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

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

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2006 Towers Perrin 3 Towers Perrin Towers Perrin is one of the worlds largest privately-held professional services firms with over $1.5 billion in revenue, a staff of 5,500 and offices and affiliates in 28 countries We provide innovative solutions to clients in three areas: Human resource strategy, design and management Actuarial and management consulting to the financial services industry Reinsurance intermediary services Fifth largest in the world We count as clients: 75 of the top p/c insurers 80 of the top global life insurers 50 of the top 60 multinational insurance organizations

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

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Why Purchase Reinsurance

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

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

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

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A Look Back at 2004 2006

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2006 Towers Perrin 10 A Look Back at 2004 2006 2004 4 hurricanes pound Florida The final one, Ivan, wreaks havoc in the Gulf Market reaction Cant happen again 2005 Katrina, Rita and Wilma strike the Gulf Coast Katrina and Rita produce record losses in Offshore Energy Katrina and Wilma set record Recreational Boating losses as well First time multiple marine interests effected in one event Market reaction Is this now the norm 2006 No Catastrophic events impact marine market

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

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

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

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The Current Landscape

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2006 Towers Perrin 15 Property Catastrophe Market Update Impressions pre-quotes (up to the PCI) Reinsurance underwriters indicated that they under-priced January 1, 2006 business: Didnt fully appreciate the size of Katrina Underestimated Wilma loss Didnt fully account for increased retro costs and limited retro capacity Tried to factor changes in models into pricing but they underestimated the impact on many programs Didnt account for understatement of exposures (TIV) by cedants

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

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

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

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

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

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

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

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

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

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

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Exposure Data

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

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

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

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

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

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2006 Towers Perrin 32 to a Zoomed in View

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2006 Towers Perrin 33 to Location Detail

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2006 Towers Perrin 34 Total Insured Values By Location

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2006 Towers Perrin 35 Select Locations

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2006 Towers Perrin 36 Review location of a risk

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2006 Towers Perrin 37 Review concentration and nearby locations

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2006 Towers Perrin 38 Microsoft Aerial Imagery Note: Microsoft currently provides Birds Eye aerial views only for major metropolitan areas

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A Look Ahead

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

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