Reinsurance Supported InnovationProfitably Insure New Risks

September 2010

reDEFININGCapital | Access | Advocacy | Innovation

Reinsurance Supported InnovationThe global insurance market is now highly competitive in almost every sector of the industry. Insurance for personal and commercial lines in most developed nations is a mature industry. Product innovation has had little noticeable impact on industry premiums. Very few truly new insurance products have been added to the industry landscape and 2010 and 2011 appear to be headed for net decreases in industry-wide premiums for core non-life premiums.

What does this all mean? Insurers likely will be spending much more time on product innovations in an attempt to reverse the negative premium trends and to gain competitive advantages in their selected markets.

Management will likely need to address questions such as:

> What new or changed risk exposure(s) do our insureds face that a new insurance, savings or risk management product may eliminate, mitigate or finance?

> What product or coverage additions or enhancements to currently offered products would be necessary to stop the decrease in on-level premiums earned from the insured?

> What product or coverage enhancements would be necessary to increase the on-level premiums earned from the insured?

We believe that the answers to these fundamental innovation questions will require the consideration of insuring new risks that are less well understood than those currently insured. Aon Benfield, and like-minded innovative reinsurers, can be helpful in assessing, transferring, mitigating, or financing these new risks. There has never been a better time to ask your reinsurers to participate in the new risks and opportunities associated with the innovations that will be required to grow the insurance market.

Reinsurers as Insurance Product Innovators?

Aon Benfield understands that

reinsurers are not necessarily

known for helping insurers to

innovate their original policies.

What is different now? Reinsurers

have seen significant declines in

assumed premiums from insurers,

especially from casualty and

specialty insurers. Leading reinsurers

engaged by Aon Benfield on

product innovation-related matters,

have proven to be open-minded,

creative and willing to reinsure a

range of uncertainties associated

with new product innovations.

Line New / Changed Exposure Likely InnovationsMotor > Lease and loan leverage has increased

> Fewer financing options> Incorporation of Gap coverage> Reasonably priced optional endorsements for most dealer sold

coverages> Post-catastrophe government assessment coverage

Home > More mobile population> Less owner equity / higher leverage in home> Homes less resistant to catastrophes than previously believed> Flood risks more severe than previously considered> Fewer financing and refinancing options> Greater role of governments in homeowners' insurance> Better understanding of post-catastrophe long-term

assessment risk> Better understanding of community collapse risk post-

catastrophe

> Death/Disability linked leverage reduction and management riders> Event linked equity protection products protecting the homeowners'

interests rather than lender interests> Excess and integrated flood coverage> Severe catastrophe temporary or permanent relocation policy options> Post-event government assessment coverage> Blanket brown and white goods (home appliances) warranty and

extended warranty coverage

Liability > Greater personal liability expected or assumed from more "entitled" societies

> More transparency to personal wealth

> Higher limits available through core motor and homeowners policies> Higher personal liability umbrella limits offered

Health > Medical tourism> Greater participation in healthcare costs incurred as a result of

employer coverage cutbacks> Greater government involvement in health care delivery

> Defined benefit supplementary coverage sold to the individual> Private healthcare insurance products for severe illness and trauma

Life > Higher homeowner and consumer credit leverage> Reduction in coverage and policy accumulation benefits> Greater transparency on term and whole life policy costs and

comparative features

> New life products focused on leverage reduction in the event of death that are not focused on a specific lender

> New savings products with life contingencies

Identity > Internet transparency and public record access enable impersonation and related financial fraud

> Misuse of voluntarily disclosed but private data supplied to public websites is common

> Insurance and services contracts restore personal credit and financial histories

> Insurance and services contracts to remove false or unintended data from public websites

> Insurance contracts to cover legal costs from alleged misuse of data> Insurance contracts to cover damages from alleged misuse of data

Savings > Increased investment volatility> Much lower fixed income securities yields> Much lower bank saving products yields> Perception that municipal bonds may be more risky> Record bank failures

> Savings products with any number of life and catastrophe event related contingencies

Personal Insurance

Aon Benfield

Commercial InsuranceLine New / Changed Exposure Likely InnovationsProperty > Over $50 billion in paid commercial losses from recent events have provided great

insight to the risks associated with natural catastrophe models> Physical structures much more vulnerable to damage from natural catastrophes

than previously considered

> Insurance coverage that more carefully differentiates resistive qualities of specific physical structures insured

> Insurance products that provide differentiated coverage for progressively higher quality levels of underlying structural details

Business Interruption

> Greater appreciation for the potential duration of business interruption from large natural and man made events

> BI limits tied to a physical loss are often insufficient to sustain the full business interruption impact from even widespread events

> Lower access to bank short-term financing as banks continue a massive global deleveraging push and face uncertainty about absolute capital levels

> Contingent BI products with even more transparent event triggers

> Parametric payment or settlement options in addition to indemnity coverage if speed to settlement outweighs the benefit of full indemnity coverage

> Liquidity facilities (with interest) built into BI clauses that allow the insured uncontested access to funds while the claim is being adjudicated

Workers'Compensation

> Low interest rate environment means premiums cover less of the ultimate costs> Much higher worker productivity and thin staffing mean worker injuries and

outages cost employers more than they have previously> Very high training costs and time to temporarily or permanently replace injured

workers> Financial crisis and bank deleveraging has reduced the sources and increased the

cost of loss funding by insureds

> Workers' compensation program endorsements to cover higher replacement and retraining costs

> Workers' compensation loss funding options embedded in the insurance product

> Excess employer payments for business interruption due to multiple and simultaneous injuries to workers

General Liability

> Greatly expanded potential corporate liability and the need for much greater limits than the insurance market has historically supplied

> Greater respect for the substantially higher cost of capital in the event that tail risks occur during a sustained period of deleveraging

> Potential for government takeover of the claims adjudication and payment process for mass torts

> Greatly expanded limits for higher risk and premium levels

> Contingent liquidity facilities from insurers> Policy provisions that serve to help insureds prevent

the government takeover of the claims adjudication and payment process for mass torts

Products Liability

> Greatly expanded potential corporate liability for products and the need for much greater limits than the insurance market has historically supplied

> Greater respect for the substantially higher cost of capital in the event that products liability tail risks occur during a sustained period of deleveraging

> Potential for government takeover of the claims adjudication and payment process for mass torts

> Greatly expanded limits for higher product liability risk and premium levels

> Contingent liquidity facilities from insurers for products liability

> Policy provisions that serve to help insureds prevent the government takeover of the claims adjudication and payment process for multiple claimant product liability situations

Commercial Motor

> Technology advances have continued to give fleet operators real time insight to exposures

> Driver monitoring has become a very important component to managing risk

> Development of more comprehensive exposure and rating plans that further differentiate the insured based on the additional available data

> Fleet-performance based predictive modelsProfessional Liability

> New, higher and more transparent levels of professional responsibility / accountability under Dodd Frank Act and other similar measures still under consideration globally

> General public outrage about the extent of financial institution bailouts and relatively high level of intolerance for more entity specific relief

> Pooled financial institution failure plan for next crisis> Concern over ultimate cost of potential D&O and E&O claims arising from the

financial crisis> Uncertainty around the pace of economic recovery and the potential for greater

D&O and E&O claims as the expected recovery materialized more slowly than hoped

> Greater differentiation of the acts of individual directors and individual officers and the greater potential for a shared limit to become unsuitable for a collection of directors and officers

> Greater hospital control or involvement in medical professional liability coverage provisioning and claims adjudication

> Leveling of claims frequency of claims from nearly a decade of decreasing claims frequency

> Broadening of interest in material risk transfer and risk financing products for all professional liability and E&O for those dealing in securities, mortgages, derivatives and consumer financial products

> Systemic risk transfer and risk financing products for pooled failure risk for the next crisis

> Higher D&O and E&O limits and generally more interest in individual and per professional coverage

> Supplemental individual professional coverage for hospital provided medical professional liability

> New products related to the new U.S. government led healthcare system

Trade Credit > Realization that trade credit markets nearly stopped and in some cases required government assistance

> Recognized need for greater transparency into individual credits and possibly independent credit assessments to efficiently support the credit risk underwritten

> Insurance products that differentiate the provision and cost of protection when granular and transparent data is made available to underwriters

> Systemic risk transfer and risk financing products from insurers

Energy > Significantly change landscape for potential liabilities given the scale of the deepwater horizon case

> Realization that not even the most financially secure organizations can sustain similar events without quadrupling their cost of capital, suffering material downgrades and needing to sell even strategic assets

> Substantially higher limits for substantially higher premiums reflecting the new realities

Marine > Substantial volatility in volumes of shipping> Potential for rapid increase in exposure if global recovery continues

> Product features that reflect up-front the notion of paying for actual shipping volumes

Surety > Massive infrastructure projects globally struggle to find sufficient surety capacity> Contractor concentrations are significant> Sureties are much more sensitive to concentrations in projects and contractors

> New capacity from nontraditional sources to complement leading sureties

> Project sponsor support of surety commitments

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Copyright Aon Benfield Inc. 2010 | #4748 - 08/2010

About Aon BenfieldAs the industry leader in treaty, facultative and capital markets, Aon Benfield is redefining the role of

the reinsurance intermediary and capital advisor. Through our unmatched talent and industry-leading

proprietary tools and products, we help our clients to redefine themselves and their success. Aon Benfield

offers unbiased capital advice and customized access to more reinsurance and capital markets than anyone

else. As a trusted advocate, we provide local reach to the world’s markets, an unparalleled investment

in innovative analytics, including catastrophe management, actuarial, and rating agency advisory, and

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For more information please contact your Aon Benfield broker or:

Mike Bungertco-Chief Executive Officer, Aon Benfield+1.312.381.5301michael.bungert@aonbenfield.com

Bryon EhrhartChairman, Aon Benfield Analytics and Aon Benfield Securities+1.312.381.5350bryon.ehrhart@aonbenfield.com

John MooreHead of International, Aon Benfield Analytics+44 (0)20 7522 3973john.moore@aonbenfield.com

Dominic Christianco-Chief Executive Officer, Aon Benfield+44 (0)20 7522 3866dominic.christian@aonbenfield.com

Stephen MildenhallChief Executive Officer, Aon Benfield Analytics+1.312.381.5880stephen.mildenhall@aonbenfield.com