The Perfect The Perfect StormStorm

STRIMA 2011

Mark A. Goode, CIC, CPCUExecutive Vice PresidentWillis Public Entity GroupMark.Goode@willis.com704.344.4867 (office)704.904.1792 (mobile)

2

The Perfect StormSTRIMA 2011

TOPICS

1. Current Market Place Conditions

2. Factors Contributing to Market Volatility

3. Impact of RMS 11

4. Impact on the Client

3

Current Marketplace Conditions

HARD OR SOFT MARKET?

Transition

Stressed

Volatile

“In Flux”

Fragile

Under Pressure

Dysfunctional

Inconsistent

Fluid

Schizophrenic

4

Large Account Property Rate Change Q2 - 2011

*

-9.48%

10.00%

4.98%

0.07%

-10.00% -10.00%

-8.00%

-12.00% -10.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

Effective Rate Change

Effective Rate Change -10.00% -10.00% -8.00% -12.00% -10.00% -9.48% 0.07% 4.98% 10.00%

Q1 2010 Q2 2010 Q3 2010 Q4 2010 Jan-11 Apr-11 May-11 Jun-11 Jul-11

Data includes 30 shared and layered accounts bound between April 1st and June 30th 2011

14.46% increase

in 60 days

Japanese Earthquake

RMS 11.0 debuts

5

Factors Contributing to Market Volatility

1. Deteriorating Carrier Financial Results

2. Black Swan Events

3. Political Uncertainty

4. Inflation Fears

5. Re-Insurance Treaty Premium Increases

6. Minimal / No Investment Income

7. RMS 11

6

2nd Quarter Insured US Catastrophe Losses, 2000-2011

$1.46

$6.24

$2.79

$5.05

$2.33

$0.93

$5.04

$2.30

$7.11

$4.47

$6.38

$15.09

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

$ Billions

For the 2nd Quarters of

2000-2010, the average US

Insured loss was

$4 billion.

For the 2nd Quarter of 2011,CAT losses in the US have topped $15 billion

Data Sourced from Insurance Information Institute, Is the World Becoming Riskier, Dr. Robert Hartwig July 15th, 2011

7

Industry Combined Ratios, 2000-2010

The U.S. property/casualty insurance industry’s after tax net income rose $6 billion to $34.7 billion from the previous year.

Increases in net income and overall profitability in 2010 were directly attributable to improvement in investment results.

Lower investment yields less financial leverage mean that combined ratios for insurers must be better (i.e. lower) in order for insurers to achieve ROE on par with past investments.

In 2010, Insurers experienced a net growth in written premium for the first time since 2007. Declines in premiums slowed to .2% down from .6% in 2009 and 3.5% in 2008.

Source: ISO 2010 Financial Results

Annual P/C Industry Combined Ratios

90.00%

100.00%

110.00%

120.00%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Q12011

Industry Combined Ratio

812/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

Top 15 Most Costly World Insurance Losses, 1970-2011*

(Insured Losses, 2010 Dollars, $ Billions)

$11.3$14.0 $14.0$14.9$20.5$20.8 $23.1$24.9

$35.0

$72.3

$10.0$9.3$9.0$8.0$8.0

$0

$10

$20

$30

$40

$50

$60

$70

$80

ChileQuake(2010)

Hugo (1989)

TyphoonMirielle(1991)

Charley(2004)

NewZealandQuake(2011)

Rita (2005)

SpringTornadoes

(2011)

Wilma(2005)

Ivan (2004)

Ike (2008)

Northridge(1994)

WTCTerrorAttack(2001)

Andrew(1992)

JapanQuake,

Tsunami(2011)*

Katrina(2005)

Taken as a single event, the Spring 2011 tornado season would likely become the 9th costliest event in

global insurance history

3 of the top 15 most expensive

catastrophes in world history have occurred in the past 18 months

*Through June 20, 2011. 2011 disaster figures are estimates; Figures include federally insured flood losses, where applicable.Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute.

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100

200

300

400

500

600

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Worldwide Natural Disasters,1980 – 2011*

*2011 figure is through June 30. Source: MR NatCatSERVICE

Meteorological events(Storm)

Hydrological events(Flood, mass movement)

Climatological events(Extreme temperature, drought, forest fire)

Geophysical events(Earthquake, tsunami, volcanic eruption)

Already 355 events through the first 6

months of 2011

Number of Events

10

Number of Federal Disaster Declarations, 1953-2011*

13 1

7 18

16

16

7 71

21

22

22

02

52

51

11

11

92

91

71

74

84

64

63

83

02

2 25

42

23

15

24

21

34

27 28

23

11

31

38

45

32 3

63

27

54

46

55

04

54

5 49

56

69

48 5

26

37

55

98

14

8

43

0

10

20

30

40

50

60

70

80

90

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

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

10

11

*

The Number of Federal Disaster Declarations Is Rising

There have been 1,998 federal disaster

declarations since 1953. The average

number of declarations per year is 34 from

1953-2010, though that few haven’t been

recorded since 1995.

The number of federal disaster

declarations is on track to set a new

record in 2011, with 48

declarations through July 1.

Source: Federal Emergency Management Administration: http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.

*Through July 1, 2011.

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2011 Black Swan Events

Major Global Loss Events December 2010: Australia - Flash

Flooding January 12th-16th: Brazilian

Landslides and Earthquake January 12th: Haitian Earthquake February 2nd: Australia – Cyclone

Yasi February 22nd: New Zealand

Earthquake March 11th: Japanese Tsunami,

Earthquake, Nuclear Disaster April 27th: Tuscaloosa, Alabama

Tornado May 22nd: Joplin, Missouri Tornado June 1st: Springfield, Massachusetts

Tornado

2011 is already the highest global Loss Year on record

$260 billion on worldwide economic losses

$55 billion in insured losses

Three of the most 15 costly global catastrophes in the world have occurred over the course of the past 18 months

Japanese Tsunami: 2nd, $35 billion in losses

February New Zealand Earthquake: 9th, $10 billion in losses

2010 Chilean Earthquake: 14th, $8 billion in losses

Source: Insurance Information Institute: Reinsurance in the Age of Black Swans, Robert P. Hartwig CPCU

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Modeling Differences: Regional Variation

Portfolios concentrated across certain geographic areas will be affected by different influencing factors.

The state of Florida is least impacted by the new release of RMS version 11.0 due to a better understanding of wind speed reduction and decreased landfall in the panhandle region.

The State of Texas has the largest increase between versions because of increased inland exposure and poorer construction quality than originally thought.

Region Reason for Modeling Change

Gulf States Poorer construction practices than originally thought.

Southeast Across the board increases in inland wind exposures.

Mid-Atlantic Greater inland exposures as well as slower weakening of storms after landfall.

Northeast Higher inland wind speeds and increased presence of transitioning storms.

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RMS 9.0 vs RMS 11.0Actual Results (% Change – Same Data Points)

ClientModel

Version100-Year Wind PML

% Change250-Year Wind PML

% Change500 Year Wind PML

% Change

State

(SE Footprint)

RMS 9.0

RMS11.0

$77,842,969

$256,021,944228%

$146,672,639

$499,981,762327%

$210,780,730

$780,030,063270%

Real Estate Management

(SE Footprint)

RMS 9.0

RMS11.0

$11,153,505

$23,363,687109%

$21,308,356

$44,331,966108%

$30,899,628

$64,910,657110%

Academic Institute

(Texas Footprint)

RMS 9.0

RMS11.0

$227,780,274

$485,651,081113%

$390,468,355

$835,285,185114%

$555,861,620

$1,160,294,560109%

Hotel Gaming and Casino

(NOLA Footprint)

RMS 9.0

RMS11.0

$33,995,256

$45,177,31732%

$62,605,792

$104,228,47866%

$90,670,458

$159,337,13976%

1412/01/09 - 9pm eSlide – P6466 – The Financial Crisis and the Future of the P/C

Criteria Necessary for a “Market Turn”

Sources: Barclays Capital; Insurance Information Institute.

CRITERIA STATUS COMMENTS

Sustained Period of Large Underwriting Losses

Not Yet Happened

Apart from Q2:2011, overall p/c underwriting losses remain modest

Combined ratios (ex-Q2 CATs) still in low 100s (vs. 110+ at onset of last hard market)

Prior-year reserve releases continue reduce u/w losses, boost ROEs

Material Decline in Surplus / Capacity

Surplus is At / Near Record

High

Surplus hit a record $565B as of 3/31/11 Analysts est. excess surplus of $75-$100B Some excess capacity may still remain in reinsurance markets Weak growth in demand for insurance is insufficient to absorb

much excess capacity

Tight Reinsurance Market

Somewhat in Place

Higher prices in Asia/Pacific Modestly improved pricing for US risks Upwardly pressure on US treaty pricing 7/1/2011

Renewed Underwriting & Pricing Discipline

Not Broadly Evident

Commercial lines pricing trends remain negative Competition remains intense as many seek to maintain market

share Terms & conditions—no broad tightening

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Stages of the Insurance Cycle

Capital Infusion>>>Increased Capacity

Premium Falls as Capacity is Deployed

Profits Erode into Losses

Severe Underwriting Losses>>>Bottom of Market

Increased Underwriting Standards>>>Rising Premiums>>>Reduced Capacity

“Happy Days are Here Again!”

Profit

Loss

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