This represents approximately 12.5% of the expected market insured loss of $25bn from these storms - the Bermuda reinsurance market generally writes catastrophe reinsurance at a high attachment level, and it is likely that this percentage would have been far greater if the loss had been a single insured event of $25bn rather than the loss being realized from four separate storms. Consequently third quarter earnings from the Bermuda reinsurance market remained resolute and only three companies reported negative earnings in this quarter - Renaissance Re, PX Re and Quanta, and only five companies had combined ratios higher than 100%. Should catastrophe loss activity remain low in the 4th quarter, Bermuda reinsurers are on target to continue posting strong returns in the majority of business lines written and to be well-positioned to take advantage of improved trading conditions expected during 2005 in Florida and the South-East following the hurricane activity. If one place can be singled out as being pivotal to the growth and expansion of the reinsurance industry in the past 20 years, it is Bermuda Reactions Magazine 34

35 Special Re-View Bermuda What's in store? Although not matching the rate at which new companies were established in 2001/2, some new companies have recently evolved and will add to the market in Perhaps most interesting is the emergence of Hedge Fund companies who are backed by various institutional investors and have the ability to write conventional reinsurance business using either a fronting company or more generally by consolidating indemnity via Trust Funds. The hedge fund industry's relationship with reinsurance markets began in the 1990's principally via investments in catastrophe bonds and insurance swaps, but the recent trend shows hedge funds with significant capacity available for traditional property catastrophe and retrocessional business. The two most prominent Hedge Funds currently based in Bermuda offering traditional reinsurance capacity are Nephila Capital Ltd and CIG Re, the latter being backed by the well-known US hedge fund Citadel. A new entrant expected to set-up in Bermuda during 2005 is Independence Re. Another recent market development has been the arrival of Financial Guarantee reinsurance companies, serving the primary financial guarantee companies and reinsuring investment grade structured finance and municipal transactions. The most prominent of these are Channel Re (S&P AAA) with both Renaissance Re and Partner Re as major owners, and Bluepoint Re (S&P AA) which is owned by Wachovia Corporation. Most recently it has been announced that a new company called Ascend is setting-up with 15 staff due to move to the island. Companies already based in Bermuda continue to expand their business and further diversify their operations. Most prominently, Aspen recently provided a $200m capital allocation to the Bermuda company to facilitate an increase in property reinsurance underwriting activities, primarily to service their existing client base in the US and Japan. A number of senior reinsurance staff relocated from London to Bermuda following this announcement, with James Few being appointed Chief Underwriting Officer of Aspen Insurance Ltd. The world of corporate governance (Sarbanes-Oxley, SEC) and the impact of the Eliot Spitzer inquiries has created a great deal of uncertainty throughout the insurance and reinsurance market, and this will also be a likely factor in maintaining pricing levels over the short-term as well as much greater transparency and discipline in business practices throughout the industry. So as we move into 2005, the Bermuda reinsurance market remains financially strong and relatively free of major legacy issues. Having secured its position as one of the three key global reinsurance markets, Bermuda is expected to consolidate this through 2005 in a stabilizing property and casualty treaty market.... as Bermuda has long claimed, and proved by the OECD good housekeeping seal of approval, the business case for using Bermuda for global business is of the highest standard and repute Shoreliner Magazine, London 35

36 Modeling Re-View Catastrophe Modeling Re-View The 2004 Atlantic hurricane season will go down in history for not only the amount of insured loss, but also for the frequency of severe hurricanes making landfall in a single state within a short period of time. The 2004 Pacific Northwest typhoon season was the worst ever recorded with ten storms making landfall in Japan, and with other countries also severely affected, notably the Philippines. Flood risk is still of major concern globally. Several new models covering new territories in Europe are due for release in and Flood Zone Determination services are now being offered in the US to quantify flood risk exposure to a high level of resolution. EQECAT Inc released a brushfire model in the US, the first of its kind, along with its first probabilistic catastrophe model for US winter storms. Elsewhere, upgrades have been made to typhoon models for South Korea and China as well as Taiwan earthquake. RMS also released a new Hong Kong typhoon model. A new generation of windstorm models from AIR Worldwide Inc and EQECAT Inc have been released for European territories. RMS expects to release its revised model for Europe in The increasing need for more detailed exposure information and higher quality of data reflects a move away from modeling at Cresta levels of resolution and towards more detailed levels. US Workers' Compensation writers have also improved their capture of location details, to enable them to benefit from new models for earthquake and terrorism. In the US, total insured losses from the four hurricane events are estimated at more than $20 billion, surpassing the amount of loss Hurricane Andrew caused in Of the near 2 million claims filed, over 30,000 homeowners experienced loss from more than one hurricane, creating a financial crisis as many homeowners were forced to assume multiple policy deductibles amounting to 2% of the insured value of the home. For a $200,000 home, this equates to assuming $4,000 for each event. The Florida Hurricane Catastrophe Fund, the state-run reinsurance fund set up in the wake of Hurricane Andrew, will bear only around $2 billion of the loss. Since the CAT Fund has an occurrence retention, insurers were forced to assume separate retentions for each hurricane event. This therefore limited the amount of relief from the Fund which has been criticized by many insurers. As a consequence, the Florida State Board of Administration is currently considering lowering the retention of the Fund and offering a drop-down feature for three or more events. This will be debated when the annual Legislative Session commences in March of The key issue for policyholders, insurers and reinsurers is how to reduce their financial exposure to multiple events in the same season. UK & Europe Increasing technical awareness of clients and reinsurers and the demand for extra analysis during the renewal period on sensitivity of portfolios to model parameters is a hot topic. Data quality continues to be a key issue with thorough data audits, which are timeand resource-intensive, proving of high value this renewal in giving reinsurers confidence in the client data files passed to them. Asia There is a growing requirement for flood models and more accurate earthquake and typhoon models for Asia, as models are generally producing higher losses than expected. Developments are taking place in earthquake modeling for China, while the China Insurance Regulatory Commission (CIRC) has called for a disaster insurance scheme to be set up. The typhoons in Japan produced significant losses to the domestic ceding companies. The losses to the reinsurance market were much lower than those sustained by the primary companies, but continue to grow at the time of going to press. Catastrophe models Following the highly unusual nature of the 2004 Atlantic hurricane season, there will be significant research by the catastrophe modeling industry into the frequency potential for seasonal event clustering as well as a detailed review of estimated modeled losses. Catastrophe modeling firm Risk Management Solutions is conducting a detailed review of thousands of claims aimed at providing insight into wind damage, demand surge, adjusting practices and costs, in order to make model vulnerability functions more robust. In Europe there is much activity producing the first river flood models for central Europe. First generation models for European wind, Australian cyclone and earthquake, and Japanese perils will have been revised by the end of

37 Modeling Re-View Catastrophe Modeling Re-View (continued) Terrorism New perils being modeled Indian Ocean tsunamis footnote Over the past two years, A.M. Best has been researching methods used by insurers and reinsurers to quantify their risk exposure to terrorism events. In 2005, A.M. Best will introduce a comprehensive set of questions aimed at uncovering a company's accumulation and loss potential in single buildings, aggregate 500-foot zones, and to a 5 Ton Truck Bomb. The level of detail in this questionnaire will aid A.M. Best in determining whether a terrorist attack might have a potentially devastating impact on the insurance organization. Terrorism Risk Insurance Act (TRIA) TRIA is set to expire at the end of If it were to be renewed, it would allow the industry to continue to develop capacity and interest in providing terrorism coverage. If not, there could be a significant impact on the industry as insurers seek ways to assess their loss exposure. Terrorism modeling tools have provided a benchmark for assessing the size of loss potential from various attack types but are not used with the same level of deliberation as the natural peril models. Regardless of the technique chosen to create a scenario, detailed data is required and insurance companies will continue to work to improve their data capture to enable them to benefit from the improved modeling tools. AIR Worldwide Inc is developing a catastrophe simulation model to estimate the financial impacts of events in the US such as brushfires and is due to release a winter storm model in Other expectations It is expected that there will be an increased use of models generally in South East Asia, as well as more refined models being developed for some territories. General consensus is that there is growing emphasis on the quality of exposure data and an increase in technical knowledge which ultimately tests the quality and credibility of models. In Europe, Solvency II is leading to an interest in other catastrophe perils to be modeled, such as subsidence. General consensus is that there is growing emphasis on the quality of exposure data and an increase in technical knowledge which ultimately tests the quality and credibility of models The very large earthquake in Indonesia and the subsequent tsunami which devastated much of the coastal region of the Indian Ocean has caused a huge humanitarian disaster. Insurance losses are currently an unknown, although it is thought that in much of the affected area only a small proportion of the economic loss is insured. Catastrophe model coverage of the region is limited, and catastrophe models do not generally cover tsunami risk 37

38 Modeling Re-View Known model releases and planned upgrades USA EUROPE ASIA SOUTH AMERICA OCEANIA RMS 2005 Upgrade: Japan - typhoon / earthquake Upgrade: Australia - cyclone / earthquake EQECAT 2004 US Brushfire Upgrade: Europe - windstorm Upgrade: South Korea - typhoon Upgrade: Mexico - earthquake US Winter Storm Upgrade: Italy - earthquake Upgrade: China - typhoon Upgrade: Taiwan - earthquake EQECAT 2005 Germany - flood EQECAT 2006 RMS 2004 Belgium - flood Hong Kong - typhoon Upgrade: Chile - earthquake Upgrade: Italy - earthquake Upgrade: Taiwan - earthquake RMS 2006 Upgrade: Central & NE America - earthquake Upgrade: Europe - windstorm China - earthquake - under discussion Upgrade: Colombia - earthquake Germany - flood Upgrade: Mexico - earthquake Upgrade: UK - storm surge Upgrade: Southern Europe - earthquake Upgrade: European - earthquake / flood AIR 2004 Upgrade: Central & Eastern US - earthquake Europe - windstorm AIR 2005 US Brushfire Greece - earthquake Upgrade: South America models US Winter Storm Italy - earthquake Upgrade: Western US - earthquake Portugal - earthquake AIR 2006 Central America - earthquake / hurricane Korea - earthquake / typhoon Alaska - earthquake (fire following) China - earthquake - under discussion Hawaii - earthquake (fire following) 38

39 Modeling Re-View Financial Modeling & Actuarial Services Re-View Predictive Modeling: Use of Generalized Linear Models in US ratemaking and regulatory acceptance (or rejection) Casualty (especially D&O) pricing techniques and model parameter uncertainty Europe: the FSA has established a risk-based capital approach and discussions on the EU's Solvency II proposal continue slowly The financial modeling of reinsurance is becoming a standard part of the renewal process, required by reinsurance buyers as part of their decision-making and compliance processes. Catastrophe excess of loss pricing outside the US is departing from technical rates as reinsurers write for market share rather than economic profitability. With widespread reinsurance modeling, we are able to see the actual loading being charged by reinsurers and how these are changing over time. With widening differentials in credit ratings, there is research interest in the extent to which rates can reflect credit risk and how this can be modeled. Given the lack of data on reinsurance company failure and the case that reinsurers tend to slow payment rather than default, this has proved a difficult problem to solve. In response to regulatory changes in the UK and Australia, as well as the forthcoming Solvency II in Europe, many insurers have spent 2004 implementing their own asset-liability models, typically licensed from consulting actuaries. These models enable the enterprise level of risk to be assessed for both assets and liabilities. Current Directors and Officers rate-making does not appropriately account for the current environment. Our team in New York is developing a pricing methodology which takes a financial market approach to price Directors & Officers reinsurance contracts. A paper outlining the methodology will be published in the Casualty Actuarial Society Forum in March We are expanding our Political Risk and Trade Credit capabilities in order to support client needs. We will test the performance of our trade credit model against a cedant' s internal credit model required under Basel II. In addition, it will provide indications to reinsurers on the capital required to support the ceding company's portfolio. The UK's Financial Services Authority has established a risk-based capital approach to solvency which permits companies to use their own stochastic risk models to calculate risk capital. Meanwhile, discussions by the twenty five EU members on Solvency II proceed slowly with the final proposals slipping from 2006 to 2007 and, realistically, unlikely to be implemented before was characterized by clusters of windstorm events in Japan and Florida. This will lead to financial models being revised to take account of such phenomena by relaxing their current assumption that events are independent from each other was characterized by clusters of windstorm events in Japan and Florida. This will lead to financial models being revised to take account of such phenomena by relaxing their current assumption that events are independent from each other 39

40 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, Willis Re employs 1,000 Associates and handles more than USD 11 billion in premiums. With locations worldwide, Willis Re provides local service with the full backing of an integrated global reinsurance broker. More than ever before, clients need to access the world's reinsurance markets through a broker they can trust to represent them superbly. Acting as a single team, Willis Re delivers a coordinated service to clients. Through your Willis Re client advocate you can be assured of access to our leading team of experts, whether in risk modeling, actuarial services or reinsurance design. Specialists in contract wordings, claims and reinsurance accounting deliver services from an integrated platform. Whether your operations are global, national or local, Willis Re can help you access worldwide markets, negotiate optimum terms, ensuring you make better reinsurance decisions. willisre.com London Willis Limited Willis Re Ten Trinity Square London EC3P 3AX U.K. Tel: +44 (0) Australia Willis Re Australia 1 Castlereagh Street Level 4 Sydney, Australia NSW 2000 Tel: Bermuda Willis Re Bermuda The Vallis Building 3rd Floor 58 Par-la-Ville Road PO Box HM1995 Hamilton HM 11 Bermuda Tel: Chile Willis Re Chile Office 1001 Alcantara 200 Las Condes Santiago, Chile Tel: Denmark Willis Re Nordic Smakkedalen 4, 1 DK 2820 Gentofte Denmark Tel: France Gras Savoye Ré 2 à 8 rue Ancelle Neuilly sur Seine Cedex F Paris, France Tel: Germany Hamburg Willis Re Germany Heuberg 1 D Hamburg Postfach D Hamburg Germany Tel: Germany Munich Willis Re Germany Schwanthalerstrasse 69 D Munich Germany Tel: Hong Kong Willis Re Hong Kong 3502 The Lee Gardens 33 Hysan Avenue Causeway Bay Hong Kong, China Tel: Ireland Willis Insurance Services 7-9 South Leinster Street Dublin 2, Ireland Tel: Italy Bologna Willis Re Southern Europe Strada Maggiore, 26 Palazzo Rossini I Bologna Italy Tel: Italy Genoa Willis Re Southern Europe Piazza Dante 7 I Genoa Italy Tel: Italy Milan Willis Re Southern Europe Via Maroncelli, 5 I Milan Italy Tel: Italy Rome Willis Re Southern Europe 22, Via Panama I Rome Italy Tel: Japan Willis Japan Limited Ohtemachi Tatemono Toranomon Building 10F 6-12 Toranomon 1-chome Minato-ku Tokyo Japan Tel: Malaysia Willis Re Malaysia Level 24, Tower 2 MNI Twins 11, Jalan Pinang PO Box Kuala Lumpur Malaysia Tel: Mexico Willis Re Mexico Av. Sante Fe # 495 Col. Santa Cruz Manca Santa Fe, Mexico D.F Tel: Poland Willis Re Poland ul Leszno Warszawa Poland Tel: Singapore Willis Re Singapore 78 Shenton Way # 23-02/03 Singapore Tel: Spain Willis Re Iberia Paseo de la Castellana 36-38, 4a Planta E Madrid Spain Tel: Taiwan Willis Re Taiwan 2nd Fl. 114 Chung Shan N. Rd., Sec. 2, Taipei, 104, Taiwan, ROC Tel: UK Ipswich Willis Re Friars Street Ipswich IP1 1TA U.K. Tel: +44 (0) New York Willis Re Inc. Wall Street Plaza 88 Pine Street, 4th Floor New York, NY U.S.A. Tel: +1 (212) Atlanta Willis Re Inc. I Glenlake Parkway Suite 1100 Atlanta, GA Tel: +1 (404) Chicago Willis Re Inc. 10 South LaSalle Street Suite 3000 Chicago, IL Tel: +1 (312) Dallas Willis Re Inc. One Galleria Tower Noel Road Suite 1375 Dallas, TX Tel: +1 (972) Farmington Willis Re Inc. Three Farm Glen Boulevard Suite 301 Farmington, CT Tel: +1 (860) Los Angeles Willis Re Inc. 500 South Grand Avenue Suite 1610 Los Angeles, CA Tel: +1 (213) McLeansville Willis Re Inc Millstream Road Suite 200 PO Box 3000 McLeansville, NC Tel: +1 (336) Miami Willis Re Inc Brickell Avenue Suite 1110 Miami, FL Tel: +1 (305) Minneapolis Willis Re Inc France Avenue South Suite 450 Minneapolis, MN Tel: +1 (952) Nashville Willis Re Inc. 26 Century Blvd. Nashville, TN Tel: +1 (615) Philadelphia Willis Re Inc Market Street Suite 2700 Philadelphia, PA Tel: +1 (215) San Francisco Willis Re Inc. One Bush Street 10th Floor San Francisco, CA Tel: +1 (415) Stamford Willis Re Inc. One Landmark Square Suite 310 Stamford, CT Tel: +1 (203) Willis specialists have recently published other market reviews which might be of interest to you: Global Energy Review Lloyd s Review 2004 All of the above are available at or through your Willis contact. 40 RE/2648/12/04 Willis Limited, Registered number: England and Wales. Registered address: Ten Trinity Square, London EC3P 3AX. Lloyd's Broker and Member of the General Insurance Standards Council.