2013 US Insurance Market Report

Marsh Risk Management Research
MARKET PERSPECTIVE
UNITED STATES INSURANCE MARKET REPORT 2013
FEBRUARY 2013
CONTENTS
Foreword 1 Executive Summary 2
Reinsurance 4 US Property/Casualty Industry Major Coverage Lines

Property.......................................... 11 Casualty.......................................... 14 International Casualty..................... 17 Financial and Professional: Directors and Officers.................18 Commercial Errors and Omissions..................................20 Employment Practices Liability...21 Fidelity/Crime Insurance............23 Fiduciary Liability.......................24 Lawyers Professional Liability.....25
Insurance Markets by Specialty

Aviation........................................... 27 Captives.......................................... 29 Employee Benets........................... 30 Energy............................................. 32 Environmental................................. 35 Marine............................................. 36 Political Risk and Structured Credit.............................................. 38 Surety............................................. 39 Trade Credit..................................... 40
Insurance Markets by Industry

Chemical......................................... 43 Communications, Media, and Technology...................................... 45 Construction................................... 47 Education........................................ 49 Entertainment and Events............... 51 Financial Institutions....................... 53 Health Care..................................... 55 Hospitality and Gaming................... 57 Life Sciences.................................... 59 Manufacturing and Automotive....... 61 Mining............................................. 63 Power and Utilities .......................... 65 Public Entity.................................... 67 Real Estate...................................... 69 Retail/Wholesale, Food, and Beverage......................................... 71 Transportation: Rail ............................................73 Road..........................................74
FOREWORD
It seemed in late October that the 2012 hurricane season would end on a benign note. Then nature reminded us that it pays no heed to our arbitrary deadlines and timelines. Sandy became a hurricane on October 24, rolled through the Caribbean, and took aim on the midAtlantic seaboard. Although downgraded to a tropical storm by the time it made landfall in New Jersey, New York, and Connecticut, Superstorm Sandy hit with fury and wreaked havoc across a wide area, including throughout New York City. The loss of life was high; the economic losses, still being tallied, are in the tens of billions of dollars; and Sandy ranks as one of the costliest storms in US history. And yet, while insurers will pay substantial claims, the impact on the overall insurance markets will not be devastating. Sandy may contribute to the slow upward trend in property insurance pricing that we have seen in the past year, but it will not on its own force a rapid hardening of the market. As was the case through the deepest parts of the slowly receding recession and through the historic global catastrophe losses of 2011, insurers weathered the storm, made good on their policy commitments, and worked with brokers to help clients begin to recover. Every major insurable event, however, sparks some changes in both attitudes and processes, and adds some lessons to be learned. It is still too early to predict Sandys ultimate lessons, but one of them will surely touch on the changing climate and weather patterns. In Sandys wake, climate change no matter its root cause was on the minds of many insurers, politicians, and risk managers. Some of the specific risk issues Sandy raised include: Concentrations of risk. The mix of insurance products companies require. The importance of such insurance contract items as limits, sublimits, terms, conditions, and definitions. The need to plan for scenarios that may seem to some unlikely. And in this early part of 2013, there are many other issues those of us involved in risk management and insurance are required to pay attention to and develop plans for, including: The ongoing evolution and understanding of cyber risk, including the potential for hackers to unleash a digital superstorm. Political risk, not only in emerging economies but in developed ones. Continuing global economic conditions, which, while improving, still generate a certain unease among many. Regulatory environments, which in the US will include looming decisions over the future of the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), the implementation of health care reform, efforts in many states to control workers compensation costs, and more. But through it all, we should keep an eye on the positive. For all its ferocity, Sandy reminded us of the strength of the human spirit and the overall resilience of the business community. Companies will rebuild, and will do so with lessons learned in mind. The insurance and risk management industry will evolve with a more mature understanding of risk, bringing creativity and a genuine sense of innovation to help ensure that organizations have the balance sheet protection and resiliency needed to realize their growth strategies. At Marsh, we will continue to invest in our longstanding commitment to be there for our clients whenever and wherever you need us. As always, we thank all of our colleagues for their efforts on behalf of our clients and for their contributions to the US Insurance Market Report 2013. We offer it to you with our compliments. And we invite you to contact your Marsh client executive or any other member of your client service team to discuss this report in greater depth.
David Bidmead, Chief Executive Officer, US Marsh, Inc.
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EXECUTIVE SUMMARY
Following are some key takeaways from Marshs US Insurance Market Report 2013.
Commercial errors and omissions (E&O) insurance and cyber insurance rates generally began trending upward in 2012, and are likely to continue doing so in 2013. Employment practices liability insurance (EPLI) rates, after a few years of decreases from many insurers, typically firmed in 2012. Entering 2013 insurers generally are expected to seek modest increases from most insureds, particularly those with significant loss history.
MAJOR COVERAGE LINES

PROPERTY
Superstorm Sandys affect on the property insurance markets, while still being determined, likely will be to temper what had been a generally improving rate environment in late 2012. Decreases in property insurance pricing generally are unlikely in early 2013. Sandy highlighted the importance of flood insurance issues including the definition of flood versus storm surge, the role of the National Flood Insurance Program, and erosion of flood limits.
SPECIALTY COVERAGE LINES

AVIATION
The aviation insurance market was generally stable entering 2013, with rates decreasing slightly at renewal and capacity abundant. Barring an extraordinary event, large-scale changes to the marketplace are unlikely in 2013. Capacity and rates are likely to remain generally stable.
CASUALTY
Casualty insurance markets in general are expected to continue in a state of transition in 2013, one that will be felt unevenly across various lines of business and client demographics. Workers compensation will remain a key issue for many employers, and the impact of recent reforms in California will be closely monitored. Umbrella and excess insurers generally are seeking to manage limits more conservatively, in part to limit their exposure to any one class of business or single event. Entering 2013, pressure generally continued to build in the lead umbrella insurance market, with a particular focus on attachment point and price.
CAPTIVES
The captive insurer market is expected to continue to grow in 2013, as it has for the past 15 years, with US states becoming more competitive in the captive marketplace. Issues related to various state regulations and cyber security are likely to continue.
EMPLOYEE BENEFITS
With the future of health care reform seemingly secured by the re-election of President Obama, employers in 2013 generally will focus on absence management, aggressive health management, and account-based plans. Employers will also evaluate and work with the next generation of cost management strategies, including the use of private exchanges, a private-sector alternative to the state health insurance exchanges.
FINANCIAL AND PROFESSIONAL

The directors and officers (D&O) liability insurance market, after a decade of declining rates, generally began to firm in 2012, a trend that appears likely to continue in 2013. Insureds should be prepared for risk differentiation to play an increasingly important role in their renewal processes.
2 Insurance Market Report 2013
ENERGY
The energy industry largely escaped losses from Superstorm Sandy. Insurance capacity for the energy industry was adequate entering 2013, which should generally temper the size of any rate increases from insurers. However, sectors that recently were hit hard with losses likely will experience capacity constraints and commensurate upward rate pressure. Pricing generally is trending upward in excess liability insurance markets for the energy industry.
Pricing generally increased in some countries in the Middle East and North Africa at the end of 2012, a trend that appears likely to continue in 2013. Some private insurers have been reluctant to underwrite certain high-profile and potentially sensitive risks, including infrastructure and power projects. Structured credit insurance rates were stable in 2012, and are likely to remain so in 2013, barring unforeseen events. After several years of slowly shrinking demand, many multinationals have expressed a renewed strong interest in purchasing multi-country political risk insurance programs.
ENVIRONMENTAL
The overall market for environmental insurance products was fluid and highly competitive entering 2013. Rate increases were being seen from some insurers, although not across the entire market. Many environmental insurers focused rate increases or coverage restrictions client by client. Claims frequency continued to rise, with leading markets reporting increases in first-party claims. Superstorm Sandy resulted in the potential for significant environmental losses and claims; however, the impact if any on environmental insurance rates will take time to determine.
SURETY
Surety capacity continues to expand as losses have not affected capacity or the reinsurance that supports it. Entering 2013, surety underwriters generally anticipate diminishing profitability due to a significant increase in surety loss frequency and severity, particularly due to contractor defaults. Contractors should be well prepared to demonstrate their prequalification process to underwriters. There is growing use of an independent financial profile or benchmarking reports to complement the prequal process.
MARINE
The marine insurance market entered 2013 in an unsettled state. Capacity generally remained abundant, but the market appeared to be in the first stages of a firming cycle, following years of flat or declining rates. The high-profile marine liability class losses suffered by insurers on their net account plus the average 30% reinsurance premium increases faced by some Lloyds Syndicates drove this year-end market change. Cargo and stock throughput underwriters are looking more closely at their catastrophic risk exposures and aggregates following Superstorm Sandy and may attempt to modify coverage terms and conditions or to seek slight premium increases for higher hazard risks.
TRADE CREDIT
Despite continued concern about the European sovereign debt crisis and other global events, conditions in the US trade credit insurance market generally favored insureds at the end of 2012. Rates at renewal were generally flat to down slightly in the fourth quarter of 2012, a trend expected to continue into 2013. The trade credit insurance markets generally have been more diligent in underwriting since the credit crisis. Insurers continue to carefully deploy their capacity and require additional information from insureds. The private insurance market is still covering risks in Spain and Italy, both on a portfolio and select basis, but are scrutinizing these risks and requiring higher self-insured retentions.
POLITICAL RISK AND STRUCTURED CREDIT

Conditions in the political risk market remained generally stable in 2012, despite volatility in some regions of the world. Competition and capacity generally remained strong entering 2013, although underwriters have limited capacity in some countries.
Note: For specific insurance market and risk trends by industry, see the Industry Specialties section of this report.
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REINSURANCE
2013 RENEWAL RATES
The reinsurance market at January 1, 2013, was characterized by ample dedicated capital and stable pricing with only loss-affected lines and regions experiencing price volatility. The Guy Carpenter Global Property Catastrophe Reinsurance Rate on Line (ROL), Index (see Figure 1) fell marginally at the renewal. This is the seventh consecutive annual renewal in which changes to the index have equaled 10% or less, indicating a global market with capacity appropriate to meet demand. Over this period the reinsurance market has responded well to financial crises, increasing international losses, and numerous Atlantic Basin and European wind events. There was variation regionally, with US property catastrophe pricing most affected by the landfall of Superstorm Sandy while other regions were flat to down (see Figure 2). Price movements for non-catastrophe lines of business were also mixed. Marine and energy saw noticeable rate increases but many other lines experienced reductions.
SUPERSTORM SANDY AND OTHER DRIVERS

The stable renewal was driven by a combination of factors including new reinsurance capacity, reduced catastrophe losses, and high levels of capital. Fully dedicated reinsurance capital rose to record levels during the first nine months of 2012, exceeding $190 billion at the end of the third quarter. It was against this backdrop that Sandys late landfall along the densely populated northeast US coastline in late October caused an expensive and complex loss for insurers and reinsurers. Sandy was a unique event in that atypical meteorological conditions combined to create one of the most expensive weather-related catastrophes on record. There has been concern for some time about potential losses from a major weather event in the Northeast region as the area is densely populated with highly valued real estate. The concern was warranted as thousands of buildings were destroyed in the states of New Jersey and New York, including southern parts of New York City, by Sandys
FIGURE 1: GLOBAL PROPERTY CATASTROPHE ROL INDEX

1990 TO 2013
450 400 350 300 250 200 150 100 50 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1/1 2013
Source: Guy Carpenter & Company, LLC
devastating storm surge and strong winds. Sandys landfall, combined with historically high crop losses in the United States and other severe weather outbreaks across the globe, resulted in global insured losses exceeding $50 billion in 2012. This was nevertheless significantly less than the $120 billion of insured loss sustained in 2011. The sector therefore entered 2013 in a strong position despite capital levels likely stagnating in the fourth quarter of 2012 due to Sandy. The sector continues to be challenged by the macroeconomic environment. Lackluster and diminishing gross domestic product growth in both developed and developing economies continues to pressure top lines. At the same time, the ongoing debt crisis in Europe and fiscal uncertainty in the United States have prompted insurers to seek higher-grade investments. This reduces near-term credit risk but lowers investment returns and increases interest rate sensitivity. Finally, evidence continues to suggest that insurer reserve releases are diminishing and will not be able to bolster earnings for much longer. All of these developments mean that underwriting performance, adaptability, and capital management are now manifestly at the center of any profitable growth strategy.
SOLUTIONS FOR PROFITABLE GROWTH

In this challenging market, insurers and reinsurers require sophisticated solutions to identify, mitigate, and transfer an evolving range of risks. Guy Carpenter, one of the Marsh & McLennan Companies, has identified six key areas where carriers can successfully enhance profitable growth and create franchise value. These include optimal capital management, clear and consistent communication to rating agencies and regulators, appropriate domicile selection, and capital markets opportunities, including strategic mergers and acquisitions (M&A) as well as convergence solutions.
CAPITAL MANAGEMENT
CAPITAL TRANCHING
Optimizing capital significantly enhances profitability. Reinsurance plays a crucial role in reducing capital costs, but it is most effective when those costs are precisely understood. One way to do so is through tranching, or calculating the effect of reinsurance on companies cost of capital. Unlike other approaches, capital tranching introduces a priority order within capital to help clients measure and improve the cost of capital.
FIGURE 2: REGIONAL PROPERTY CATASTROPHE ROL INDEX

1990 TO 2013
300 250 200 150 100 50 0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 1/1 2013
US l EUROPE l UK l
Source: Guy Carpenter & Company, LLC
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CONVERGENCE OF CAPITAL MARKETS

The convergence of traditional reinsurance and capital markets capacity has now occurred. Nontraditional capital, a term that is fast becoming obsolete, today accounts for approximately 16% of total property catastrophe risk transfer limit purchases. Indeed, the catastrophe bond market in 2012 saw primary issuance of $5.45 billion, the highest level since the financial crisis and second only to 2007. The influence of capital markets capacity is set to expand strongly over the next few years. This development will provide carriers with additional flexibility to offload and diversify risk and truly establish capital market solutions as a sustainable complement to traditional reinsurance.
RATING AGENCIES
The need to manage and understand the requirements and criteria of rating agencies has been reinforced by significant rating activity over the last 12 months. Many of these actions have been in response to the challenging economic environment. With only moderate improvement expected in 2013, commercial ratings are expected to continue to reflect variation in insurers fortunes. The need to convey a clear and consistent message has never been more important as rating agencies demand increased interaction and transparency. The process needs to be carefully managed to ensure that insurers and reinsurers attain an optimal financial strength rating.
MERGERS AND ACQUISITIONS

Strategic M&A is another means of enhancing franchise value. The current environment of low valuations and limited economic growth may encourage firms to consider an acquisition as a key component of growth strategies. Although M&A activity continued to slow in 2012, several potential catalysts exist for successful transactions in 2013 and beyond.
DOMICILE SELECTION
Choosing the right domicile is pivotal to every companys growth strategy as it can significantly impact carriers bottom line. Recent years have seen an increase in relocations, with companies shifting operations and domiciles from one country to another. The largest insurance and reinsurance markets have traditionally been and remain the United States, the United Kingdom, Continental Europe and Japan. However, companies are increasingly analyzing the relative merits of other regions. Regulatory environments, Solvency II equivalence, tax rates, access to talent, and proximity to major markets are all important factors to consider when deciding whether to relocate to domiciles such as Bermuda, Switzerland, Ireland, and Singapore.
RISK, RATINGS, AND REGULATION

The evolving criteria and requirements of risk management, rating agencies, and domicile selection also have a significant impact on carriers operations. Gaining a better understanding of catastrophe risk, adapting to changing rating agency criteria, and reevaluating the suitability of domicile are all paramount in achieving profitable growth.
This chapter is taken from the executive summary of Guy Carpenters January 2013 Renewal Report: The Route to Profitable Growth. For more information, visit Guy Carpenters website at www.guycarp.com
CATASTROPHE MODELING
It is no surprise that regulators and risk managers are increasingly scrutinizing the assessment of catastrophe risk through the use of numerical models in todays marketplace. Insurers and reinsurers are therefore increasingly looking to develop their own view of risk by acquiring a deeper understanding and more sophisticated use of catastrophe model results. The deeper the understanding that they can derive from the models they use, the better they will be able to communicate the rationale behind decisions to regulators and rating agencies while also supporting reinsurance structure and pricing.
US PROPERTY/CASUALTY INDUSTRY
At the end of the third quarter of 2012 (the latest information available at this writing), the US property/casualty (P/C) industry boasted a strong balance sheet; the industry overall was financially strong entering 2013. Strengthening of the income statement is likely to remain a top priority for insurers in the quarters ahead.
US PROPERTY AND CASUALTY INDUSTRY
NINE-MONTH 2012 FINANCIAL HIGHLIGHTS (DOLLAR AMOUNTS IN MILLIONS)
The industrys financial performance through the first nine months of 2012 improved substantially over the same period in 2011, with strong earnings growth and a significant increase in net income. CAT losses declined significantly through the third quarter of 2012 especially when compared to the record levels posted in 2011 although they remained elevated compared to recent years. Superstorm Sandy, however, will negatively affect fourth quarter earnings results as preliminary loss estimates were in the $25 billion range. The storm losses could eliminate the industrys full-year earnings, although the industrys overall solid capital position should remain intact. The industrys net income through the first nine months of 2012 nearly tripled when compared to the same period in 2011 due to a dramatic drop in underwriting losses reported for the period and, to a lesser extent, to more adequate pricing from the industry perspective. The improvement materialized despite mixed trends in net investment income. Moderate CAT losses through the first nine months of 2012, higher earned premiums, and insurers liberal capital positions will considerably offset the financial affects of Sandy for most insurers through the end of 2012; however, the storms ultimate financial toll is still being determined. Insurers investment performance continued to be challenged in 2012. Although insurers generally manage very conservative investment portfolios, the global financial crisis was a reminder of just how volatile and unpredictable investment returns can be. Despite the overall turnaround in investment performance in recent years, the P/C industry faces near-term investment challenges as historically low interest rates continue to produce lower yields. Because investment income remains a major component of profitability for insurers, increased pressure falls on underwriting profitability. Issues in the European bond markets have had minimal impact on the US P/C industry as insurers generally invest their portfolios domestically. Although US-based global insurers do have modest exposure to the European bond markets, their portfolios tend to be of high quality with little exposure to incidental European banks and sovereigns. Insurer results are likely to be affected in 2013 and beyond by the continued decline in the pace of reserve
9 MONTHS 2012 Net Premiums Written Net Underwriting Gain (Loss) Net Investment Income Net After-Tax Income Policyholders Surplus Combined Ratio $345.4 ($4.4) $35.8 $31.2 $579.4 100.1
9 MONTHS 2011 $330.8 ($30.4) $36.3 $12.3 $537.0 108.5
CHANGE 4.4% NM -1.3% 152.7% 7.9% -8.4
Source: AM Best Company
Insurers profitability faces pressure in 2013 given the slow economic recovery, low interest rates, and an expected reduction in reserve releases. Slow economic growth could affect total insurable risks, while the natural increase in prices due to inflation generally leads to rising claims costs, causing insurers to play catch up by increasing premium rates. Competition among insurers is expected to remain intense in 2013 as insurers are pressured to generate returns that meet their cost of capital and improve their market share. Nonetheless, as with previous years, P/C insurers can be expected to focus on fundamentals in 2013, which means protecting their balance sheets through such measures as pricing adequacy, underwriting discipline, capital planning, and preparing for major catastrophe (CAT) events.
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US PROPERTY AND CASUALTY INDUSTRY

OPERATING RESULTS 1980 TO NINE MONTHS 2012 (IN BILLIONS) $80 $60 $40 $20 $0 -$20 -$40 -$60 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Source: AM Best Company
INVESTMENT GAINS l
NET INCOME l
NET UNDERWRITING GAIN/LOSS l
releases. Although reserve releases continue to support earnings to some degree, reserve redundancies are gradually shrinking and some insurers reported higher levels of adverse development in the third quarter of 2012. Overall, the reserves for the P/C industry are adequate; however, their release will not boost underwriting results by as much in 2013 as they have in the past. The US P/C industry continues to maintain a strong capital position. The industry entered 2013 with adequate capacity to endure adversity; however, earnings challenges will likely cause those capital cushions to abate. Share buybacks continue to remain on insurers agendas given that many P/C insurers are trading at or below book value. A reduction in dividends and share repurchases over the longer term is likely as profitability is challenged, lower investment returns persist, and more modest reserve releases impact earnings. Many US P/C insurers reported premium rate increases across all business lines at the end of 2012. These increases were primarily driven by earnings shortfalls as opposed to capital necessity. Above average losses, subdued investment returns, and receding reserve releases are likely to support this pricing trajectory in the near term. This should not be considered signs of a
conventional hardening of the market as price changes are not uniform and are being seen in specific areas. In addition, the industry is not starving for capital. Steadily rising rates and an increase in insurable exposures contributed to an increase in net premiums written, with A.M. Best estimating a 4% increase through the first half of 2012, year over year. After navigating fairly well from a capital perspective through a financial crisis, high levels of CAT losses, and a year that ended with Superstorm Sandy, the US P/C industry faces continued challenges in 2013. Underwriting discipline and profitability will be crucial to maintaining financial strength as investment returns and reserve releases are not expected to support earnings to the level they had in the past. Insurers in 2013 need to focus on underwriting profitability (having produced combined ratios in excess of 100% during the past four years) in combination with pricing adequacy.
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MAJOR COVERAGE LINES
PROPERTY
INSURANCE MARKET CONDITIONS
COVERAGE Property SEGMENT Non-CAT-Exposed Organizations Moderately CAT-Exposed Organizations (1% to 30% of values in CAT zones) Largely CAT-Exposed Organizations (more than 30% of values in CAT zones) Loss-Driven Organizations RATE CHANGE Q4 2012 5% decrease to 5% increase Flat to 10% increase 5% increase to 15% increase Flat to 15% increase RATE CHANGE Q4 2011 10% decrease to 10% increase (depending on use of incumbents) Flat to 10% increase 10% increase to 30% increase or higher if exposure was severe 10% increase and higher
The above represents the typical rate change at renewal for average/good risk profiles.
MARKET COMMENTARY
The US property insurance market rebounded in 2012, following a year of near-record losses from natural disasters, poor investment income, and a still-sluggish global economy. Losses from Superstorm Sandy, however, are likely to temper what had been a generally improving rate climate for insureds in the late third and early fourth quarters of 2012. Decreases in property insurance rates are unlikely in early 2013, with some insurers pushing for rate increases, especially for clients with losses from Sandy. Flat or declining premium rates at renewal typically will likely be reserved for insureds with favorable loss histories and low catastrophe (CAT) exposures, but are likely to be more broadly available by midyear, barring a large CAT event. The first three quarters of 2012 saw relatively minor insured losses from catastrophe events; in fact, many insurers posted positive third quarter financial results, leading to a stable US property insurance rate environment. Renewal rates began generally moderating by the fourth quarter and, prior to Superstorm Sandy, many insureds were able to renew with flat to slight increases in pricing. Just over 25% of insureds renewed with decreases in the first three quarters of 2012. While nearly 60% of insureds experienced a modest increase at renewal, the level of increases fell with each quarter, from an average of 3.9% in the first quarter to 2.5% in the third. As expected, companies with significant CAT exposures were most likely to experience higher increases at renewal than companies with little to no CAT exposures. In the first
half of the year, CAT-exposed companies averaged 5% increases at renewal; in the third quarter, the average increase had fallen to 3.5%. A companys loss history is also important in determining individual rates, and there may be upward pressure on rates in 2013 as losses from Sandy are fully quantified.
SUPERSTORM SANDY
In late October 2012, Superstorm Sandy made landfall in southern New Jersey and wreaked havoc on the
US PROPERTY ALL RISK CLIENTS

PERCENT OF ACCOUNTS WITH RATE CHANGES
58%
59%
57%
57%
16%
14%
15%
16%
26% Q1 2012
27% Q2 2012
28%
27% Q4 2012
Q3 2012
Source: Marsh Global Analytics
INCREASE DECREASE NO CHANGE
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Eastern Seaboard, becoming one of the costliest storms in US history. It caused widespread property damage and disrupted the operations of thousands of businesses. Approximately 8.6 million homes and businesses lost power, some for more than two weeks. Although the business interruption losses have yet to be fully quantified, modeling firm RMS has estimated insured losses may reach $20 billion to $25 billion, with total damages topping $50 billion by most estimates. Only Hurricane Katrina, which totaled $41.1 billion in insured losses, would rank as more costly. Although losses from Sandy will affect insurers bottom lines, it is not expected to be a market-changing event, but rather an earnings event. Most losses will likely be contained within the insurers retention, although some reinsurance treaties may be triggered; therefore, Sandy should have little to no effect on the treaty reinsurance market. Overall, insurers were well capitalized to absorb the loss, and most are not likely to reduce capacity in 2013, barring unforeseen events. Individual insurers, however, may more carefully scrutinize their catastrophe aggregates.
TERRORISM AND POLITICAL VIOLENCE
high-risk countries for political violence where capacity may be limited. The government-backed scheme in the US the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) is set to expire on December 31, 2014. As the programs expiration approaches, whether to extend it and in what form will be increasingly debated by industry and government officials.
RISK TRENDS
The US property insurance market is well positioned to absorb the losses from Superstorm Sandy. The storm, however, is likely to cause insurers to look at a number of risk issues.
BUSINESS INTERRUPTION
Insurers and insureds learned a tough lesson about the unpredictability of business interruption costs during the 2011 floods in Asia, resulting in insurers increased scrutiny of business interruption exposures and, in some cases, altered terms and policy limits. In 2012, Superstorm Sandy caused significant disruption to thousands of businesses on the East Coast. As a result of the storm, business interruption coverage is likely to be an issue at the forefront for both carriers and insureds in 2013. Insureds should expect more critical analysis of their exposures and potential limits
The standalone terrorism and political violence insurance market remains relatively stable; pricing remains generally competitive and capacity abundant except in certain high-risk cities for terrorism, or in
MAJOR GLOBAL MARKET PROPERTY (CATASTROPHE-EXPOSED RISKS): TYPICAL RATE CHANGES IN Q4 2012
PROPERTY (CAT-EXPOSED) Australia Canada Chile China France Germany India Indonesia Italy Japan Korea Mexico Russia South Africa Spain Turkey UAE UK US Increase 0-10% Stable -5% to +5% Stable -5% to +5% Stable -5% to +5% Stable -5% to +5% Increase 0% to 10% Increase 10% to 20% Increase 0% to 10% Increase 20% to 30% Increase 0% to 10% Stable -5% to +5% Stable -5% to +5% Stable -5% to +5% Increase 0% to 10% Stable -5% to +5% Increase 20% to 30% Decrease 20% to 30% Increase 0% to 10% Increase 0% to 10%
DECREASE > 30% l DECREASE 20-30% l DECREASE 10-20% l DECREASE 0-10% l Source: Marsh
INCREASE > 30% l INCREASE 20-30% l INCREASE 10-20% l INCREASE 0-10% l
placed on their programs by carriers. Companies should undergo a comprehensive review of their exposures in order to better understand their needs and design effective programs.
single-carrier placements, where the flood limit is with one insurer, the remaining limits will drop down and coverage can be sought from another carrier at the top/ excess of the remaining limit. Insureds should discuss the details of these situations with their brokers.
SANDY HIGHLIGHTS FLOOD ISSUES

FLOOD VS. STORM SURGE
CAT MODELS
Catastrophe models have become increasingly important in the property insurance marketplace. Properly used, CAT models help clients make informed decisions, proactively design a marketing strategy, differentiate their risks for underwriters, create transparency, and implement risk-based allocations. In early 2011, RMS released its latest model update, which took into account lessons learned from recent windstorms. It dramatically increased loss estimates in Texas and Mid-Atlantic states, and significantly increased the storm surge potential in the Northeast. AIR Worldwide also updated its modeling software in 2011. It remains to be seen what effect Sandy will have on future models. Models help insureds and insurers understand what their expected losses may be from various CAT events, and thus to develop acceptable program sublimits. Insurance brokers and their clients use the modeling results to help design the program structure, as modeling can be performed on each individual layer as well as on the overall program. This allows analyses of various options, such as insureds self-insuring layers that may be too costly or transferring risk to various insurers where they see value and efficiency in so doing. The rating agencies use modeling to assess catastrophe risk as a primary threat to an insurers solvency. They run the models on an insurers aggregate exposure, which, depending upon how exposed an insurer is, may impact its rating. In fact, RMS 11 has had the effect of significantly increasing aggregations and the amount of available capital insurers need to avoid insolvency following a large catastrophic event.
A significant issue in determining how coverage will apply following Sandy or any similar event will be the distinction between flood and storm surge within a particular policy. Some policies may state that storm surge is encompassed within the definition of flood while others may stipulate that it is part of the named windstorm definition. Such distinction may determine the available limit and the deductible that will apply to the loss. It is expected that there will be increased scrutiny of definitions and deductibles relating to windstorm, flood, and storm surge in the months to come. This discussion may also include tsunami, specifically whether the peril belongs in the flood definition or in earthquake.
NATIONAL FLOOD INSURANCE PROGRAM (NFIP)
Many companies supplement their commercial flood insurance limits with coverage through the NFIP, a federally funded program. In the summer of 2012, the program was reauthorized through September 2017. The legislation contained sweeping provisions, designed to improve the programs fiscal stability as it was more than $18 billion in debt even before Sandy. Included in the legislation are provisions to increase rates over a period of five years, require lenders to accept non-NFIP-backed insurance, and permit multifamily owners to purchase commercial flood policies.
ERODING FLOOD LIMITS
Superstorm Sandy may cause the erosion of some insureds flood aggregate limits for their policy periods. As a result, if another flood event occurs, insureds with eroded flood limits would have only what remains of their original limit, which for some could be nothing. It is thus important for companies to consider their options for reinstating flood limits. Typically, reinstating coverage with the carrier(s) in the primary layers can be costly, and underwriters may not be willing to reinstate limits so soon after the event. For shared and layered programs where the flood coverage resides in multiple layers it is recommended that a properly written drop-down wording be in place. With such wording, it likely makes more sense to purchase limits at the top of the program (excess limits) rather than to reinstate the eroded primary limits. For
Contact: DUNCAN ELLIS US Property Practice Leader +1 212 345 3183 duncan.c.ellis@marsh.com
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CASUALTY
COVERAGE Workers Compensation SEGMENT Guaranteed Cost Loss Sensitive General Liability Guaranteed Cost Loss Sensitive Automobile Liability Guaranteed Cost Loss Sensitive Umbrella and Excess Liability Lead Excess Layers RATE CHANGE Q4 2012 5% decrease to 5% increase 5% decrease to 5% increase 5% decrease to 5% increase 5% decrease to 5% increase 5% decrease to 10% increase 5% decrease to 10% increase Flat to 5% increase Flat to 5% increase RATE CHANGE Q4 2011 10% decrease to 10% increase 5% decrease to 5% increase 10% decrease to 5% increase Flat to 10% decrease 5% decrease to 5% increase 5% decrease to 5% increase Flat to 10% increase Flat to 5% increase
MARKET COMMENTARY
Entering 2012, casualty insurance markets were in a state of transition, one that continued in an uneven fashion across various lines of business and client demographics. The trend held throughout 2012 and is expected to continue into 2013.
GENERAL LIABILITY
in general experienced increasing rate pressure as the year progressed. Some insureds secured decreases at renewal, typically those with exceptional loss histories, strong safety controls, and lower hazard exposures. Rates for GL insurance traded in a wider range than in 2011, typically
US GENERAL LIABILITY CLIENTS

The general liability (GL) insurance market was generally stable in 2012, although there was some moderate firming. Insurers typically sought rate increases entering 2013; however, capacity and competition remain adequate and generally mitigated the size of increases. Fewer companies saw rate reductions than in the previous quarter and the number of flat renewals increased. Premium rates at renewal for about half of insureds were flat to some increases. The predominant exposure base revenue generally showed a moderate, single-digit increase in 2012 compared to 2011. Increasing rates caused a minimal migration in program structures from guaranteed cost to loss sensitive, as well as increased deductibles for 12% of insureds with loss sensitive programs. In industries that showed signs of more aggressive growth, rate increases were generally moderated to balance the degree of overall premium increase. Loss sensitive GL placements
42%
40%
49%
54%
18%
19% 13% 18%
40%
41%
38%
28%
Q1 2012
Q2 2012
Q3 2012
Q4 2012
INCREASE NO CHANGE DECREASE
from 5% reductions to 15% increases. Terms and conditions remained relatively unchanged; however, increased underwriting scrutiny required more time to prepare submissions, increased management sign-offs, and strong analytical backing.
AUTOMOBILE LIABILITY
Individual risk factors, including industry, employee concentrations, loss mitigation techniques, and historical loss experience. As insurers look to increase rates or change program structures, more clients are looking to market their business as they seek alternatives to achieve optimal results. The overall time needed to complete renewals has increased, and underwriters are applying their guidelines in a more prescriptive fashion. There have also been some new insurer entrants into the primary casualty space, which has been a welcome addition for many insureds. Workers compensation is significantly influenced by state-directed activity, on both legislative and rate issues. In California, often viewed as a bellwether for the industry due to its size, there have been clear indications in recent years of stress in the underlying technical workers compensation market. Against this backdrop, California in 2012 passed its most significant workers compensation legislative reform since 2004 in an effort to create efficiencies in the system, reduce costs, and increase benefits for permanently disabled injured employees. It will take time to realize the full impacts of the new legislation. In 2012, more than half of clients experienced flat rates at renewal or rate increases. For guaranteed cost structures, the rate increases became more challenging as the year progressed, prompting a small number of clients to move to loss-sensitive programs, and just over 10% of those with loss-sensitive programs to increase their deductibles.
Auto liability insurance rates generally remained stable in 2012, with some reductions and more renewals experiencing flat rates. Insurers sought higher attachment points on large fleets, which resulted in more insureds marketing their programs than had been the case in recent years. Most insurers sought rate increases, but typically agreed to lower rates than in their original quotes. A minimal number of insureds moved to loss sensitive programs, with about 6% increasing deductibles on existing loss-sensitive programs. Many insurers used auto liability insurance to help balance their workers compensation line of business. Auto liability insurance rates at renewal traded in a wider range than the prior year, generally from 5% decreases to 10% increases, excluding those clients whose retentions changed. Additional underwriting scrutiny was common in auto liability insurance renewals, as was the case in other casualty lines. Clients with best-in-class fleet management strategies and favorable loss histories typically saw the best rates and terms.
WORKERS COMPENSATION
The workers compensation line of business continued in 2012 to operate at a historically unprofitable level for insurers. Insurers are likely to seek rate increases and higher retentions in 2013 in order to return the workers compensation line of business to profitability. Employers that favorably differentiate their claims management and loss-control programs generally will fare best, and those willing to take more control and explore loss-sensitive programs to control costs may be more insulated from any sweeping market trends on rate increases. The workers compensation insurance market experienced another challenging year in 2012 as insurers faced continued economic challenges and medical costs continued to increase. The magnitude of rate increases will depend on such characteristics as: Program structure, whether it is guaranteed cost or loss sensitive. Concentration of a clients risk in a particular geography.
WORKERS COMPENSATION CLIENTS

46%
45%
49%
51%
17%
23%
14%
16%
37%
32%
37%
33%
Q1 2012
Q2 2012
Q3 2012
Q4 2012
INCREASE NO CHANGE DECREASE
Marsh 15
Underwriters are inundated with submissions, so it is important to initiate the renewal process early ideally 120 days prior to the policy or program effective date. Developing a communications strategy around all key attributes of a companys risk profile will benefit the renewal process. It is imperative that organizations provide underwriters with complete, accurate, and thorough data and analysis in order to differentiate their risk profile in areas such as large losses, loss trends, and safety programs.
EXCESS CASUALTY
the sidelines are opportunistic in competing to replace traditional incumbents. Structuring non-traditional excess liability towers became the norm in 2012, using, for example, buffers, shorter limit leads, and captives as alternative structures to be contemplated in many renewals. These restructurings were not limited to what are generally considered to be the more difficult industries of construction, energy, chemical, and life sciences. The majority of markets saw an increase in average attachment points, while overall limit deployment decreased. This was especially true for those more difficult classes of business, where many insureds saw an increase in premium with an increase in attachment point, and in many cases, restrictions on capacity at renewal. Generally, the excess casualty insurance market saw rate increases in the mid-single digits in 2012, leveling off in the latter half of the year as the trading market overtook the technical market. There was modest exposure base growth with an abundance of mid-excess capacity fueled by new entrants with strong balance sheets. Several insurers rebalanced their portfolios and re-entered the excess liability marketplace, helping to level off any drastic pricing increase for the general industries. In 2013, casualty experts expect to see a stabilizing excess marketplace as insurers see opportunity to be more aggressive throughout the year. More use of predictive modeling, including in umbrella and excess casualty, is expected, especially with the frequency of severity increasing. Carriers are looking at different ways to deploy their capacity, and are willing to split limits. Actual renewal terms will vary depending on several risk-specific factors, including the class of business, emerging risk potential, clash likelihood, excess loss history, number of viable lead umbrella carriers, and the change in risk retention appetite of the insured.
Entering 2013, pressure continued to build in the lead umbrella insurance market, with a particular focus on attachment point and price. The mid-excess layers, however, generally continued on a stable path, with significant competition and capacity moderating the effect of firming rates experienced in the lead market. To limit their exposure to any one class of business or single event, umbrella and excess insurers are seeking to manage limits more conservatively, especially where there is clash potential between different insureds. In 2012, excess casualty insurance could be viewed in several ways as a tale of two markets: new versus renewal, lead versus excess, US versus international, and complex versus standard. Carriers reacted differently depending on which side of the market they were on, many times within the same segment and within the same industry. Ample global capacity will likely continue to push the supply side of the equation in 2013 as markets waiting on
US EXCESS CASUALTY CLIENTS

47%
47%
47%
56% Contact:
33%
41%
38%
29%
JONATHAN ZAFFINO US Casualty Practice Leader +1 212 345 2263 jonathan.zaffino@marsh.com
20% Q1 2012
13% Q2 2012
15% Q3 2012
15% Q4 2012
Note: Not all stacked bars will add to 100 due to rounding. Source: Marsh Global Analytics INCREASE DECREASE NO CHANGE
INTERNATIONAL CASUALTY
COVERAGE International Casualty Controlled Master Program Automobile Controlled Master Program International Package Policy SEGMENT Guaranteed Cost Loss Sensitive Guaranteed Cost Loss Sensitive Guaranteed Cost RATE CHANGE Q4 2012 5% increase to 5% decrease Flat to 5% increase Flat Flat to 5% increase 5% increase to 5% decrease RATE CHANGE Q4 2011 Flat to 5% decrease Flat to 5% decrease Flat Flat to 5% decrease Flat to 5% decrease
MARKET COMMENTARY
The international casualty insurance market remained stable entering 2013, with typically moderate price decreases on favorable risks. Competition remained strong, with new capacity in the international package policy (IPP) segment. Insurers expanded their appetite to more aggressively write IPP and other international casualty products. Notably, a number of insurers that previously pursued only large-program business expanded into the package space; while a few historically IPP-only carriers broadened their appetite to write more challenging large risks. There now are more insurers competing for the same risks relative to prior years, creating more alternatives for insurance buyers. Insureds that secured decreases at renewal typically did so by virtue of favorable loss experience. In the third and fourth quarters of 2012, underwriters showed increased discipline in managing their administrative and nominal risk transfer costs. Buyers of guaranteed cost programs benefitted from somewhat better market conditions compared to those on the loss sensitive side. A notable exception is in the Defense Base Act (DBA) niche, which has experienced some firming. This has been due in large part to the winding down of the Department of States single-source program, and the resulting exposure and claims growth in the open DBA market. Any further pricing increases in 2013 likely will be determined by loss development and US government contracting volumes overseas.
As for fronted programs, more often than not large accounts experienced growth in their aggregate exposures and saw greater lawsuit activity outside of the United States. Both factors contributed to increased loss projections and corresponding upward pressure on fronting fees. Although competition among insurers remained strong entering 2013, the international casualty market is experiencing the gradual firming that first emerged in the US domestic market.
Contact: STEPHEN KEMPSEY International Casualty Leader +1 212 345 1052 stephen.l.kempsey@marsh.com
Marsh 17
FINANCIAL AND PROFESSIONAL: DIRECTORS AND OFFICERS

SEGMENT Large Cap ($10 billion and higher) Mid Cap ($2 billion to $10 billion) Small Cap/Micro Cap (up to $2 billion) Private Companies RATE CHANGE Q4 2012 Flat to 10% increase Flat to 10% increase Flat to 10% increase Flat to 15% increase RATE CHANGE Q4 2011 Flat to 10% decrease Flat to 5% decrease Flat to 5% decrease Flat to 5% decrease
MARKET COMMENTARY
After a decade of steadily declining rates, the directors and officers (D&O) liability insurance market entered a state of transition by the second quarter of 2012, when insurers generally began to firm and even increase premiums, starting with primary program layers. Insureds should be prepared for underwriters to continue seeking rate increases in 2013. Until the fourth quarter of 2012, excess capacity remained competitive and overall program rate reductions were still achievable. But by the end of 2012, total program renewal premiums were generally flat to up as much as 10%, signaling excess insurers more disciplined approach to capacity. Stated market capacity remains abundant, exceeding $1.5 billion. But several factors have put pressure on insurer profitability in the broader space, including the prolonged period of rate decreases, a decline in the number of public companies, low interest rates, an aggressive plaintiffs bar, and litigation trends, particularly in the private company arena. Primary D&O insurance rates increased more than overall D&O program rates until the fourth quarter, when total program rate increases began to equal or even surpass those of the primary layers in a few instances. The market for side A difference-inconditions (DIC) coverage remained stable for insureds heading into 2013. Meanwhile, the market for small cap companies tightened at a slightly faster rate than that for large cap companies; more than two-thirds of the small caps saw rate increases in 2012, compared to just over half of the large caps. This was driven in part by increased claims and litigation activity related to mergers and acquisitions involving smaller companies.
Insureds should be prepared for risk differentiation to play an increasingly important role in their renewal processes. Those insureds that prepare thorough submissions with high-quality analytics, communicate with their broker directly to underwriters, and start the renewal process early will be best positioned to negotiate competitive renewal terms. Accessing all insurers appropriate to a companys risk profile and program will be important as testing pricing against the market will be critical throughout 2013.
RISK TRENDS
DODD-FRANK
The Dodd-Frank Wall Street Reform and Consumer Protection Act is driving significant plaintiff attorney activity around executive compensation. After an initial spate of derivative lawsuits alleging breach of fiduciary duty stemming from negative say-on-pay shareholder votes, the plaintiffs bar appears to be taking a new approach in the form of front-ended, class-action lawsuits. These suits seek to enjoin the say-on-pay vote up front by alleging inadequate and/or misleading disclosure in proxy statements relating to underlying components of executive compensation, including authorization and/or reserving of underlying shares and goal setting with results accountability. Further, these suits are seeking injunctive relief, not damages, and are being brought in the companys principal place of business versus Delaware. These suits are increasing in number and significant activity is expected for the 2013 proxy season, with plaintiffs attorneys noticing investigations of public companies as a matter of course when proxy statements are filed.
SECURITIES LITIGATION
While the number of federal securities lawsuit filings remained fairly constant in 2012, the number of cases settled or dismissed reached record lows. Only 92 suits settled and 60 cases dismissed the lowest number since 1998, according to data from NERA Economic Consulting, one of the Marsh & McLennan Companies. Nearly 600 class-action suits were pending resolution at the end of 2012, an increase from 2011. The average settlement in 2012 (after excluding extraordinary settlements) was $36 million, above the $32 million average for 2005-2011. Merger objection suits comprised just under one-third of the federal filing activity in 2012, but this does not account for M&A lawsuits filed at the state level which, together with the federal filings, have put pressure on insurers. Higher attorneys fees and increased complexity of this multi-jurisdictional litigation has caused many D&O insurers to try to impose a separate, self-insured retention for M&A-related claims on susceptible primary D&O insurance programs.
attorneys offices around the country, and international regulators continue to aggressively pursue alleged violations of the FCPA, the UK Bribery Act of 2011, and similar laws. D&O insurance does not cover loss arising from actual illegal activity, but oftentimes coverage can at least be triggered for individuals defense costs. Insurers and clients alike are monitoring the Stronger Enforcement of Civil Penalties Act of 2012, which proposes increased penalties for violations of the FCPA and other laws. Introduced in the Senate Banking Committee in July, the bill is expected to be considered by Congress in 2013.
INSIDER TRADING
Concerns regarding insider trading are bringing reinvigorated scrutiny over so-called 10b5-1 trading plans, named for an SEC rule. The plans are intended to govern trading of corporate stock by company officers and key executives in order to allow insiders to sell shares without actual or perceived conflict. The plans also serve to support defense against allegations of improper trading since they only allow executives to trade at specified periods, and then only when not in possession of any material, nonpublic information regarding their organizations. The plans, however, are not regulated and so are not required to be filed or disclosed, resulting in a lack of transparency around whether or not an executive has a trading plan in place or if such a plan has been changed or even canceled. An analysis of regulatory records and trading patterns by The Wall Street Journal, published in November 2012, reported that corporate executives with trading plans in place often achieved better returns on stock sales around market-moving news than did those who traded at regular, annual intervals. From an insurers perspective, 10b5-1 trading plans might serve to strengthen governance and fortify defenses against insider trading allegations. But new concerns about how insured executives deploy and execute these plans will likely fuel insurer diligence with an increased level of dialog around internal guidelines regarding their use.
FOREIGN CORRUPT PRACTICES ACT (FCPA)

US companies face growing global enforcement of anticorruption laws. The Department of Justice (DOJ), the Securities and Exchange Commission (SEC), US
DIRECTORS & OFFICERS LIABILITY INSURANCE

HISTORICAL RATE (PRICE PER MILLION) CHANGES: AVERAGES
4.6%
1.6%
4.0% 1.3%
-1.3%
-4.5%
-6.5%
-6.2%
-5.9%
-3.8%
-0.6%
2.1%
0.2%
3.3%
Contact: BRENDA SHELLY US D&O Practice Leader +1 415 743 7767 brenda.shelly@marsh.com
Q1 2011
-9.6%
Q2 2011
-9.1% Q3 2011
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Q4 2012
PRIMARY l
TOTAL PROGRAM l
Marsh 19
FINANCIAL AND PROFESSIONAL: COMMERCIAL ERRORS AND OMISSIONS

COVERAGE Errors and Omissions Cyber SEGMENT Technology, Media, Miscellaneous Network, Information Security, and Private RATE CHANGE Q4 2012 Flat to 5% increase Flat to 5% increase RATE CHANGE Q4 2011 5% decrease to 5% increase 5% decrease to 5% increase
MARKET COMMENTARY
Rates for commercial errors and omissions (E&O) and cyber insurance began trending upward in 2012, and are likely to continue doing so in 2013. The increases are driven primarily by a combination of an increase in frequency and severity of claims and poor underwriting results, which themselves are a result of declining rates over past renewal cycles. Rates at renewal in the fourth quarter of 2012 generally were flat to slight increases. The E&O insurance market is expected to remain competitive in 2013, with a wide range of rate changes at renewal, driven by loss history, exposure changes, rate history, and the quality of the individual risk. Some underwriters have begun to restrict the capacity offered on each transaction. Despite the general upward trend in rates, some rate decreases are still possible for insureds with limited exposures and favorable claims histories. The continued frequency of high-profile data breaches has many underwriters scrutinizing their appetite and methodology for privacy coverage. Although no underwriters had withdrawn from the market at years end, Marsh has witnessed underwriters not renewing specific accounts, increasing premiums, increasing retentions, introducing new policy terms, requiring use of their vendors, and requiring more detailed underwriting information for privacy exposures. This has been most common for insureds with substantial amounts of personally identifiable information and personal health information.
PRIVACY AND CYBER EXPOSURE

Privacy claims specifically the cost of notifying affected persons about data breaches and providing credit monitoring and identity restoration services increased in 2012. Underwriters are showing greater interest in practices and procedures surrounding information security, with a particular focus on third-party information holders and others that have access to confidential information as well as contract management, disaster planning, and incident-response plans.
LIMIT OF LIABILITY
Many companies face greater insurance requirements from their customers, especially technology providers and those handling sensitive data. Requirements generally are within most insureds program limits, but the scope of coverage requested is expanding to include network, information security, and privacy insurance. In order to remain competitive and to be able to satisfy customer contract requirements, insureds should consider building an E&O or cyber insurance program that anticipates future requirements. Otherwise, insureds may need to expand their insurance programs at the time they enter into a contract, or simply decline those opportunities that require insurance that falls outside of their existing program.
Contact: SANDY CODDING US Commercial Errors and Omissions Practice Leader +1 617 385 0277 sandy.codding@marsh.com
RISK TRENDS
Technology, media, and services firms continue to face the fallout from a slowly recovering economy. Privacy claims, meanwhile, are at the forefront of insurers agendas.
FINANCIAL AND PROFESSIONAL: EMPLOYMENT PRACTICES LIABILITY

SEGMENT Large Organizations Financial Institutions Midsize Organizations RATE CHANGE Q4 2012 Flat to 5% increase Flat to 5% increase Flat to 10% increase RATE CHANGE Q4 2011 5% decrease to 5% increase 5% decrease to 5% increase 5% decrease to 5% increase
MARKET COMMENTARY
After several years of generally decreasing rates for employment practices liability insurance (EPLI), many insurers took firmer positions in 2012. Entering 2013, underwriters are expected to seek at least modest increases from most insureds in 2013, particularly those accounts with significant loss history. Capacity remained strong as EPLI generally has been a profitable line of business for insurers, small and midsize companies, which have had more severe claims than larger companies, are expected to see the highest rate increases in 2013.
EEOC CHARGES
In its 2012 fiscal year, which ended on September 30, the EEOC received 99,632 charges from employees alleging employment practices violations including discrimination, harassment, and retaliation by their employers. This total was just under 2011s record total of 99,447. For the second straight year, the EEOC obtained record monetary recoveries on behalf of employees totaling $365.4 million. The commission reduced its pending files significantly, by more than 20%, due to improved operations and high staffing levels. The reduction in the number of EEOC Charge filings in 2012, however, does not signify a decrease in EPL exposure. The EEOC in 2012 announced several initiatives that are intended to continue the agencys focus on systematic discrimination cases.
RISK TRENDS
The Equal Employment Opportunity Commission (EEOC) is expected to continue to devote additional resources in 2013 to investigating the discriminatory use of criminal records and other employment background check methodology in hiring, termination, and other employment-related decisions. In 2011, the EEOC issued revised guidelines explaining the extent to which employers can use arrest or conviction information in employment decisions. Although the use of arrest or conviction records is not expressly prohibited under Title VII of the Civil Rights Act of 1964, an employer could violate Title VII if the use of such records has a disparate impact on a protected class. Nearly 20 states have passed or are considering legislation to restrict how and when employers may use background checks in employment decisions, and are requiring that information obtained in such background checks be related or substantially related to the employees job. Given the EEOCs focus on this issue, it is likely there will be an increase in litigation in this area both from the EEOC and by private plaintiffs.
SOCIAL MEDIA
The EPL exposure pertaining to use of social media is a concern for employers heading into 2013. Social networking risks hold potential liability for employers, which are challenged to balance their computer and internet usage policies with employees freedom of speech. In 2012, the National Labor Relations Board (NLRB) emerged as another champion of the rights of union and nonunion employees as it sought to protect employees rights to engage in concerted activity via social media. To this end, the NLRB has been active in pursuing administrative enforcement actions against employers with overly broad social media policies that allegedly prevent employees from voicing concerns about unfair working conditions or practices. The most common claim arising from either employees or employers accessing social networking sites seems to be allegations of privacy violations, although the practice could also lead to claims of discrimination and
Marsh 21
defamation. The potential exposure is compounded by the fact that many employers, directly or through thirdparty vendors, routinely use social networking sites in their employment screening process. At the end of 2012 Congress was considering legislation that would prevent employers from requesting that prospective job applicants and employees provide their private social media site passwords as a condition of employment, and several states including California and Maryland, have moved quickly to enact such laws.
were filed in the same period, accounting for more than 80% of all employment class-action lawsuits filed, according to Seyfarth Shaw LLPs Workplace Class Action Litigation Report. The settlement value of these claims outpaced settlements of employment discrimination claims, with a January 2012 settlement against a pharmaceutical company being one of the highest at $99 million.
WAGE AND HOUR CLAIMS

Wage and hour claims (including related meals and rest period and/or unfair practices claims) remain largely excluded from coverage under EPLI policies, even as they remain the single largest employmentrelated exposure for US employers. Wage and hour claims filed in 2012 more than tripled the total number of employment discrimination claims and Employee Retirement Income Security Act (ERISA) claims that
Contact: ADEOLA I. ADELE US Employment Practices Liability Leader +1 212 345 1724 adeola.i.adele@marsh.com
FAIR LABOR STANDARDS ACT CASES IN FEDERAL COURT
6,786
4,055
1,580
1,558
1,633
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
For 1993-1999: Federal Judicial Caseload Statistics for 12-month year ending September 30 For 2000-2012: Federal Judicial Caseload Statistics for 12-month year ending March 31 Source: Seyfarth Shaw LLP, Workplace Class Action Litigation Report, 2012
1,457
1,545
1,562
1,717
1,854
1,961
2,035
3,426
3,464
4,389
5,302
5,644
6,081
7,006
7,064
FINANCIAL AND PROFESSIONAL: FIDELITY/CRIME INSURANCE

SEGMENT Financial institutions Commercial organizations RATE CHANGE Q4 2012 Flat to 5% increase Flat to 5% increase RATE CHANGE Q4 2011 Flat to 5% decrease Flat to 5% decrease
MARKET COMMENTARY
The fidelity/crime insurance market showed certain signs of firming in 2012, with insurers generally unwilling to provide rate decreases at renewal, a trend that may continue in 2013. Competitive forces prevented underwriters from seeking significant rate increases from most insureds, with the exceptions being those that have experienced material increases in their exposures or those with adverse loss experience. Renewal pricing in the fourth quarter of 2012 was generally flat to slightly up, with rate decreases becoming more difficult to secure.
NONTRADITIONAL EMPLOYMENT
Efforts to reduce labor costs through nontraditional employment relationships, including outsourcing and the use of independent contractors, will likely continue in 2013 and beyond. These efforts can create uninsured exposures for businesses, as many standard fidelity/crime insurance policies were written before such practices were common. Underwriters generally are amenable to modifying the definition of employee in standard policy forms to capture these types of arrangements, provided insureds can demonstrate that they have adequate controls in place.
RISK TRENDS
The economic uncertainty that led businesses to lay off employees, limit salary and wage increases, and cut back on internal security and fraud controls continued to drive the risk of employee theft. Employee dishonesty is one of the biggest fidelity/crime exposures for many companies, although other exposures are growing in relative importance.
DIRECT LOSS DEFENSE

A federal appeals court recently rejected a fidelity insurers direct loss defense in a case involving a computer hacking incident, and required the insurer to indemnify the retailer for its expenses on the basis that the policy exclusion was not unmistakably clear and that it did not unambiguously limit coverage to losses resulting solely or immediately from the theft. In response to the court ruling, some underwriters are developing riders and endorsements to clarify that coverage under fidelity/crime policies only applies to the theft of money or other tangible assets, as was originally intended. Insureds should consult with their brokers to ensure that their policy language is clear, and to determine whether they should purchase other types of coverage, such as a privacy/network security policy.
CORPORATE ACCOUNT TAKEOVERS

Corporate account takeovers through which hackers or other malicious entities seek to obtain corporate banking credentials through phishing or malware are a growing threat for many businesses. Although financial institutions are the prime target of such attacks, nonprofit and small to midsize companies that have substantial funds on deposit with banks and may have relatively unsophisticated IT security systems have also been targeted.
Contact: KEVIN GUILLET US Fidelity Practice Leader +1 212 345 8095 kevin.guillet@marsh.com
Marsh 23
FINANCIAL AND PROFESSIONAL: FIDUCIARY LIABILITY

SEGMENT Plan Assets of $1 billion and higher Plan Assets of $250 million to $1 billion Plan Assets Under $250 million RATE CHANGE Q4 2012 Flat to 5% increase Flat to 5% increase Flat to 5% increase RATE CHANGE Q4 2011 5% decrease to 5% increase 5% decrease to 5% increase 5% decrease to 5% increase
MARKET COMMENTARY
Rates for fiduciary liability were generally stable through much of 2012; however, signs of a market firming emerged late in the year. Rates were generally flat to up slightly in the fourth quarter as insurers began to take a firmer stance on renewals, in some cases seeking significant increases in rates from insureds with particularly risky loss profiles. Although capacity generally remained strong, some insurers showed a willingness to increase pricing on some insureds, a trend that could signal further rate increases in 2013. Insurers also cited the underfunding of defined benefit plans as one justification for rate increases for some insureds.
EXCESSIVE FEE LITIGATION

Excessive fee litigation remains a concern for underwriters. In one such case, a Missouri federal court in March 2012 awarded damages of $36.9 million (excluding defense costs) to plaintiffs in an excessive fee action.
AFFORDABLE CARE ACT

Plan sponsors could face a number of risks if they do not comply with provisions of the Affordable Care Act, which is set to take effect over the next several years. These risks may include claims by plan participants and/or Department of Labor audits based on a sponsors failure to provide mandated coverage or for breach of fiduciary duty for a sponsors failure to provide the appropriate notice of coverage availability to plan participants.
RISK TRENDS
EMPLOYER SECURITIES
Final and preliminary settlements of Employee Retirement Income Security Act (ERISA) securityholder claims totaled more than $134 million through September 2012, as compared to approximately $115 million in total settlements in 2011. Case law since 2005, when ERISA claims peaked at more than $700 million, had largely supported plan sponsors that could demonstrate procedural prudence by establishing and following sound ERISA processes. But, in February 2012, one U.S. appeals court ruling suggested that the presumption of prudence should not apply at the motion to dismiss stage.
SETTLOR CLAIMS
In February 2012, the New York Court of Appeals ruled that a fiduciary liability policy did not provide coverage for the alleged ERISA violations of the insureds acting in their capacity as the settlor of their employee benefit plans and that the insurer was not required to indemnify the insureds. Several insurers have amended their policies to specifically provide coverage for settlor acts following this court ruling.
Contact: CATHY CUMMINS US Fiduciary Liability Practice Leader +1 212 345 8707 cathy.cummins@marsh.com
FINANCIAL AND PROFESSIONAL: LAWYERS PROFESSIONAL LIABILITY

SEGMENT Large Firms (500+ attorneys) Midsize Firms (200 to 500 attorneys) Small Firms (50 to 200 attorneys) RATE CHANGE Q4 2012 2% decrease to 5% increase Flat to 5% decrease Flat to 5% decrease RATE CHANGE Q4 2011 Flat to 10% decrease 5% decrease to 20% decrease 5% decrease to 15% decrease
MARKET COMMENTARY
After years of steady rate decreases, the market for lawyers professional liability (LPL) insurance began to firm in 2012, a trend that is expected to continue in 2013. Firms of all sizes saw modest rate decreases for renewals in the last quarter of 2012, although the decreases were generally not as significant as in the previous year. For some large law firms (those with 500 or more attorneys), rates at renewal increased slightly in the fourth quarter of 2012. In 2013, some LPL insurers may seek rate increases to offset investment income losses and increased claims activity, even if it means losing some clients. Midsize and large law firms continued to seek additional excess layers to increase their overall program limits. As there generally continued to be ample excess capacity, law firms typically were able to obtain higher limits with minimal impact to the total cost of insurance. Some excess insurers have sought to enter the primary market for larger law firms, although generally without much success as law firms tend to prefer continuity of insurers given the long-tail nature of most LPL claims.
LITIGATION TRENDS
Some key areas of litigation concern for insurers include the failure to understand the law and/or insufficient preparation, unethical or improper conduct, fee disputes, failure to timely file pleadings, and frivolous or malicious prosecution. Such allegations are most often seen in the areas of intellectual property, commercial real estate, and class actions. Litigation related to law firm bankruptcies is also a growing concern for law firms and errors and omission insurers.
POTENTIAL COVERAGE RESTRICTIONS

No blanket restrictions have been imposed on LPL placements. However, some insurers have imposed new requirements on law firms for uniform policy forms in the areas of employment practices liability (EPL), management liability, and cyber insurance.
Contact: ANNE MARIE DAVINE Lawyers Professional Liability Practice Leader +1 212 345 6927 annemarie.davine@marsh.com
RISK TRENDS
MERGERS
Merger activity among law firms continued at a high pace in 2012, driven largely by small law firms looking to expand geographically. Merger activity is generally expected to continue into 2013 with the continued creation of global law firms. Meanwhile, with the recent dissolution of a number of large law firms, many firms are reviewing the way they conduct business in an effort to improve their operations.
Marsh 25
INSURANCE MARKETS BY SPECIALTY
AVIATION
COVERAGE Aircraft Products Liability SEGMENT Aerospace Manufacturers General Aviation Manufacturers Hull and Liability Airlines General Aviation RATE CHANGE Q4 2012 Flat to slight reduction 10% increase to 15% increase with higher retentions 9% decrease to 15% decrease Hull: flat to 5% decrease; Liabilities: 5% decrease to 10% decrease Flat RATE CHANGE Q4 2011 Flat to slight reduction 10% increase to 15% increase with higher retentions 7% decrease to 10% decrease Hull: flat to 5% decrease; Liabilities: 5% decrease to 10% decrease Flat
Financial Institutions
MARKET COMMENTARY
The aviation insurance market was generally stable entering 2013, with rates decreasing slightly at renewal and capacity abundant. Across segments, aviation insurance was considered a buyers market in 2012, with favorable conditions for most insureds. Barring an extraordinary event, changes to the marketplace are unlikely in 2013. Capacity and rates are likely to remain stable and the market friendly for insureds. For the past few years, insureds have benefitted from a competitive marketplace with significant increases in capacity, which resulted in more capital available than was in demand. Although no large amounts of additional capacity are expected to enter the market in 2013, the existing capacity is more than adequate. Prices generally fell in 2012, with some insureds securing decreases up to 10% at renewal. In 2013 the marketplace is likely to settle and stabilize into a tighter trading range, typically plus 5% to minus 5%. Challenging classes (for example, general aviation aircraft manufacturing) and insureds with poor loss histories may see modest increases at renewal, commensurate with their exposures and loss experiences. Across the insurance industry underwriters are being more watchful about their companies combined ratios. As a result, they are likely to pay closer attention to expense ratios, which may drive the market in 2013. Some insurers may choose to reject the more aggressive deals, but programs priced within the trading range
are likely to be accepted. This increased scrutiny is not likely to cause a firming of the market, but may serve to stabilize rates throughout 2013. The aviation insurance market is driven in large part by the reinsurance market, which is a primary reason the marketplace is profitable. As terms and conditions have expanded in the treaty space, retail underwriters have been able to expand terms offered to insureds.
GENERAL AVIATION
Capacity in the general aviation hull and liability insurance segment can reach $500 million, although typical limits purchased are closer to $300 million. To illustrate the overcapacity prevalent in the aviation market, up to $2 billion in insurance limits are possible for this coverage. Although hull values are often in the $50 million to $65 million range, insurers have been able to absorb losses relatively easily. Significant competition among carriers exists in this space for all risks, both large and small.
MANUFACTURING
Like general aviation, the manufacturing segment has significant competition and an abundance of capacity. Up to $2.25 billion in capacity is available for risks in this segment, and is uniform for risks of all sizes and risk levels.
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AIRLINES
INVESTMENT IN TECHNOLOGY AND TRAINING

As aviation industry technology improves, its proper use and analysis can act as a risk mitigation strategy for insureds. Advancements in technology have improved safety and provide a wealth of information and data. One of the keys to continued improvement in safety and therefore fewer losses is to properly analyze the data to facilitate the improvement of safety processes and training programs. A robust training program will act as a risk mitigation strategy, which, coupled with a welldesigned insurance program, can protect an organization against its myriad of risks.
Losses in this segment continue to be small, reflective of outstanding training and investments in safety processes. Available capacity is $1.5 billion to $2 billion and can generally be obtained without difficulty.
RISK TRENDS
PROTECTING PREMIUMS
The favorable insurance market for insureds over the past few years has resulted in relatively lower premium rates, as well as expanded terms and conditions. A challenge for insureds in 2013 will be to protect these favorable program conditions. Companies may do this by differentiating their risks in the marketplace, showcasing their investments in safety procedures and claims management processes, and highlighting their risk profiles as superior compared to their peers.
Contact: BRUCE FINE US Aviation Practice Leader +1 312 627 6370 bruce.fine@marsh.com
CONTRACTUAL LIABILITY
It is typical for risks to be transferred or assumed via contract in the aviation industry. This trend of accepting/transferring risk by contracts will continue. Companies should carefully review and consider the risks assumed or transferred via contract and discuss the implications with their insurance broker to ensure insurable risks are adequately covered.
CAPTIVES
MARKET COMMENTARY
The captive insurer market is expected to continue to grow in 2013, as it has for the past 15 years, with US states becoming more competitive.
DOMICILES
to collect self-procurement taxes. The analysis set forth under the legislation has led to companies using alternative approaches to their domicile decisions and how they develop their contracts. The language of the law, however, has led to confusion as to its applicability. Many experts have argued that the NRRA does not apply to captive insurers. In November 2012, the Vermont Captive Insurance Association released a notice detailing the creation of the Coalition for Captive Insurance Clarity, which is advocating for clarification by Congress, stating that the NRRA does not, nor was it intended to, apply to captives. Operating under the assumption that the NRRA does apply to captives, there are still options available that will help captives plan in relation to selfprocurement taxes. For example, captives can consider domicile choices. By moving its captive into its home state so long as it is possible, and there is captive legislation in that state the captive would be admitted in the home state, so the NRRA, and thus the states selfprocurement tax, would not apply.
Companies have become more likely to establish onshore domiciles, either in the US or the EU, according to Marshs 2012 Captive Benchmarking Report. Before 2001, offshore domiciles were favored; between 1991 and 2000, 65% of captives were located in offshore domiciles and 35% onshore. Since 2001, the trend has reversed, with 41% of captives onshore, and 59% offshore. US domiciles continued to see growth during 2012, and this growth will likely continue through 2013. New Jersey has established five captives in the two years since passing its enabling legislation. Connecticut granted licenses to its first two captives in 2012. Missouri has created 25 captives since 2007. A number of states have updated or established new captive legislation: Florida, Maine, Tennessee, and Vermont updated existing laws; Louisiana and Oregon enacted captive laws in 2009 and 2012. Utah, the number two US domicile in number of captives, is seeing growth in small captives, known as micro-captives. Micro-captives can be a good tool for smaller companies if their captives are treated as an insurance company for tax purposes this can allow the buildup of underwriting profits in the captive on a taxexempt basis, assuming compliance with all applicable laws and regulations and with sound risk management and business purposes such as the primary drivers.
SOLVENCY II
Although Solvency II is a European Union initiative, US companies that have captives domiciled in the EU may still feel its effects. Solvency II is scheduled to become effective on January 1, 2014, but there remains a great deal of work to be done before full implementation. Outside of the EU, some domiciles are seeking equivalence, including Bermuda, Switzerland, and Japan.
LINES OF COVERAGE
There is increased interest in the use of captives to insure cyber risks, especially among retail and consumer product companies. In addition, supply chain risk and contingent business interruption risk are popular topics of discussion among captive clients. Another focus area in 2013 will be the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), which is set to expire in 2014.
RISK TRENDS
DODD-FRANK
Captive owners have been watching the Dodd-Frank Wall Street Reform and Consumer Protection Act since its passing in 2010, particularly its Non-Admitted Reinsurance and Reform Act (NRRA). A provision in the NRRA permits only the home state of an insured
Contact: ART KORITZINSKY Captive Advisory Leader North America +1 203 229 6768 arthur.g.koritzinsky@marsh.com
Marsh 29
EMPLOYEE BENEFITS
MARKET COMMENTARY
With the future of health care reform seemingly secured by the re-election of President Obama, employers in 2013 generally will focus on absence management, aggressive health management, and account-based plans, while also looking ahead to the next generation of cost management strategies. One approach that is increasingly in the spotlight is the use of private exchanges, a private-sector alternative to the state health insurance exchanges. Private exchanges give employers a way to offer employees a broader choice of benefits while allowing carriers to compete for their business and manage their risk. According to Mercers National Survey of Employer-Sponsored Health Plans, 56% of employers say they would consider a private exchange for either their active or retired employees. Both within private exchanges and in traditional benefit programs, there is likely to be significant growth in voluntary benefits. Improvements in technology, new product offerings, and targeted marketing to help connect employee needs with the myriad of products available in the marketplace, making voluntary benefits a strategic part of an employers benefits plan. more likely to expect sharp cost increases (40% expect a cost impact of at least 3%). The major provisions of PPACA will take effect in 2014, when employers will be required to extend coverage to all employees working 30 or more hours per week or face possible penalties. About a fourth of all survey respondents said they will have to take action to avoid possible penalties. This ranges by industry, from just 16% of financial services employers to 46% of employers in retail and hospitality. Just 6% of survey respondents believe it is likely that they will drop their medical plans after the public insurance exchanges come online. In anticipation of added cost pressures from health care reform, employers stepped up cost management efforts in 2012. Findings from Mercers survey suggested that consumer-directed health plans will play an increasingly central role in many employer health programs. Workforce health management, or wellness, has emerged as employers top long-term strategy for controlling health spending. For a third year in a row, there was a sharp increase in the use of financial rewards or penalties to incentivize higher participation in wellness programs, from 33% to 48% of large employers. While measuring return in investment in these programs remains a challenge for many employers, just over half of very large employers (those with 20,000 or more employees) have formally measured ROI and, of those, more than three-quarters say that their programs have had a positive impact on medical plan trend.
HEALTH CARE REFORM

The Patient Protection and Affordable Care Act (PPACA) will affect some employers far more than others. When asked to estimate the cost impact of the key provisions that go into effect in 2014, a recent survey of 1,203 employers conducted by Mercer found: The majority of employers expect some increase in health benefit cost due to the new requirements, but the size of the increase varies. About a third of survey respondents (34%) expect a substantial increase of 3% or more, while 24% say cost will rise by less than one percent or not at all. Employers that will be hit hardest are those with large part-time populations those in retail and hospitality services. Nearly half of these employers (46%) expect PPACA will push up cost by 3% or more in 2014 and another third dont yet know what the impact will be. Employers in the health care industry are also
VOLUNTARY BENEFITS
With health care costs continuing to rise, albeit at a slowing rate, employers are looking for options that will allow their employees to customize benefit offerings. Voluntary benefits programs allow them to do this while controlling health care costs at levels that are closer to the inflation rate. As employers step up cost management
efforts in anticipation of health care reform, voluntary benefits can facilitate a move from traditional employer-paid defined benefit programs to a defined contribution approach that integrates employer-paid and employee-paid elements. Going forward, voluntary benefit programs will include the following: Accident insurance. Critical illness/cancer coverage. Dental and vision plans. Short- and long-term disability. Hospital indemnity. Long-term care. Life insurance. Ancillary benefits will include the following, among others: Auto and home insurance. Identity theft. Legal assistance. Pet insurance. Online discounts for retail products and services. Consolidation among providers of voluntary benefits is likely.
DISABILITY
Although most employers offer some form of disability coverage, their focus has become more proactive. Consider the following findings from a recent Mercer survey: Reducing the impact of absence on operations is among the top three priorities in this area for half of respondents. Fully one-third of survey respondents have formal return-to-work programs, and most report them to be effective. The direct cost of incidental absence and disability benefits is equivalent to 4% of payroll among respondents offering these programs. Unplanned absences result in indirect costs, such as the cost of replacement labor and productivity, which Mercer estimates to be at least equivalent to the direct costs, bringing the total to 8% of payroll. Time away from work, whether due to sickness, disability, family care, or restorative vacation, has an impact on business operations; properly insuring that risk remains a priority. Regarding disability insurance, low interest rates and high unemployment are expected to put upward pressure on premium rates, especially for long-term disability, which is expected to rise 10% to 15%. A combination of aggressive vendor management, plan design changes, and integration with health management strategies can help keep those expected increases in check. Some of the plan design changes employers are considering include asking employees incrementally to shoulder more of the financial burden for their benefits. In addition, executive disability products are expected to grow to help limit uncovered compensation for high-paid employees driven by long-term disability plan maximums and the exclusion of variable pay from covered pay.
LIFE INSURANCE
Generally speaking, premiums for group life insurance and related coverages have held steady or decreased slightly year-over-year. Despite its affordability, life insurance coverage has decreased steadily in each of the past six years. Most consumers and families admit they are underinsured when it comes to income replacement due to the demise of the primary insured. In addition, many employers that provide employer-paid life insurance have reduced their coverage in recent years by reducing the multiple of pay for all employees or by reducing the maximum benefit, which reduces coverage for high-paid employees. To replace the lost coverage, employers are offering additional employee-paid life insurance options and are using online evidence of insurability applications to make the enrollment process easier for employees.
Contact: GREG ARMS Employee Benefits Practice Global Leader +1 212 345 4067 greg.arms@marsh.com
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ENERGY
COVERAGE Offshore Property/Rigs SEGMENT Named Windstorm Offshore Shelf (Non-wind) Offshore Deep (Non-wind) Control of Well Offshore Shelf Offshore Deepwater Onshore Onshore Property/Business Interruption Without Natural CAT With Gulf of Mexico Wind With other Natural CAT Liabilities Primary Excess up to $200 million Excess Greater than $200 million RATE CHANGE Q4 2012 Flat to 10% decrease Flat Flat 5% decrease Flat 5 % decrease to 10% decrease 5% decrease to 10% increase Flat to 10% increase Flat to 10% increase 5% increase to 10% increase 5% increase to 15% increase 5% increase to 10% increase RATE CHANGE Q4 2011 Flat Flat to 10% increase Flat to 10% increase Flat Flat to 20% increase Flat 15% decrease to 5% increase Flat to 10% increase or more Flat to 10% increase or more Flat to 5% decrease Flat 5% decrease to 25% increase
MARKET COMMENTARY
Insurance capacity for the energy industry is generally available entering 2013, which may generally temper the size of any rate increases from insurers. However, sectors that recently were hit hard with losses will likely experience capacity constraints and commensurate upward rate pressure, notably deepwater control of well, pipeline operators, programs with large excess casualty limits, and insureds with extensive fracking exposures. Insurers are increasingly focused on quality of risk; therefore, insureds are well advised to put together detailed underwriting submissions and market presentations.
OFFSHORE PROPERTY/RIGS
generally flat, with the possibility for slight reductions. Named windstorm rates also are likely to decrease possibly by as much as 10%.
CONTROL OF WELL
Deepwater drilling activity in the Gulf of Mexico was significantly more active in 2012 than 2011. Although rates and deductibles are still high compared to what they were before the Macondo losses, operators continue to purchase significant limits and pay market prices, understanding the need to carry adequate levels of insurance coverage. Rates are expected to remain firm in this area throughout 2013. The market environment is brighter for wells on the Gulf of Mexico shelf and onshore, which typically require more modest limits. It appears that capacity and competition remains plentiful. There have been few well incidents among shale operators and rates remain competitive. With the supply of insurance capacity outstripping demand, rates are generally softening in this area for insureds with good exposures and low losses.
The offshore property insurance market was stable entering 2013, as 2012 saw no significant operational losses and the Gulf of Mexico experienced its fourth straight year without named windstorm losses. Demand for named windstorm coverage fell in 2012 in part due to merger and acquisition (M&A) activity. Rates for operational risk for offshore property and mobile offshore drilling units in 2013 are likely to remain
ONSHORE PROPERTY/BUSINESS INTERRUPTION
The downstream energy insurance market entered 2013 in a state of uncertainty as it faces increasing scrutiny following a spate of worldwide losses at refineries and petrochemical plants during the first half of 2012. Before these losses, insurers were pushing to increase premium rates; however, most accounts renewed flat or in a range of plus 10% to minus 10%. The insurance market environment is dominated by a surplus of capacity: Worldwide capacity is between $2.8 billion and $3 billion, with a theoretical maximum of $3.5 billion. However, the bulk of this capacity is offered by a handful of insurers, which are reluctant to commit their full capacity to an individual program. In the second half of 2012, US domestic renewals were relatively flat for capacity-driven risks as underwriters competed aggressively, especially where the insureds retention levels were high. In the fourth quarter, US insureds typically renewed in a range between a 15% reduction in rates to a 5% increase; the largest reductions were secured by those with good loss histories and lower capacity requirements. In 2013, renewals are expected to be challenging with protracted negotiations as underwriters seek to push for increased rates. However, with capacity robust and losses remaining at normal levels, flat renewals should still be achievable. The energy industry, though buffeted by several international losses, did not have any significant named windstorm losses in 2012. Although losses from Superstorm Sandy have not been fully quantified, it does not appear they will significantly impact downstream energy insurers, whose financial results have improved from previous years.
CASUALTY
which will likely drive insurers to demand rate increases in order to maintain premium levels. Excess Liabilities: No significant new capacity appears to have entered the excess insurance market, with a limited number of lead umbrella carriers for US risks. The US market offers full occurrence form and up to $200 million in capacity; Bermuda market capacity is available excess of $200 million and overall available market capacity is approximately $750 million when combined with London capacity (up to $1 billion is available for insureds willing to pay the high premiums for additional limits). In 2013, increased rate pressure is expected all the way up the tower. Capacity in the higher layers continues to be priced based on the relative rates of the underlying layers; however, some Bermuda and European carriers are attempting to charge rates that are higher than underlying pricing. As a result, true competition between layers continues to be a challenge. The theme in the excess marketplace is cost for capacity, with many carriers setting new, significantly higher minimum price per million standards. For insureds purchasing significant excess limits, there is little room for negotiation, as carriers have not shown a great deal of flexibility in their pricing models. Overall, insureds in 2013 are expected to renew with increases ranging generally from 5% to 15%. Additionally, some carriers may push to increase attachment levels on some lines, including auto, which is starting to be a concern with developing claims severity. On the positive side, some insureds that experienced significant rate increases over the past two years may see some flattening in 2013. Risk differentiation and a robust presentation are keys in an insureds efforts to secure a favorable result. Underwriters are likely to focus on safety and integrity management, systems and training, and age and location of assets as critical risk assessment criteria.
Primary Liabilities: Many casualty insurers are reassessing their appetites, especially for insureds with fracking and liquid pipeline exposures. The market has experienced a number of sizeable pipeline-related claims over the past few years, which caused a number of carriers to drastically cut back their capacity or underwriting activities. Likewise, several large carriers have taken a very cautious approach to companies that have sizeable exploration activities where fracking is heavily employed. Another trend is that treatment of defense costs in retentions and limits are under scrutiny and may not be offered on all placements going forward. Single-digit rate increases are generally expected on renewals in 2013, with pressure by insurers to increase premiums. Additionally, there is an expectation that exposure increases may start to flatten or decrease,
RISK TRENDS
A more positive view of domestic energy production and the specter of future energy independence are helping to drive an increased demand for US hydrocarbonbased energy. Domestic liquids and oil production are up as is domestic usage of natural gas as a fuel for power generation. This likely will require additional investments in energy-related infrastructure and is starting to drive an increased demand for insurance in the energy industries.
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M&A ACTIVITY
Merger and acquisition activity in the energy space continues: Larger companies are shedding marginal assets and many are shifting their focus from the international arena to domestic operations, creating opportunities as well as challenges. Demand for insurance will likely decrease as larger firms acquire smaller ones, as larger ones typically purchase less insurance. Acquisitions in the midsize arena, however, create opportunities as the resulting larger entity may have increased requirements for more comprehensive risk management and insurance programs. The trend toward the formation of master limited partnerships (MLP) in the energy industry continues. This tax-advantaged corporate structure is ideally suited for the domestic energy boom onshore, where stable asset bases and a predictable cash flow makes the MLP structure attractive to investors. MLPs present different risk dynamics and the corporate parents risk appetite may not fit the risk adverse appetite of the MLP itself. Careful consideration needs to be given to the structure of retentions, limits, and the scope of coverage for MLPs. Many foreign firms that invest in the US have demonstrated increased concern around fracking, pollution, and pipeline safety and may seek additional coverage above and beyond what US firms typically carry.
INFRASTRUCTURE CONSTRUCTION
An increase in infrastructure spending creates an increased demand for insurance solutions for new projects. Some are developed using outside financing, which likely will spark demand for comprehensive insurance programs. The market is well aware of these developments and is poised to take advantage of these new opportunities. Insureds need to plan ahead to address the expected growth plans and position their insurance programs accordingly.
EXCESS LIABILITY MARKETS

The turmoil in excess liability insurance markets for the energy industry over the past few years is likely to continue as sizeable losses are being presented to insurers and some recent high-profile claims are paid. Pricing is trending upward, and continued scrutiny of critical risk issues continues, including allocation of liabilities based on indemnities given under contract; safety and process management, asset integrity, and quality of risk; and aggregation of risk in single locations.
Contact: BERTIL OLSSON US Energy Practice Leader +1 713 276 8711 bertil.olsson@marsh.com
ENVIRONMENTAL
COVERAGE Pollution Liability (site pollution coverage) Contractor Pollution Liability (contractor operations coverage) SEGMENT All All RATE CHANGE Q4 2012 Flat to 5% increase Flat to 10% increase RATE CHANGE Q4 2011 5% to 10% decrease 5% to 10% decrease
MARKET COMMENTARY
The overall market for environmental insurance products was fluid and highly competitive entering 2013. Rate increases were being seen from some insurers, although certainly not across the entire market. Rather than re-underwriting entire books of business, many environmental insurers focused rate increases or coverage restrictions client by client. Claims frequency continued to rise, with leading markets reporting increases in first-party claims. Superstorm Sandy resulted in the potential for significant environmental losses and claims; however, the impact if any on environmental insurance rates will take time to determine. Competition for construction projects, which typically are buyers of environmental insurance, is expected to be strong in 2013. Rates are expected to remain competitive as the result of extensive capacity in the environmental insurance market. Competition for short-term site liability policies is also likely be competitive in 2013 as carriers seek to write more of these policies and reduce their aggregate exposures to longer-term programs in order to achieve a more balanced underwriting strategy. That said, longer-term policies of up to 10 years in term are still available, depending upon class of business and/ or type of transaction. Premium changes for 2013 are expected to generally range between decreases of 10% to increases of 10%, depending upon the client, its loss history, and specific risks. Insuring known remediation costs associated with historic operations continues to prove challenging as a result of the collapse of the cost-cap market in 2011. However, an established insurer has entered the market offering a remediation management policy that may fulfill this critical need.
RISK TRENDS
ENVIRONMENTAL REGULATIONS
Global environmental regulations continue to evolve. Businesses that operate outside of or plan to expand beyond the US should be aware of liability schemes that may hold current and previous owners responsible for site cleanup. Some regulations include financial assurance, compulsory environmental insurance requirements, and fines and penalties for noncompliance. The most notable changes are seen in the EU with the introduction of the European Liability Directive, and with Chinas Tort Law, which shifts the burden of proof to the polluter. Further, China is in a trial phase to require compulsory environmental insurance nationwide by 2015. As such, the use of global environmental insurance as a risk management tool is expected to increase.
BUSINESS FINANCIAL RISKS

Environmental insurance continues to be used in mergers, acquisitions, and divestitures; brown field redevelopment; and a variety of other business areas. The use of the remediation management insurance policy coupled with a resurgence of non-traditional measures such as liability buyout and guaranteed fixed-price remediation are providing companies with the options to help manage costs related to known environmental liability.
Contact: CHRIS SMY Environmental Practice Leader +1 404 995 2748 chris.smy@marsh.com
Marsh 35
MARINE
COVERAGE Marine Liabilities Blue Water P&I Blue Water Hull Brown Water Hull/P&I/Pollution Marine Cargo Midsize Organizations Midsize Organization Large Organizations Cargo Stock Throughput Midsize Organizations Large Organizations SEGMENT RATE CHANGE Q4 2012 Flat to 5% increase Average 7.5% general increase Flat to 5% increase 5% increase to 5% decrease Flat to 10% decrease Flat to 10% decrease Flat to 10% decrease Flat to 10% decrease RATE CHANGE Q4 2011 Flat Average 5% general increase Flat to 5% reduction Flat to 7.5% decrease Flat to 20% decrease Flat to 20% decrease Flat to 20% decrease Flat to 15% decrease
MARKET COMMENTARY
The marine insurance market entered 2013 in an unsettled state. Capacity remained abundant, but the market appeared to be in the first stages of a firming cycle, following years of flat or declining rates. The highprofile, marine liability class losses suffered by insurers on their net account plus the average 30% reinsurance premium increases faced by some Lloyds Syndicates drove this year-end market change. Although the change is most evident in the marine liability market, it is likely that insurers in the long-unprofitable hull class will seek to impose rate increases as well. Cargo and stock throughput underwriters are looking more closely at their catastrophic risk exposures and aggregates following Superstorm Sandy and may attempt to modify coverage terms and conditions or to seek slight premium increases for higher hazard risks. An increase in attritional losses in 2012 has caused cargo and stock throughput underwriters to seek higher deductibles or to re-evaluate specific coverage terms.
MARINE LIABILITIES
risks involving non-poolable protection and indemnity (P&I) liabilities and energy industry related risks.
BLUE WATER HULL
Despite consistent underwriting losses, insurers continue to underwrite blue water vessels as this line of business has generated significant cash flow. Although a few underwriters have withdrawn, nearly $2 billion is available in aggregate capacity, far in excess of the amount required to cover most of the worlds vessels. Entering 2013, it is likely that hull underwriters may push for increases akin to those being achieved in the liability market. The hull markets ability to enforce this firming in the face of substantial over-capacity remains to be seen.
BROWN WATER VESSELS
It appears that the marine liabilities market has entered a firming cycle. At year-end 2012 and into 2013 insurers are likely to seek minimum increases of 10% to upward of 30% on clean to attractive business. A general expectation of renewal as expiring is unrealistic. Underwriters likely will be paying particular attention to
With the exception of those fleets that arrange P&I insurance through one of the international group clubs, most brown water hull and P&I programs are placed on a packaged basis in the US market. Rates were effectively flat through 2012, typically within a range of 5% decreases to 5% increases. Some insurers sought modest increases; however, abundant capacity continued to drive competition, creating the opportunity for cost savings for insureds with good records. The London market remains wary and disinterested toward P&I risks in view of the volatile nature of US crew exposures, but it is a viable option and competitive on hull-only risks. It is likely
that the effort to firm market conditions and achieve rate increases will continue entering 2013.
PROTECTION AND INDEMNITY
market remained competitive entering 2013, especially for smaller and midsize companies, with rates typically renewing in the range of flat to 10% reductions.
Increased costs of renewal within the 13 international group (IG) club market may prove stressful for some ship owners as most have not seen a recovery in freight/hire rates. The general increases announced by the IG clubs range from 5% to 16.5%. The clubs are expected to take a firmer line on achieving overall budgeted terms clubs will be less likely to grant discounts from the general increase to owners with good records, and more owners will experience increases/penalties applied over and above the general increase. In general, the market is reporting claims inflation approaching 7% and a continuing significant increase in major claim severity, particularly regarding removal of wreck losses. This increased claims severity is impacting the clubs by way of individual retentions, pool losses, and excess of loss reinsurance costs. Above the individual club retention (increased from $8 million to $9 million for 2013-2014), the IG pools losses are modeled to exceed the peak losses sustained in the 2006-2007 and 2007-2008 years. The pool limit has yet to be announced for 2013-2014. The IG clubs likely will adjust their premium allocation models to fund increased pool contributions. The IG clubs are heavily dependent on the marine market, particularly Lloyds and Bermuda for excess of loss reinsurance. Following several high profile losses these costs are set to increase materially. The increased excess of loss reinsurance costs likely will be passed directly to ship owners and are expected to be directly proportional to vessel tonnage.
MARINE CARGO AND STOCK THROUGHPUT (STP)
RISK TRENDS
EFFECTS OF SUPERSTORM SANDY
It will take some time to fully quantify and understand the losses caused by Superstorm Sandy. Although small in comparison to the losses facing the property and casualty industry, the marine insurance marketplace specifically the cargo/STP markets will be impacted by Sandys losses. Insurers appear likely to look for more details on shipping routes and patterns in the wake of Sandy, and to increase scrutiny around inventory values and the consolidation of stock at ports or elsewhere. Insurers likely will look at such issues across their portfolios in an effort to control their own aggregates.
PENDING REINSURANCE CHANGES

The CAT events of 2011, Superstorm Sandy, and a few significant marine claims are expected to impact the overall marine reinsurance market. Reinsurers are certain to be hit with claims from Sandy, although it is not expected to be a marine-market-changing event. It is likely that reinsurance pricing will increase as will insurer retention levels, putting pressure on underwriters to set pricing at rates that will achieve profitability. Most marine reinsurance treaties renew on January 1; therefore, it is unlikely that the impact of reinsurance market changes on the retail insurance market will be seen for the first few months of 2013.
ATTRITIONAL LOSSES
The cargo and STP markets have seen a higher incidence of attritional losses. Insureds should be aware of this as insurers may try to impose higher deductibles/retentions or coverage amendments to mitigate the increase in attritional losses. This is likely to affect companies that trade in perishable products and/or time-sensitive inventories. To counteract the push for increased retentions, insureds should focus on reviewing and improving their internal loss control and risk mitigation strategies and on presenting them properly to insurers. A detailed presentation to insurers, distinguishing the organization from its peers and highlighting the quality control mechanisms in place, can help an organization avoid or mitigate increases in retentions.
Contact:
Cargo and stock throughputs (STPs) have been profitable lines for marine insurers. Capacity has consistently increased and was estimated at approximately $1.35 billion at the end of 2012. New insurers have entered the market, and existing carriers have increased their capacity in an effort to write larger lines and to maintain market share. These conditions have spurred competition, putting pressure on pricing and positively affecting terms and conditions in favor of insureds. In 2013, insureds with reasonably good loss histories generally should be able to secure flat to slight decreases at renewal, while more challenging insureds may experience flat rates to single-digit increases. Demand for STP programs continues to increase. Although some carriers may reevaluate their STP positions in light of Superstorm Sandy, most are likely to continue to pursue STP business. The cargo and STP
GUY P. CLAVELOUX Global Marine Practice Leader +1 212 345 6923 guy.p.claveloux@marsh.com
Marsh 37
POLITICAL RISK AND STRUCTURED CREDIT

COVERAGE Foreign Investment Insurance (Expropriation and Political Violence Coverage) Contract Frustration/Non-Payment Insurance RATE CHANGE Q4 2012 Flat, except for high-demand or high-risk areas, which may see increases of 10% or more 5% increase RATE CHANGE Q4 2011 Flat to 10% increase Flat to 10% increase
MARKET COMMENTARY
Conditions in the political risk market remained generally stable in 2012, despite volatility in some regions of the world. Competition and capacity generally remained strong entering 2013, although underwriters have limited capacity in countries of particular concern, including China, Taiwan, Brazil, Kuwait, and Saudi Arabia. Pricing increased in some countries in the Middle East and North Africa at the end of 2012, a trend that is likely to continue in 2013. Some private insurers have been reluctant to underwrite certain high-profile and potentially sensitive risks, including infrastructure and power projects. Structured credit insurance rates were stable in 2012, and are likely to remain so in 2013, barring unforeseen events. Shrinking demand from European banks as a result of the sovereign debt crisis has been offset by growing interest among US banks in using credit insurance to manage their capital under Basel III requirements.
DEVELOPED COUNTRIES
An emerging development is that of some buyers seeking coverage for political risks in developed countries, including the United States and certain countries in Western Europe. However, with a few exceptions, insurers have generally lagged in offering products to this new segment of market demand.
SUPPLY CHAIN
Another emerging trend is that of insurance buyers showing greater interest in solutions to address supply chain disruptions stemming from expropriation actions, political violence, and related exposures. This differs from mainstream risk transfer solutions, which have traditionally focused on providing coverage for political risk events that directly affect overseas assets and operations owned by the insured. Many companies do not own overseas assets, yet they rely heavily on outsourced supply from developing countries. These firms face supply chain risk from the occurrence of political risk events impact on their overseas suppliers. Trade disruption insurance covers losses to the insured buyer of goods or services arising as a consequence of political risk events impacting a thirdparty supplier. Compensation may include lost income and/or additional expense. However, the insurer pool for this emerging class has been small, policies have been difficult to close, and pricing has been relatively expensive.
RISK TRENDS
MULTI-COUNTRY POLICIES
After several years of slowly shrinking demand, many multinationals have expressed a renewed strong interest in purchasing multi-country political risk insurance programs. Following the Arab Spring in 2011, many insureds came to realize that it is often difficult to predict the potential for political violence or leadership changes in any country. A multi-country strategy enables insureds to take a broader view of global political risk, while offering cost savings.
Contact: STEPHEN KAY US Political Risk and Structured Credit Practice Leader +1 212 345 0923 stephen.kay@marsh.com
SURETY
COVERAGE Contract Surety SEGMENT Large Contractors Midsize Contractors Commercial Surety Fortune 1000 Small Commercial RATE CHANGE Q4 2012 10% decrease to flat 10% decrease to flat 10% decrease to flat Flat RATE CHANGE Q4 2011 Flat 10% decrease to flat 10% decrease to flat Flat
MARKET COMMENTARY
Preliminary data shows that surety industry underwriting results for 2012 were set to produce the seventh consecutive year of profitability for the surety line. Surety capacity continues to expand as losses have not affected capacity or the reinsurance that supports it. New underwriting approaches have emerged, with additional capacity from new market entrants and increased limits from existing sureties. Entering 2013, surety underwriters generally anticipate diminishing profitability due to a significant increase in surety loss frequency and severity, particularly due to contractor defaults. At the end of 2012, many underwriters were reporting increased frequency of surety losses from claims on performance and payment bonds as a result of construction company defaults. This trend is expected to continue in 2013. Contractors should be prepared to demonstrate their prequalification process to underwriters. There is growing use of an independent financial profile or benchmarking reports to complement the prequal process. Interest in alternative project financing techniques such as public private partnerships (P3) and gap financing is ramping up in the US due to the number of required infrastructure repair and improvements. P3 and gap financing contracts are complex, and part of a successful outcome may include using experienced surety brokers to help contractors negotiate terms to win.
CONTRACT SURETY
challenges as higher margin contracts acquired three to four years ago have been replaced with lower margin work. The combination of lower margin work and greatly reduced supply of new contract opportunities creates financial stress for many contractors, thus increasing surety company loss exposure should the contractor default. Sureties want details of the prime subcontractors prequalification process, and routinely expect the prime contractor to secure subcontractor default risk with bonds, subcontractor default insurance, or other means. In 2013, sureties are likely to scrutinize the subcontractor prequalification discipline used by prime contractors. Deficiencies deemed serious are likely to have an adverse affect on surety capacity available for the contractor. Contractors also face increased risk as some obligees/owners attempt to transfer risks that were traditionally theirs to the contractor.
COMMERCIAL SURETY
The commercial surety line is expected to show slight premium growth in 2013. As was the case in 2011, 2012 brought several startup commercial operations to the commercial surety marketplace. This, plus the aggressive growth goals of the existing surety markets, put downward pressure on rates. The commercial surety market expansion is causing some dysfunction in service as underwriters are leaving to join these new sureties. It is important to know how your surety will manage service in the event your underwriter resigns, as this trend is expected to continue in 2013.
Contact: JOSEPH A. (DREW) BRACH US Surety Practice Leader +1 616 304 0307 joseph.a.brach@marsh.com
Total US construction activity in 2013 is predicted to produce 8% growth, according to FMI Corporation. Some construction companies face serious financial
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TRADE CREDIT
SEGMENT Whole Turnover Key Account Single Debtor RATE CHANGE Q4 2012 5% decrease to 10% decrease Flat to 5% decrease Flat RATE CHANGE Q4 2011 Flat to 5% decrease Flat to 5% decrease Flat
MARKET COMMENTARY
Despite continued concern about the European sovereign debt crisis and other global events, conditions in the US trade credit insurance market favor insureds at the end of 2012. Although claims activity increased slightly in 2012, entering 2013 it remained acceptable to underwriters, and capacity remained strong. Rates at renewal were generally flat to down slightly in the fourth quarter of 2012, a trend expected to continue into 2013, barring unforeseen events. Although the trade credit insurance market remains profitable for insurers, the industry has become more diligent in its underwriting since the credit crisis. The private insurance market is still covering risks in Spain and Italy, both on a portfolio and select basis, but are scrutinizing these risks and requiring higher self-insured retentions. Some insureds notably, those companies selling into Southern Europe, Argentina, Venezuela, and elsewhere could find 2013 particularly challenging.
most countries in southern Europe, insurers have essentially stopped covering new risks in Greece due to the countrys mounting debt issues. Many insurers with so called cancelable coverage have exercised their options to cancel credit limits, especially on these import or trade obligations that would be more exposed to a currency devaluation should Greece be forced to exit the euro. The Greek government is seeking support from a European Union-backed export trade credit insurance program, but obtaining such coverage can be a lengthy process given the bureaucracy of the EU. Many government export credit agencies throughout the world likely will continue to cover sales to Greece, but only for firms in their countries.
LESSONS LEARNED SINCE 2008

Should the European debt crisis worsen, it appears that insurers and policyholders will be better prepared than they were during the credit crisis in 2008, when insurers were criticized for canceling large swaths of credit limits on customers that ultimately remained creditworthy. Since then, insurers have renewed their focus on underwriting decisions, which could lead to credit limits being more sustainable should the European debt crisis escalate. At the same time, many policyholders have improved their own credit risk management techniques and are retaining more risk. In addition, modifications to policies including non-cancelable credit limits or limits with delayed cancelation allow policyholders to make more informed credit risk decisions and avoid being immediately impacted by adverse credit insurer actions.
Contact: MICHAEL KORNBLAU US Trade Credit Practice Leader +1 212 345 5368 michael.kornblau@marsh.com
RISK TRENDS
EUROPEAN SOVEREIGN DEBT CRISIS
Underwriters remain concerned about the European sovereign debt crisis. The debt crisis has contributed to the decision by many European banks to reduce trade financing, which increases the risk of default among importers and exporters seeking trade credit coverage. Insurers are closely monitoring the situation in Europe as further economic troubles there could have a ripple effect on markets in other geographies, including the United States. Although the overall trade credit insurance market remains stable and capacity remains available for
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INSURANCE MARKETS BY INDUSTRY
CHEMICAL
COVERAGE Property SEGMENT Largely CAT-Exposed (greater than 50% of values) Moderately CAT-Exposed (10% to 20% of values) Primary Casualty Guaranteed Cost Loss Sensitive Excess Casualty US, London, Bermuda, Zurich RATE CHANGE Q4 2012 5% to 10% increase Flat to 5% increase Flat to 10% increase Flat to 5% increase Flat to 10% increase RATE CHANGE Q4 2011 Greater than 10% Flat to 5% increase Flat to 5% increase Flat to 5% increase Flat to 5% increase
MARKET COMMENTARY
The chemical insurance market continues to see increasing rates for both property and casualty insurance.
PROPERTY
Chemical industry insureds generally saw property rates increase in the single digits entering 2013; however, companies with significant global catastrophe (CAT) exposures typically experienced higher increases. Catastrophe models, notably RMS version 11, are being used by most insurers and impact the level of CAT capacity carriers are willing to provide. Modest rate reductions may still be achieved by restructuring limits/ deductibles in programs, or for companies that have demonstrated positive changes in their risk profiles. Insureds should start the renewal process early. Final terms and conditions are often being negotiated late in the process, and include underwriting questions related to natural hazard, supply chain exposure, unsafe chemical substances, engineering concerns, and recent losses.
CASUALTY
the treatment of allocated loss adjustment expense (ALAE), which allocates specific loss adjustment claims expenses including fees paid to outside attorneys, experts, and investigators to defend claims. Guaranteed cost programs are becoming increasingly difficult to negotiate and are not always available, depending on company size and individual risk profile. Large chemical clients will most likely continue purchasing general liability programs in 2013, while small chemical companies typically look to purchase specific risk transfer coverage when available.
RISK TRENDS
The current business environment for companies in the chemical sector remains favorable, despite uncertainties related to the European sovereign debt crisis, the modest growth experienced in several mature economies, and the recent slowdown in China. The restructuring efforts engaged in at the start of the economic downturn significantly improved many companies financials, leaving them well positioned to take advantage of future economic recovery. The chemical industry continues to redefine itself with ongoing expansions in emerging economies. The rise of shale gas production in the US has resulted in significant investments in the petrochemical industry. The industry continues to invest heavily in product innovation, especially around alternative energy, green chemistry, and water/food supplies. Many chemical companies in 2011 had strong cash positions combined with low borrowing costs, which drove M&A activities. In 2012,
Primary casualty rates for chemical insureds showed slight increases in the last quarter of 2012 for companies that had suffered losses. Significant increases in rates and/or retention levels were typical in 2012 for insureds with favorable loss histories, especially for large companies with umbrella layers. In an attempt to limit their potential exposures, insurers are examining
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however, the chemical industry saw a slowdown in the number of transactions due to economic uncertainties.
PRODUCT RISKS
The number of studies linking chemical substances to specific diseases and pathologies has increased and should be monitored closely. Risk managers should anticipate underwriting questions if their companies are involved in the manufacturing or marketing of products deemed hazardous, and should present to underwriters their own scientific evidence. The ability to demonstrate a rigorous product stewardship process is also essential.
NATURAL HAZARDS
Although the industry did not experience major losses over the past two years and was largely spared damage from Superstorm Sandy, the potential impact of natural disasters on manufacturing operations and the chemical supply chain are significant, especially in the Gulf of Mexico. Risk managers, working with their brokers, should understand the full scope of these exposures and highlight approaches to managing CATrelated areas, including supply chain resiliency and property protection.
Contact: FABRICE LEBOURGEOIS US Chemical Practice Leader +1 215 246 1219 fabrice.lebourgeois@marsh.com
SUPPLY CHAIN
The 2012 explosion at a German facility manufacturing cyclodo-decatriene (CDT), a base material used to produce nylon resin, was another reminder of the complexity of many supply chains in the chemical industry. Insurers have expressed increasing concern about their aggregation of risk, especially in areas that are prone to natural catastrophes. Risk managers should work with their brokers to assess and quantify these exposures (interdependencies and contingent time element) in order to secure the requisite coverage.
COMMUNICATIONS, MEDIA, AND TECHNOLOGY

COVERAGE General Liability Workers Compensation Umbrella Property D&O Liability Public Private Employment Practices Liability Fiduciary Errors and Omissions SEGMENT RATE CHANGE Q4 2012 Flat to 2% increase Flat to 10% increase Flat to 10% increase 5% increase to 10% increase Flat to 10% increase 5% increase to 15% increase Flat to 5% increase Flat to 5% increase 3% increase RATE CHANGE Q4 2011 1% increase 2% decrease 3% increase 3% decrease Flat to 10% decrease 5% increase to 10% decrease Flat to 5% decrease Flat to 5% decrease 5% decrease
MARKET COMMENTARY
PROPERTY
Property insurance rates increased an average of 2% for communications, media, and technology (CMT) companies in 2012. In 2013, it is expected that rates at renewal typically will range from flat to singledigit increases for insureds with no losses and no catastrophic (CAT) exposures. However, accounts with CAT exposures may find it hard to obtain the same or increased limits and rates will likely be higher. It is likely that underwriters will continue to scrutinize supply chain resiliency and the associated contingent time element coverage they are willing to provide. Catastrophe definitions are also expected to receive increased attention from property underwriters throughout 2013.
CASUALTY
Rates for workers compensation programs increased along with CMT companies experience modification factors, likely resulting in continued rate increases in 2013. The workers compensation market remains in a state of transition; insurers are looking to increase rates or change program structures. Umbrella insurance coverage typically follows the pricing of the underlying coverage, especially for general liability programs. Typically, companies experienced rate increases averaging 5% to10% entering 2013.
US GENERAL LIABILITY CMT CLIENTS

33% 10%
37% 66% 16% 3% 47% 31% Q3 2012 14% 22% Q4 2012 64%
CMT companies generally saw average casualty rate increases of 5% in 2012. Competition and capacity remained steady entering 2013; however, accounts that had been marketed in the previous few years have likely seen the bottom in terms of rates. Organizations payrolls increased slightly at the end of 2012, but most increases were related to rising bonuses and commissions and not necessarily to additional head count.
57%
Q1 2012
Q2 2012
INCREASE DECREASE NO CHANGE
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Rates for directors and officers (D&O) liability insurance firmed through 2012; the average renewal rate increase was 5% for total D&O programs entering 2013. Generally, primary layers increase at a larger percentage than excess layers. Some companies with negative risk profiles experienced significant rate increases and/or increased retentions. Errors and omissions (E&O) liability insurance rates varied widely for CMT firms in 2012; most programs renewed with a slight increase in rates. The pace of increases is likely to accelerate in 2013 as insurers are taking a harder line and showing a willingness to lose accounts that they feel are underpriced. Insurers continue to experience an increase in both the frequency and severity of E&O and cyber claims. As a result, they are pushing for rate increases; however, as the market remains competitive, there likely will be a wide range of rate changes on renewals.
services, and credit monitoring. Some organizations are subject to regulations that stipulate minimum standards for data security often a function of the industry sector in which an entity operates or its status as a publicly traded company, private enterprise, or nonprofit organization. Companies in highly regulated industries should seek confirmation that their cloud vendors security policies comply with regulatory requirements. Cloud vendors should anticipate and be prepared to undergo security audits to verify compliance. Increasingly, customers are demanding unlimited or significant increases in limits of liability for data security. Understanding contractual norms and legal trends will help to determine appropriate coverage and contract negotiation strategies. The majority of data breaches are the result of insider negligence: Primary sources of these breaches include rogue or disgruntled employees, fatigue, unsecured laptops, tablets, smartphones, flash drives, social media, unsecured wi-fi connections, and unshredded documents. All organizations should take precautions and address these potential sources of a breach.
RISK TRENDS
Convergence continues to drive rapid change in CMT companies business models. A silo approach to delivering products and services is no longer a prevalent strategy companies are blending multiple value chains (for example, technology, media, and consumer) and operating in multiple spaces. Risk managers should involve themselves in the cross-chain conversation by understanding the consumer experience shifts, industry shifts, and organizational shifts and how these affect their organizations exposures to risk.
CATASTROPHIC RISK MANAGEMENT

A number of recent CAT events have heightened awareness of both direct and indirect property exposures for CMT companies and of the true costs of both primary and contingent business interruption (CBI). As a result, expect continuing and increasing scrutiny by insurers and reinsurers on these exposures. Companies will likely face new demands from insurers for information relating to supply chain and CBI exposures, both direct and indirect. In the absence of this information, CBI coverage may not be offered or could be severely limited. Information supply chain analysis is similar to physical analysis. Having a clear picture of the flow of information, cash, and products at all levels within the organization helps companies determine where they start to make money and where the strategic value is. This allows companies to make decisions on where to focus supply chain resiliency efforts.
MERGERS AND ACQUISITIONS

Companies involved in mergers and acquisitions (M&A) continue to use transactional risk solutions as a means to limit risk or enhance the competitiveness of bids. When purchasing insurance for such scenarios, key drivers remain largely the same: sellers seek clean exits and the introduction of a buyer-side policy into the auction process, and US corporations continue to take a cautious view when investing overseas. It is challenging to predict where or when transactions may occur; nevertheless, those responsible for risk management should be prepared to address the potential risks if and when a transaction takes place.
Contact:
CLOUD COMPUTING/DATA SECURITY

Data security is the primary concern for most companies that use third-party providers for cloud computing. Should a data breach occur in a cloud service providers network, the customer is likely to be primarily responsible for notification, provision of call center
TOM QUIGLEY US Communication, Media & Technology Practice Leader +1 617 385 0287 thomas.m.quigley@marsh.com
CONSTRUCTION
COVERAGE General Liability SEGMENT Large Organizations Midsize Organizations Excess Casualty Large Organizations Midsize Organizations Builders Risk AOP CAT A/E Professional Large Organizations Small to Midsize Organizations All Contractors Professional Project Professional Owners Protective Professional Indemnity Contractors Pollution Liability Contractors Pollution and Professional Liability All All All All Large Organizations Flat to 5% increase Flat to 5% increase Flat to 5% increase Flat to 5% increase Flat to 5% increase Flat to 5% increase Flat to 10% increase Flat to 5% increase RATE CHANGE Q4 2012 5% increase to 9% increase 5% increase to 9% increase 4% increase to 8% increase 5% increase to 9% increase RATE CHANGE Q4 2011 Flat to 5% increase Flat to 5% increase 5% increase to 9% increase 5% increase to 9% increase Flat Flat to 10% increase Flat to 15% increase Flat to 5% increase Flat to 5% increase Flat to 10% increase Flat to 5% decrease 5% decrease to 5% increase Flat to 10% increase, depending on loss history Flat to 5% increase
MARKET COMMENTARY
PRIMARY CASUALTY
being negotiated case by case, often with additional premium charges. The workers compensation market has been relatively stable for good quality risks. Pricing tightened throughout 2012, and is expected to continue to do so in 2013. Insureds with adverse loss experience, whether frequency or severity driven, are likely to experience significantly greater increases. The market for project-specific GL is likely to remain competitive in most states in 2013, marked by enhanced coverage and abundant capacity. In New York, many owners and contractors purchase project-specific GL in response to Labor Law 240/241 (known as the scaffold law). In an effort to eliminate subcontractor versus subcontractor lawsuits, excess and surplus lines (E&S) insurers include cross-suit exclusions.
Renewal rates continued to escalate throughout 2012 for commercial general liability (CGL) insurance for contractors. Capacity was not an issue; however, insurers with contractor business were affected by increases in claim settlement amounts and frequency of claims, rising costs related to health care, natural disasters, and years of significant rate reductions. Fewer carriers are willing to use the standard Insurance Services Offices (ISO) additional insured endorsements and remain strict regarding additional insured wording as they try to limit coverage afforded to the additional insureds on the contract requirements. Many other traditionally available coverage grants are now
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Pricing for GL wraps remains competitive, except in New York, where claims under the scaffold law average $1.5 million to $3 million resulting in virtually no market there for GL wraps. In New Mexico and Texas, however, GL wraps are seen as a necessity where statute restricts one partys ability to indemnify or provide additional insured status to cover the negligence of another party. Pricing for apartment projects increased to the level charged for condominium projects in 2012, a trend expected to continue in 2013. In many jurisdictions, the same type of coverage enhancements on GL wraps that were discussed for project-specific GL placements are being obtained.
CONTROLLED INSURANCE PROGRAMS (CIP)
BUILDERS RISK
Builders risk activity remained flat throughout 2012, with a slight increase for insureds with catastrophe exposure. Experts believe that natural disasters such as Superstorm Sandy may have an impact on pricing with July 2013 renewals, when there is further clarity regarding Sandy losses.
PROFESSIONAL LIABILITY
Entering 2013, the market for owner and contractor controlled insurance programs, or wrap-ups, remains competitive in most markets, with New York, for reasons described above, being an exception. General contractors that are able to manage and assume risk of loss arising out of subcontractor claims are increasingly implementing contractor controlled insurance programs (CCIPs) to gain a competitive advantage, earn a return off of their risk management effort, and provide a single insurer for GL claims in jurisdictions that limit indemnification and additional insured protection. Although fewer markets have capacity and appetite to insure both the construction, operations, and maintenance risk on projects, the major insurers are gaining comfort and continue to favor: Infrastructure projects; often funded with private capital in a public private partnership (P3) whose concessionaires implement CIPs to lower cost. Contractors and sophisticated owners that employ extensive loss control measures and represent a source of recurring revenues. Well-managed rolling programs typically receive a five-year operations period, and completed operations of up to 10 years. Coverage for warranty repair work may also be available.
UMBRELLA/EXCESS
It appeared that the markets for contractors professional liability and architects and engineers professional liability began to firm at the end of 2012. Although most carriers sought rate increases on renewing business entering 2013, those rates declined compared to the increases sought in 2012, and are anticipated to decrease further. Contractors are likely to see rate increases average about 5% through 2013, though insureds with significant losses will continue to see higher rate increases on renewals. In addition, insurers in larger markets may be less amenable to coverage changes and modifications. Capacity remains plentiful for professional liability coverage for both contractors and architects and engineers, with newer markets aggressively seeking new business. Capacity is also abundant for owners protective coverage and contractors professional liability project coverages. With respect to project coverages for architects and engineers professional liability, capacity remains limited and more costly than other standard coverages. However, the owners protective coverage continues to offer a cost-effective alternative, and there are more markets willing to offer the coverage at least on an excess basis.
ENVIRONMENTAL LIABILITY
The environmental insurance market remains competitive, with multiple carriers offering contractors pollution standalone forms and combined forms. An increase in the use of contractors pollution liability with contractor projects is expected in 2013, as is the use of multiple carriers in mega-projects.
The majority of insureds that renewed in the fourth quarter of 2012 saw a premium increase, especially clients with large transportation fleets. In many instances buffer layers were needed for project specific and contractor practice programs, as carriers often require higher attachment points for certain segments of the industry. This includes street and road contractors, contractors with large fleets, and cases in which perproject general aggregates were needed.
Contact: MIKE ANDERSON US Construction Practice Leader +1 212 246 1294 michael.w.anderson@marsh.com
EDUCATION
COVERAGE Property SEGMENT Large Organizations Small Organizations Casualty Large Organizations Small Organizations International Large Organizations Small Organizations RATE CHANGE Q4 2012 Flat to 5% increase Flat to 5% increase Flat to 5% increase Flat to 5% increase Flat to 5% increase Flat to 5% increase RATE CHANGE Q4 2011 Flat to 10% increase Flat to 5% increase Flat to 3% increase Flat to 3% increase Flat to 5% increase Flat to 10% increase
MARKET COMMENTARY
Entering 2013, insurers were more active on package business, with rates generally renewing with flat to 3% increases, depending on loss experience, change in exposure, and expiring rate. Lead umbrella insurers remained limited and few will offer coverage for athletic participants, sexual molestation, and police professional liability. Recent highly publicized allegations of sexual misconduct at some universities have not affected coverage or rates, but have pushed carriers to seek more information surrounding molestation training and reporting procedures. Despite overall slow economic growth, payroll projections for 2013 continue to grow. Many institutions have seen enrollment increases, which improved staff retention. As expected, larger schools continue to retain more risk.
PROPERTY
likely that underwriters will continue to sharpen their focus on natural catastrophe modeling results and flood and business interruption exposures. In November, a major insurer of fine arts reported an expected loss of $40 million as a result of damage to many of its insureds properties in New Yorks Chelsea arts district. This may affect insureds that purchase separate fine arts policies, especially if they have exposures to natural catastrophe perils.
CASUALTY
Rates in the primary casualty insurance markets were generally stable entering 2013. The overall frequency of claims has declined; however, the severity of claims continues to grow. Large settlements for slips and falls, student assaults, vehicle-related incidents, date rapes, fan violence, drowning, suicides, and violent acts on and off campus have forced underwriters to approach these exposures more cautiously. United Educators changed its general liability exposure base from a full-time equivalent student rate to an operating expenses rate, which allows it to charge higher premiums as the growth in online students may not have been captured in the prior calculation. Most other carriers are Insurance Services Office (ISO)-based and likely will continue to rate based on square footage. Many insurers are unwilling to provide coverage for sexual molestation claims stemming from childcare operations, summer sport camps, campus housing,
In general, property insurers reported positive results for the first nine months of 2012, largely due to more disciplined underwriting and a lack of natural catastrophe losses. The rate increases seen in 2010 and 2011 began to moderate for insureds that did not have significant exposure to natural catastrophes or adverse loss experience. For insureds without coastal exposures particularly in the Northeast US the extent of the impact of Superstorm Sandy on market conditions will be helped by an abundance of market capital. Post-Sandy, it is
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fraternities, and athletics. Additionally, risks such as rock climbing, white water rafting, equestrian clubs, and spelunking also concern education underwriters. Despite this challenging environment, most schools likely will continue to offer the broadest sport programs available to attract new students. The excess workers compensation market remains restrictive and rates are expected to increase up to 15%. Midsize schools on guaranteed cost workers compensation programs can expect increases up to 5%, depending on individual state filing and loss experience.
REPUTATION
Damage to a schools reputation after a major incident can significantly disrupt classes and affect students, faculty, and the surrounding community. However, many recent on-campus tragedies have enhanced the support for enterprise risk management (ERM) from senior management within the organization.
CYBER RISK
Data security and privacy breaches continue to be areas of concerns as education institutions are increasingly dependent on their networks. As a result, the exposures related to intellectual property, health care regulations, identity theft, and other first- and third-party risks continue to grow. Therefore, risk managers should regularly review their risk mitigation strategies designed to protect against these risks.
Educators legal liability insurance including directors/ trustees and officers (D&O) liability, employment practices liability (EPL), and educators errors and omissions (E&O) liability remained competitive in early 2012 for the not-for-profit education segment due to the prolonged soft market and insurer competition. In the second half 2012, rates began to firm in the 5% to 6% range due to increased EPL loss experience. Overall, most insurers cite a deterioration in the loss experience in their portfolios, mainly due to an uptick in the frequency of EPL claims. Other key issues impacting their books include antitrust claims and class-action lawsuits related to allegations of misleading job placement statistics, such as those associated with law schools. For these reasons, further rate firming is expected in 2013. One leading insurer expects rates to increase in the 3% to 5% range, independent of any adjustments for exposure or loss experience. Other insurers estimate rate increases in the 5% to 15% range, independent of any adjustments for exposure or loss experience. The for-profit and publicly traded professional liability insurance market remained tight and limited at the start of 2013. These institutions often are forced to purchase D&O and EPL programs separately from E&O.
FAILURE TO EDUCATE
Claims alleging a failure of institutions to educate their students are on the rise, with the legal costs increasing faster than other liability events. Underwriters continue to review the current retention levels for their attachment points.
OVERSEAS PROGRAMS
Interest and participation in study-abroad programs continue to grow. To meet the demand, many institutions have built or are planning to build state-of-the-art facilities to attract students and become more global in their missions, operations, and research programs.
Contact: JEAN DEMCHAK Global Education Practice Leader +1 860 723 5635 jean.demchak@marsh.com
RISK TRENDS
The financial impact of the global economic downturn remains the main issue for education institutions. Although investments are slowly recovering, federal budget decreases continue, in part causing increased tuitions, personnel reductions, and other cost-control measures. Many institutions are beginning to invest their investment growth on capital improvement projects again such as new residence halls and laboratories that were delayed or canceled due to the change in funding.
ENTERTAINMENT AND EVENTS

COVERAGE Property SEGMENT Non-CAT-Exposed Organizations Midsize CAT-Exposed Organizations (TIV <$250 million) Large CAT-Exposed Organizations (TIV >$250 million) Primary Casualty Large Organizations Midsize Organizations Excess Casualty Large Organizations Midsize Organizations Financial and Professional Large Organizations Midsize Organizations RATE CHANGE Q4 2012 Flat to 5% decrease Flat to 10% increase Flat to 10% increase Flat to 5% decrease Flat to 5% decrease Flat to 5% increase Flat to 5% increase Flat to 5% increase Flat to 5% increase RATE CHANGE Q4 2011 Flat to 5% decrease Flat to 5% decrease Flat to 5% increase 5% decrease to 10% decrease 5% decrease to 10% decrease 5% decrease to 10% decrease 5% decrease to 10% decrease Flat to 5% decrease Flat to 5% decrease
MARKET COMMENTARY
The entertainment and events insurance marketplace remained competitive entering 2013, with capacity expected to increase in most insurance lines of significance in 2013. Although the industry faces challenging business conditions, there are signs of strengthening: Sales, attendance, advertising, and overall revenues increased slightly in many sectors in the second half of 2012 and are projected to increase further in 2013. As the economic recovery materializes globally, some increases in the exposure base are likely across different lines of business and may require companies to reassess their insurance limits. Key insurance market drivers continued to be asset management and cost control. Insureds should continue to implement risk control and claims management best practices and consider evaluation of alternative program structures. With an increase in both capacity and the number of insurers in all lines, competition likely will continue to drive favorable renewal terms for most entertainment and events insureds. Merger and acquisition activity is projected to increase in the industry in 2013. Such transactions often result in significant changes in insurance limits, deductibles,
and retentions, as well as in policy terms and conditions. Entertainment and event firms should begin insurance renewal processes early, run new catastrophe (CAT) models, review preparedness, and allow the introduction of market competition as necessary to achieve renewal goals. It is important to analyze the results from new risk financing models and be prepared to respond to insurers questions about the changes.
PROPERTY
Property insurance pricing is likely to moderate for entertainment and events insureds in 2013. Insurers are focused on tightening terms around several key coverages and perils of importance notably flood and business interruption. Positive underwriting results combined with added capacity kept the property insurance market for entertainment and events companies generally competitive in 2012. Average property insurance premium rates for most accounts renewed between flat and 5% increases. Those companies with prior claims and/or significant catastrophe (CAT) exposures typically saw slightly higher rate increases. In part in response to Superstorm Sandy, insurers may be more vigilant in ascertaining flood zones and limiting capacity for high hazard areas. Insureds will need to
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closely monitor changes in flood zones over the course of the policy term as this can affect the applicable deductibles and sublimits applied in losses, as well as the amount of insurance needed to cover their exposures. Contingent time element (CTE) claims from the 2011 Japan earthquake/tsunami and floods in Thailand continue to materialize; as a result, insurers are more focused on policy wording and reporting of exposures. This is likely to intensify in 2013 as CTE losses from Sandy are quantified and understood.
CASUALTY
to managing such catastrophe-related areas as supply chain resiliency, property protection, and business continuity plans.
BUSINESS INTERRUPTION
The financial impact of business interruption is gaining more attention from entertainment and events organizations. An interruption to operations, either from direct damage to the business or from a contingent exposure such as civil authority, presents challenges from a business strategy perspective. Insurers likewise are raising concerns about how they underwrite these risks and are increasingly requiring more detailed information from insureds. Entertainment and events organizations should undertake a comprehensive review to understand how interruptions to their operations may affect their businesses and how disruptions to direct and indirect suppliers may impact them. This analysis will help insureds and their brokers design the limits, terms, and conditions of a comprehensive program.
Generally, casualty insurers sought flat to slight increases in rates at renewal, if loss history was favorable, and looked for rate and/or retention increases for programs that experienced losses in 2012. In 2013, pricing for most casualty lines of coverage is expected to increase. Average casualty insurance renewal rates for entertainment and events organizations ranged from flat to 5% decreases in 2012; companies with the most attractive risk profiles typically experienced larger rate reductions. Additional primary and excess capacity entered the marketplace for sports and events business, providing additional limits. Notable trends included more organizations purchasing higher excess liability limits, a focus on risk control, and increased attention to alternative risk finance options.
WORKERS COMPENSATION
Workers compensation is a growing challenge for many entertainment organizations. Cumulative trauma claims, particularly those filed in California, have increased dramatically. The marketplace for workers compensation insurance is limited; it does not appear that additional capacity will enter the market any time soon. Deductible/retention amounts are increasing, resulting in underwriters demanding increased collateral.
Rates remained competitive for directors and officers (D&O) liability entering 2013. Employment practices liability (EPL) rates increased slightly for some insureds due to increased litigation, which has resulted in underwriters requesting detailed exposure information. There is growing interest in cyber coverage.
SPECIAL EVENTS LIABILITY

More organizations are looking to engage directly with consumers through special events, which present specific insurance and risk management issues involving contractual liability and vicarious liability. Insurers on primary insurance programs may exclude coverage for these events, forcing organizations to structure standalone special event insurance programs.
RISK TRENDS
The focus remains on asset management and cost control, including for insurance premiums.
Contact:
NATURAL CATASTROPHES
After avoiding major losses for most of the year, many entertainment and events companies were hit by heavy flooding, significant property damage, and considerable business interruption losses from Superstorm Sandy in the fourth quarter of 2012. Although this put pressure on the insurers and reinsurers serving the entertainment and events industry, the marketplace was well positioned to absorb the losses. Risk managers should be working with their brokers to review their companies approach
ROBERT MURPHY Global Entertainment & Events Practice Leader +1 215 246 1470 robert.e.murphy@marsh.com
FINANCIAL INSTITUTIONS
COVERAGE Financial and Professional SEGMENT D&O FI Bond Errors and Omissions Fiduciary Employment Practices Liability Property General Liability Mortgage Impairment Guaranteed Cost Loss Sensitive Automobile Liability Guaranteed Cost Loss Sensitive Workers Compensation Guaranteed Cost Loss Sensitive Umbrella/Excess Liability RATE CHANGE Q4 2012 Flat to 5% increase Flat to 10% decrease Flat to 10% increase 15% to 25% increase Flat to 5% increase Flat to 3% increase Flat to 5% increase Flat to 5% increase Flat Flat Flat to 5% decrease Flat to 5% decrease Flat to 5% increase RATE CHANGE Q4 2011 7% decrease 1% decrease 2% decrease 1% decrease Flat Flat to 5% increase Flat to 5% decrease Flat to 5% decrease Flat to 1% decrease Flat Flat to 3% decrease Flat to 3% decrease Flat to 1.5% decrease
MARKET COMMENTARY
Capacity for major lines of insurance purchased by financial institutions generally remains strong. But despite a surplus of available capacity, there appears to be a gradual firming of rates across most product lines. The prolonged low interest rate environment has resulted in significantly lower yields in insurers investment portfolios. While combined loss and expense ratios have generally been improving for insurers, the challenging yield environment means insurers need to increase rates and/or reduce expenses to hit the return on equity (ROE) targets their investors are demanding. Insurers are still generally flexible in the negotiation of coverage terms but their resolve in holding the line on pricing seems to be strengthening.
PROPERTY
insurance companies until Superstorm Sandy, which caused many FI firms to suffer business interruption, infrastructure damage, and property losses. Although the full impact of losses continues to be evaluated for FI businesses, insurers and reinsurers are expected to appropriately respond to insured losses across all affected industries, including FI; market capacity should remain adequate. But underwriters will likely be requesting greater details for loss and exposure data in the near term and FI firms with higher levels of CAT exposures may experience larger rate increases. Financial institutions that are able to provide and demonstrate effective loss reduction and loss mitigation measures that offset their exposures will be best positioned to achieve the best outcomes with their property programs.
CASUALTY
Property rates are trending stable across all sectors of financial institutions (FI). There had been relatively few natural catastrophes (CAT) in North America during 2012 that impacted FI firms including
Casualty rates are generally stable across all sectors of financial institutions. However, the casualty market continues to give indications of firming, particularly for workers compensation, and ongoing pressure for workers compensation rate increases is expected
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to continue in 2013, barring unforeseen events. An organizations experiences will vary according to its exposures and loss history. Capacity across all casualty lines remains adequate.
both electronic and non-electronic for which the organization is responsible, including information that may be in the custody of a business partner.
RISK TRENDS
All sectors of the US financial institutions industry made gradual, but steady, progress towards recovery in 2012, consistent with the moderate growth of the overall US economy. Firms also face growing risks and costs associated with the broad scope and complexity of regulatory reform.
While capacity remains relatively stable, rates for directors and officers (D&O) liability and professional liability (E&O) are firming, particularly for banks and consumer finance companies. This is driven in part by the macro pricing trends, losses from the credit crisis that continue to mature, and continued regulatory scrutiny faced by banks and consumer finance companies. There is pressure to increase rates for companies in the insurance and asset management sectors, though the impact has not been as great as it has been in the banking and consumer finance space. In employment practices (EPL), fiduciary liability, and fidelity, capacity remains abundant but insurers have been resisting requests for premium reductions and in many cases pushing for modest premium increases. Capacity for cyber liability also remains adequate, but there has been some pressure for rate increases due to the size and frequency of recent breaches, many of which have been high-profile events. Financial institutions continue to be targeted by hackers and data thieves, and firms are strongly encouraged to continuously revisit the efficacy of security measures, encryption, and other protocols that are in place regarding protection of confidential information
LIBOR INVESTIGATION
The full implications of the LIBOR investigations that began in 2012 remain to be seen, but it is expected that most losses would likely be attributed to derivatives, which would be difficult to measure. Errors and omissions claims are possible, but claimants will likely have trouble proving economic damage. Fines are likely, but will mostly be uninsurable. The impact to US financial institutions is uncertain at this point as the investigations continue to evolve.
ASSET QUALITY AND STRENGTH

A recent Federal Deposit Insurance Corporation (FDIC) report indicates that levels of troubled assets and troubled institutions remains high, but progress towards recovery continues. Loans to commercial and industrial borrowers, residential mortgages, and credit card balances continue to increase, and the banking sector has realized year-over-year earnings increases over at least 12 quarters. There were more than 50 bank failures during 2012, but the number of problem institutions was fewer than 700 as of the third quarter of 2012 the lowest since the end of 2009.
US FINANCIAL INSTITUTIONS D&O CLIENTS

33% 50% 13%
42% 67% 17%
NATURAL CATASTROPHES
The increase in frequency and severity of natural catastrophes, both nationally and internationally, may lead to adjustments in modeling over the next 12 to 18 months. In the near term, the property market is expected to remain relatively unchanged, barring unforeseen events, although financial institutions with significant catastrophe exposures may experience larger rate increases or be required to increase their deductibles and retentions.
Contact: EUGENE SHEEHAN Financial Institutions Industry Practice Leader +1 617 385 0329 eugene.c.sheehan@marsh.com
13% 53% 38% 42%
22% 11%
Q1 2012
Q2 2012
Q3 2012
Q4 2012
Note: Not all stacked bars will add to 100 due to rounding. Source: Marsh Global Analytics INCREASE NO CHANGE DECREASE
HEALTH CARE
COVERAGE Medical Professional Liability Managed Care Errors and Omissions HMO Reinsurance and Provider Excess Loss SEGMENT Health Care Managed Care Managed Care RATE CHANGE Q4 2012 Flat to 5% decrease Flat to 5% increase Medical trend increase to claims-driven increase RATE CHANGE Q4 2011 Flat to 5% decrease Flat to 5% decrease Medical trend increase to claims-driven increase
MARKET COMMENTARY
Anticipation of the Patient Protection and Affordable Care Act (PPACA, or health care reform) is likely to continue to drive mergers, joint ventures, and affiliations across the continuum of care, which will most likely change the risk profiles of health care organizations through 2013 and 2014. As the industry evolves, the market for medical professional liability insurance is likely to continue to be competitive for stable insureds, barring market-changing events. Managed care liability is likely to expand as organizations become more involved in building networks of providers and directing care of patients across the continuum. Employment of physicians is likely to continue, not only with primary care physicians but also specialists, as organizations seek to build out a comprehensive offering of needs while controlling the cost of care. Management liability exposure likely will increase as organizations are challenged on their choice of referral partners. Meanwhile, the need for data security/privacy and provider excess loss coverages likely will continue to expand as more organizations recognize the increase in capitated payor contracts and flow of electronic information across the network of providers.
MEDICAL PROFESSIONAL LIABILITY
insurers. Although some historic capacity did attempt small rate increases on renewals, competition generally overcame these attempts. Insurers that have historically written medical malpractice for physicians have seen many of their policyholders be acquired or hired by health care institutions typically, hospital systems as they prepare for reform; many of these insurers are now considering writing medical malpractice coverage for those same institutions. Although largely a developing trend, this is expected to add capacity in the medical malpractice space, likely providing a more competitive and favorable environment for health care organizations. The marketplace for senior care providers has seen more aggressive competition in recent years. Insurers have and will continue to push for premium increases where losses have increased or increasing loss trends are clear.
MANAGED CARE ERRORS AND OMISSIONS
Although the health care industry continued to prepare for health care reform, risk transfer costs associated with medical malpractice remained generally stable in 2012. Capacity remained stable entering 2013, with incumbent insurers typically rising to competitive pressures to retain clients. Newer capacity that which entered the market over the last several years showed more interest in writing new business than historic capacity, thereby creating increased competition for incumbent
After years of continued declines in pricing, the market for managed care errors and omissions (E&O) began to level off in early 2012. In 2013, capacity is likely to remain stable, and insurers are likely to seek moderate rate increases of 5% to 10%, barring unforeseen events. As business models evolve in response to PPACA, underwriters focus likely will include new services, data protection and security, the move from traditional markets into the exchange environment, the move from the commercial market into the Medicare/ Medicaid market, movements toward the provision of direct medical services, and attendant medical malpractice exposures.
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PROVIDER EXCESS LOSS
COMPLIANCE AND REGULATORY RISK

Health care reform adds a number of compliance guidelines to an already heavily regulated industry. Health providers will have more stringent patient safety measures, care protocols, coding and reimbursement audits, and case management guidelines. For those organizations pursuing ACO status with CMS, risks include clinical integration, data collection and measurement, new staffing models, managed care liability, and patient engagement in care.
Competitive pricing and terms can still be obtained for provider excess loss insurance, though insurers have become more selective. As health care organizations continue to form accountable care organizations (ACOs) and similar networks, demand for provider excess loss insurance as a mechanism to cap losses from patient catastrophic illness and accidents is expected to increase.
RISK TRENDS
The health care sector now represents almost 20% of US gross domestic product. With the passage of PPACA and its subsequent validation by the US Supreme Court, organizations are moving quickly to prepare for the change in reimbursement models by forming ACOs and population management programs. This shift is causing significant activity in mergers, acquisitions, joint ventures, affiliations, and employment of physicians. All of these activities present a broad range of risks.
INCREASED MANAGEMENT LIABILITY

The health care environment continues to evolve as economic realities and new regulations force health providers and health insurers to evaluate their business models. It is apparent that PPACA will remain intact, but uncertainty still remains regarding the finer points of the new landscape. Trends that lend themselves to increased management liability risks include: ACOs: As hospitals, doctors, and managed care organizations execute some form of an ACO strategy, they face directors and officers (D&O) liability risks related to making the correct business decisions, cyber/data risk in creating secure technology platforms, and errors and omissions (E&O) risk related to making the correct care coordination decisions. All of these factors are causing entities to rethink how they structure management liability programs. Physician Employment: Record numbers of physicians are leaving the sole or group practice environment to work directly for larger employers. For the hospitals that are hiring these physicians, the risk of employment practices liability increases significantly. Mergers and Acquisitions and Partnerships: As entities evaluate strategic merger and acquisition opportunities, D&O risks related to adequate due diligence and the eventual success/failure of the new ventures could increase. Similarly, partnership decisions create exposures related to choosing a partner, working with a partner once a relationship is established, and disengaging from a partnership that is not working well.
DECLINING REIMBURSEMENT
Reimbursements from the Centers for Medicare and Medicaid Services (CMS) are tied to quality of care provided, as well as targeted reduced cost of care through shared savings plans. To meet the goals established by CMS, health providers are focusing on efficiency to help maximize reimbursement, reduce expenses, and improve quality. Declining reimbursements and tying revenue to outcomes have been leading to new operating models through the employment of physicians, mergers, acquisitions, and alliances. These are expected to create opportunities to provide services across larger populations.
EXPANDED SERVICES
Offering the full array of services through an ACO is integral to gaining efficiencies. This approach seeks to reduce administrative expense and provide more opportunity to manage care efficiently. It is projected that at least 2,000 organizations will be in some sort of risk-sharing contract by January 1, 2014. As operating strategies are implemented for the acute care segment, the largest increase in exposure likely will stem from the employment of physicians of all specialties. By the numbers, the largest specialty class being employed is primary care physicians. Mergers, joint ventures, and affiliations are also forming with other providers in the continuum of care to address the full scope of services needed to reduce costs for patient care. There likely will be significant demand for provider excess loss insurance and HMO reinsurance to help mitigate potential financial losses for these organizations, barring unforeseen events.
Contact: HOLLY MEIDL US HealthCare Practice Leader +1 615 340 2446 hollis.d.meidl@marsh.com
HOSPITALITY AND GAMING

COVERAGE Property RATE CHANGE Q4 2012 5% decrease to 5% increase Flat to 15% increase General Liability Liquor Liability Auto Liability Workers Compensation Umbrella D&O Fidelity Flat to 10% increase Flat to 5% increase Flat to 5% increase Flat to 10% increase Flat to 10% increase Flat to 10% increase Flat to 5% increase RATE CHANGE Q4 2011 Non-CAT: flat to 5% decrease CAT: 5% increase to 10% or more increase Flat to 5% increase Flat to 5% increase Flat to 5% increase Flat to 5% increase Flat to 5% increase Flat to 5% decrease Flat to 5% decrease
MARKET COMMENTARY
Capacity is expected to increase in most insurance lines of significance to the hospitality and gaming industry in 2013, barring unforeseen events. If the economic recovery materializes globally, as is expected, some increases in the exposure base are likely. Insureds should start their renewal process early running new property insurance models, reviewing disaster preparedness, and allowing for the introduction of market competition as necessary to achieve their renewal goals.
PROPERTY
CASUALTY
Hospitality and gaming companies casualty insurance renewal rates generally ranged from flat to increases around 5% in the fourth quarter, depending largely on loss experience. For hospitality clients, rates can be affected by loss experience and spread of risk, particularly for those with large concentrations in New York City. For gaming clients, renewal results directly tie into loss ratios, and auto loss ratios have been increasing. Many clients that have traditionally purchased workers compensation on a guaranteed cost basis have begun to move to loss sensitive programs. Collateral concerns are also top of mind. Rate increases also stem from valet exposure and garagekeepers liability. One option to mitigate valet exposure is to contract with a valet company and obtain additional insured status from the contractor. Maritime exposure highlights a possible emerging trend for gaming companies as the Supreme Court will soon be hearing a case to better define what a vessel means. If the Court rules that a docked barge is a vessel, costs could trend upward as maids, cooks, and other employees will be deemed maritime employees, with access to higher benefits than traditional workers compensation.
The property insurance market is in a state of transition. With no reduction in overall market capacity, renewal rates in the fourth quarter of 2012 were flat to slightly higher. The full impact of Superstorm Sandy will be seen as 2013 progresses, but losses could bolster support for continued rate increases on CAT-driven accounts in 2013. Terrorism insurance is widely considered an essential coverage for global hospitality and gaming companies and for those considered high-risk occupancies. Overall, 62% of Marshs hospitality and gaming clients purchased terrorism coverage between the fourth quarter of 2011 and the third quarter of 2012, including 68% of hotel clients and 52% of restaurant clients.
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As the excess casualty market continues to transition, companies that can demonstrate to insurers that changes in exposures are not likely to impact their overall risk are more likely to mitigate potentially significant premium increases at renewal.
or other health hazards. Organizations should develop and test crisis management plans to minimize the potential impact of these events, through prompt and well-organized actions, effective communications, and humanitarian support.
FOOD ISSUES
The growing trend toward gluten-free menu items at Americas restaurants and catered events is increasing the demand for a special kind of insurance designed to protect food-service businesses against lawsuits arising from bad reactions to food products. Although any restaurant may face a lawsuit arising from alleged food poisoning or food allergies, those promising gluten-free menu items are at even greater risk of a lawsuit if a customer chooses a gluten-free item and still has a reaction. Food service businesses including restaurants, catering companies, and other food service providers can protect themselves against the high cost of lawsuits by purchasing product liability and completed operations coverage. Such insurance typically covers lawsuits related to gluten reactions and other food allergies, food poisoning, or injuries or damages caused by the products a restaurant or caterer sells.
Following several years of steady rate decreases, directors and officers (D&O) insurance rates began to climb in 2012. Insurer profitability is under pressure, and underwriters are expected to continue to seek rate increases in 2013. Insurers generally are expected to seek modest rate increases in 2013 for employment practices liability insurance (EPLI), particularly for small and midsize companies. The fidelity bond/crime market flattened out at the end of 2012.
ENVIRONMENTAL
Although many insureds had realized 5% to 10% decreases in environmental insurance premiums entering the fourth quarter of 2012, insureds generally saw a shift to flat to 5% increases, with the potential for even higher increases for those with particularly severe loss experiences. Several insurance markets have expressed that they may need to increase pricing in 2013 for those companies affected by the redevelopment of impacted or Brownfield properties.
HEALTH CARE REFORM

Because they typically employ more part-time hourly employees than companies in other industries, hospitality companies expect federal health care reform to have a particularly strong impact on their businesses. Surveyed by Mercer shortly after the US Supreme Court decision that upheld key provisions of the Patient Protection and Affordable Care Act (PPACA), 46% of hospitality and retail employers said that they expect their health care costs to increase 3% or more as a result of reform. Though some provisions of health care reform are still a year from taking effect, hospitality employers should start preparing now. As they determine their strategies for complying with health care reform, hospitality organizations should determine the optimal mix of full-time and part-time employees in order to balance health care costs and workforce productivity, how the states in which they operate are responding to PPACA, and how to ensure that their health plans meet new affordability standards.
RISK TRENDS
The global financial crisis, a volatile investment environment, and a troubled economy have had a significant effect on the hospitality and gaming industry.
ENVIRONMENTAL RISKS
Hospitality companies face a range of potential environmental exposures, including those related to indoor air quality, fuel storage, and waste handling. Catastrophic events and the operations of facilities in close proximity can also expose hospitality operations to potential cleanup and business interruption losses from contaminated flood waters and odors or pollutants entering the premises. Superstorm Sandy was a reminder that these types of risk exist. For instance, water ingress can create an environment in which mold can grow, bringing a risk of indoor air quality issues.
REPUTATION RISKS
A hospitality or gaming company can suffer long-lasting reputational damage from a variety of crises such as safety issues, security lapses, political unrest, on-site food handling, sponsorships, and rumors of bed bugs
Contact: JANICE L. SCHNABEL Global Hospitality and Gaming Practice Leader +1 503 248 6490 janice.l.schnabel@marsh.com
LIFE SCIENCES
COVERAGE Products/Excess SEGMENT Branded/Patented Generic Pharmaceutical* Medical Devices: Implant/ Invasive* Medical Devices: All Other Clinical Trials Marine Cargo All Classes Midsize Organization Large Organizations Directors and Officers All Sizes Large Organizations Property All Sizes RATE CHANGE Q4 2012 5% increase to 10% increase 10% increase to 25% increase 5% increase to 10% increase 5% increase to 10% increase Flat Flat to 10% decrease Flat to 5% decrease 5% increase to 10% increase Flat to 5% decrease Flat to 10% increase RATE CHANGE Q4 2011 Flat to 10% increase Flat to 10% increase Flat to 10% increase; those with losses 15% increases and higher Flat to 10% increase; those with losses 15% increases and higher Flat Flat to 20% decrease Flat to 20% decrease Flat to 3% decrease Flat to 20% decrease Flat to 10% increase
MARKET COMMENTARY
The insurance market for life sciences firms is in a state of transition. At the start of 2013, rate reductions were becoming less frequent. Competition existed for some products, such as foreign clinical trials insurance and stock throughput insurance, but rates trended up for products liability insurance and for property insurance following Superstorm Sandy. It is critical that insureds start the renewal process early and be prepared to offer detailed information to underwriters.
PROPERTY
Named storm deductibles in hurricane-prone areas are typically 2% to 5% of the location or unit value of the property suffering the loss. Many carriers did not recognize the upper mid-Atlantic and Northeast coasts as hurricane areas, and it is likely that the named storm deductible will become a percentage deductible regardless of geographic location. It is likely that there will be more scrutiny by underwriters of flood zones in 2013, with potential capacity or deductible restrictions in high-hazard zones.
PRODUCT LIABILITY
Although the true scope of losses from Sandy, including property damage and business interruption, will take some time to fully calculate, it is unlikely that insureds will see any declines in property rates in the near future. Organizations that experienced losses from the storm will likely see rate increases in 2013.
In 2012, insurance rates generally increased across the various segments of life science product risks in ranges of 5% to 25% or greater in some cases. In general, smaller firms and those with no loss history experienced moderate rate increases while larger firms or those with catastrophic losses faced more significant rate increases. Although one major carrier retrenched from this space and others cut back capacity on certain risks, capacity is expected to remain relatively stable throughout 2013.
* Increased difficulty in obtaining coverage for specific classes of drugs. Also, some higher self-insured retentions and exclusions. Large generics have seen 30% rate increases keeping in line with revenue sales. Small generics have seen flat rates at best.
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Overall capacity for financial and professional insurance products remained abundant entering 2013, although the number of primary insurers for the life sciences industry remained relatively limited. Carriers are also managing their primary limits and there has been the start of a shift from $25 million leads for larger life sciences companies to carriers leading with a lower limit, in the $15 million range. The primary market for directors and officers (D&O) liability insurance continues to transition to a firmer market, with underwriters typically seeking rate increase on their primary books of business, particularly from those insureds with less favorable risk profiles. Side A capacity remains abundant, but the majority of life sciences companies continue to purchase traditional program structures and not side A only coverage. For side A difference-in-conditions (DIC), sufficient capacity has kept pricing relatively competitive. For private companies, insurers typically sought to impose higher mergers and acquisitions retentions for private companies, but coverage terms remain generally favorable for both private and public companies.
MARINE CARGO AND STOCK THROUGHPUT (STP)
for most life sciences risks. The London cargo/STP market continues to be a global leader in the life sciences industry sector in terms of coverage offering, claims handling, and pricing.
RISK TRENDS
The global life sciences industry is experiencing significant change that is being driven by many factors, including an aging population, pricing pressures from health care providers and governments, research and development pipeline challenges, regulatory pressures, and high-profile legal challenges and court decisions.
REGULATORY AND LEGAL ISSUES

Recent and pending regulatory actions, court decisions, litigation, and legislation pose challenges for boards of directors and risk managers of life sciences companies. Regulators are making greater use of the Responsible Corporate Officer Doctrine as a prosecution tool, while also continuing to focus on enforcing the Foreign Corrupt Practices Act, pursuing life sciences companies for off-label marketing violations, improving patient safety, and minimizing drug shortages. Branded manufacturers are also concerned about recent federal legislation allowing generic manufacturers to sell biosimilars. Generic manufacturers, meanwhile, won a major victory with the Supreme Courts June 2011 decision in Pliva v. Mensing, relating to failure to warn claims. As a result, scores of court decisions have dismissed litigation against generic drug manufacturers. Life sciences firms are also engaged in legal battles over intellectual property and patents; this spring, the Supreme Court will review the legality of patent settlements between branded and generic manufacturers.
Cargo and stock throughputs (STPs) have been profitable lines for marine insurers. Capacity has steadily increased, both from new market entrants and existing insurers adding capacity, and stood at approximately $1.35 billion in early 2013. Competition has produced generally stable insurance market conditions; insureds with reasonably good histories generally secured flat to slight decreases at renewal, while more challenging accounts typically experienced flat to single-digit increases. The effects of Superstorm Sandy may have some impact on the cargo/ STP markets, though the full impact of the storm will take some time to determine. Demand for STP programs continues to increase. Such programs can be an alternative to standard property policies, provide a balance between property and marine exposures, and offer the ability to cover inventory in transit, in storage, and during processing under one policy. For some, it has been an attractive option over the past 24 months as property insurance rates have been more volatile. Although some insurers may reevaluate their STP positions in light of Sandy, it is likely that most insurers will continue to pursue STP business, although their appetite to underwrite life sciences accounts is likely to remain limited. Coverage offerings for the control of damaged goods, valuation, and perishable shipments clauses are inconsistent across the US, as a standard cargo policy form does not provide sufficient coverage
SUPPLY CHAIN/BUSINESS CONTINUITY

The life sciences industry is heavily dependent on key and sole suppliers. The shift to outsourced manufacturing has put added pressure on organizations to understand and plan for its inherent risks. The aftershocks from the devastating natural catastrophes of 2011 still rippled through global supply chains at the start of 2013. These events and practices have raised concerns in board rooms and risk management circles about the true resiliency of supply chains and related risk transfer mechanisms.
Contact: BRUCE BELZAK Life Sciences Practice Leader +1 215 246 1030 bruce.c.belzak@marsh.com
MANUFACTURING AND AUTOMOTIVE

COVERAGE Property SEGMENT Large Organizations Midsize Organizations Workers Compensation Guaranteed Cost Loss Sensitive General Liability Guaranteed Cost Loss Sensitive Excess Liability Lead Excess Layers Marine Cargo Large Organizations Midsize Organizations Cargo Stock Throughput Large Organizations Midsize Organizations RATE CHANGE Q4 2012 Flat to 10% increase Flat to 7.5% increase 10% increase or more (if available or offered) Flat to 5% increase Flat to 5% increase Flat to 5% increase Flat to 5% increase 10% increase or more (if available or offered) Flat to 15% decrease Flat to 15% decrease Flat to 15% decrease Flat to 15% decrease RATE CHANGE Q4 2011 Flat to 10% increase Flat to 7.5% increase 10% decrease to 10% increase 5% decrease to 5% increase 10% decrease to 5% increase Flat to 10% decrease Flat to 10% increase Flat to 5% increase Flat to 20% decrease Flat to 20% decrease Flat to 15% decrease Flat to 20% decrease
MARKET COMMENTARY
PROPERTY
CASUALTY
Average property insurance premiums for manufacturing clients generally renewed in a range from flat to singledigit increases in 2012. Slight premium reductions were possible for some insureds, often when incumbent carriers were replaced. Capacity was stable entering 2013, and there was significant market competition. Generally, rates in 2013 are expected to renew between flat and low single-digit rate increases on loss-free insureds, while modest, incrementally higher rate increases are likely for those with moderate to poor loss histories. Superstorm Sandy is not expected to be a market-changing event in terms of additional rate increases for manufacturing companies in 2013. Coverage terms and conditions may be impacted by a broadening of high-hazard wind zones in the Northeast as well as a potential percentage deductible required by insurers for Northeast wind.
The casualty insurance markets for manufacturers generally followed those of the overall casualty market. Workers compensation continues to be a significant concern, driven by such issues as medical inflation and increased severity of claims. Although claims frequency continues to decline due to ongoing safety improvements, the trend of increased medical costs will require manufacturers to look for longer-term strategies to manage the variable cost components of workers compensation.
Entering 2013, rates for directors and liability (D&O) insurance programs generally continued to increase. Average financial and professional insurance premium rates at renewal for manufacturing companies generally ranged from flat to 5% increases entering 2013; buyers with risk-specific issues saw additional upward pressure on rates. Many manufacturing companies focus on the financial strength of their D&O insurers and
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are cautious of concentrating capacity with any one insurer. Due to the current regulatory environment and an increase in D&O claims outside of the US, many manufacturing companies with international exposures are buying local admitted policies in the countries/ jurisdictions in which they do business.
MARINE
MACRO-ECONOMIC INFLUENCES
In the fourth quarter of 2012, the political impasse over the impending fiscal cliff in the United States as well as financial issues in Europe resulted in lighter orders and negatively affected production and business confidence for 2013. Although the Bureau of Economic Analysis reported that the US economy grew 2.7% in the third quarter of 2012, manufacturers are still worried about the impact of larger economic and political issues on their businesses.
Marine cargo and stock throughput insurers are looking more closely at their catastrophic risk exposures and aggregates. Admitted insurance regulations and compliance are increasingly a concern for manufacturing organizations. The auto manufacturing sector suffered significant losses from Superstorm Sandy. This sector was already challenging, with limited insurers willing to provide coverage. Sandy is expected to impact auto manufacturers more markedly than other manufacturing sectors, and may result in a restriction of available capacity as well as some insurers potentially exiting the marketplace. Overall, the marine cargo and stock throughput markets will be affected by Sandy, notably in the auto sector.
MEGA TRENDS
The automotive sector is influenced by mega trends; those manufacturers that can effectively manage these trends will likely have a competitive advantage over their peers. Key areas of risk include government regulations, social media, mergers and collaborative efforts to offset the cost and risk of technology advancements, and alternatives to vehicle ownership.
RISK TRENDS
Macroeconomic stresses continue to impact the growth of manufacturing.
Contact: DAVID CARLSON US Manufacturing Practice Leader +1 216 937 1361 david.t.carlson@marsh.com
SUPPLY CHAIN AND BUSINESS RESILIENCY

The risks associated with supply chain and business resiliency have been driven home by recent events such as Superstorm Sandy and the 2011 Thailand floods. Manufacturers will continue to review supplier agreements and assess potential policy coverage changes so that they are understood and managed to their benefit.
MINING
COVERAGE Property SEGMENT Surface Underground Primary Casualty Hard Rock and Minerals Coal Excess Casualty Hard Rock and Minerals Coal (Surface and Underground) Excess WC RATE CHANGE Q4 2012 5% increase to 10% increase 5% increase to 10% increase 4% increase to 7% increase 7% increase to 12% increase 8% increase to 10% increase 7.5% increase to 12% increase 7.5% increase to 15% increase RATE CHANGE Q4 2011 Flat to 5% increase 2% increase to 5% increase Flat to 4% increase 2% increase to 5% increase 2% increase to 5% increase 5% increase to 7% increase Flat to 5% increase
MARKET COMMENTARY
Insurers in the mining industry are generally taking a harder line regarding the value of their capacity at the start of 2013. Capacity is tightening for property, primary casualty, and excess casualty insurance, and rates at renewal are typically increasing. Insurers are seeking premium pricing for their allocated capacity, particularly for industries perceived high risk industries such as mining. Excess casualty appears to be experiencing the highest rate increases, regardless of the level of competition that may exist. Underwriters appear unwilling to reduce rates below their minimums, with only modest room for negotiation. When a full marketing effort is undertaken, final negotiated rates are often below the insurers initial quote but still well above expiring rates.
PROPERTY
CASUALTY
Casualty capacity is also tight but adequate from a small group of insurers in the mining sector. Rates for primary commercial general liability generally are increasing, but not to the same extent as in property or excess casualty. Excess or umbrella liability insurance capacity has declined somewhat over the past year, particularly for underground mining. Underwriters that have as much as $25 million in capacity typically are charging higher rates and in some cases cutting back on their limit authorizations, particularly when they consider the target rate too thin or the hazards too great. Some underwriters, concerned about the tort climate in several states, are seeking high rates while also reducing though not eliminating capacity.
Property insurance capacity remains generally adequate, but is not sufficient to overcome insurers demands for higher rates, higher minimum deductibles, and more technically complete underwriting submissions. More insurers are now demanding mine site inspections before offering quotations. Technical underwriting questions are becoming more precise; without plausible answers, underwriters may refuse to quote or re duce the capacity they are willing to offer. Minimum rates generally are moving up substantially, which can drive above-average rate increases for small and midcap mining companies.
Capacity for financial insurance products in the mining sector remains adequate and in line with most other industries. Competition remains strong, with rates, coverage terms, and available policy limits generally favorable. One notable exception is coal mining, where underwriters are paying greater attention to mining companies financials and operating philosophies in light of current coal market conditions.
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RISK TRENDS
Coal continues to be depressed as the global recession lingers. Natural gas production is high and prices are comparatively low. Electric utilities are converting to natural gas as they cancel or delay new coal-fired power plants. Precious metals continue to fare better with gold and silver prices at all-time highs. Industrial minerals companies are seeing signs of modest recovery as their sales and profitability improve despite higher production costs, partly due to fuel prices and regulatory compliance.
REGULATORY COMPLIANCE
Mine operators continue to be challenged by changing Mine Safety and Health Administration (MSHA) regulations, including lower dust and noise thresholds. Higher operating costs, largely driven by new or tightened regulations and compliance technology, are making it harder for mines to operate profitably. Health care costs are also rising as certain provisions of the Patient Protection and Affordable Care Act take effect; this added cost alone has resulted in some mine closures.
ENGINEERING STANDARDS
Stricter underwriting and risk engineering standards are requiring greater attention from both mine operators and their brokers. Primary and some excess mining property and casualty insurers are requiring risk engineering reports prior to releasing quotes, and those engineering reports are having a direct impact on capacity allocations. This tightening of standards requires that insureds and their brokers make underwriting submissions as early as 60 to 90 days prior to renewal dates. Failure to submit thorough underwriting information in a timely manner is, increasingly, having a negative impact on coverage terms and pricing.
Contact: KEN SLOAN US Mining Practice Leader 865.456.2367 ken.l.sloan@marsh.com
COLLATERAL POSITIONS
A tighter credit environment requires mine operators to reassess their collateral positions related to large deductible programs and reclamation surety capacity. Many surety programs require letters of credit to support surety capacity. Large deductible insurance programs require letters of credit to neutralize the insurers credit risk associated with incurred claims below the deductible. Letters of credit typically draw down a mining companys credit lines; for some mining companies struggling to maintain cash flows or with aging assets, banks may elect to reassess their financial liabilities associated with credit lines and letters of credit. This may limit mining companies ability to secure needed mine permits or maintain low-cost, largedeductible insurance programs.
POWER AND UTILITIES

COVERAGE Casualty SEGMENT Industry Mutuals Commercial Markets Property Non-CAT Exposed CAT-Exposed Financial and Professional D&O Fiduciary RATE CHANGE Q4 2012 3% increase to 8% increase 10% increase or higher 3% increase to 5% increase 10% increase to 15% increase Flat to 10% increase Flat to 10% increase RATE CHANGE Q4 2011 3% increase to 6% increase 10% increase or higher Flat to 15% increase Flat to 15% increase Flat Flat
MARKET COMMENTARY
Many utilities in the Northeast sustained substantial damage as a result of Superstorm Sandy in the fourth quarter of 2012, including to traditionally self-insured transmission and distribution equipment, power production, and other insured facilities.
PROPERTY
rate increases of 5% to 10% for non-catastrophe-exposed insureds and generally in the 10% to 15% range for CAT exposed power and utilities insureds.
CASUALTY
Property insurance rates increased an average of 3% to 5% for insureds with good engineering information and favorable loss ratios for the first three quarters of 2012. Some insureds were able to secure flat rates or modest reductions through extensive marketing and/ or changing the participating insurers. Insureds with a high frequency or severity of losses typically experienced rate increases greater than 20%, and some struggled to attract capacity. As a result of Sandy, underwriters are likely to increase their reliance on CAT models and focus more of their attention on insureds CAT exposures. Additionally, they may push for aggregate limits and deductibles from 2% to 5% for all clients with named wind and critical flood zone exposures, especially on the Eastern US coastline. Underwriters are increasingly selective in determining which risks they will write, and are reinforcing underwriting discipline in an effort to return their portfolios to profitability. Carriers are closely scrutinizing policy wording and are requesting changes, clarifications, or limits on some coverages. In the first half of 2013, property insurers are expected to press for
A combination of shrinking global capacity and continued efforts to improve underwriting results generated renewal premium increases for most insureds during 2012. Entering 2013, industry mutuals typically sought rate increases in the range of 3% to 8% for those with favorable loss ratios. In the lead umbrella space, many insureds in 2013 are likely to experience rate increases of 10% or higher at renewal. Additionally, some lead umbrella insurers may push for higher attachments on new business. Excess liability global capacity has declined over the past two years, including significant reduction by Lloyds. Bermuda excess insurers have also reduced or choose to selectively deploy their total capacity. The situation stabilized at the end of 2102, and market capacity appeared to be adequate to meet most insureds needs. Rates are expected to increase an average of 10 % to 20% or more at renewal in the first half of 2013.
During the third quarter of 2012, just over 40% of regulated utilities renewed their primary directors and officers (D&O) liability programs with premium increases while just under 40% experienced premium increases in their total D&O programs. There continued to be adequate capacity and competition on excess
Marsh 65
D&O layers. A premium rate increase of 5% to 10% is expected on Aegis D&O programs in 2013. This does not, however, take into account the continuity credit that Aegis provides, which may offset most of the premium increase.
FRACKING
The increasing supply of natural gas resulting from fracking has had and will have a great impact on electric generation. This could include the earlier than previously planned retirements of coal and nuclear generation stations and slow the construction of renewable energy generation facilities.
RISK TRENDS
ATTRACTING SKILLED WORKERS
Attracting and training the utility workforce of the future is an increasingly urgent issue, with up to a third of the sectors workforce estimated to reach retirement age in the next 10 years. Utility industry associations are working to address this need through various programs.
Contact: DANIEL S. McGARVEY US Power & Utilities Practice Leader +1 864 240 5458 daniel.s.mcgarvey@marsh.com
CYBER THREATS
As power is a critical element of the nations infrastructure, cyber-security threats and the preventive measures in place at US utilities are receiving enhanced focus. Annual reports by utility organizations are increasingly citing cyber threats among material risks, and expenditures to address this growing threat are on the rise. A successful attack could have far-reaching impacts including equipment damage, data theft, service interruption, and brand damage.
PUBLIC ENTITY
COVERAGE Property SEGMENT Non-CAT-Exposed Public Entities Moderately CAT-Exposed Public Entities (1% to 30% of values in CAT zones) Largely CAT-Exposed Public Entities (more than 30% of values in CAT zones) Loss Driven Public Entities (Sandy Losses) Primary Casualty Guaranteed Cost Loss Sensitive Excess Casualty Excess Workers Compensation RATE CHANGE Q4 2012 5% decrease to 5% increase RATE CHANGE Q4 2011 10% decrease to 10% increase (depending on use of incumbents) Flat to 10% increase
Flat to 10% increase
5% increase to 15% increase
10% increase to 20% increase or higher if exposure was severe 10% increase and higher 5% increase to 10% increase Flat to 5% increase 3% increase to 5% increase 5% increase to 30% increase
5% increase to 15% increase or more 5% increase to 10% increase Flat to 5% increase Flat to 5% increase 5% increase to 20% increase
MARKET COMMENTARY
PROPERTY
CASUALTY
Superstorm Sandy caused significant damage to public entities real and personal property and critical infrastructure. Many public entities faced higher uninsured property losses than insured losses, in part because they had sought to reduce costs by reducing overall policy limits and/or critical coverage sublimits such as flood. The result will be a reliance on the Federal Emergency Management Agency (FEMA) to pay for storm-related damage. It is critical that public entities understand the interplay between insurance and FEMA claims and establish effective claims accounting protocols. For example, FEMA regulations state that if its insurance purchasing requirements are not met, assistance will not be provided for future disasters of the same type.
Casualty insurance rates remained fairly stable for public entities through the second half of 2012; entering 2013, insurers were pushing for increases. For insureds with favorable loss experience, however, flat rates could still be achieved. Capacity remained robust and stable, creating competition and helping to keep rate increases to a minimum. Specialized programs are being more closely scrutinized and guaranteed cost and low deductible programs remain limited.
EXCESS WORKERS COMPENSATION
The excess workers compensation market remains erratic, with significant increases in both rate and retention levels for public entities due to the continuing increase in medicals costs as well as presumptive injury claims for police and fire. Some carriers are introducing corrections both in rate and retention levels across the board, while others are focusing on specific states.
Marsh 67
For public entities, capacity was limited entering 2013, with the exit of select insurers over the past several years. Increases in rates and retentions have increased competition among insurers, particularly from those that were not previously well represented in the sector. Some carriers no longer accept self-administration of claims. With the exception of pooling arrangements and risk retention groups which are limited by state guaranteed cost programs are virtually nonexistent for police and fire exposures.
SUBCONTRACTED WORK
Public entities are increasingly finding cost savings by subcontracting services, ranging from refuse collection to medical services in jails. This raises concerns as third parties are not public entities; therefore, they are not subject to the same protections under tort immunity laws. Public entities generally will transfer 100% of the risk when subcontractors are involved, but some risk will remain for the entity.
RISK TRENDS
Public entities continue to manage the challenges of slowly recovering economy, although there was increasing evidence of economic upturn and stabilization in 2012.
Contact: JEAN DEMCHAK Global Education and Public Entity Practices Leader +1 860 723 5635 jean.demchak@marsh.com
REDUCTION IN WORKFORCE
Many public entities are turning to volunteers to perform many essential services, including law enforcement. The risk implications are unclear, but there is an increased focus on volunteers and the additional risks they may present to both the entity and its insurer(s).
AGING INFRASTRUCTURE
Government funding to public entities is extremely limited, and funds are not widely available for improvements or expansion. Catastrophic levy, dam, and bridge accidents/failures have increased over the past several years, and poor maintenance can create liability for public entities.
REAL ESTATE
COVERAGE Property SEGMENT Non-CAT-Exposed Organizations Moderately CAT-Exposed Organizations (1% to 30% of values in CAT zones) Largely CAT-Exposed Organizations (more than 30% of values in CAT zones) Loss Driven Organizations Casualty Umbrella/Excess Liability General Liability Workers Compensation Automobile Liability Management Liability Privately Held Publicly Held Environmental Pollution Legal Liability Contractors Pollution Liability RATE CHANGE Q4 2012 5% decrease to 5% increase Flat to 10% increase 5% increase to 15% increase Flat to 15% increase 2% increase to 6% increase Flat to 10% increase 2% increase to 7% increase Flat to 5% increase Flat to 5% increase Flat to 5% increase 10% decrease to 10% increase 5% decrease to 10% increase RATE CHANGE Q4 2011 10% decrease to 10% increase (depending on use of incumbents) Flat to 10% increase 10% increase to 30% increase or higher if exposure was severe 10% increase and higher 2% increase to 6% increase Flat to 5% increase 2% increase to 7% increase Flat to 5% increase Flat to 5% decrease Flat to 5% decrease Flat to 10% decrease Flat to 5% decrease
MARKET COMMENTARY
Insurance market conditions continued to pose challenges for some real estate insureds at the start of 2013 as capacity remained available, but many insurers were either holding rates steady or seeking increases. Clients with catastrophe (CAT) exposures experienced the most pressure on rates. In 2013, real estate clients need to clearly define and prioritize their renewal goals and ensure that their data is complete and accurate.
PROPERTY
to 5% increases at renewal, with results varying by CAT exposure, loss history, occupancy class, and data quality. In the residential real estate sector, multifamily, framed construction risks saw a significant lift in rates and a drive by insurers to increase deductible levels to address frictional losses that have been eroding premium needed to fund long-term CAT losses, with primary and first excess layers seeing the most pressure. Property insurers are managing their CAT exposures by reducing limits, amending terms and conditions, increasing deductibles, and/or modifying sublimits. Underwriters are insisting upon high-quality data to meet the new modeling requirements and the demands of treaty reinsurers and rating agencies. To generate the best results at renewal, real estate firms need to distinguish themselves from their peers. Important items to focus on are: Starting the renewal process early and with highquality risk and underwriting data.
The property insurance market for real estate companies remained in transition for the first three quarters of 2012. Results varied by client based upon their individual risk profile and loss experience, but an upward rate trend continued. By the fourth quarter of 2012, rate increases seen earlier in the year began to level off and in certain instances reductions were being achieved. This changed, however, following Superstorm Sandy. Average pricing in the fourth quarter ranged from flat
Marsh 69
Proactively modeling exposures to understand which locations are key premium drivers. Considering alternative solutions for specific risk drivers. Considering alternative deductible/loss-funding strategies and/or smaller primary layers to generate market competition.
CASUALTY
Coverage is still being written for Brownfield redevelopment projects, although activity in this segment has slowed in recent years as the result of a sluggish economy. Claims for mold, legionella, and indoor air quality issues continue in the commercial and habitational segments, with many claims the result of maturing construction defects and weather-related events. Claims in the retail and industrial segments are reflective of more traditional pollution events, such as leaking underground storage tanks and contamination from historic dry cleaners.
Primary and excess casualty insurance premium rates continued their slight upward transition during the second half of 2012, with various real estate classes noticing more rate volatility than others depending on occupancy, size, and geography. Guaranteed cost programs in both general liability and workers compensation realized higher rate increases compared to loss sensitive programs. Fewer insurers appear willing to write standalone workers compensation for guaranteed cost. Rate changes are dependent on loss experience, yearover-year exposure changes, and length of time since previous marketing efforts. Ample capacity in the marketplace for diversified real estate portfolios has moderated significant rate increases as competition (or threat of competition) has worked to keep pricing near expiring levels. General liability rates have been increasing faster for habitational exposures than any other segment, with fewer insurers willing to write portfolios with significant habitational components. Some insurers have also restricted writing new apartment exposures, which likely will lead to further firming in this area.
RISK TRENDS
The US economy showed signs of strengthening and the real estate industry was slowly improving toward the end of 2012.
CAPITAL MARKET ENVIRONMENT

The capital market remains challenging for real estate firms that need to be able to access the credit markets when their debt comes due or when acquiring new properties. Lenders and investors are particular about property type, location, and sponsorship. Positive signs include an increase in US commercial property sales over last year and a limited revival of the commercial mortgage backed securities (CMBS) market.
VACANCY RATES AND OPERATING INCOME

High vacancy rates and increased expenses have taken their toll on the operating incomes of real estate companies. Vacancy rates are easing somewhat around the country, but vary greatly by property type and location. Apartment vacancy rates are the most improved, followed by office and industrial. Retail vacancy rates also have improved, but by a lesser amount.
Financial and professional insurers generally began to push back in 2012 on rate reductions experienced in 2011, although capacity remained strong and prices stable entering 2013. Real estate clients typically experienced flat to slight increases at renewal. Competition for excess layers remains strong.
ENVIRONMENTAL
DECREASED MARKET VALUE OF ASSETS

The market value of assets has declined in many sectors, resulting in decreased portfolio values, leverage ratios, and property liquidity. Property owners and management companies have postponed building improvements as they decrease operating expenses. If job creation continues in metropolitan areas, vacancy rates may continue to improve, ultimately increasing asset market values.
Contact: JEFFREY S. ALPAUGH Global Real Estate Practice Leader +1 617 385 0476 jeffrey.s.alpaugh@marsh.com
The real estate industry continues to be targeted as a preferred segment by environmental insurers. Significant capacity is available to build higher limits for pollution legal liability and contractors pollution liability insurance. Market competition has helped to keep pricing at renewal generally flat, but some insureds could see rate swings between 10% reductions and 10% increases, depending on class of business and loss history. New business rates remain competitive and policies are being used to strategically manage risk in short sales and foreclosures.
RETAIL/WHOLESALE, FOOD, AND BEVERAGE

COVERAGE Property SEGMENT Large, Non-CAT-Exposed Organizations Midsize, CAT-Exposed Organizations (TIV less than $250 million) Large, CAT-Exposed Organizations (TIV more than $250 million) Primary Casualty Large Organizations (sales greater than $5 billion) Midsize Organizations (sales less than $5 billion) Excess Casualty Large Organizations (sales greater than $5 billion) Midsize Organizations (sales less than $5 billion) Financial and Professional Liability Publicly Owned Companies Privately Owned Companies RATE CHANGE Q4 2012 Flat to 5% Increase Flat to 10% Increase Flat to 5% Increase Flat to 10% Increase Flat to 10% Increase Flat to 10% Increase Flat to 10% Increase Flat to 5% Decrease Flat to 5% Decrease RATE CHANGE Q4 2011 Flat to 5% decrease Flat to 5% increase Flat to 5% increase Flat to 5% increase Flat to 5% increase Flat to 5% decrease Flat to 5% decrease Flat to 5% decrease Flat to 5% decrease
MARKET COMMENTARY
The insurance markets for the retail/wholesale, food, and beverage (RWFB) industry remained relatively flat entering 2013, with increases driven primarily by loss experience.
PROPERTY
Available through marine insurers, stock throughput (STP) insurance may provide a viable strategy to remove inventories from a standard property insurance program. Most RWFB companies have concentrations of values that may be exposed to catastrophic risks. STP can help to reduce overall property insurance costs and eliminate percentage deductibles for inventory losses. Placement requires coordination between existing property underwriters. Sandy caused significant damage to property, power, transportation, and infrastructure, forcing many organizations to reduce or cease operations in stormaffected locations. Electronic failures also disrupted web shopping and fulfillment operations for some RWFB companies. Many RWFB companies have also experienced supply chain disruptions from recent CAT events. Companies are advised to consider integrating third-party and extended supply chain operations, as well as alternative customer fulfillment strategies, within their business resiliency protocols and planning.
CASUALTY
Through the first three quarters of 2012 there were certain indications that the property insurance market was stabilizing. In late October, however, Superstorm Sandy caused significant damage to property and infrastructure in the eastern United States. Though it does not appear that Sandy will have a significant longterm impact on the property insurance market, insurers are likely to seek rate increases for companies with poor loss histories or significant losses arising from the storm. The increase in the frequency and severity of natural catastrophe (CAT) events in recent years may result in additional catastrophe modeling adjustments over the next 12 to 18 months. Insurers may be more vigilant in ascertaining flood zones and in scrutinizing CAT-exposed geographies, and may limit capacity for retailers, wholesalers, food, and beverage companies with operations in high-hazard locations.
The RWFB industry generally experienced flat rates to minor increases entering 2013 for general liability insurance, and moderate rate increases for workers
Marsh 71
compensation. Excess/umbrella casualty rates at renewal generally continued to trend upward, and the casualty insurance market generally continued to show signs of firming. The renewal experience of a company may vary according to its exposures and loss history. Those with difficult risk profiles are more likely to realize the highest increases in pricing and primary attachment points, possibly in conjunction with coverage restrictions.
BUSINESS RESILIENCY
The globalized supply chain that RWFB companies employ can be vulnerable to fuel costs, cargo capacity, natural catastrophes, and product or commodity shortages. A failure along the chain could result in production delays, product shortages, and empty store shelves, which could contribute to changes in consumer buying behavior. Although most food and beverage manufacturers sustained minimal losses from Sandy, the retail/wholesale industry on the whole was among the hardest hit by disruptions in the weeks following the storm. Preliminary estimates indicate that storm-related closures may have cost the retail industry as much as $4 billion in lost sales.
Directors and officers (D&O) rates generally appeared to be firming at the end of 2012, particularly for publicly held RWFB organizations, which averaged flat to moderate increases. Employment practices liability (EPL) rates also trended upward as EPL claims, including wage and hour, harassment, discrimination, and wrongful termination allegations remained a significant area of concern, particularly for retailers. Cyber liability capacity generally remained adequate, although pricing may begin to firm.
PRODUCT AND FOOD SAFETY RISKS

The Food Safety Modernization Act of 2011 has become a focus of food safety regulators, with the USDA and FDA increasing enforcement staff. Food manufacturers and retailers have been the targets of litigation in the areas of food labeling, nutritional information, and health claims. The pervasiveness of social media has contributed to the risk of brand and reputation damage to manufacturers. The retail sector generally employs well-defined product recall protocols; however, they are often focused on notification and removing products from the retail stream. Many RWFB organizations contractually transfer liability to third parties, but a large loss event could exceed a third partys ability to indemnify the retailer for losses. RWFB companies should perform due diligence on the quality control measures of their third-party business partners.
RISK TRENDS
The RWFB industry generally made progress toward recovery during 2012. The full impact to the industry of Superstorm Sandy remains to be seen, while the industrys outlook is being tempered by global political and fiscal uncertainties.
EMPLOYMENT PRACTICES
RWFB organizations, particularly those with large numbers of employees spread across multiple locations and those experiencing high turnover rates, are frequently challenged by differences in federal and state labor and employment practices regulations. Wage and hour claims and allegations of harassment and discrimination, some of which have achieved classaction status, remain a concern. Social networking also remains a potential liability risk for RWFB organizations, which are challenged to balance their computer and internet usage policies with employees freedom of speech. For instance, the National Labor Relations Board may pursue administrative enforcement actions against employers deemed to have overly broad social media policies that restrict or prevent employees from voicing concerns about unfair working conditions, and that are perceived to be discriminatory, or that impede employees privacy rights.
CYBER RISK
As more information is shared among manufacturers, merchandisers, and retailers, the risk remains high for an information breach or the loss of sensitive data. Regulations have led to increased litigation, while a publicized data breach and issues surrounding it can significantly impact a firms brand and reputation. RWFB organizations should actively perform cyber risk assessments to strengthen internal controls, including encryption capability. More RWFB companies appear to be seeking to obtain and/or are evaluating whether to purchase cyber liability coverage.
Contact: MAC NADEL Retail/Wholesale, Food & Beverage Industry Practice Leader +1 203 229 6674 mac.d.nadel@marsh.com
TRANSPORTATION: RAIL
COVERAGE Casualty SEGMENT Regional/Short Line Freight Class I Freight Commuter/Transit Property Rolling Stock All Risk Property RATE CHANGE Q4 2012 Flat to 5% increase 3% to 5% increase Flat to 5% increase Flat Flat to 5% increase RATE CHANGE Q4 2011 Flat to 5% increase 5% increase Flat to 5% increase Flat to 5% increase 5% to 10% increase
MARKET COMMENTARY
PROPERTY
The property insurance market for rail companies generally stabilized in 2012 following a difficult 2011 with respect to natural catastrophe losses, specifically flood. Capacity was generally unchanged in 2012, and rate changes at renewal subsided to mostly flat, but with increases up to 5% depending on the degree of CAT exposure. Superstorm Sandy is expected to influence the rail market in 2013.
CASUALTY
of the release of any TIH materials. In fact, history demonstrates that railroads can be subjected to multibillion dollar liability claims for personal injury and property damage arising out of such events.
PASSENGER-FREIGHT CONTRACTS
Millions of passenger trips are taken on trains operating on tracks owned by freight railroads. The indemnity and liability provisions in the contracts between passenger and freight operators must be reviewed in order to build an insurance program that adheres to the terms and conditions of such contracts. A finite insurance market for railroad liability insurance provides challenges for obtaining coverage due, in part, to underwriters concerns of pyramiding limits.
The casualty insurance market for railroads is generally projected to remain stable for the first half of 2013. There were no major adverse loss trends in 2012 or significant increases in exposure (ridership/car loads) across the industry. This, coupled with the fact that competition remains generally strong for lead and excess railroad liability business, will likely keep rates relatively flat to modest increases for the near future.
FLOOD
Flood exposures to both passenger and freight railways are a significant concern for insurers and insureds. These exposures are difficult to quantify, nearly impossible to model effectively, and historically have caused some of the largest rail property losses. The limited interest among insurers in providing this coverage has made the product extremely sensitive to flood occurrences. As insured values generally rise each year, there does not appear to be a commensurate increase in capacity.
Contact: JAMES BEARDSLEY Global Rail Practice Leader +1 202 263 7667 james.beardsley@marsh.com
RISK TRENDS
The US rail freight industry is generally expected to grow by 50% by 2050 to meet consumer demand.
HAZARDOUS MATERIALS
Railroads face extreme uncertainty with the transport of hazardous materials, especially toxic inhalation hazard (TIH) materials. Each time a railroad transports a TIH material, it faces potentially ruinous liability in the event
Marsh 73
TRANSPORTATION: ROAD
COVERAGE General Liability Automobile Liability Workers Compensation SEGMENT All All Guarantee Costs (CA only) Guarantee Costs (AOS) Loss Sensitive Umbrella/Excess Liability All RATE CHANGE Q4 2012 3% to 10% increase 5% to 10% increase 10% to 100% increase 10% to 50% increase 8% to 18% increase 5% to 15% increase RATE CHANGE Q4 2011 2% to 10% increase 2% to 8% increase 10% to 30% increase 5% to 25% increase 5% to 10% increase Flat to 10% increase
MARKET COMMENTARY
CASUALTY
generally showed increases in the 3% to 8% range for companies with good loss histories.
TRUCK BROKER LIABILITY
The casualty insurance market for transportation companies generally tightened in 2012, with rates increasing on average in the 5% to 10% range for risks with good loss experience. If competition was brought in on the primary lines, incumbent insurers generally were more willing to reduce the rate increase. If exposures had decreased, insurers generally sought rate increases. The workers compensation marketplace generally continues to tighten, with many insurers declining to write monoline workers compensation.
UMBRELLA/EXCESS
A few insurers are looking to exclude truck broker liability coverage from their primary automobile coverage. The excess market for this business is also limited.
RISK TRENDS
DRIVER SHORTAGE
Motor carriers are generally experiencing a shortage of qualified drivers. As part of the effort to attract qualified drivers, some transportation companies are re-engineering their routes.
The umbrella/excess insurance marketplace experienced several changes recently, including fewer carriers willing to write in some layers. Rate increases have generally been in the 5% to 15% range, and carriers are looking at safety scores and other compliance monitoring. Umbrella/excess liability insurers are generally seeking to raise their attachment points for participating on transportation risks, and some have withdrawn from writing transportation risks altogether. Capacity is generally available, although it has become more challenging to structure accounts that have had losses penetrating higher layers.
OCCUPATIONAL ACCIDENT COVERAGE
LITIGATION
There generally has been an increase in successful litigation against transportation intermediaries for liability arising out of loads they have tendered to trucking companies. Two recent judgments of more than $40 million involving single-auto accidents appear to have influenced the pricing models of excess auto liability underwriting.
Contact: MARK LANGER Transportation Practice Leader +1 212 345 1084 mark.d.langer@marsh.com
In the market for occupational accident coverage, one insurer has withdrawn altogether, and two others have ceased writing such coverage in California. Pricing
NOTES
Marsh 75
NOTES
ABOUT MARSH
Marsh is a global leader in insurance broking and risk management. We help clients succeed by defining, designing, and delivering innovative industry-specific solutions that help them effectively manage risk. We have approximately 26,000 colleagues working together to serve clients in more than 100 countries. Marsh is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy, and human capital. With more than 53,000 employees worldwide and annual revenue exceeding $11 billion, Marsh & McLennan Companies is also the parent company of Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; Mercer, a global leader in talent, health, retirement, and investment consulting; and Oliver Wyman, a global leader in management consulting. Follow Marsh on Twitter @Marsh_Inc.
For further information, please contact your local Marsh office or visit our website at marsh.com
Marsh is one of the Marsh & McLennan Companies, together with Guy Carpenter, Mercer, and Oliver Wyman.
This document and any recommendations, analysis, or advice provided by Marsh (collectively, the Marsh Analysis) are not intended to be taken as advice regarding any individual situation and should not be relied upon as such. This document contains proprietary, confidential information of Marsh and may not be shared with any third party, including other insurance producers, without Marshs prior written consent. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Any modeling, analytics, or projections are subject to inherent uncertainty, and the Marsh Analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Except as may be set forth in an agreement between you and Marsh, Marsh shall have no obligation to update the Marsh Analysis and shall have no liability to you or any other party with regard to the Marsh Analysis or to any services provided by a third party to you or Marsh. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or re-insurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage. Copyright 2013 Marsh Inc. All rights reserved. Compliance MA12-12111 4621

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Marsh Risk Management Research

UNITED STATES INSURANCE MARKET REPORT 2013

Reinsurance 4 US Property/Casualty Industry Major Coverage Lines

Insurance Markets by Specialty

Insurance Markets by Industry

David Bidmead, Chief Executive Officer, US Marsh, Inc.

MAJOR COVERAGE LINES

SPECIALTY COVERAGE LINES

FINANCIAL AND PROFESSIONAL

2 Insurance Market Report 2013

POLITICAL RISK AND STRUCTURED CREDIT

SUPERSTORM SANDY AND OTHER DRIVERS

FIGURE 1: GLOBAL PROPERTY CATASTROPHE ROL INDEX

Source: Guy Carpenter & Company, LLC

4 Insurance Market Report 2013

SOLUTIONS FOR PROFITABLE GROWTH

FIGURE 2: REGIONAL PROPERTY CATASTROPHE ROL INDEX

300 250 200 150 100 50 0

Source: Guy Carpenter & Company, LLC

CONVERGENCE OF CAPITAL MARKETS

MERGERS AND ACQUISITIONS

RISK, RATINGS, AND REGULATION

6 Insurance Market Report 2013

9 MONTHS 2011 $330.8 ($30.4) $36.3 $12.3 $537.0 108.5

CHANGE 4.4% NM -1.3% 152.7% 7.9% -8.4

Source: AM Best Company

US PROPERTY AND CASUALTY INDUSTRY

Source: AM Best Company

NET UNDERWRITING GAIN/LOSS l

8 Insurance Market Report 2013

MAJOR COVERAGE LINES

10 Insurance Market Report 2013

US PROPERTY ALL RISK CLIENTS

Source: Marsh Global Analytics

INCREASE DECREASE NO CHANGE

INCREASE > 30% l INCREASE 20-30% l INCREASE 10-20% l INCREASE 0-10% l

12 Insurance Market Report 2013

SANDY HIGHLIGHTS FLOOD ISSUES

US GENERAL LIABILITY CLIENTS

19% 13% 18%

Source: Marsh Global Analytics

INCREASE NO CHANGE DECREASE

14 Insurance Market Report 2013

WORKERS COMPENSATION CLIENTS

Source: Marsh Global Analytics

INCREASE NO CHANGE DECREASE

US EXCESS CASUALTY CLIENTS

JONATHAN ZAFFINO US Casualty Practice Leader +1 212 345 2263 jonathan.zaffino@marsh.com

16 Insurance Market Report 2013

FINANCIAL AND PROFESSIONAL: DIRECTORS AND OFFICERS

18 Insurance Market Report 2013

FOREIGN CORRUPT PRACTICES ACT (FCPA)

DIRECTORS & OFFICERS LIABILITY INSURANCE

Source: Marsh Global Analytics

FINANCIAL AND PROFESSIONAL: COMMERCIAL ERRORS AND OMISSIONS

PRIVACY AND CYBER EXPOSURE

20 Insurance Market Report 2013

FINANCIAL AND PROFESSIONAL: EMPLOYMENT PRACTICES LIABILITY

WAGE AND HOUR CLAIMS

FAIR LABOR STANDARDS ACT CASES IN FEDERAL COURT

22 Insurance Market Report 2013

FINANCIAL AND PROFESSIONAL: FIDELITY/CRIME INSURANCE

DIRECT LOSS DEFENSE

CORPORATE ACCOUNT TAKEOVERS