COMMERCIAL COVERAGE MARKET COMPASS

We are pleased to present 2011’s edition of Morris & Reynolds Insurance Commercial Market Predic-tions newsletter including the views from a number of industry experts on topics ranging from the cost of insurance to the capacity to write commercial insurance. As we do each year we will begin with

a few of our own observations related to our own work late last year, the start of 2011, and our daily communications with insurers and for all types of coverage that we arrange and negotiate. Commercial insurance rates in the U.S. declined slightly during the last quarter of 2010, and experts believe that trend will continue through 2011. Many types of commercial insurance, including Prop-erty & Casualty, lowered by a few percentage points during the final quarter of 2010, or remained ’flat’, according to industry experts. The fourth quarter of 2010 saw, on average, commercial property, as well as general liability, insurance rates flat or drop by 2% to 4% The largest drop was in Directors' & Officers' liability which fell by 5% to 12%. In 2011 workers compensation rates in Florida will increase by an average of 7.8% after eight years of rate reductions totaling 62%. As 2011 continues we would suggest that you consider our comments related to the computer programs (models) that insurers use to predict catastrophic hurricane. Many in the industry believe that recently re-vised models will have an impact on the cost and availability over coverage later this year and into 2012. The commercial insurance market continues to evolve based on a vari-ety of factors including economic, legal, weather and more; the mar-ketplace is in constant evolution. We look forward to keeping you apprised of how the market changes in the future and to providing your protection. Thank you for that honor. Bob Reynolds, CIC, CPIA, AAM, AIS, AU 305.238.1000 bob@morrisandreynolds.com

CASUALTY RATES DOWN

“We anticipate slight reductions on competitively marketed placements for the first six months of 2011 and flat renewals for accounts not un-der market pressure,” Mr. Kerr said. “By year-end 2011, the longest soft market period in the last 70 years will finally come to a close.”

Hofmann, M. “P/C rates down, but end of soft market in sight: MarketScout,” 6 January 2011. www.businessinsurance.com.

“Commercial property/casualty rates dropped an average of 5% in January compared with a year earlier,”

Hofmann, M. “Commercial property/casualty rates fall 5%: MarketScout.” 7 February 2011. www.businessinsurance.com.

REINSURANCE PRICING IS AVERAGING FLAT TO DOWN

“An overview of reinsurance rates reveals a picture of a generally softening market on an overall basis, with ample reinsurer capacity available for most lines. But beneath this generality lies a range of experiences for individual reinsurance buyers, according to the class of business, their own loss record and the territorial scope. In many cases, reinsurance purchasing strategies in a softening market were one of the few places buyers could turn to mitigate the effect of soft conditions in original markets. “The property retro market is not such an important driver of the rein-surance market as it was in former years. In a late renewal typical of this market, rates were flat to down for loss-free accounts.”

“2011 Reinsurance Renewal Rates: Overview,” 17 January 2011. www.gccapitalideas.com.

RMS HURRICANE MODEL UPDATING

Risk Management Solutions (RMS), one of two leading statistical and analytical tools used by the industry to predict hurricane losses, has released an updated model incorporating lessons learned from recent storms, and, according to published reports, it is expected to:

• Increase the expected annual hurricane losses in some areas to as much as 25%.

• Severely increase hurricane loss estimates in the Mid-Atlantic and even more so in Texas (due to lower adherence construction standards than in other coastal states).

• Show new and increased risk of storm damage in interior parts of the U.S. pushing the threat of hurricane related damage as far inland as Tennessee and Pennsylvania.

• Update assumptions about the damage that moderate storms can do in some areas.

There seems to be a growing sense that some insurers that use the model may have to reevaluate their capital levels and likely raise prices. However, the impact of the updated RMS model is still un-known and will not be immediate. Not every insurer uses the RMS model and many that do not employ other models as well. In addition, reinsurers that use the RMS model may be impacted in similar ways. The updated model has the potential to drive increased demand on the part of the reinsurance buyers while at the same time driving down the supply of reinsurance, which could ultimately influ-ence the overall market in terms of available capacity and the cost of coverage.

Continued on next page…

14821 South Dixie Highway Miami, Florida 33176

305 238.1000

305 255.9643

www. morrisandreynolds.com

2011 MARKET PREDICTIONS COMMERCIAL

MORRIS & REYNOLDS INSURANCE PRESENTS SPRING 2011

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2011 PROPERTY MARKET - MIXED PREDICTIONS

Several reports illustrate a mixed view of the property market in 2011 with some predicting slight decreases in prices and others an increase recovery; thus there is continued uncertainty in the market. The impact of the recent devastating earthquake in Japan, the aforementioned new RMS Hurricane Model and the protracted world wide recession each will likely impact rates and availability this and next year. “The global property markets will depend on economic recovery and individual government's actions to improve the economy and property markets. The performance of any commercial market will depend on employment rates in that area or country. Another factor that will impact the market will be the availability of finance and whether or not banks will start to lend again in 2011. Lending restrictions have remained tight since the beginning of the financial crisis.” “Emerging markets are expected to perform better than established ones, as the majority of established markets are still recovering from the impact of the global financial crisis. Although it is worth noting that emerging markets carry higher risk for investors.” Lee, N. “Property Market Possibilities for 2011,” 20 December 2010. IPINglobal. www.ipinglobal.com

WORKERS’ COMPENSATION MAY OFFSET HARD MARKET

Figures released recently indicate that this is indeed where new na-tional hard market could begin. In fact, researchers with A.M. Best & Co. think that the combined loss ratio for workers' compensation among the 40 or so largest companies workers' comp insurers will strike 116% when full-year figures for 2010 are available. That's a big underwriting loss and most predict that things will look much worse in 2011. "Our expectations are that things will erode, things will get worse before they get better," said Michelle Baurkot, Asst. VP at A.M. Best. High unemployment in the U. S. have lowered payrolls but there was still $32.6 billion in net premium in 2009. In 2008, before the credit crunch fully hit, net premium in workers' compensation was $39.4 billion. At its peak in 2005, the market saw $48.6 billion in net written premium. So how much worse will it get? Could that 116% combined ratio crest at 120% and head toward 130%? It will go higher in 2011, A.M. Best researchers believe, and possibly again in 2012. Chartis, Inc. is one company that is getting away from workers' com-pensation with all due haste, according to published comments from its President and CEO, Kristian Moor. The “company has exited two billion dollars in business in workers' compensation in the past cou-ple of years,” Moor said.

No one expects the economy to turn around quickly, which means premium volume will remain relatively low. Medical costs continue to rise, how-ever, which means carriers will con-tinue to pay out even more for workers

receiving compensation. "This is the line that is most impacted by the economy," Baurkot said. “Workers' compensation in the U.S. is becoming an underwriters' nightmare and perhaps the trigger for the oft-predicted hard mar-ket.” Reynolds, D. “The True Mover”, 17 January 2011. Risk & Insurance Magazine. www.riskandinsurance.com.

FLORIDA WORKERS COMPENSATION UPDATE

On October 15, 2010, the Florida Office of Insurance Regulation (OIR) issued an order approving a 7.8% average workers’ compensa-tion rate increase for new and renewal business effective January 1, 2011. Initially, the National Council on Compensation Insurance, (NCCI), sought an increase of 8.3% but this was negotiated to the noted 7.8%. According to Florida Insurance Commissioner Kevin McCarty, “the rate increase gives Florida the lowest rates in the Southeast, and likely keep us in the top 10 states nationally for most affordable workers’ compensation insurance and the NCCI’s prior seven an-nual filings represent the largest consecutive cumulative decrease in rates in Florida history.” Prior to reforms, Florida had the first or second highest workers’ compensation rates in the country, but now places among the lowest.

ABOUT MORRIS & REYNOLDS INSURANCE

The Reynolds family has been in the insurance profession since 1910 and has operated its Independent Insurance Agency, Morris & Reynolds Insurance, since 1950. Now in its third generation of family ownership, Morris & Reynolds offers

its clients trusted choices from the world’s leading insurers for all forms of coverage, as well as innovative care and service from a pas-sionate, award-winning team of professional people. Please feel free to contact us anytime at 305.238.1000 or visit us online at www.morrisandreynolds.com.

14821 South Dixie Highway Miami, Florida 33176

305 238.1000

305 255.9643

www. morrisandreynolds.com

2011 MARKET PREDICTIONS COMMERCIAL

MORRIS & REYNOLDS INSURANCE PRESENTS SPRING 2011