Capitalising on Opportunity: a Time of Change* the Bermuda Market Survey Apply One of Pwc Bright Colours

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Capitalising on opportunity: A time of change* The Bermuda Market Survey Apply one of PwC bright colours. Delete this note.

Introduction 2 Executive summary 4 Underwriting 8 The Bermuda Market 25 Contacts 26

PricewaterhouseCoopers Capitalising on opportunity: A time of change Introduction

Welcome to the 1st Bermuda Market Survey – ‘Capitalising on opportunity: A time of change’.

The global property-casualty industry of exposure, optimisation of • In-depth questionnaires from We are confident that you will find produced strong underwriting results reinsurance spend and protecting participants who, in combination, this report thought-provoking and in 2006, benefiting in particular and effectively allocating capital provide in excess of 75% of insightful. Copies of this survey, from a very benign year of natural among their top priorities. underwriting capacity to the along with our other publications catastrophes. In the autumn of 2006, Admittedly, none of these issues are Bermuda insurance and are all available free of charge from PricewaterhouseCoopers1 surveyed straightforward, but how effective reinsurance market (the ‘Bermuda our website (www.pwc.com/bm). a cross section of insurance will companies be in realising these Market’). Participants were and reinsurance companies objectives? Few would disagree selected to reflect a broad If you would like to discuss any (encompassing a substantial that 2006 was a period of great spectrum of capitalisation, of the issues raised in this report, proportion of the Bermuda market’s opportunity in which many product classes, insurance and please speak to your usual contact 2006 capacity) in order to provide capitalised to the fullest extent, reinsurance writers, independent at PricewaterhouseCoopers or one a unique insight into how they but following the losses of 2004 businesses and public (and of the editorial board members are addressing key operational and 2005 many feel that only an subsidiary) organisations. listed at the end of this briefing. challenges. The results reveal a adverse hurricane season or a cycle We would also appreciate your • Face-to-face interviews with high degree of consensus regarding downturn will realistically test the feedback on this report as it helps executives. the key issues facing survey effectiveness and sustainability of us to ensure that we are addressing participants, with most CEOs the changes companies have made the issues you are focussing on and The survey findings and interviews listing such factors as achieving as a result. would welcome suggested topics of were further supplemented by improvements in underwriting analysis for future surveys. significant desk research. performance, institutionalising The research effort for this report effective cycle management, comprised two dimensions: effective monitoring of aggregations

1 In this publication, unless the context requires otherwise, the term ‘PricewaterhouseCoopers’ refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

PricewaterhouseCoopers Capitalising on opportunity: A time of change PricewaterhouseCoopers Capitalising on opportunity: A time of change Executive summary

With capital providers and shareholders looking for a strong response to the heavy losses sustained in 2005, we asked CEOs to highlight and rank the top five issues on their agendas in 2006.

Key issues and operational Figure 1 Please indicate the top 5 issues on your CEO’s agenda in 2006. drivers in the Bermuda Market

Underwriting performance and cycle Record earnings in 2006 resulting management Aggregations of exposure and optimised from a combination of factors reinsurance spend including strong underwriting Capital levels and allocation performance, a light catastrophe load and solid investment income New distribution channels reflected a return to form for many New markets (geographical)

participants following significant New markets (classes of business) capital depletion in 2005. CEOs, therefore, are looking to the future Investment management and performance and are focussing on opportunities Regulation

for growth and improved cycle Human capital challenges management. The lessons learnt from the 2005 hurricanes, Katrina, Embedding risk management Rita and Wilma (‘KRW’), however, Cost control

still resonate with participants Diversification and their capital providers, and this survey unsurprisingly found Improved management information that most CEOs are particularly Improved rating agency management

focussed on improving underwriting Improved finance function effectiveness performance, ensuring effective aggregation and monitoring of Optimal use of technology exposure, optimising reinsurance Enhanced corporate governance coverage, and protecting and Lowest Highest effectively allocating capital (see priority priority Figure 1). Source: PricewaterhouseCoopers

PricewaterhouseCoopers Capitalising on opportunity: A time of change The Top Five… seemed to show at the exposures Capital levels and allocation New distribution channels ultimately hitting their books. As scientists predict that higher The Bermuda Market demonstrated Participants highlighted the sourcing Underwriting performance and sea surface temperatures are likely unprecedented success in attracting of new distribution channels as a cycle management to increase the frequency and significant capital in the latter stages key priority, however, the survey’s severity of storms, and that 2006 of 2005 and early part of 2006 in the results show only single digit A combination of factors, including was in fact more anomalous than form of existing companies percentage changes in business nominal catastrophe losses, the previous few years, reinsurers replenishing depleted balance sourced from the ‘Big 4’ of Marsh, heightened competition and excess are re-evaluating their methods of sheets, the ‘class of 2005’ start-up Aon, Benfield and Willis, and an capacity in some sectors highlight assessing exposure to catastrophes. companies, Lloyd’s entrants and overall reduction in business that, despite a record year, views Participants are no different and this approximately $3bn for the sidecars. sourced from other brokers. There are that 2007 will reflect a general survey highlights in more detail Following such a ‘surge’, however, was a single digit increase in softening in prices except in some some of the approaches being capital management is a topic on the business sourced directly. Various fairly specific natural disaster prone deployed to protect capital. agenda of most CEOs surveyed and discussions with participants areas. Top-line growth was not 2007 could highlight a return of highlighted that while they were always possible for participants to 2006 also proved an interesting year capital that companies are unable to keen to explore new distribution achieve despite first-rate underwriting for the capital markets which deploy profitably. For example, as channels the practical application profitability. Harder markets tend to provided various alternative various modelling firms are making was proving harder to deploy. mask weaknesses and flatter results. opportunities for insurers to offload changes to their models, most The acid test will come with the (primarily catastrophe) risk from their notably to include improved data New markets cycle downturn. This survey seeks balance sheets, particularly in light on ‘storm surge’ and ‘demand surge’, to identify what companies are doing of elevated reinsurance costs and companies look increasingly likely Number five of the top five issues to manage a cycle downturn beyond depleted capacity in certain zones. to pull back from certain catastrophe on CEO’s agendas in 2006 was the maintaining ‘underwriting discipline’. Catastrophe bonds and the zones. Participants are paying close penetration of new markets, both emergence of the ‘sidecar’ provided attention to the various modelling geographically and by business attractive avenues for certain changes being contemplated or Aggregations of exposure and class. The survey indicates, participants. Our survey has implemented by the rating agencies optimisation of reinsurance spend however, that geographical markets revealed several motivations for and the impacts these have on was more the priority of a smaller ceding to sidecars, with executives capital charges. For example, Whilst the magnitude of KRW losses number of participants who were citing cost effectiveness, capital Standard and Poor’s has revised the surpassed anything seen before, considering opportunities in London, charge relief, risk reduction and way it applies capital charges relating perhaps what was more interesting US, Continental Europe and Dublin rapid and opportunistic capacity to significant natural disasters. for market observers was the in almost equal numbers, than the apparent surprise some companies expansion as the most ubiquitous.

PricewaterhouseCoopers Capitalising on opportunity: A time of change preserve of the majority who On the face of it, the profile of risk asserted that they were not managers has never been higher. considering opportunities in any Regulators have enacted sweeping of these areas. The survey results changes to the way financial indicate that both the established institutions handle risk; senior participants included within the executives are keenly aware of the sample, as well as the new start-ups, damage that can be done to their were seeking new ‘other lines of bottom lines if risk is not managed business’ opportunities. properly; and rating agencies and analysts are scrutinising risk management practices as never …and The Rest! before. Yet, in many ways, the discipline of risk management is still 2 As might be expected, human somewhat neglected. Embedding capital challenges were high on the risk management remains both a agenda and fell just outside the top key issue and a key priority for five issues. A finite supply of local survey participants. talent has resulted in work permit and term limit issues being faced Various other issues remain a focus by almost all participants and, in for most, including investment particular, the new start-ups. Certain management and performance, cost expense ratios have faltered under control, diversification and regulation. the weight of re-location and local allowance packages and bonus Interestingly, rating agency allocations and the survey has found management, improved management that participants have discovered information, improved finance non-compete clauses being tested function effectiveness and optimal as attractive offers have filtered use of technology were not generally through the market. considered a priority by participants.

2 See PricewaterhouseCoopers FS briefing – Creating value: Effective risk management in financial services (www.pwc.com/financialservices)

PricewaterhouseCoopers Capitalising on opportunity: A time of change PricewaterhouseCoopers Capitalising on opportunity: A time of change Underwriting

Effective planning to ensure improved underwriting performance, defining risk appetite and capital allocation and institutionalising effective cycle management are commonly recognised as top priorities by participants of this survey.

Planning and cycle management management and most Boards of Figure 2 Please rate from 1 to 5 the following functional areas on the level of involvement Directors. About half of all participants in producing your business plan? surveyed shared their business Business planning approach plans with rating agencies and a quarter with their external auditors Executive management For most participants, the importance (see Figure 3 overleaf). Finance of producing a clearly defined business plan is clear through the Underwriting high level of involvement from the Risk appetite Actuarial finance, underwriting and executive Dedicated business planning team management functional areas, with As exposure and risk models are over 85% of all underwriters having revised (mainly in response to KRW) Claims had direct and in-depth involvement participants are seeing both an Risk management at the planning phase (see Figure 2). impact on premium rates but more importantly exposures in certain Low High involvement involvement Participants favour both a top-down zones that have been revised and ground-up approach, in upwards and which are no longer Source: PricewaterhouseCoopers combination, in producing their compatible with their risk appetite business plans, with about a quarter (see Figure 4 overleaf). favouring a ground-up approach only. Most business plans are Risk appetite appears to be produced four months in advance of evaluated by participants mainly the commencement of the following at a class of business level, although year, with that plan on average being capital allocation in many cases is updated quarterly. As would be performed at an even more granular expected, business plans are fully level (see Figure 5 and 6 overleaf). reviewed by all executive

PricewaterhouseCoopers Capitalising on opportunity: A time of change Figure 3 Please rate from 1 to 5 how the following factors influence your Figure 4 Which of the following reference points do you consider in your definition business planning. of risk appetite? 85% 15%

69% 31%

Profitability target Probability of loss of surplus % 75% 25%

Market condition Total value at risk/PML 67% 33%

Risk appetite Financial strength rating 42% 58%

Strategy guidance from board of Probability of ruin 33% 67% directors/investors/group/head office Rating agencies’ capital model RDS/catastrophe scenarios 33% 67% 31% 69% Previous year’s business plan MPL 25% 75% Premium volume 8% 92% Diversification credit No risk appetite definition 8% 92% Not at all Most influential influential 0 100%

Source: PricewaterhouseCoopers Yes No

Source: PricewaterhouseCoopers

Figure 5 What is the lowest level at which your risk appetite is considered? Figure 6 What is the lowest level at which capital is allocated?

8% 8% 17% 8% 8% 33% Group Company/individual business unit/syndicate Territory Class of business 8% Class of business Underwriter Underwriter Contract Per risk policy 42% Class of business and geographic zone 43% By contract 8% 17%

Source: PricewaterhouseCoopers Source: PricewaterhouseCoopers

PricewaterhouseCoopers Capitalising on opportunity: A time of change 85% 15%

69% 31% Cycle management shareholder value creation remains Figure 7 What stage in the underwriting cycle do you see the following classes a priority, particularly after the faith of business? 54% 46% A number of participants were able shown by the capital markets in the 46% 54% to take full advantage of some autumn of 2005. When asked to excellent pricing in certain areas but what extent controls will be used Property catastrophe (Peak Zone) 7% 14% 79% there are strong signs that top line by participants to optimize the Property catastrophe (Non-Peak Zone) 7% 57% 36% growth is gradually being replaced opportunities from a cycle downturn, Other property 23% 54% 23% by declines with strong competition, participants identified that most 31% 69% particularly in the casualty markets, reliance will be placed on monitoring Professional liability 80% 20% creating sizeable offsets to hard rates renewal rate movement and premium Other casualty 78% 22% in a limited number of catastrophe rate adequacy, as well as placing Marine, energy, aviation and satellite 78% 22% exposed areas (see Figure 7). reliance on underwriting guidelines and pricing guidelines (see Figure 9 0 100% With a variety of drivers responsible overleaf). Downturn About the same for market cycles, the survey asked Upturn participants what they thought were Unsurprisingly, participants the key drivers of the cycle in the perceived difficulties in determining Source: PricewaterhouseCoopers Bermuda Market (see Figure 8). when the underwriting cycle will turn as the top barrier to an effective Figure 8 Please grade by level of importance the factors that you consider Many of the organisations currently underwriting cycle management to be the key drivers of the underwriting cycle to the Bermuda face a clear quandary of how strategy within their organization Insurance/Reinsurance Companies. to ensure robust discipline in (see Figure 10 overleaf). underwriting whilst ensuring that Incidence of catastrophe losses

International competition

Level of reinsurance premium rates

Local competition

New entrants to the market

Market share objectives

Prior year deterioration in claims reserves

Not at all Most important important

Source: PricewaterhouseCoopers

PricewaterhouseCoopers Capitalising on opportunity: A time of change 10 Figure 9 To what extent will the following controls be used by you to manage Figure 10 Please select the top 5 barriers you perceive to an effective underwriting cycle a cycle downturn? management strategy within your organisation.

Difficulties in determining the shape of the future Premium rate adequacy monitoring underwriting cycle Renewal rate movement monitoring Difficulties in determining when the underwriting cycle will turn Pricing guidelines (extent of deviation Difficulties in determining/monitoring premium rate adequacy from technical price) Underwriting guidelines Difficulties in monitoring the key drivers of the underwriting cycle Actuarial type reviews on portfolio Difficulties in ensuring that underwriters adhere to and profitability deliver the underwriting cycle management strategy Performance benchmarking Difficulties in sustaining broker relationships if exiting classes of business in a soft market Peer review Difficulties in determining robust exposure measures New business/declinature ratio monitoring High frictional costs (e.g. acquisition costs) in moving into new segments/markets No Most reliance reliance Difficulties in achieving effective performance measurement Limited access to market intelligence Source: PricewaterhouseCoopers Difficulties in identifying the key drivers of the underwriting cycle Capital management

Difficulties in changing the attitudes and behaviours of staff

Increase in expense ratio due to lower premium volumes Difficulties in measuring own performance versus market performance Difficulties in determining future outwards reinsurance Difficulties in quantifying the relationship between premium rate adequacy versus business volumes Heterogeneous nature of business portfolio

Not a barrier Barrier

Source: PricewaterhouseCoopers

PricewaterhouseCoopers Capitalising on opportunity: A time of change 11 There are strong indicators that the undersupply of Figure 11 If the market premium rating is normalised to 100 for the 2005 underwriting year, what level do you expect the market premium rating to be for the 2006, 2007 and capacity during 2006 in the property catastrophe 2008 underwriting years? market was a market dislocation that has subsided Inwards reinsurance market quickly to a position of some surplus of capacity % and, with the casualty markets continuing a path 250 of high competition, premium pressure has been 200 prevalent throughout the 2007 renewals season. 150 100

Premium Rating Index 50 2006 2007 2008

Premium rates and pricing showing a percentage-rate change increase in excess of 25%. Over Direct and primary market This survey asked participants to 90% of participants saw increases % provide their sense for premium in excess of 50% being achieved in 250 rating through 2008. It should be property catastrophe (peak zone) 200 business (see Figure 12 overleaf). noted that early indications for 150 2007 may temper some of the anticipated rate increases recorded An average of 99% of participants’ 100 primary risks and 96% of inwards Premium Rating Index 50 by participants in the autumn of 2006 2007 2008 2006 (see Figure 11). reinsurance risks are rated according to documented technical pricing. The application of statistical Only 8% of all participants surveyed Retrocessional reinsurance market exposure-based rates is the most experienced an overall percentage % rate change decline in the 2006 common pricing approach for 250 renewals over 2005 business primary risks and inwards reinsurance 200 underwritten, with almost 60% business (see Figure 13 overleaf). 150

100

Premium Rating Index 50 2006 2007 2008

Property catastrophe (Peak Zone) Property catastrophe (Non-Peak Zone) Marine, energy, aviation and satellite

Source: PricewaterhouseCoopers

PricewaterhouseCoopers Capitalising on opportunity: A time of change 12 Figure 12 In which classes are increases in excess of 50% being achieved?

Property catastrophe (Peak Zone) 92%

Marine, energy, aviation and satellite 38%

Other property 15%

Property catastrophe (Non-Peak Zone) 8%

Professional liability 0%

Other casualty 0% 69% 31% 0 100%

Source: PricewaterhouseCoopers 46% 54% 54% 46% 54% 46% 54% 23% 77% Figure 13 What percentage of your business (by 2005 gross written premium) was rated according to documented15% technical pricing? 85%

15% 85%

Primary risks 99% 1%

Inwards reinsurance 96% 4% 15% 85% Retrocessional reinsurance 93% 7%

00 100%100 Yes No

Source: PricewaterhouseCoopers

PricewaterhouseCoopers Capitalising on opportunity: A time of change 13 A benign 2006 hurricane year provided some Figure 14 Which exposure-based catastrophe modelling packages do you use? respite for the Bermuda Market. Early predictions ‘foresee an above-average Atlantic basin 100% tropical cyclone season in 2007 and anticipate an above-average probability of United States major hurricane landfall’.3 With a forecast of three intense hurricanes, the measures companies established following KRW may be tested. 20

0% Wind Earthquake Flood Terrorism Tornado & Hail Catastrophe risks and risk certain exposures was not aggregation anticipated (see Figure 15). EqeCat RMS AIR In-house FEMA Underwriting discipline remains the Source: PricewaterhouseCoopers Catastrophe risks industry ‘buzzword’; participants have translated this in their reaction Figure 15 In your view, what were the main reasons, if any, for the differences in the actual Participants were able to provide a to underwriting strategy around versus modelled results in 2005? very frank assessment of the impact catastrophe risks in 2006 (see of the 2005 hurricane season; this Figure 16 overleaf). survey particularly focussed on Estimation of demand surge impact participants’ use of exposure-based It is not surprising, therefore, to see Allowance for perils not modelled by catastrophe models catastrophe modelling packages that new versions of models by RMS, Quality of catastrophe models (see Figure 14). AIR Worldwide Corp and EqeCat Inc were released in 2006. Standard & Estimation of other amplification factors ‘Storm surge’ and ‘demand surge’ Poor’s has said that capital Reporting and capture of catastrophe exposures accounted for significant differences requirements for primary property/ between actual versus modelled casualty insurers will ‘increase Encoding of catastrophe exposure details results, but many participants substantially because a requirement Modelling assumptions of underwriter pointed to concerns over the quality for natural catastrophic risk is Capture of contractual terms and inuring reinsurance and performance of the models being included as a hard test’ Recoverability of reinsurance used, as well as allowances made and introduced their revised capital for their limitations, as the main model in 2007 with exactly that Not a reason Reason reasons why the magnitude of focus (see Figure 17 overleaf). Source: PricewaterhouseCoopers

3 Extended Range Forecast Of Atlantic Seasonal Hurricane Activity And U.S. Landfall Strike Probability For 2007: Department of Atmospheric Science Colorado State University

PricewaterhouseCoopers Capitalising on opportunity: A time of change 14 Figure 16 What areas have you amended within your underwriting strategy around Figure 17 What changes to the modelling of catastrophe risks do you anticipate in 2007? catastrophe risks in 2006?

Risk appetite policy 69% 31% Adjustments to catastrophe model outputs for non-modelled perils Underwriting guidelines 46% 54% 54% Aggregation monitoring by peak Adjustments to catastrophe model outputs exposure zone 46% 54% 46% 54% for model assumptions Underwriting authorities 23% 77%

Management information 15% 85% Use of greater number of models Reporting to rating agencies 15% 85%

Increased reinsurance/retrocession 15% 85% Improved/strengthened data quality requirements Referral process 8% 92% 15% 85% Peer reviews 100% Allowance for building codes 0 100% Yes No Measurement of data quality Source: PricewaterhouseCoopers

Development of in-house climate change

Development of in-house demand surge assumptions

Allowance for under insurance

0 100% Already in place Changes planned in 2007 Changes not planned

Source: PricewaterhouseCoopers

PricewaterhouseCoopers Capitalising on opportunity: A time of change 15 62% 38%

38% 62%

23% 77% Risk aggregation tightening of policies and Figure 19 When are aggregations of risk typically assessed/monitored? procedures in the specific area of 15% 85% Embedding risk and capital risk aggregation (see Figure 18). 8% 92% management into the day-to-day Pre-acquisition of new business 77% 23% running of the business has Timely and regular monitoring Pre-renewal of existing business 69% 31% emerged as one of the key priorities of aggregations has consistently 31% 69% for survey participants. Too often proven to be the key (see Periodic reviews 69% 31% At renewal of outward reinsurance the definition of risk is too narrow Figure 19). protections 15% 85% and a closer focus on risk reflects Post catastrophe/event losses 15% 85% the increasing complexities and Risk management is a top level uncertainties facing participants priority for the Bermuda Market, 0 100% when dealing with the fallout from with regular discussions being held Yes No climate change and other extreme at the board level and almost all and unpredictable forces. The surveyed having some sort of risk Source: PricewaterhouseCoopers survey has recorded a general function (see Figure 20).

Figure 18 Which of the following aggregations of risk are monitored? Figure 20 Who is primarily responsible for identifying, monitoring and managing the aggregations of risk?

Country/region of the world 85% 15%

States/counties 69% 31% Chief underwriter 62% 38%

ZIP code/postcode 54% 46% Chief risk officer 38% 62%

Class of business 46% 54% Actuary 23% 77%

Individual cedant 38% 62% Systems-driven/automated 15% 85% CEO Business segment 38% 62% 8% 92%

Underlying insured 31% 69% CFO 8% 92% 69% Individual broker 23% 77% Line of business 8% 92% 31% 69% CAT model events 8% 92% Statistician 8% 92%

Max foreseeable loss 8% 92% Quota share cedant 8% 92% Claims director 100% 0 100%

Yes No 0 100% Yes No Source: PricewaterhouseCoopers Source: PricewaterhouseCoopers

PricewaterhouseCoopers Capitalising on opportunity: A time of change 16 Upwards of $8bn of capital flowed into sidecars Figure 21 Please grade the following reasons for purchasing outwards reinsurance. and catastrophe bonds in the Bermuda Market in 2006 proving that specialist investors are speedily Protect against catastrophe events reactive to market dislocations and that the capital Protect against aggregation of risk markets were swiftly able to provide cost effective, Improve net profitability collateralised non-traditional protections. Increase capacity Utilise arbitrage opportunities

Smooth underwriting performance Reinsurance There is a clear upside to both the Improve balance sheet strength use of sidecars and catastrophe Protect financial strength rating bonds by participants. However, In addition to exposure Improve ability to write larger risks management, optimisation of the extra attention being paid to Improve financial strength rating reinsurance spend was the second both products by rating agencies most important issue for the CEOs (in particular A.M Best’s modelling Protect solvency margin of the Bermuda Market in 2006 with respect to catastrophe bonds) Improve solvency margin (see Figure 21). and the potential both for the collateral behind the sidecars to Not at all Most important important For the survey group, no stranger disappear as quickly as it appeared and for the ‘host’ companies to to using the capital markets for Source: PricewaterhouseCoopers risk transfer, 2006 was a year in change their risk retention appetite which the attractiveness of new every few years, raises questions opportunities particularly resonated about their longevity. (see Figure 22 overleaf).

There has been a diversity of capital markets risk transfer products available to participants but clearly 2006 was the year of the sidecar (see Figure 23 overleaf).

PricewaterhouseCoopers Capitalising on opportunity: A time of change 17 Figure 22 Did you use, or are you considering using, the capital markets for risk transfer in 2006?

23%

Yes, and increasingly doing so Yes, about the same as last year 39% Yes, but less than before No, but considering No, not considering 15%

8% 15%

Source: PricewaterhouseCoopers

Figure 23 If applicable, what capital market risk transfer products have you used?

‘Sidecar’ vehicle 38% 62%

Catastrophe bonds 8% 92%

Catastrophe swaps 8% 92%

Insurance securitisation 8% 92%

Weather derivatives 100% 31% 69% Credit derivatives 100%

Credit securitisation 100%

Non-catastrophe securitisation 100%

0 100

Yes No

Source: PricewaterhouseCoopers

PricewaterhouseCoopers Capitalising on opportunity: A time of change 18 Tellingly, divergence in practice at the sharp Figure 24 What is included in your underwriting guidelines? end of underwriting can often be translated into bottom line performance; quality control around Limits 92% guidelines and review are often the acid test. Capacity 85% Risk aggregation guidelines 85%

Risk selection criteria 69% Controls and processes whether policy risk management Pricing methodology 69% is used. Interestingly, 20% of Risk appetite 62% participants surveyed did apply Underwriting guidelines policy risk management methods. Minimum data requirements 62% and meetings There is a relatively consistent view Underwriting ethos 46% of what is required to define authority Target returns 46% With a clear elevation of focus on limits, however, certain participants quality underwriting the survey used a more extensive range of Policy wording guidelines 46% explored some of the controls and criteria (see Figure 25 overleaf). 46% processes surrounding the front Pricing guidelines (deviation from technical price) end of the underwriting process, 80% of participants use internal Underwriting file documentation 38% in particular guidelines and authority audit to monitor underwriters’ Premium rates/adjustments 15% limits (see Figure 24). individual authority limits, with Purchasing of outwards RI 8% underwriting systems checks and Participants review guidelines external reviews also being relied Peer review 8% periodically (generally every six on. Just under half of participants 0 100% months), however, the level and surveyed hold weekly underwriting Source: PricewaterhouseCoopers extent of those reviews appear to meetings (10% hold daily meetings), vary in practice, with very often little with about a third holding monthly substantive revision. By and large, meetings and the remainder underwriting guidelines typically (a not de minimis number) holding cover criteria such as historical meetings on a quarterly basis (see claims experience, as well as the Figure 26 overleaf). size and location of risk, to identify

PricewaterhouseCoopers Capitalising on opportunity: A time of change 19 Figure 25 Which of the following criteria are used to specify the level of underwriting Figure 26 Which of the following are discussed as a formal agenda item at regular authority given to your underwriters (e.g. criteria for underwriting underwriting meetings? authorities/licenses)?

Significant new business 85% 15% Class 69% 31% Significant renewals 85% 15% Market premium rate movements 77% 23% Size of risk/maximum exposure 54% 46% Aggregations of risk 77% 23% Sub-class 31% 69% Underwriting strategy 69% 31% Premium rate adequacy 69% 31% Business segment 23% 77% Significant lapses 54% 46%

Premium level for new business 23% 77% People/resource issues 54% 46% 7% 14% 36% Marketing to brokers 46% 54% Territorial scope 15% 85% Market intelligence/reinsurance 38% 62% 36% security reviews Authority to purchase facultative Underwriting controls 38% reinsurance 8% 92% 62% Risk walkthroughs 31% 69% Premium volume per annum for renewal 8% 92% business Peer reviews 31% 69%

Historical claims experience 100% Allocation of capacity 8% 92% No regular underwriting meetings 8% 92% are held No underwriting authorities 15% 85% 0 100% 0 100% Yes No

Yes No Source: PricewaterhouseCoopers

Source: PricewaterhouseCoopers

PricewaterhouseCoopers Capitalising on opportunity: A time of change 20 Underwriting reviews

The survey has found that on average 88% of underwriting files (by gross written premium) for direct and primary risks are peer reviewed each year, with 75% of underwriting files (by gross written premium) being reviewed (see Figure 27).

Figure 27 Which of the following has undertaken a review of your underwriting operations in the last 3 years?

Internal audit 77% 23%

Specialist internal team 62% 38%

Underwriter from other business units 46% 54%

Regulators 38% 62%

Rating agencies 31% 69% 31% 69% Reinsurer 31% 69%

External consultant 23% 77%

Potential acquirer/capital provider 8% 92%

0 100% Yes No

Source: PricewaterhouseCoopers

PricewaterhouseCoopers Capitalising on opportunity: A time of change 21 The attraction and retention of highly skilled Figure 28 What is the size of the underwriting department within your Bermuda employees represent significant challenges for organisation, including underwriting support teams? participants. In particular, focus on the recruitment 12 Underwriters and retention of quality underwriting staff has been 17 Assistant underwriters 4 identified as a top priority. 6 Cat modellers 3 5 2 Pricing actuaries 3 Underwriting teams cited new entrants to the market as 4 (TA’s) being the primary cause, with the 5 25 high marketability of good quality Total Despite very significant human 36 capital challenges many participants underwriting staff and expatriate 0 40 have been successful in growing repatriation also representing key Average number of people their underwriting teams (see causes (see Figure 29 overleaf). 2005 2006 Figure 28). The survey sought participants’ Source: PricewaterhouseCoopers In spite of the heavy pull by new views on the quality of their start-ups in the market, 50% of underwriting staff versus that of participants experienced no their competitors. Interestingly, turnover of underwriting staff, with no participant felt that their staff 41% experiencing only minimal was less than comparable to the turnover. Where turnover was market and 83% felt they were experienced, 81% of participants above the average market standard (see Figure 30 overleaf).

PricewaterhouseCoopers Capitalising on opportunity: A time of change 22 Figure 29 Please highlight the top 5 factors in attracting and retaining the right Figure 30 What is your perception of the quality of your underwriting staff versus that underwriters for your organisation. of your competitors?

17% Reputation of the organisation

Sharing in the profits of the organisation

Career progression opportunities Well above 41% Level of basic remuneration Above Comparable Long term benefits (e.g. pensions etc.)

Quality of training programme 42% Short term benefits

Other Source: PricewaterhouseCoopers Other forms of recognition

Status/title

Lowest Greatest priority priority

Source: PricewaterhouseCoopers

Enhanced corporate governance

PricewaterhouseCoopers Capitalising on opportunity: A time of change 23 PricewaterhouseCoopers Capitalising on opportunity: A time of change 24 The Bermuda Market

What is the Bermuda Market? Bermuda’s response to three global shortages of insurance A commercial insurance and and reinsurance capacity in the reinsurance market in which past 20 years has made the Island 4 various entities participate: what it is today; the fourth largest reinsurance market in the world, • Bermuda domiciled insurers with 13 of the world’s top 40 and reinsurers; and reinsurers based on the Island.

• Bermuda subsidiaries and The Bermuda Reinsurance market branches of US, European tripled in size to approximately and international insurers $28 billion in 2005, from and reinsurers. approximately $9 billion in 2001 while gaining market share. Bermuda is referred to as the ‘world’s risk capital’, a reference to the Bermuda is the largest Property innovation, entrepreneurialism Catastrophe reinsurance market; and leadership of Bermuda insurers Bermuda’s reinsurers provide an and reinsurers and the Bermuda estimated 40% of US property government that has fostered the catastrophe reinsurance capacity. growth of this business.

4 Standard and Poor’s Reinsurance Highlights Report 2006

PricewaterhouseCoopers Capitalising on opportunity: A time of change 25 Contacts

If you would like to discuss any of the issues raised in this report, please Survey participants speak to your usual contact at PricewaterhouseCoopers or one of the editorial board members listed below: We would like to take this opportunity to thank all those organisations and executives who agreed to participate in the development of this survey. Caroline J. Foulger We are extremely grateful for the time that they gave us, especially for the Partner openness with which they discussed the key issues facing their industry. Phone: +1 (441) 299-7103 Email: [email protected] Production Colm A. Homan Partner Phone: +1 (441) 299-7116 The development and production of this survey involved a number of people Email: [email protected] and we would like to thank those listed below for their valuable contribution:

Arthur Wightman Elanor Lewis Senior Manager Kelley Dunne Phone: +1 (441) 299-7127 Louise Hayter Email: [email protected] Lara Correia Hannah deCosta

For information on other insurance and financial services related publications or if you would like additional copies of this survey, please contact Louise Hayter, Senior Manager, Bermuda Marketing, on +1 441 299 7184 or email [email protected].

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