The State of the Marine Reinsurance Market A

The State of the Marine Reinsurance Market A Look Back, A Look Forward Thomas Dean January 18, 2007 Tom Dean, Marine Practice Leader, Towers Perrin January 18, 2007 © 2006 Towers Perrin

Discussion n Towers Perrin n About The Firm n Why Buy Reinsurance n The Principals of Reinsurance n The Types of Reinsurance Purchased — Facultative versus Treaty n What’s Driving Today’s Marine Reinsurance Purchasing Decisions n A Look Back at 2004 - 2006 n The 2004 and 2005 Catastrophic Seasons n Primary Ocean/Marine Post KRW n Recreational Watercraft Post KRW n Lessons Learned n The Current Landscape n Property Catastrophe Market Update n Marine Reinsurance January 2007 n Primary Marine Market January 2007 n Markets that Write Marine Reinsurance — Bermuda, United States, United Kingdom and Europe n Exposure Data n Importance of Modeling n A Look Ahead © 2006 Towers Perrin 2

Towers Perrin n Towers Perrin is one of the world’s largest privately-held professional services firms with over $1. 5 billion in revenue, a staff of 5, 500 and offices and affiliates in 28 countries n We provide innovative solutions to clients in three areas: n Human resource strategy, design and management n Actuarial and management consulting to the financial services industry n Reinsurance intermediary services — Fifth largest in the world n We count as clients: n 75 of the top p/c insurers n 80 of the top global life insurers n 50 of the top 60 multinational insurance organizations © 2006 Towers Perrin 3

Towers Perrin TOWERS PERRIN REINSURANCE n Risk Management n Actuarial n Program Structure n Financial Projections Analysis n Program Placement n Financial Modeling n Exposure Analysis n Claims Processing n Contract Negotiations n Towers Perrin Claytons © 2006 Towers Perrin TILLINGHAST and Reporting n Product Development & Analysis HR SERVICES n Benefits Design Administration n Communications n Executive Compensation n Reinsurance Analysis n Salary Management n Risk Management n Change n Mergers, Acquisitions Management and Restructuring 4

Why Purchase Reinsurance

Why Purchase Reinsurance n What is Reinsurance? n The sharing of risk between an insurer and reinsurer n It enhances the fundamental objective of insurance: — To spread the risk so that no single entity finds itself saddled with a financial burden beyond its ability to pay n Reinsurance is purchased essentially for four reasons: n Limit liability on specific risks n Stabilize loss experience n Protect against catastrophes n Increase capacity © 2006 Towers Perrin 6

Treaty Versus Facultative n There are basically two types of reinsurance contracts written by the underwriters: n Treaty Reinsurance (Pro Rata and Excess of Loss) — Under the pure treaty contract, the insured cedes a block of business on an ongoing basis to the reinsurer — In such situations there could be more than one reinsurer each taking a specific amount or percentage of the total liability n Facultative Reinsurance — Deals with a specified risk insured by a particular policy or group of policies — The reinsurer individually underwrites the specific risk © 2006 Towers Perrin 7

What’s Driving Today’s Marine Reinsurance Purchasing Decisions? n Losses from 2004 and or 2005 severely impacted marine reinsurance programs n Resulting in increased costs n For most Insurance companies reinsurance is considered an expense. n To alleviate the increased costs, companies decided to retain more net — Take greater retentions or co-insurance n Exposures and overall aggregates n Insurers ability to track them © 2006 Towers Perrin 8

A Look Back at 2004 – 2006

A Look Back at 2004 – 2006 n 2004 n 4 hurricanes pound Florida n The final one, Ivan, wreaks havoc in the Gulf n Market reaction — Can’t happen again n 2005 n Katrina, Rita and Wilma strike the Gulf Coast n Katrina and Rita produce record losses in Offshore Energy n Katrina and Wilma set record Recreational Boating losses as well n First time multiple marine interests effected in one event n Market reaction — Is this now the norm n 2006 n No Catastrophic events impact marine market © 2006 Towers Perrin 10

A Look Back at 2004 – 2006 n Primary Ocean Marine Market Post KRW — Commercial Hull and Cargo – Katrina produced largest loss ever to these segments – However far less than anticipated – Hull Powered vessels performed well Non powered vessels did not Largest claim component was Salvage – Cargo Bulk commodities fared better than expected Containerization and Packaging minimized losses – Market reaction – Accounts affected by the hurricanes pay increases otherwise pricing is still competitive © 2006 Towers Perrin 11

A Look Back at 2004 – 2006 n Recreational Watercraft n All four 2004 events, Katrina and Wilma produced devastating losses n In addition, marinas along the Gulf Coast and Florida set record losses n New RMS Yacht model is released however model does not have sufficient loss data to give it credibility — Patch required after initial release n Large Mega Yachts were also affected n Market Reaction n To re-address their underwriting in specific US locations (coastal states) © 2006 Towers Perrin 12

Insurance Lessons Learned n Insurers need to prepare for multiple, medium-sized hits in a single year in addition to a single, large hit n Aggregate losses from hurricanes in a given year can be much higher than the largest occurrence loss n Hurricanes can be closely spaced in both location and time; i. e. , clustered n Loss amplification due to demand surge, greater than expected vulnerability, business interruption issues, civil disorder, clash with other lines, and claims adjustment issues n How realistic are the results obtained from statistical hurricane models? n Contractual issues and coverage erosion: n Will insurers be forced to pay claims due to flooding and storm surge, even if explicitly excluded in contract language? © 2006 Towers Perrin 13

The Current Landscape

Property Catastrophe Market Update Impressions pre-quotes (up to the PCI) n Reinsurance underwriters indicated that they under-priced January 1, 2006 business: n Didn’t fully appreciate the size of Katrina n Underestimated Wilma loss n Didn’t fully account for increased retro costs and limited retro capacity n Tried to factor changes in models into pricing but they underestimated the impact on many programs n Didn’t account for understatement of exposures (TIV) by cedants © 2006 Towers Perrin 15

Property Catastrophe Market Update n Prices increased at April 1 st: n More information on Katrina and Wilma developed n RMS and AIR shared more information on model changes n Lack of retro capacity (and extremely high pricing) became better understood n July 1 st pricing reached “technically adequate” levels based on: n Predictions of an active hurricane season n New models fully implemented n Major purchases by Allstate and others at high prices n Severe capacity shortages © 2006 Towers Perrin 16

Property Catastrophe Market Update n January 1 st placements: n Reinsurers indicated that they would be seeking July 1 st pricing levels for January 1, 2007 renewals: — Many reinsurers indicated they would not be purchasing retro and thus capacity would be limited n Outcome: n Initial quotes were high reflecting an effort to obtain July 1 st pricing levels despite no hurricane losses and reinsurers having extremely successful year n Quotes did not correlate to model results as closely as they have in prior years n Ultimately, underwriters and cedants reached a compromise on pricing — Those that waited obtained better pricing — Placements oversubscribed © 2006 Towers Perrin 17

The Current Landscape Marine Reinsurance Market at 1/07 n The current environment is relatively “flat” n Due to the lack of loss activity in 2006 and plenty of capacity via the US, UK, Bermuda and European Markets n Capacity remains stable n Current Marine Reinsurance market conditions: n Pro Rata — Capacity for all classes remains tight – Offshore Energy available as original rates had moved dramatically – Other Marine lines little if any and limited for new programs — Introduction of Occurrence Caps and Aggregate Caps have opened up some new capacity especially for Offshore Energy © 2006 Towers Perrin 18

The Current Landscape – Marine Reinsurance Market at 1/07 n Excess of Loss — Pricing and capacity dependent on Wind exposure, Aggregate control and recent loss history — Offshore Energy is limited – Here capacity is most restricted and 1 st loss Gulf wind cover cost prohibitive — Wind Aggregate for lines such as Recreational Watercraft now vies with Property for capacity among reinsurers © 2006 Towers Perrin 19

The Current Landscape – Primary Marine Insurance Market at 1/07 n Current Primary Marine Insurance Market n Cargo – competitive — — Big tickets items are under pressure This is now spreading to mid sized accounts Capacity continues to grow Expanded warehousing and stock risks coming back n Blue Water Hull – competitive, despite losses n Brown Water Hull – competitive, especially in the Gulf © 2006 Towers Perrin 20

The Current Landscape – Primary Marine Market at 1/07 (Cont’) n Recreational Watercraft – apart from Florida, prices dropping n Marine Liabilities – competitive as the line remains profitable n Excess Marine Liabilities – plenty of capacity, product commoditized n Offshore Energy – Market flattening after increases of 2006 — Pressure on terms & conditions for non-Go. M exposures — 10 -15% increases in Go. M — Coverage for BI, LOPI and Wind still limited © 2006 Towers Perrin 21

Markets That Write Marine: United States n No markets have stopped writing Marine Reinsurance — ACE Tempest Re shifted majority of portfolio to UK — WEL/Catlin Re US starts writing in 2006 n Shifts in internal reporting © 2006 Towers Perrin 22

Markets That Write Marine: United Kingdom n Markets no longer writing Marine reinsurance: n Allianz n WTK Syndicate n New markets writing Marine Reinsurance n London Lead Markets for US domiciled business: n ACE Syndicate (RAD/LOD) n Aspen Re (RAD/LOD) n BRM Syndicate (LOD) n Canopius Syndicate (RAD/LOD) n Catlin Syndicate (RAD/LOD) n Chaucer Syndicate (LOD) n Hiscox Syndicate (LOD) n Limit Syndicate (RAD/LOD) n Millennium Syndicate (RAD/LOD) © 2006 Towers Perrin 23

Markets That Write Marine: Bermuda n Arch Re n Ariel Re n Folksamerica Re n Harborpoint Re n Lancashire Re n Max Re n Montpelier Re n Validus Re n XL Re © 2006 Towers Perrin 24

Markets That Write Marine: Europe n AXA Re - Paris n Hannover Re - Germany n Munich Re - Germany n Partner Re - Zurich © 2006 Towers Perrin 25

Exposure Data

Exposure Data n Transparency n Underwriter’s responsibility to gather as much information as possible from the broker or other resources n Why? — Regulatory Involvement — Sarbanes Oxley — Rating Agencies – Rating agencies are also asking for this information and unless presented, a public company’s rating could be negatively effected — Reinsurer requirements © 2006 Towers Perrin 27

Exposure Data n Gathering a comprehensive exposure data set is critical to the reinsurance placement process and falls upon the underwriter shoulders n Underwriters need to become more familiar with models because… n Management requires the information to build into the tracking of Corporate Aggregates n Reinsurers are asking for data, and in light of information, assumptions will be made (worst case scenarios) © 2006 Towers Perrin 28

Exposure Data Modeling n Some essential data elements include: n Warehouse locations — Location, street address — TIV — Deductibles — Construction — Occupancy — Year of construction n Yachts — Construction — Age — Home ports n Hulls — Construction — Age — Home Ports — Fleeting Areas © 2006 Towers Perrin 29

Exposure Data Modeling n Inaccurate exposure data can lead to: n Under/over estimation of reinsurance needs n n (retentions and limits) Pricing discrepancies Capacity shortfalls Questioning of underwriting by management Re-allocating aggregate © 2006 Towers Perrin 30

Users Can Move From an Overview of the Data… © 2006 Towers Perrin 31

…to a Zoomed in View… © 2006 Towers Perrin 32

…to Location Detail © 2006 Towers Perrin 33

Total Insured Values By Location © 2006 Towers Perrin 34

Select Locations © 2006 Towers Perrin 35

Review location of a risk © 2006 Towers Perrin 36

Review concentration and nearby locations © 2006 Towers Perrin 37

Microsoft Aerial Imagery Note: Microsoft currently provides “Bird’s Eye” aerial views only for major metropolitan areas © 2006 Towers Perrin 38

A Look Ahead

A Look Ahead…Thru July 1 n Competitive environment continues n Supply of capacity outweighs demand putting pressure on reinsurance pricing n Disparity between primary and reinsurance market grows again putting pressure on reinsurance costs n Improve pricing of reinsurance n Do not buy as much reinsurance, greater retained exposures © 2006 Towers Perrin 40

A Look Ahead…Thru December 31 n No Storms n Pressure is on n Capacity is abundant — Marine insurers – Deterioration of Original terms and conditions — Marine reinsurers – Pressure to provide improved terms n Major storms occurs — Did you get it right? – Does management continue to support the business © 2006 Towers Perrin 41