Willis Re 1 st View Renewals 1.1.7 The tipping point? Contents Introduction 1 Class review 2 After the extraordinary challenges of the last few years, buyers and sellers of reinsurance are taking advantage of the global lull in natural catastrophe activity and the ongoing interest that the capital markets have displayed in reinsurance. The twin blessings of fewer losses and more capital combine to make the 7 reinsurance renewal season, for most insurers, less costly. Reinsurers are rebuilding both their balance sheets and their commercial confidence while, at the same time, insurers are creating and implementing sophisticated enterprise risk management programs. Willis is pleased to be at the vanguard of this activity. Our clients recognize that the magnitude, diversity and complexity of risks they confront every day have not diminished. Nevertheless, there is a demonstrable atmosphere of relief as insurers and their reinsurers take advantage of the current respite and work to apply the hard-learned risk management lessons of the 4 and 5 underwriting years. With this in mind, it is important to report that 6 is going to be a good year for reinsurers. The absence of large catastrophe losses combined with a firm pricing environment has generated strong underwriting results for reinsurers. Rising investment yields are augmenting these positive underwriting results. This positive outcome is nurturing increased competition and, as a consequence, many of our clients are seeing a stabilization of, or a reduction in, their reinsurance costs. Rates for both property and casualty exposures are generally flat or falling modestly. In Europe (with the exception of wind exposed Northern European multi- territory covers where rates are firm), Asia, Australia, Latin America and those areas and classes of business of the United States not prone to natural catastrophes, rates are flat or have fallen by 5% to 1%. The major exception to this trend is United States property business, where the insurer has significant East Coast or Gulf Coast wind-exposed business. This business is experiencing rate increases. In this market, there are five macro factors at play. First, reinsurers have sought to bring January renewals of Nationwide and/or Critical Cat accounts in line with the mid-year 6 pricing levels with cedants experiencing rate increases of around 4%. Second, reinsurance pricing is reflecting the perception of increased volatility that is embedded in the latest property catastrophe models. Third, reinsurers are trying to recoup losses from the catastrophes of 5. Fourth, reinsurers and their investors also have a new appreciation for the insured values and the resulting catastrophe exposures in the Northeast coast of the United States the third peak zone. Finally, there is simply not enough retrocession capacity for reinsurers to spread their catastrophe risks. Reinsurers, as a consequence, require greater returns to compensate for this increased retained exposure. On the ensuing pages, I am pleased to provide you with more detailed analyses from our business segment experts on recent market trends. I hope that you find this commentary to be useful and informative. In closing, I would like to wish you the very best for a safe and profitable 7. Peter Hearn, CEO Willis Re Class review (continued) 3 Class review Property 4 Rates and territories - Property 5 Rates and territories Casualty 6 The charts in the Willis Re - 1 st View relate to overall property catastrophe excess of loss pricing movements. They are indexed to 1 in 199. Contacts Willis Re Research David Pannell pannelld@willis.com Tel: +44 () 2 7488 9714 Willis Re Public Relations Helen Davis helen.davis@willis.com Tel: +44 () 2 7488 877 Copyright 6 Willis Limited/Willis Re Inc. All rights reserved: No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, whether electronic, mechanical, photocopying, recording, or otherwise, without the permission of Willis Limited/Willis Re Inc. Some information contained in this report may be compiled from third party sources we consider to be reliable; however, we do not guarantee and are not responsible for the accuracy of such. This report is for general guidance only, is not intended to be relied upon, and action based on or in connection with anything contained herein should not be taken without first obtaining specific advice. The views expressed in this report are not necessarily those of the Willis Group. Willis Limited/Willis Re Inc. accepts no responsibility for the content or quality of any third party websites to which we refer. Willis Re 1 st View Renewals 7 1
Class review Willis Renewals 1.1.7 Aerospace XOL rate on line reductions in the region of 5% - 7.5% on a like for like book. Direct airline premiums fell between 2% and 22.5% in Q4, and approximately 17% overall in 6. Rates have fallen by a greater extent (25% - 3%) with premiums over the year supported by fleet and passenger growth. Casualty (US) Continued softening in primary market during last quarter. Strong competition for desirable business contributing to 5 off for the year. Several new E&S Casualty start ups. Initial indications of interest from the Bermudan Class of 5 in entertaining certain Casualty reinsurances. Casualty (International) General & Employers Liability Good results for reinsurers have encouraged rate concessions. Treaty conditions otherwise showing little change. Casualty (International) Professional Lines Polarization of reinsurers' interests in the more specialty arenas has led to some posturing for rate increases. Some reinsurers have ameliorated their position to protect their market share. Casualty (International) Motor UK and French rate increases around 7.5% and 2% respectively. Elsewhere, loss free layers down 5% to 1%. Courts Act, EU 5th Directive and original price reductions have not stopped reinsurance competition. Engineering Proportional capacity generally unchanged. Selective ceding commission increases driven by improving underwriting results. Healthcare (US) Base rates flat or reducing. Reinsurance rates stable to depending on loss performance/frequency and severity trends. Life, Accident & Health NBC Terrorism capacity becoming increasing available across all lines. Catastrophe pricing falling below 6 levels. Marine (US) Underwriters competing with their property colleagues for corporate catastrophe aggregates. Increased reserving from Katrina and Rita are feeding into renewal pricing. Reinsurers verifying cedants' implementation of Cat exposure management plans. Australia 4 35 25 15 1 5 Caribbean 25 15 1 5 Chile 5 45 4 35 25 15 1 5 Willis Re - 1 st View Renewals 7 2
Class review (continued) Willis Renewals 1.1.7 Marine (International) Rates remain flat in Q4 6. Pressure on 7 pricing, especially on Gulf of Mexico energy exposed covers due to benign hurricane season and clients looking for greater value from their reinsurers. Non-Marine Retrocession Significant capacity reductions for worldwide business. Increased number of collateralized one shot covers and more pillared or named territory cover. Increased Industry Loss Warranty activity. Political Risk Increase in reinsurance capacity, primarily aimed at Lloyd s and new entry of Bermuda markets for political risk and structured trade credit lines. Primary rate decreases of 2%-3% despite political risk market losses estimated at USD4MM over past three years. Professional Liability (US) D&O - Modest increase in capacity and appetite. Terms and conditions slightly improved. E&O - Abundant capacity/appetite for most classes, except large accounts, at attractive terms and conditions. Surety (US) Rate reductions of 5 on increased levels of exposure driven by improving portfolio credit quality and continuing good experience. Higher net retentions, adequate capacity and new market interest. Trade Credit Loss ratios developing well on original business. Original insurance conditions deteriorating with rate reductions and demands for increased limits. The reinsurance market remains relatively soft with further erosion of reinsurers margins, despite the demand for more capacity. Workers Compensation (US) Working layer reinsurers, impacted by primary rate reductions, pushing hard to maintain expiring rates (dollars). Abundant worldwide capacity continues to exert downward pressure on catastrophe pricing. Colombia 5 45 4 35 25 15 1 5 France 4 35 25 15 1 5 Germany 45 4 35 25 15 1 5 Willis Re - 1 st View Renewals 7 3
Class review Property Willis Renewals 1.1.7 Property Europe Risk Rate reductions achievable if programs are loss free. Cat Rate softening of 5% - 1% for single territory covers. Rates holding firm on wind exposed Northern European multi- territory covers. Pro rata Minor improvements in commissions and general conditions. Australia Risk Rates are steady and increases in line with loss activity. No shortage of capacity. Cat No shortage of capacity - significant lines being offered. Rates are stable & in-line with aggregate growth or slightly below. Pro rata Improved terms available either increased commission terms or introducing profit commission. Natural perils tending to be excluded. No shortage of capacity. Latin America Risk - Increasing move from pro-rata to XL, as pro-rata terms remain hard and there is an abundance of Risk XL capacity. Cat - A benign 6, coupled with a desire for diversification away from key cat zones, has increased appetite among reinsurers for Latin American Cat business. Pro rata - The flow to Risk XL has meant that pro-rata reinsurers have lost significant income, which might force a reappraisal of the terms and conditions being offered. Middle East/Asia Risk Pricing off 5% to 15% but more variable as a function of experience. Reinsurer's capacity up and stronger interest from Bermuda. Cat Territories, where terms agreed, show pricing off 5% to 15% in monetary terms, but significantly more when adjusted for aggregate growth. Reinsurer s capacity up and stronger interest from Bermuda. Pro rata Terms & conditions stable - reinsurer capacity up outside territories where original rating pressures have squeezed already tight margins. UK Risk Rate reductions achievable on loss free books. Higher level of interest from markets not already on a panel. Cat Reinsurers prepared to offer long term clients flat renewals following significant loss free period. Some pressure required to maintain capacity on the higher layers following changes to vendors catastrophe models. Pro rata Reinsurers generally willing to renew at expiring levels. US Risk Reinsurers continue to try and reduce catastrophe exposure in risk business with limited success. Cat Northeast has now become the definitive 3rd catastrophe peak zone. Midwest pricing has remained competitive despite high loss frequency in this region during 6. Message from reinsurers is that 1.1.7 nationwide and/or critical cat pricing appears to be coming into line with the mid-year 6 accounts. This pricing environment allied with a fully established Class of 5 means that there is little likelihood that major shortfalls will exist on January 7 Nationwide accounts. Pro rata Terms and conditions generally stable although most pro-rata business renews mid-year with a heavy bias toward Florida. Mexico 5 45 4 35 25 15 1 5 Non-Marine Retrocession 6 5 4 1 Turkey 6 5 4 1 Willis Re - 1 st View Renewals 7 4
Rates and territories Property Willis Renewals 1.1.7 Property Pro Rata Commission Risk Loss Free Risk Loss Hit Cat Loss Free Cat Loss Hit Algeria +2.5% +1% Australia Flat Flat +1% Caribbean Flat +1% to +3% +1% Chile Flat China Colombia Flat Central & Eastern Europe France +1% to +2% +1% +1% to +2% to Flat to Flat to Germany +1% to +2% +1% Flat Hong Kong Indonesia Flat +1% +1% to Ireland Flat Flat +7.5% Flat Italy/Southern +2% -7.5% Europe Mexico Flat +1% to +2% Morocco 1.5% Flat Nordic Countries +2.5% to Philippines Flat to Non-Marine Retrocession +2% +1% to to +7.5% 5% 15% 2% 3% South Africa Flat Spain Flat Flat Sri Lanka Flat Switzerland +2% to to Taiwan Flat to -2% Flat -2% to -25% Turkey Flat to UK Flat to -7.5% US Marine Flat Flat Flat Flat Flat US Property Regional +1% Venezuela Flat Vietnam Flat to Regional Flat (but North-East +2%) National +4% +1% to +2% +1% to to to National +4% +1% to UK US 6 5 4 1 4 35 25 15 1 5 Venezuela 45 4 35 25 15 1 5 Willis Re - 1 st View Renewals 7 5
Rates and territories Casualty Willis Renewals 1.1.7 Casualty Pro Rata Commission XL Loss Free XL Loss Hit Willis Re Algeria Australia Flat Caribbean Flat Chile China Colombia Central & Eastern Europe Flat France Flat for motor to +3% for motor Germany Flat +1% Hong Kong to Indonesia Ireland Flat Italy/Southern Europe +2% Flat +2.5% Mexico Morocco Nordic Countries +1-4% Philippines Flat to +2% +1% South Africa Flat Flat Spain Flat Flat Sri Lanka Switzerland +2% +1% Taiwan Turkey Flat to UK -2% +1% US Marine Flat +2% Venezuela Vietnam Flat to 5% to +1% Global resources, local delivery For over 1 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 1,1 Associates and handles more than USD12 billion in premiums. With 4 locations worldwide, Willis Re provides local service with the full backing of an integrated global reinsurance broker. Willis Re - 1 st View Renewals 7 6