www.marsh.com

Budgeting for Results in 2011: A Strategic Overview of the Insurance Marketplace

January 2011

2Marsh

Reasons for Optimism, Causes for Concern in the P/C Insurance Industry

Exposure Growth Began in 2nd Half 2010, Accelerate in 2011

P/C Insurance Industry Capacity as of 6/30/10 Is at Record Levels and Has Recovered 100%+ of the Capital Lost During the Financial Crisis

Record Capacity, Depressed Exposures Mean that Generally Soft Market Conditions Will Persist into 2011

There is No Catalyst for a Robust Hard Market at the Current Time

High Global 2010 CAT Losses Insufficient to Trigger Hard Market

– Localized insurance and reinsurance impacts are occurring, especially earthquake coverage in Latin/South America, Offshore Energy Markets, European Wind Cover

Financial Strength & Ratings of Global (Re)Insurance Industries Remained Strong Throughout the Financial Crisis in Sharp Contrast With Banks

Major Transformation of US Economy Underway with Major Opportunities for Insurers through 2020 in Health, Tech, Natural Resources, Ag., Energy

Investment Environment Is/Remains Much More Favorable

– Volatility, however, will persist and yields remain low

– Both are critical issues in long-tailed commercial lines like WC, Med Mal, D&O

3Marsh

ROE: P/C vs. All Industries1987–2009*

* Excludes Mortgage & Financial Guarantee in 2008 and 2009.Sources: ISO, Fortune; Insurance Information Institute.

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

US P/C Insurers All US Industries

P/C Profitability IsCyclical and Volatile

Hugo

Andrew

Northridge

Lowest CAT Losses in 15 Years

Sept. 11

Katrina, Rita, Wilma

4 Hurricanes

Financial Crisis*

(Percent)

4Marsh

P/C Insurer Impairments, 1969–2009

The Number of Impairments Varies Significantly Over the P/C Insurance Cycle, With Peaks Occurring Well into Hard Markets

815

127

11 934

913 12

199

1614 13

3649

3134

50 4855

60 5841

2916

1231

18 1949 50

4735

1814 15

7 65

0

10

20

30

40

50

60

70

69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

5 of the 11 are Florida companies (1 of these 5

is a title insurer)

5Marsh

Reasons for US P/C Insurer Impairments, 1969–2008

38%

14%8%

8%

8%

7%

9%

4%

4%

Deficient Loss Reserves and Inadequate Pricing Are the Leading Cause of Insurer Impairments, Underscoring the Importance of Discipline.

Investment Catastrophe Losses Play a Much Smaller Role

Deficient Loss Reserves/Inadequate Pricing

Reinsurance Failure

Rapid GrowthAlleged Fraud

Catastrophe Losses

Affiliate Impairment

Investment Problems

Misc.

Sig. Change in Business

6Marsh

P/C Insurance Industry Combined Ratio, 2001–2010:H1*

* Excludes Mortgage & Financial Guaranty insurers in 2008, 2009 and 2010. Including M&FG, 2008=105.1, 2009=100.7, 2010:H1=101.7 Sources: A.M. Best, ISO.

95.7

99.3 100.1101.0

92.6

100.898.4

100.1

107.5

115.8

90

100

110

120

2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010:H1

Best Combined Ratio Since 1949 (87.6)

As Recently as 2001, Insurers Paid Out Nearly

$1.16 for Every $1 in Earned Premiums

Relatively Low CAT Losses, Reserve Releases

Cyclical Deterioration

Heavy Use of Reinsurance Lowered Net

Losses

Relatively Low CAT Losses, Reserve Releases

Lower CAT Losses,

More Reserve Releases

7Marsh

Underwriting Gain (Loss)1975–2010:H1*

* Includes mortgage and financial guarantee insurers.Sources: A.M. Best, ISO; Insurance Information Institute.

Large Underwriting Losses Are NOT Sustainable in Current Investment Environment

-$55

-$45

-$35

-$25

-$15

-$5

$5

$15

$25

$35

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

The industry recorded a $5.1B underwriting loss in

2010:H1 compared to $2.1B in 2009:H1

Cumulative underwriting deficit from 1975 through

2009 is $445B

($ Billions)

8Marsh

$8

.3

$7

.4

$2

.6 $1

0.1

$8

.3

$4

.6

$2

6.5

$5

.9 $1

2.9 $

27

.5

$6

1.9

$9

.2

$6

.7

$2

7.1

$1

0.6

$7

.9

$1

00

.0

$7

.5

$2

.7

$4

.7

$2

2.9

$5

.5 $1

6.9

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*20??

US Insured Catastrophe Losses

*Through June 30, 2010.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Sources: Property Claims Service/ISO; Munich Re; Insurance Information Institute.

2010 CAT Losses Are Running Below 2009, So Far Figures Do Not Include an Estimate of Deepwater Horizon Loss

$100 Billion CAT Year is Coming Eventually

First Half 2010 CAT Losses

Were Down 19% or $1.4B from first half 2009

($ Billions)

2000s: A Decade of Disaster

2000s: $193B (up 117%)

1990s: $89B

9Marsh

Top 12 Most Costly Disastersin US History

(Insured Losses, 2009, $ Billions)

$11.3 $12.5

$18.2$22.8 $23.8

$45.3

$8.5$8.1$7.3$6.2$5.2$4.2

$0$5

$10$15$20$25$30$35$40$45$50

Jeanne(2004)

Frances(2004)

Rita (2005)

Hugo(1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Northridge(1994)

9/11Attacks(2001)

Andrew(1992)

Katrina(2005)

8 of the 12 Most Expensive Disasters in US History Have Occurred Since 2004;

8 of the Top 12 Disasters Affected FL

Hurricane Katrina Remains, By Far, the Most Expensive Insurance Event in US and World History

10Marsh

Total Value of Insured Coastal Exposure

(2007, $ Billions)

$224.4$191.9

$158.8$146.9$132.8

$92.5$85.6$60.6$55.7$51.8$54.1

$14.9

$479.9$635.5

$772.8$895.1

$2,378.9$2,458.6

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000

FloridaNew York

TexasMassachusetts

New JerseyConnecticut

LouisianaS. Carolina

VirginiaMaine

North CarolinaAlabamaGeorgia

DelawareNew Hampshire

MississippiRhode Island

Maryland

In 2007, Florida Still Ranked as the #1 Most Exposed State to Hurricane Loss, with

$2.459 Trillion Exposure, but Texas is very exposed too, and ranked #3 with $895B

in insured coastal exposure

The Insured Value of All Coastal Property Was $8.9 Trillion in 2007, Up 24% from $7.2 Trillion in 2004

11Marsh

Change in Commercial Rate Renewals, by Line: 2010:Q3

Most Major Commercial Lines Renewed Down in Q3:2010 at a Pace Similar to that of a Year Earlier

Percentage Change (%)

-3.7%

-2.8% -2.7%

0.3%

-5.2% -5.6% -5.3%-4.7%

-4.4% -4.2%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

12Marsh 12

Important Issues & Threats Facing Insurers: 2011–2015

Source: Insurance Information Institute

1. Establishing Adequate Reserves and Prices

Failure to do so is the leading cause of death of p/c insurers

2. Rationalize Pricing with the New Investment Reality

Insurers must generate risk-appropriate rates of return and achieve their cost of capital in order to maintain the ability to attract/retain capital

3. Structure Business to Seize Growth Opportunities in the Post-Crisis World

Need to have products, expertise for the growing industries of the 2010s

4. Fend Off Regulatory and Legislative Attacks

Federal fireworks may be over for now, but scores of anti-insurer bills/regulatory proposals will be considered each year across the US

Operational Challenges

www.marsh.com

Property, Casualty, and Management Liability

14Marsh

Insurance Markets Third Quarter 2010Property Insurance: Rate Trends

Source: Marsh Benchmark Portal Data as of 9/14/10

Property “All-Risk” Historical Rate Changes

15Marsh

Insurance Markets Third Quarter 2010Property Insurance: Potential Market Changers

Types of events that could change the current soft property insurance market

– Large loss in remainder of North Atlantic hurricane season

– Global economic conditions

– Major tectonic event strikes heavily developed area

– CAT modeling changes

– Rating agency scrutiny, based on model changes

16Marsh

Insurance Markets Third Quarter 2010Property Insurance: New CAT Models

February 2011: Release of RiskLink® Version 11 by Risk Management Solutions, Inc., also known as RMS 11

Most changes to model focus on U.S. windstorm

Six main areas of change:

1. Occurrence rates

2. Decrease in the modeled rate at which storms weaken as they move inland—known as the “filling rate”

3. New storm surge assumptions

4. Update of the vulnerability functions for various structures

5. Redesign of the business interruption (BI) model to link BI to the severity of the event rather than the property damage assumptions

6. Redesign of the secondary modifiers

17Marsh

Insurance Markets Third Quarter 2010Property Insurance: New CAT Models

What do the new models mean for insureds now?

Collect and use best possible data, for example

– New storm surge assumptions

In some cases, the modeled footprint of a surge event will significantly change

- Insureds should use the model’s ability to allow for input of the ground floor elevation of buildings and the provision of flood defenses

– Geo-coding: Detailed addresses can be converted into latitude and longitude coordinates allowing for more accurate modeling

– Vulnerability functions

Expected to result in increased mean damage ratios, especially at low wind speeds

Increases the importance of detailed construction data based on the Applied Technology Council (ATC) construction scheme

18Marsh

Insurance Markets Third Quarter 2010Property Insurance: Alternative Risk Transfer

Focus on alternative risk financing options has not been strong recently

At same time, data quality and analytics have increased in importance

– Insurers have increased demand for high quality information

What more can be done with the data generated?

– Better data allows for better modeling estimates, and more informed decisions around limits, technical premiums being charged, and retentions

– Allow insureds to more comfortably consider alternatives

Risk incentive sharing programs

Captives

Large-funded or unfunded deductible programs

Purchase of CAT coverage on an aggregated basis over multiple years

Insurance program optimization

19Marsh

Insurance Markets Third Quarter 2010Casualty Insurance: Rate Trends

Source: Marsh Benchmark Portal Data as of 9/14/10

Casualty: General Liability Historical Rate Changes, Averages

20Marsh

Two main drivers keeping rates down

– Competition among primary casualty insurers

– Carrier results generally have remained positive through economic downturn

Implications for budgeting approach

– Collateral

– Exposure

Some insureds have made overly conservative estimates for exposure reductions

Data suggest many exposures have leveled off or are increasing

Caution clients to correctly anticipate exposure levels

– Strategic initiatives

Need to develop strategic plans

Use solutions on pre- and post-loss basis: Core of Marsh’s 3D process*

Use advanced risk modeling and analytics

Insurance Markets Third Quarter 2010Casualty Insurance: Primary Casualty Considerations

*For more information on Marsh 3D, contact your Marsh representative

21Marsh

According to NCCI, workers’ compensation market has experienced 23 consecutive quarters of rate decrease

– WC accounts for almost 17% of all commercial premium writings Drivers include

– Abundance of capacity

– Positive loss experience

– For large account buyers, many deductible programs and other risk financing structures have insulated the carriers from the losses

California

– California Workers Compensation Rating Board has recommended about a 30% increase to pure premium rates for January, 2011

– Decision from commissioner pending, however move is an indicator of market direction New York

– Legislation passed that affirmed increases to loss costs

– Modification is the first step toward premium increases

– Effective October 1, there will be a 7.7% increase to loss costs

Insurance Markets Third Quarter 2010Casualty Insurance: Workers’ Compensation

22Marsh

Events in the Gulf of Mexico are a reminder of the importance of a well-constructed, seamless umbrella excess tower

Rates

– Generally flat to very slight increases (low single digits) for lead umbrella

– Excess liability rates generally flat to moderate decreases, based on the class of business and competition levels

Attachment points and limits

– Relatively stable trend line on third-party liability attachment points

– Notable exception is the increased pressure on auto liability attachments

Average limits purchased remain relatively stable year over year

Coverage

– Many recent adjudications have created the need for new policy language

– Renewed scrutiny of pollution language as a result of the Deepwater Horizon incident

Continued increase in competition

New capacity, which on an aggregate basis now stands at roughly $2 billion

Expect broader competition in the lead and first excess layers, and thus relatively predictable and favorable results for insureds into 2011

Insurance Markets Third Quarter 2010Casualty Insurance: Umbrella/Excess

23Marsh

Insurance Markets Third Quarter 2010Financial and Professional Insurance: Directors and Officers Liability

D&O: Public Companies

Historical Rate Changes (price per $million), Averages

Source

Source: Marsh Benchmark Portal Data as of 9/14/10*Total Program refers to primary plus excess premiums.

*

24Marsh

Downward pressure on rates likely to continue

– Pockets of resistance by individual carriers on individual deals

– Overall, market for D&O remains healthy and competitive

Events that might change the outlook could include

– Loss of capacity due to M&A activity or market withdrawal

– Increasing claims activity due to economic conditions

– Rapid progression of current claim trends

Insurance Markets Third Quarter 2010Financial and Professional Insurance: D&O

25Marsh

Employment Practices Liability (EPL)PL more prominent when companies downsizing and restructuring

First three quarters of 2010

– EPLI clients generally seeing rate decreases in the 5 percent range

– Should remain stable for balance of 2010 and perhaps into 2011

– Retentions have remained flat in most cases

EPLI markets

– Argo Re added capacity in 2Q - Now almost $800 million available

– Expect to see a new Chartis form released in coming weeks

– Wage and hour claims remain largely uninsured with some defense cost sub-limits available

Insurance Markets Third Quarter 2010Financial and Professional Insurance: EPL

26Marsh

Insurance Markets Third Quarter 2010Financial and Professional Insurance: Fiduciary Liability

Fiduciary Liability:

Historical Rate Changes (price per $million), Averages

Source: Marsh Benchmark Portal Data as of 9/14/10*Total Program refers to primary plus excess premiums.

*

27Marsh

Market for cyber and privacy insurance growing and evolving

– New carriers have entered the privacy market domestically and in Lloyds

– Coverage has evolved

Higher limits for privacy breach expenses such as notification costs

Now offer elements of the coverage as services outside the limits, rather that simply as funds to indemnify expenses.

Carriers offering a broader and simpler “failure of technology” trigger for the cyber property/business interruption coverage

Insurance Markets Third Quarter 2010Financial and Professional Insurance: Cyber Risk

www.marsh.com

Questions & Answers

The information contained herein is based on sources we believe reliable, but we do not guarantee its accuracy. Marsh makes no representations or warranties, expressed or implied, concerning the application of policy wordings or of the financial condition or solvency of insurers or reinsurers. The information contained in this publication provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation, and should not be relied upon as such. Statements concerning tax and/or legal matters should be understood to be general observations based solely on our experience as insurance brokers and risk consultants and should not be relied upon as tax and/or legal advice, which we are not authorized to provide. Insureds should consult their own qualified insurance, tax and/or legal advisors regarding specific coverage and other issues. All insurance coverage is subject to the terms, conditions and exclusions of the applicable individual policies. Marsh cannot provide any assurance that insurance can be obtained for any particular client or for any particular risk. This document or any portion of the information it contains may not be copied or reproduced in any form without the permission of Marsh Inc., except that clients of any of the companies of MMC need not obtain such permission when using this report for their internal purposes, as long as this page is included with all such copies or reproductions.

Marsh is part of the family of MMC companies, including Kroll, Guy Carpenter, Mercer, and the Oliver Wyman Group (including Lippincott and NERA Economic Consulting).

Compliance #