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In this issue From the editors

Workers’ Compensation reinsurance market showcase

2 The “hot topic” at the recent PCI conference was TRIPRA and what cedants and reinsurers are going to do to prepare for its potential non-renewal. In fact, we heard rumors that A.M. Best had recently sent letters to a number of carriers advising them that they had failed “post-TRIPRA” stress tests and requesting they present plans for addressing this before year end (something we can help with if you’re one of the unlucky few!). Both of these subjects are topics we touched upon in our last few newsletters; you can review articles here: http://www.willisre.com/Risk_Financing_Structuring/ Resource/Workers_Compensation/Publications/ What was made clear now, though, is that the reinsurance market has not yet reached a landing point regarding how it is going to tackle this TRIPRA risk, something further complicated by some significant changes in personnel at a number of key reinsurance markets across the pond. Given this time of year where many companies prepare to renew their coverages at 1/1, we decided to focus this issue on two key items: those recent personnel changes in London alluded to above and a review of 2013 catastrophe pricing. For the first, we provide a “road map” of specific comings and goings, attempt to quantify what these changes may mean from an industry capacity perspective and offer our insights. For the second item, we use our Catastrophe Pricing Monitor tool to look back this past year in an effort to better forecast how the 1/1 renewal landscape will take shape. Time will tell if the soft reinsurance market will continue apace or if it is finally beginning to slow.

Willis Re Workers’ Compensation Catastrophe Pricing Review

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In our next issue…

• Has the reinsurance market reached a landing point if TRIPRA is non-renewed?

• What did we learn from the 1/1 renewal season?

November 2013

WORKERS’ COMPENSATION

REVIEW

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Existing Capacity New Underwriters: Michael Cliffton, Ryan Ward, Zak Mallen, Adam Howard

Workers’ Compensation reinsurance market showcase London / European 2014 appetite Workers’ Compensation catastrophe coverage was historically reinsured predominantly by the Accident &Health (A&H) markets at extremely cheap costs until the events of 9/11 took place. Immediately following 9/11, the A&H capacity dried up, leaving a vacuum in the market for carriers seeking catastrophic protection. Characteristically the Lloyd’s marketplace reacted quickly and began offering a similar product to fill the void in the marketplace, albeit at multiples of what the A&H markets were previously charging. More than 12 years later, Lloyd’s and the London market have become the “go to” market for quoting and leading this product line. The beauty of the London market is that there are many sources of capacity and underwriters all housed in a small geographic area, which offer several advantages for carriers seeking to obtain coverage quickly and efficiently. The downside of this business model is that when one underwriter decides to move to another entity, a domino effect of resignations, personnel changes and underwriting appetites occurs. After several years of stability, we recently saw an unprecedented change within the London U.S. Casualty reinsurance market. A number of new markets opened up Casualty operations and some high profile underwriters moved to new positions at other markets. The following is a summary of changes in the Workers’ Compensation marketplace which we hope those who place business within the London market will find useful. Senior underwriters in London tend to receive six months’ “gardening leave,” when they leave a company. As a result, certain underwriters have recently left the market, albeit temporarily. Ultimately, once the various moves finalize, the Lloyd’s marketplace, though, will have six new sources of U.S. Casualty capacity. This is significant, especially when you take into account that prior to the recent capacity expansion, there were perhaps no more than 15 markets with varying degrees of Casualty appetite operating within Lloyd’s. The appetites and focus of the new capacity is still to be ascertained in certain instances and we should learn more over the coming months. That said, in order to provide some clarity, Willis Re has asked each Workers’ Compensation market to provide details of their anticipated appetite and capacity for 2014. Following is a report on the feedback we received:

Chaucer Syndicate 1084 Current underwriters: Michael Clifton, Ryan Ward, Zak Mallen, Adam Howard, Richard Bonnett Market feedback Chaucer will look to respond opportunistically to the original and reinsurance rate environment. As such the following could change materially.

With regards to Workers’ Compensation, Chaucer’s 2014 business plan contemplates $16 million of net premium roughly split 50/50 between per risk and catastrophe / clash. Currently their line size extends to $5 million per risk and $20 million across a program. They are looking to extend this to $30 million for 2014 to replicate their former capabilities. In terms of appetite, Chaucer looks to support small-to-medium mono-line specialists or regional multi-line carriers for working layer coverage, but equally are happy to offer catastrophe support to multi-line nationwide insurance companies. Their lowest attachment point will be $500,000, but this will be selectively used and written in conjunction with other layers as a package. Chaucer is looking to reposition themselves as a lead / quoting market of Worker’s Compensation going forwards. High hazard / distressed business does not necessarily faze the underwriters as long as they believe the right specialists and reinsurance structures are in place. Chaucer notes that this is very much a conservative plan, but they have the ability to exceed the Net Written Premium (NWP) targets should market conditions permit.

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Existing Capacity Departing Underwriter: Paul Sandi

New Capacity New Underwriter: Paul Sandi

Willis Re commentary Perhaps the most significant move has been the U.S. Casualty team of Mike Clifton, Ryan Ward, Zak Mallen and Adam Howard departing from Aspen Re for the Chaucer syndicate. Prior to this, the Chaucer syndicate had been a fairly conservative market writing a small book of business. Hiring the Aspen Re team will change this outlook and we anticipate Chaucer will become one of the preeminent London Casualty markets in the near future. The new team headed by Mike Clifton, will work with the existing Chaucer underwriters, creating one of the largest teams in London. The appetite, line size and leadership qualities that Chaucer will have going forward will be similar to those that existed when the team was at Aspen Re. Mike Clifton and Ryan Ward are due to start at Chaucer in late November / early December, while Zak Mallen and Adam Howard have already started and have shown a keen appetite for expanding Chaucer’s book.

Canopius Syndicate 4444 Current underwriter: Paul Sandi Market feedback Canopius syndicate has provided the following appetite / capacity details:

• Working layer target market – mono and regional state carriers, attachment point of $5 million. Lower attachments will be considered based on size and jurisdiction of carrier

• Within a life attachment of $10 million for super regional carriers (lower attachment points will occasionally be considered)

• Catastrophe layers considered for carriers of all sizes • Long term relationship focus • Ability to quote • $5 million line any one program

Willis Re commentary Last year, Canopius syndicate acquired the GSC 958 syndicate. While this was predominately a U.S. Property book, GSC wrote a small U.S. Casualty book as well. This was Canopius’ first involvement with U.S. Casualty reinsurance and, at the time of acquisition, they took the position that they wanted to review the book and then decide whether they wanted to continue with the line. Following this, Paul Sandi, previously an underwriter with Liberty 4472, was hired to effectively start a new U.S. Casualty book. Paul recently completed his “gardening leave” and is now actively seeking business opportunities. Canopius’ intends to write a book of about £9 million in year one and will look to ramp this up over the next two-to-three years.

Liberty Syndicate 4472 Current underwriters: Kevin Ritchie and Ralph Stainbank Market Feedback Liberty syndicate writes nearly £9 million (Lloyd’s net basis) of U.S. Workers’

Compensation treaty reinsurance premium. By premium volume, this is split roughly two-thirds per-life exposed treaties and one-third clash/catastrophe treaties. Liberty has a minimum per-life attachment point for new business of $2 million, but is interested in participating on per-life exposed layers above this level. In terms of catastrophe-exposed (multiple life) treaties, Liberty has aggregate constraints in California, but outside of California they are very interested in expanding their participations at the right terms. Liberty syndicate prefers to exclude nuclear, biological, chemical and radioactive (NCBR) terrorism on WC Catastrophe treaties, but will consider this on a case-by-case basis. Willis Re commentary The two senior principal underwriters at Liberty 4472 (Kevin Ritchie and Ralph Stainbank) remain at Liberty. They recently employed Nav Haque from Atrium 609; over time, he will be a replacement for Paul Sandi. We feel that Liberty’s appetite and lead position in the London marketplace will not be impaired by the recent personnel change.

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New Capacity New Underwriter: John Pilkington

Ascot Syndicate 1414 Current underwriters: John Pilkington and Jack Gardner Market feedback WCA market conditions and premium income

Ascot believes WC primary insurance rates will continue to be firm through to the end of 2013 and beyond. They expect rates to increase anywhere from 5% to 15% depending on the state. As such, Ascot expects reinsurance rates to soften a little as the divergence in pricing dynamics between the primary insurance market and the reinsurance market continues to widen. Ascot’s gross written premium income forecast for 2014 is $2 million for per-person exposed WCA and $2.5 million for catastrophe WCA business. WC per-person exposed Ascot prefers to reinsure companies that are specialty, single state, niche writers of WCA rather than the nationwide stock companies. They also consider state funds or the newly-privatized funds as being desirable risks. Ascot believes that clients with a one or two state focus tend to be more versed with local issues and nuances that produce favorable results from a claims perspective. While Ascot will not seek to expand into those states that have undergone a succession of rate decreases in the past five to seven years such as Illinois, New York or Florida, they do believe there may be some opportunities in California for 2013/2014 following recently announced rate increases. Ascot will only reinsure WC risk exposed business on an excess of loss basis. Their minimum attachment point is $500,000. They will not seek to write per-person exposed covers above a $10 million attachment point unless they are adequately priced. Terrorism will be provided with either NBCR included or excluded. Ascot’s maximum line is $500,000 per program. WC Catastrophe Ascot’s primary focus will be toward small to medium sized regional carriers and niche writers. Depending on the attachment point of the treaties, they will also consider super-regional and nationwide writers. The Workers’ Compensation catastrophe portfolio will form the cornerstone of their “short-tail” Casualty writings and they will become an active quoting market in this line, in tandem with their WC risk exposed writings. Terrorism coverage will be provided with either NBCR included or excluded. If the TRIPRA Act is not reinstated, Ascot will continue to provide coverage for all terrorism perils following an appropriate adjustment in pricing. Ascot’s maximum line is currently $5 million per program but will increase to $10 million for 2014. Willis Re commentary Ascot syndicate is a prominent Property market that earlier this year employed John Pilkington to establish a new Casualty book of business. Prior to joining Ascot, John, a high profile and experienced underwriter, was the Active Underwriter at the Barbican Syndicate. With Ascot’s Casualty book now up and running, we anticipate that come 1/1, they will be prominent Casualty market.

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Existing Capacity New Departing Underwriters: Joe Bonanno (BRIT BM), Jim Quinn, Tom Hanley

BRIT Syndicate 2987 Current underwriters: Simon Bird, Matthew Wood, Andrew Murnieks and Joe Bonanno (Bermuda Branch) Market feedback BRIT is optimistic regarding WCA business and is pleased to see WC carriers leading

the industry by taking year-on-year rate increases as they strive to return to underwriting profitability. BRIT’s optimism is only tempered by a concern for the effect of medical inflation on treaties with a low attachment point and an increased frequency of claims with a value in excess of $5 million. BRIT supports the full spectrum of carriers from single state writers and state funds through to nationwide players. They are seeking partners who have a focused business plan to outperform the market and are prepared to retain an appropriate level of risk in relation to their portfolio. A key differentiator for BRIT is a strong claims department; they know that identifying catastrophic claims early and pro-actively managing these claims achieves better outcomes for both the injured worker and for reinsurers. WC is a core product in BRIT’s portfolio and will remain so in the future. Their strategy is to form long term relationships with reinsurance partners and to offer significant capacity on their programs. To this end, BRIT can offer their partners capacity of up to $10 million on a risk basis and $20 million on catastrophe placements. In addition, they can offer NCBR terrorism coverage and per person cover excess of $10 million. Willis Re commentary At BRIT 2987 Matt Wood (previously Jim Quinn’s assistant underwriter) has been elevated to a more senior role to take the book forward. He will continue to report to Simon Bird who continues to run the Casualty department. The message from BRIT is that it is “business as usual” and, in fact, they are looking to grow their Casualty book. With that said, BRIT recently opened a branch office in Bermuda headed up by Joe Bonanno, a former Markel Re executive. The new branch office will write on behalf of the BRIT syndicate in London. Please note, Joe Bonanno’s former book at Alterra Bermuda is now being underwritten by Bill Pentony out of the Markel / Alterra New Jersey office.

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Existing Capacity New Departing Underwriters: Jamie Lewis, Michael Clifton, Ryan Ward, Zak Mallen, Adam Howard, Lucy Town

Existing Capacity New Departing Underwriters: No change

Markel Zurich Branch (on behalf of 3000) ~ Previously Alterra Switzerland writing on behalf of 1400:

Current underwriters: Per Evers Hansen and Hanne Olander Market feedback Below, Markel Zurich has provided their per program and per person capacities for

2014. Capacities remain unchanged: • Catastrophe: $20 million • Risk: $2 million

For 2014, coverage will be written on behalf of Lloyd’s Syndicate 3000. Markel Zurich expects to be able to increase their California Earthquake capacity (and for Nationwide full terrorism); however, this still awaits approval. Markel Zurich has the potential to increase capacity offered when the pricing is stable. Willis Re commentary Per Evers Hansen and Hanne Olander continue to be focused primarily on WC catastrophe business; they consistently offer competitive terms and significant capacity in support of their underwriting. Markel Zurich is a significant market leader for WC Catastrophe business. For the last couple of years, they have expanded their appetite to support per person exposed layers, generally attaching excess of $5 million. The per life exposed capacity is offered on a “following” basis, as Per and Hanne gain more confidence with the product.

Aspen Re U.K. Current underwriters: Jamie Lewis and Michael Brooks. Please note: Lucy Town recently resigned from Aspen to join Barbican syndicate. Market feedback: Aspen Re remains a market with one of the largest WCA capabilities in the London. They continue to have a $30 million maximum line for catastrophe business and $10 million for per life exposed layers. They can also write up

to $10 million on NBCR terrorism business, although this capacity is offered selectively. Aspen Re closely monitors their state aggregations for possible NBCR accumulations. Aspen Re’s current portfolio stands at around $120 million of business, of which about 35% ($42 million) is derived from WCA. Their expectation is that the overall size of the book will be reduced, due to the expansion in London’s capacity but they also expect that WCA will remain at around 35% of the overall book. Aspen Re will support the large nationwide carriers on a catastrophe basis and offer significant lines in doing so. Their main focus, though, is on single state / regional carriers which make up the majority of their portfolio for both per life exposed and Catastrophe business. Willis Re commentary Aspen Re remains a solid market for us going forward. We met with the senior management and were advised that they are committed to the London market. Aspen Re recently employed Jamie Lewis who will assume his new role in November and will be charged to take the book forward. Until Jamie’s arrival, the book is being maintained by Michael Brooks, who we feel is managing the workload well. Jamie notes that he appreciates the strong relationships the prior Aspen Re team, led by Mike Clifton, had with various clients and he understands that this could impact Aspen Re’s portfolio. This said, Jamie is keen to maintain a position on as much business as possible and will look to grow the book in the direction that best suits their appetite.

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New Capacity New Underwriters: Jim Quinn and Tom Hanley

New Capacity New Underwriter: Duncan Dale

Pembroke (Acapella) Syndicate 2014 Current underwriters: Jim Quinn and Tom Hanley Market feedback The Casualty treaty book will have a normal maximum program line of $7.5 million for

Workers’ Compensation catastrophe / clash and a risk line of $1 million within this. As Jim Quinn is currently serving his “gardening leave,” he is not able to specifically comment on his anticipated appetite. Willis Re commentary Jim Quinn, previously the senior U.S. Casualty underwriter at Brit 2987, was hired to start up a new book of business, starting 1/1/14. This is another major move in Lloyd’s, with Jim seen as one of the leading underwriters in the market. As he will be starting a new book of business, Jim will have scope to entertain a wide range of business lines, perhaps a wider scope than he had at Brit. For the first couple of years though, he will not have the line size and therefore, the influence, he had while at Brit. Jim is well respected among our clients and brokers and we would expect this venture to be very successful. Currently serving his “gardening leave,” Jim cannot comment on his anticipated appetite. Tom Hanley, previously with Brit, has agreed to join Jim with this new venture.

Dale Underwriting Partners, DUW Syndicate 1729 Current underwriter: Duncan Dale Market feedback This new Lloyd’s syndicate has received Lloyd’s Franchise Board approval and will be

operational for 2014. The initial stamp capacity will be £75 million with this expected to grow to £130 million over the next three years. The syndicate will provide market leading underwriting, claims and operational expertise. The Casualty book will be predominantly U.S. domiciled insurance and reinsurance, including Medical Malpractice, General Liability, Professional Lines, Management Liability, Workers’ Compensation and Auto Liability, written on a treaty reinsurance and direct basis, open market and through binding authorities. The capital structure for the syndicate is provided by ProAssurance Corporation, private names and industry-related third party capital providers. Willis Re commentary Duncan Dale is a highly respected and senior London market figure. Previously Managing Director of Amlin Syndicate’s North American Property and Casualty portfolio, he has set out to establish a new Lloyd’s Syndicate. We anticipate Duncan to become an influential market leader with an expectation of solid growth in the next few years. The London Merry-Go-Round

Aspen U.K.

Barbican 1955Ironshore

Chaucer 1084

J. Lewis

J. Quinn, T. Hanley

M. Clifton, R. Ward, Z. Mallen, A. Howard

Ascot 1414 J. Pilkington

Brit 2987

Acapella2014

Markel BM

J. BonannoBrit BM

L. Town

Amlin2001

Liberty 4472

Dale UW Partners

Canopius4444

D. Dale P. Sandi

New Capacity Existing Capacity

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Willis Re Workers’ Compensation Catastrophe Pricing Review January 1 is when the bulk of carriers renew their reinsurance treaties. From a capacity perspective, the “catastrophic” coverages make up the vast majority of reinsurance purchased within the sector. Until the tragic events of 9/11, most of these coverages were bought on a carve out basis from the A&H market. Once this capacity withdrew from the market, traditional reinsurers stepped in and provided coverage at multiples of the previous cost. However, given the lack of industry events since then, pricing has softened for 12 straight years, to the point where some reinsurers have started to make noises about having to redeploy capital into other sectors to chase higher returns. Every year, Willis Re looks back to identify both single and year-on-year trends in order to produce a quantified overview of the Workers’ Compensation catastrophe market and to set expectations for clients at their upcoming renewals. Catastrophe layers are defined as those which are subject to a multiple life warranty, designed to protect against industrial accident, earthquake and terrorism events. In order to group treaties with similar characteristics, we partition results into first, second and third layers to represent the lower, middle and upper portions of a catastrophe placement. We look both at the risk adjusted rate decreases by layer and on average across a program as well as how much pricing flexibility reinsurers offer between their initial quoted pricing and the terms at which the contracts were ultimately placed.

Findings Workers’ Compensation catastrophe-adjusted reinsurance rates have decreased an average of nearly 10% from 2012 to 2013, when looking at programs as a whole. The magnitude of pricing decreases are correlated with remoteness of risk, meaning that true “top” layers experienced more than double the year on year (YoY) rate decrease of their first “bottom” layer counterparts (as identified in the chart below).

When comparing final pricing against highest initial quotes, rate spreads saw even larger double digit decrease across all layers as identified in the second exhibit below. The interpretation of these results leads us to conclude that while reinsurers tried to “hold the line” with pricing, they ultimately capitulated dramatically once firm order terms were issued, particularly on “top” layers.

On average, top layer programs with more remote return times saw the largest spread between the maximum quoted and final rate. Pricing variation is less severe for the first and second layers, with the average treaty being placed at a rate approximately 15% lower than its maximum quote.

-15.10% -15.55%

-21.33%

-16.24%

-25%

-20%

-15%

-10%

-5%

0%1st XOL 2nd XOL 3rd XOL Total

2013 Final to Quoted Pricing Reduction

-7.27%

-9.83%

-16.96%

-9.93%

-18%-16%-14%-12%-10%

-8%-6%-4%-2%0%

1st XOL 2nd XOL 3rd XOL TotalYoY Adjusted Pricing Change

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So what can we take from these stats into the upcoming 1/1/2104 renewal season? As new Casualty capacity enters the market (mainly through an increase in London capacity via the London “merry-go-round” of underwriters – see the other article in this edition ) and as the traditional property catastrophe market gets squeezed by the influx of new non-traditional capacity, we expect the Workers’ Compensation catastrophe market to continue to be a buyer’s market in 2014. That said, it does appear as though reinsurers are at or close to their minimum rate on lines for offering their capacity. With primary rates generally increasing and payrolls increasing, reinsurers will expect to see growth in cedants portfolios, which should in turn mean we can continue to squeeze reinsurance rates and hold the rate on lines, while simultaneously improving contractual conditions on behalf of clients. As a final note to the reader, this review is intended to provide a broad Workers’ Compensation catastrophe market overview. Individual placement rate changes and quoted-to-final pricing variability may deviate from macro results due to underlying experience, exposure characteristics, geographic footprint, coverage and other factors.

How can we help? To find out how we can offer you an extra depth of service combined with extra flexibility, simply contact us. Begin by visiting our website at www.willisre.com or calling your local office.

The contents herein are provided for informational purposes only and do not constitute and should not be construed as professional advice. Any and all examples used herein are for illustrative purposes only, are purely hypothetical in nature, and offered merely to describe concepts or ideas. They are not offered as solutions to produce specific results and are not to be relied upon. The reader is cautioned to consult independent professional advisors of his/her choice and formulate independent conclusions and opinions regarding the subject matter discussed herein. Willis is not responsible for the accuracy or completeness of the contents herein and expressly disclaims any responsibility or liability for the reader's application of any of the contents herein to any analysis or other matter, nor do the contents herein guarantee, and should not be construed to guarantee, any particular result or outcome.

Contact information Simon David Sam Dutcher Brian Ingle Executive Vice President Executive Vice President Executive Vice President Willis Re Inc Willis Re Inc Willis Re Inc 525 Market Street, Suite 3400 525 Market Street, Suite 3400 One World Financial Center San Francisco, CA 94105 San Francisco, CA 94105 200 Liberty Street +1 415 955 0277 +1 415 955 0279 New York, NY 10281 simon.david@willis.com sam.dutcher@willis.com +1 212 915 8446 brian.ingle@willis.com