THEWILLIS INDEXFINEX

The Financial Institutions Insurance and Risk Management Quarterly | Q4 2009

MARKET CONDITIONS

So whilst investment returns for insurers maybe picking up, and for many 2009 is alreadyreturning some strong results, their loss ratiosfrom 2007 and 2008 are still very much at theforefront of their minds and still having an effecton current renewal rates.

Throughout 2009 insurers have maintained atough stance by looking to increase premiums atrenewal by a minimum of 10 – 15% and activelyapplying additional premium increases forgrowth, policy wording improvements andclaims experience. The market is delicatelypoised as, despite the fact there is no shortageof alternative markets (unless the limit beingplaced is significant), accessing them is nosimple matter given that almost all areunderwriting very conservatively.

The question that everyone wants to get ananswer to is how long will these conditions last?To generate the conditions necessary for a‘softer’ market there needs to be both an excessof capacity and a willingness from insurers tocompete for business. At the moment mostfinancial institutions insurers are committingtheir capacity with great care and caution andwill continue to do so until they have the

confidence that the number of losses emergingis going to reduce considerably, and stay thatway. They are not soothsayers so it will take timeand a period of low claims volumes before thistrend is reversed. In addition, this cautiousapproach is likely to be mirrored by reinsurerswhen many insurers’ treaties are renewed atthe end of the year, especially considering thatsome reinsurers are seeing loss ratios up to300% from the 2007 and 2008 years of account.Hence it is unlikely that the underlying cost(i.e. reinsurance premium) of providinginsurance will be reduced at least until theend of 2010.

However, before we resign ourselves totally tomore than a year of expensive renewals, it islikely that in the medium term some greenshoots may emerge to a limited extent. Small tomedium sized financial institutions with claimfree histories will always be attractive long-termbusiness for insurers and it is likely that this willbe the first sector of business where brokerswill be able to drive successful competitionbetween insurers again. On the basis that thesector can keep a ‘clean sheet’ of claims forthe first half of 2010, we might start seeingpremium reductions next spring or summer.

There may be signs of recovery in the economy and financial scandals aren’tas prominent on the front pages of the press as they have been, but for theinsurance market specialising in financial institutions the green shoots of aflatter market are not so forthcoming. On the whole the insurance marketmoves slowly as rates, terms and conditions are only reappraised annually. Also,typically insurance claims arising from the financial scandals emerge gradually,sometimes taking years to fully reveal quantum. The exception to this rule is theafter-effects of reinsurance renewals, which can sometimes cause spikes ofpremium increase at the beginning of the year.

Contents

Market Conditions ........1

Different Methods forPlacement of InsuranceCovers Come Under theSpotlight.......................2

University of OxfordJoins Willis ResearchNetwork (WRN)............3

Breaking News.............4

Meet the Team.............4

The Willis Index FINEX Financial Institutions Q4 2009 | 1

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2 | The Willis Index FINEX Financial Institutions Q4 2009

Traditionally, where a number of insurers arerequired to complete the placement of a policy, thebroker would produce a slip and submission topresent the risk information, loss history andcover requirements to underwriters and wouldshare details of the expiring terms and conditions,underlying layer pricing (if applicable) and theguide pricing expected to complete the placement.

The sharing of information is currentlypermissible thanks to the Insurance BlockExemption Regulation (BER), which is due toexpire in March 2010.

The DG Comp felt that common policyconditions, selection of the leader process,sharing the leader’s price with followers, andvertical placements were not in themselvesproblematical. It was, however, concerned thatin the traditional subscription market, there wasan absence of an opportunity for the followingmarket to compete and invited the industryto change its procedures or face possibleenforcement action.

Following discussions between DG Compand the European Federation of InsuranceIntermediaries (BIPAR) – see side bar article –the BIPAR high level principles were agreed.DG Comp stated, “Implementation will now bekey but if practices change in accordance withthese high level principles, it will remove ourimmediate concerns. We are calling on marketparties to develop new and creative waysof completing placements at the mostadvantageous terms for clients. We willclosely monitor the situation going forward.”

EEuurrooppeeaann FFeeddeerraattiioonn ooff IInnssuurraanncceeIInntteerrmmeeddiiaarriieess ((BBIIPPAARR)) PPrriinncciipplleess1. The intermediary shall, based on

information provided, specify the demandsand needs of the client as well as theunderlying reasons for any advice.

2. Before placing a risk, an intermediary willreview and advise a client on marketstructures available to meet its needs and, inparticular, the relative merits of a singleinsurer or a multiple insurer placement.

3. If the client, on advice of the intermediary,instructs the latter to place the risk withmultiple insurers, the intermediary willreview, explain the relative merits andadvise the client on a range of options formultiple insurer placement.*Intermediaries will expect insurers to givecareful independent consideration to theoption requested.

4. In the case of a placement of a risk with alead insurer and following insurers on thesame terms and conditions, the previouslyagreed premiums of the lead insurer andany following insurers will not be alignedupwards should an additional followerrequire a higher premium to complete therisk placement. Indeed, the intermediaryshould not accept any condition wherebyan insurer seeks to reserve to itself theright to increase the premium charged insuch circumstances.

5. During the placement of the risk, theintermediary will keep the client informedof progress.

* There are a range of options for multiple insurance placements.

Two examples of which are the following:a) Selection of a lead insurer through a competitive process and

subsequent invitation to potential following insurers to coverpart of the risk on the same contract conditions and premium, it being understood that nothing should prevent followinginsurers quoting a different premium;

b) Selection of lead insurer through a competitive process followedby a series of negotiations between the broker and potentialfollowing insurers for the coverage of part of the client’s risk notcovered by the lead insurer with identical contract conditionsand different premiums across all or some of the participatinginsurers.

DIFFERENT METHODSFOR PLACEMENT OFINSURANCE COVERSCOME UNDER THESPOTLIGHT TThhee ppllaacceemmeenntt ooff yyoouurr iinnssuurraannccee pprrooggrraammmmee hhaass bbeeccoommee mmoorree tteecchhnniiccaall aannddrreegguullaatteedd tthhaann yyoouu mmaayy hhaavvee tthhoouugghhtt..

TThhee EEUU CCoommppeettiittiioonn DDiirreeccttoorraattee ((kknnoowwnn aass DDGG CCoommpp)) hhaass bbeeeenn rreevviieewwiinngg tthheessuubbssccrriippttiioonn mmeetthhoodd ooff ppllaacciinngg tthhee llaarrggeerr aanndd mmoorree ccoommpplleexx iinnssuurraannccee aanndd ccoo--iinnssuurraannccee ppoolliicciieess,, eessppeecciiaallllyy iinn tthhee LLoonnddoonn mmaarrkkeett..

7936_Newsletter FI INDEX:A4 Newsletter 03/11/2009 09:37 Page 2

The Willis Research Network (WRN), part ofWillis Group Holdings Limited has strengthenedits position as the world’s largest collaborationbetween academia and the re-insurance industryby announcing the addition of Oxford Universityto its roster of leading academic institutions. Inkeeping with its focus on groundbreaking,industry-relevant research into catastrophe risk,the WRN will sponsor the creation of a Centre ofCatastrophe Risk Financing and Public Policy atOxford University’s Smith School of Enterpriseand the Environment.

The first of its kind, the centre will examine waysin which the costs of catastrophic events can beshared across society, equitably and sustainably,via catastrophe risk financing and sound publicpolicy on a local and global basis.

Commenting on the rationale behind the centre’screation, Rowan Douglas, Managing Director,Willis Re and Chairman of the WRN, said,“Governments worldwide are struggling to sharethe costs of natural catastrophes acrosspopulations at local and global levels via public andprivate mechanisms. Climate change and expectedincreases in extreme events make this an acuteconcern in developed and emerging economies.And yet, until now, no academic centre existed toprovide governments and others with the science,support and solutions to confront these issues.”The new Smith School of Enterprise and theEnvironment at the University of Oxford, led byformer U.K. Government Chief Scientific Adviser,

Professor Sir David King, provided the idealplatform to create such a centre, which fosterscollaboration among leading environmentalscience, economics, quantitative finance, legal andbusiness experts to meet these challenges.

Professor Sir David King said, “This excitinginitiative by Willis Re and the Smith School ofEnterprise and the Environment could not bemore timely and to the point. It is a prime exampleof how decision-makers in public and privateenterprise can be supported in building theknowledge and understanding so necessary tomanaging issues such as climate change andextreme events. We are very grateful for theopportunity given by Willis Re to build this centreas one of the leading sources of information forpublic policy on catastrophe risk management.”

The WRN-sponsored Oxford-based researchprogramme will explore ways of employing newenvironmental data, models and techniques tostimulate greater confidence in catastrophe risktransactions and public policy interventions.

The centre will be led by Dr. Patrick McSharry, who is currently a member of the Oxford Centre for Industrial and Applied Mathematics and alsoheads the System Analysis, Modelling andPrediction Group at the University's Department ofEngineering Science. His work combines researchin environmental and weather modelling withapplications for financial and industrial sectors. He is appointed Senior Academic within the WRN.

The Willis Index FINEX Financial Institutions Q4 2009 | 3

UNIVERSITY OF OXFORDJOINS WILLIS RESEARCHNETWORK (WRN)TThhee UUnniivveerrssiittyy’’ss SSmmiitthh SScchhooooll ooff EEnntteerrpprriissee aanndd tthhee EEnnvviirroonnmmeenntt FFoorrmmss CCeennttrree ooffCCaattaassttrroopphhee RRiisskk FFiinnaanncciinngg aanndd PPuubblliicc PPoolliiccyy wwiitthh SSuuppppoorrtt ffrroomm WWRRNN

So what is a BIPAR placement? The slip would notshow competing follow underwriters the premiumcalculated by the lead underwriter and followingunderwriters could set higher or lower premiumsand request different terms and conditions.

There are advantages and drawbacks to the BIPAR methodology, especially if the programmeis for a higher limit, involving a higher percentageof the available market. There may be theopportunity to achieve an overall lower premium,but at the risk of alienating underwriters and notcompleting placement or placing at a higherpremium due to the generally conservative nature of some underwriters.

In the context of the current hard market forfinancial institutions’ insurance covers, a BIPARplacement may be seen as a method of costcontainment. In a future soft or benign market,BIPAR could be a tool for driving competitionbetween insurers.

Certainly, we would look to engage with ourclients to discuss your requirements, the methods of marketing your covers, and toestablish your instructions for BIPAR ortraditional subscription placements.

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7936/10/09

MEET THE TEAM

Jonathan Hodson

Jonathan has been in the insurance industry for14 years specialising in the Financial Institutionssector and involved both as an Account Executiveand in Broking roles for Financial Institutionsworldwide, but primarily in the U.K.

Jonathan started his career in 1995 atHeath Lambert where he was responsible for theday-to-day running of the U.K. Stockbrokersscheme. He then moved on to work at specialistniche FI broker as Account Executive and Brokerconcentrating mainly on international business.

In 2003 Jonathan joined the Financial Institutionsteam at Willis as an Account Executive and Broker.Jonathan has extensive knowledge of stockbrokers,fund managers, corporate finance and bankingfinancial lines programmes.

Jonathan lives in Fulham with his wife and fourchildren. He enjoys playing and watching tennis andis a keen motorcyclist, frequently commuting intothe office on his bike.

Tel: +44 (0)20 3124 7599Email: hodsonj@willis.com

4 | The Willis Index FINEX Financial Institutions Q4 2009

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Dr. Cameron Hepburn, Senior Research Fellow at the Smith School and Visiting Fellowat the Grantham Institute, LSE, will also join the centre and be appointed WRN SeniorAcademic. Dr. Hepburn is an environmental economist specialising in climate policyand long-term decision-making.

The WRN will sponsor a research fellowship at Smith School’s new Centre ofCatastrophe Risk Financing and Public Policy. The first Willis Research Fellow, whowill be appointed from October 2009 following a period of nomination and selection,will report to Dr. McSharry.

The Oxford team will be fully integrated with Willis Re, Willis Capital Markets andAdvisory, and the other members of the WRN around the world.

The Willis Research Network (WRN) is the world's largest partnership betweenacademia and the insurance industry. Willis has teamed up more than 20 leadinginstitutions across a full range of disciplines from atmospheric science and climatestatistics, to geography, hydrology and seismology, to evaluate the impacts on theenvironment via engineering, exposure analysis and Geographic Information Systems.Additional information can be found at www.willisresearchnetwork.com.

BREAKING NEWSWillis Financial Institutions will be holding a breakfast briefing entitled ‘One Year On’on November 25, 2009. The briefing will consider how the market has moved on in thepast year since Willis hosted the ‘After the Tsunami’ seminar in October 2008. Williswill also be announcing some new academic research, as well as discussing the currentclaims environment.

This briefing is designed for Company Secretaries, Finance Directors, Risk Managersand Insurance Buyers.

Date: Wednesday November 25, 2009Time: 8:30am – 10:15amVenue: Willis Building, 51 Lime Street

London, EC3M 7DQ

AGENDA

08:30 – 09:00 Registration and coffee09:00 – 09:25 Market overview, underwriting coverage

issues and predictions for the futureDuncanHolmes,Willis

09:25 – 09:50 Current claims environmentClaire Nightingale,Willis

09:50 – 10:00 Research into Risk AppetiteJohnNaish,Willis

10:00 – 10:15 Questions and Answers

To reserve your free place at this event, please contact:

Paul SkinnerEmail: paul.skinner@willis.comTel: +44 (0)20 3124 7674

To discuss your insurance arrangements with theWillis FI team please call Derek Reeves on +44 (0)20 3124 6944.

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