NEW MARSH INDEX SHOWS INSURANCE MARKET FIRMING

Rates in the global insurance market generally firmed in the second quarter of 2012. According to the Marsh Risk Management Global Insurance Index, launched with this quarter's briefing, the global insurance market has shown a clear trend of firming since the third quarter of 2011.

The multiyear slide in liability insurance rates showed signs of moderating as general liability and professional liability insurance rates were typically stable at renewal in most major geographies.

Property insurance rates rose in the second quarter of 2012, driven by unexpected adverse loss developments from the major catastrophes of 2011, increased focus by insurers on the data provided by insureds, a rise in attritional losses, and changes to insurers' calculations of their risk-adjusted cost of capital. Property insurance rates for insureds with moderate to heavy catastrophe exposures climbed significantly in loss-affected regions; insureds without such exposures generally saw rates stabilize.

QUARTERLY OVERVIEW

• Overall pricing in the global insurance markets firmed in the second quarter of 2012, as seen in the Marsh Risk Management Global Insurance Index.
• The long trend of liability insurance rate decreases appeared to be ending.
• Property insurance rates rose in most geographies, especially in areas that experienced large losses in 2011.
• Some insurers are responding to increasing concerns about cyber risks with product innovations, such as new protection for cloud computing.

ABOUT THE INDEX

The Marsh Risk Management Global Insurance Index tracks the annual changes in rates for Marsh clients that renewed their insurance program in a particular quarter. The index provides a quick view of the trends in global insurance pricing. It is built on renewal data from 20 major countries in the following insurance lines: casualty (general liability, motor/automotive, workers' compensation/employers liability), property, and financial and professional (directors and officers, financial institutions, and professional liability).

The composite is derived from those three lines and is weighted by the amount of premium placed in each. In the chart above, the composite index of 1.014 represents a 1.4 percent increase in rates at renewal for the second quarter of 2012 as compared to renewal rates in the second quarter of 2011.

MARSH RISK MANAGEMENT GLOBAL INSURANCE INDEX

EXPOSURE VALUE CHANGES REFLECT SLUGGISH ECONOMY

Reflecting sluggish economic growth in the U.S., the value of average insured property risk exposures (total insurable value) increased 1.9 percent in the second quarter of 2012, following an increase of 1.3 percent in the first quarter. The value of business interruption exposures remained depressed.

Although the average exposure values for casualty insureds increased, the median values suggest this growth is uneven as most companies experienced flat to moderately increased exposure bases. Coupled with the upward trend in casualty exposures has been a tendency for premium increases. This is in contrast to times of economic upswing, when insurers generally are more willing to mitigate exposure increases by decreasing rates.

AVERAGE U.S. EXPOSURES TRENDS

RATE INCREASES OUTNUMBER DECREASES

Companies in the U.S. were more likely to experience rate increases than decreases in most major lines of insurance during the second quarter of 2012.

• Just over 60 percent of companies experienced increased property insurance rates, a higher percentage than in the first quarter.
• Insurers applied significant pressure on auto liability attachments in lead umbrella programs, seeking to structure higher underlying attachment levels based on fleet makeup and loss activity. Carriers are more closely scrutinizing exposure to wildfire and emerging risks such as cyber and cloud computing.
• U.S. guaranteed cost workers' compensation has been affected by higher rate increases than loss sensitive programs as underwriters target higher profitability levels.

PERCENT OF U.S. CLIENTS WITH RATE CHANGES—Q2 2012

D&O FOR PUBLICLY TRADED COMPANIES

Rates for directors and officers (D&O) liability insurance stabilized following nearly a decade of decreases. Although the changes have so far been moderate, there are indications that rates are firming.

• Companies with a market capitalization of less than $US300 million were more likely to experience increases, with almost 50 percent seeing rates go up in the second quarter. By contrast, only 20 percent of companies with a market capitalization of more than $US10 billion experienced increases.
• The rates for primary layers appeared to be firming more than for excess layers, particularly for those organizations with less favorable risk profiles. On average, rates for excess layers continued to decline modestly.

HISTORICAL RATE (PRICE PER MILLION) CHANGES—AVERAGES

GLOBAL PROPERTY CATASTROPHE RATES CONTINUE TO CLIMB

Property catastrophe rates continued to rise in the second quarter, with most major geographies experiencing increases, particularly those that experienced large losses in 2011.

• In Japan, just over a year after the Tōhoku earthquake and tsunami, increases typically continued to be greater than 30 percent on renewing programs. Similar increases were seen on accounts with exposures in Thailand, Taiwan, Singapore, and New Zealand.
• In the U.S., companies without losses generally saw increases of between 10 percent and 20 percent on renewal. Those with losses typically saw increases in excess of 20 percent, which is due in part to a disproportionate increase of insured values in catastrophe-exposed areas such as Florida.
• Underwriting decisions by insurers continued to be driven by last year's catastrophe model revisions, which began to impact pricing in the second half of 2011. Although this might suggest that increases will moderate in the second half of this year as programs renew, some insurers have indicated they will seek further increases.

Although capacity remained plentiful in the second quarter, some insurers reduced their exposure to natural catastrophe risk and a small number stopped writing new business altogether. Some property coverages and sublimits have come under greater scrutiny from insurers. No new capacity entered the market. Some European insurers began restricting the capacity offered in certain critical catastrophe zones, while others imposed additional sublimits.

PROPERTY (CATASTROPHE-EXPOSED RISKS): TYPICAL RATE CHANGES

FOCUS ON CYBER INSURANCE

Increased reliance on technology has firmly cemented cyber security as a key operational risk for organizations, especially those that handle confidential information. The U.S. Securities and Exchange Commission (SEC) has said that it considers technology and information security events as potentially "material" for public companies. At the same time, greater regulation has led to increased litigation, a trend being mirrored in other regions, particularly Europe and Asia.

The growth of cloud computing means that many companies now have increased dependence on and/or potential vicarious liability from a vendor or trading partner. Insurers continue to adapt to these risks, and, for example, have expanded privacy liability insurance in terms of both limits and coverage.

One of the latest innovations from insurers is a broadened business interruption trigger that may provide coverage for loss of income where an insured's system suffers an outage due to a failure of technology, without the requirement of a failure of computer security. Coverage for risks associated with cloud computing is now available for losses suffered from the failure of an insured's cloud provider. Generally, pricing in the global cyber insurance market remains flat, in large part due to competition from new insurers entering the market.

LIABILITY MARKETS SHOW SIGNS OF FIRMING

Rate reductions were less common and renewals that were flat or showed slight increases were the norm in most global liability insurance markets.

Rate increases were more frequent in sectors where significant losses have been posted, particularly when combined with an increase in exposure. For example, the energy market saw typical rate increases of between 10 percent and 25 percent. Less hazardous sectors were more likely to experience flat renewals, particularly if exposure levels remained stable.

D&O liability insurance rates continued to stabilize, although with decreases still obtainable in some markets.

Although capacity remained robust and increased in the professional liability market in relation to errors and omissions (E&O), insurers were less willing to compete, including within programs for primary/lower levels, reducing the ability for companies to secure decreases.

Significant large loss activity and a general deterioration in losses were the drivers in E&O lines. Although competition on pricing declined, insurers were still willing to be flexible on terms and conditions. Rates across the various E&O product lines trended up, with programs typically renewing with rate increases of up to 10 percent, depending on the class of E&O.

Overall, insurers in the second quarter increased their levels of scrutiny of new and renewing business, leading to longer underwriting times. They placed greater emphasis on the quality of data provided, including details around large losses and overall loss trends in programs.

MAJOR MARKETS LIABILITY: TYPICAL RATE CHANGES

SOCIAL MEDIA AND EMPLOYMENT PRACTICES LIABILITY

The growing use by companies of social media has ongoing implications for the employment practices liability market. Insurers are increasingly examining issues that impact companies' risk profiles, including:

• balancing employees' personal and work-related activities;
• balancing employees' freedom of speech versus employers' computer and Internet usage policies; and
• using online recruitment and background checks on potential applicants.

Infringement of intellectual property—primarily copyright and trademark infringement—are also risks associated with the use of social media.