Hurricane damage likely to exert short drag on economic ...dobelman/textfiles/Insurance...Monday, September 11, 2017 2:14 PM ET Hurricane damage likely to exert short drag on economic

Monday, September 11, 2017 2:14 PM ET

Hurricane damage likely to exert short drag on economic growth, analysts say

By Jill Ornitz

With Hurricane Irma tearing through Florida while Texas and Louisiana begin to rebuild following the devastation brought by Hurricane Harvey, analysts say financial markets should expect a short-term decrease in economic growth.

"The first consequence is that it actually pushes down economic activity because it disrupts commerce," New York Fed President William Dudley told CNBC on Sept. 8 when discussing the economic consequences of the hurricanes. "It will tend to push up prices initially. We saw in Hurricane Harvey big increases in gasoline prices, but those effects tend to be pretty transitory. The longer run effect of disasters, unfortunately, is that they actually lift economic activity because you actually have to rebuild all the things that have been damaged by the storms."

Dudley added that the hurricanes will take third-quarter growth projections down "a touch."

"A touch" could be a reduction of 1 percentage point, with consumer spending, business inventories, housing and energy sectors feeling the brunt of these effects, according to research from Goldman Sachs reported by CNBC.

The effects of Hurricane Harvey will likely show up in most August economic data releases, according to research from BMO Capital Markets.

"For the CPI, the main thrust is from higher gasoline prices, but supply disruptions and higher material costs will also exert some upward pressure," BMO's report reads. "A 6% jump ... in fuel costs will add nearly 0.2 ppts to the headline index."

Analysis from Deustche Bank economists indicates jobless claims may spike following Hurricanes Harvey and Irma, as was the case after Hurricane Katrina in 2005. Despite that near-term volatility in employment, it is not likely to alter the Fed's view that the labor market is at full employment with solid momentum, the report reads.

Research from PNC indicates economic damage will be "small and temporary." According to their report, Florida accounts for 5% of U.S. GDP and 6% of national employment. Most people will return to work quickly after the storm, and although fewer tourists may head to the Sunshine State, those recreation dollars will be spent elsewhere, minimizing damage to the national economy.

Rebuilding in the aftermath of both storms, and the higher level of economic activity that will bring, has lead bond markets to perceive that as pricing in higher inflation, according to a report in The Philadelphia Inquirer.

"We observe rising yields, particularly in the Treasury area, after eight out of 12 storms and the last six storms in a row," John Mousseau, director of fixed income at Cumberland Advisors, told the newspaper. "We think that points to overall better insurance coverage as well as quicker response by federal agencies with relief dollars."

Morgan Stanley analysts suggested that the Treasury Department's announcement of a $20 billion cash management bill maturing on Sept. 15 to fund emergency hurricane relief cheapened general collateral repo rates. U.S. Treasury rates sold off at roughly 1.5 basis points on the news, according to a report from the bank.

Article

Source: S&P Global Market Intelligence | Page 1 of 1

Monday, September 11, 2017 6:53 PM ET

Hurricane losses in '17 could 'break the bank' for federal flood insurance

By David Hood and Syed Salman Shah

As what was Hurricane Irma continues to track through the southeast U.S., the National Flood Insurance Program, or NFIP, may avoid expiration with a three-month extension but still lacks the reforms it needs to stay actuarially sound and solvent.

Loss estimates in Houston due to Hurricane Harvey and even more from Hurricane Irma in Florida could force the program, already carrying $24.6 billion in debt, to approach or exceed its borrowing limit of about $30 billion.

The Congressional Budget Office in a Sept. 1 report noted that NFIP claims, not including Harvey and Irma, are on track to top $3.7 billion. Claims from Harvey and Irma combined would need to top only about $2 billion to push the NFIP beyond its limit.

According to an S&P Global Market Intelligence analysis of NFIP data, out of about 2.7 million housing units in the Miami-Fort Lauderdale-West Palm Beach MSA, there are nearly 700,000 NFIP policies-in-force, accounting for about $1.67 billion of insured property. In Monroe County, which includes the Florida Keys, more than half the housing units possess an NFIP insurance policy.

With losses from the two hurricanes, 2017 will be a "major loss year" when it comes to flood damages, Steve Ellis, vice president of consumer advocacy group Taxpayers for Common Sense, said in an interview. "If you just look at the potential for loss this year, it is most likely going to break the bank."

Ellis believes Congress will need to raise the borrowing cap to handle claims from before the hurricane season, let alone to cover losses during it.

Irma struck Florida around the time lawmakers punted a critical reauthorization of the program until Dec. 8, giving them more time to hash out reforms through the legislative process. Originally, the program had until Sept. 30 to be reauthorized.

Ian Adams, associate vice president of state affairs at Washington, D.C.-based think tank R Street Institute, said in an interview that Congress' focus needed to be on keeping the program afloat.

"In the near term, short extensions of the program are okay, but you have to discuss longer-term fixes simply because the status quo is not sustainable as people live in flood-prone areas," Adams said.

The House Financial Services Committee has passed a series of bills reforming the program that have been sent to House leadership for full floor votes. On the other side of the Capitol, the Senate Banking Committee is pending a markup of a bill responsible for producing a reauthorization of the program.

"I think you are going to see [the] NFIP borrowing cap get raised [and] people are going to have the money necessary to begin rebuilding," Adams said. "But ... another bill from the Senate that is more substantive in terms of longer-term reform is a ways off."

Article

Source: S&P Global Market Intelligence | Page 1 of 1

1 Reinsurance Market Outlook

Contents Executive Summary: Hurricane Harvey Highlights Protection Gap 1

Reinsurance Supply 2

Global reinsurer capital 2

Traditional capital 3

Alternative capital 4

Reinsurance Demand 7

A modest upturn 7

Growing the market 9

Outlook for January Renewals 10

Alternative capital competing strongly 10

What could change the dynamics? 10

Reinsurer Results 14

A decade of strong performance 14

First half 2017 results 14

Appendix 17

Largest global reinsurers 17

Contact Information 19

Aon Benfield 1

Executive Summary: Hurricane Harvey Highlights Protection Gap Hurricane Harvey came ashore in Texas on August 25, becoming the strongest hurricane to make landfall in the US since 2004. Catastrophic flooding across a broad section of eastern Texas and into southern Louisiana has caused significant property damage and disrupted industrial production and supply chains.

There is a very human dimension to this natural disaster, given the low proportion of homeowners in the affected areas that have insurance coverage for flood. Beyond the immediate financial distress, it is already clear that economic losses will far exceed insured losses. As a result, the burden will ultimately fall mainly on US taxpayers.

Sadly, this is just the latest manifestation of a global protection gap. Economic development and demographic trends are generating new concentrations of exposure, often in areas subject to natural catastrophes and at a time of increasing event frequency. Product delivery has lagged the changing needs of corporate buyers in developed markets and personal lines coverage of natural disaster risk remains patchy. In emerging markets, insurance penetration rates generally remain very low. On a global basis, emerging areas of risk such as cyber are presenting the insurance industry with new challenges.

And yet the insurance industry is widely held to be over-capitalized and new investors are actively seeking access to diversified insurance risk. In fact, the first half of 2017 was notable for a renewed surge of alternative capital, which impacted the mid-year reinsurance renewals and is now finding its way into the primary market.

Sustained growth in reinsurance demand is dependent upon increasing the relevance of insurance to the global economy. Although alternative capital is not expected to have a material impact on the protection gap in the short-term, it potentially presents an opportunity to grow what is insurable and create new products that can address some of the underlying issues.

In the meantime, reinsurance continues to prove its worth as a means of mitigating earnings volatility, controlling peak exposures, addressing reserving risk and providing capital relief. There is every reason to believe that it will have a growing role to play, as capital becomes better matched to risk.


Reinsurance Supply Global reinsurer capital Aon Benfield estimates that global reinsurer capital stood at a peak level of USD605 billion at June 30, 2017, an increase of 2 percent relative to the end of 2016. This calculation is a broad measure of the capital available for insurers to trade risk with.

Traditional capital rose marginally to USD516 billion over the six months to June 30, 2017, solid earnings being offset by the payment of final dividends. Alternative capital rose by 10 percent to USD89 billion, reflecting renewed investor appetite for insurance risk.

Exhibit 1: Change in global reinsurer capital

Source: Aon Benfield Analytics

17 22 19 22 24 28 44 50 64 72 81 89

368 388 321

378 447 428

461 490

511 493 514 516

6% -17% 18%

18%

-3% 11%

7% 6%

-2% 5% 2%

385 410

340

400

470 455

505 540

575 565 595 605

0

100

200

300

400

500

600

700

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 H12017

USD

(bill

ions

)

Traditional capital Alternative capital Global reinsurer capital

Aon Benfield 3

Traditional capital Recent years have seen a significant build-up of industry capital, as more stringent rating agency and regulatory requirements have coincided with low inflation and an absence of significant reinsured catastrophe losses in the US. Strong retained earnings, coupled with substantial unrealized gains on bond portfolios related to quantitative easing by central banks, have resulted in traditional equity capital growing by more than 40 percent over the past decade. The 21 major reinsurance groups forming the Aon Benfield Aggregate1 (ABA) reported total equity growth of 59 percent (an increase of USD77 billion), additionally reflecting the impact of consolidation within the sector.

Exhibit 2: Change in ABA capital

Source: Aon Benfield Analytics 1 The Aon Benfield Aggregate comprises 21 major reinsurers domiciled in developed markets that write approximately 50 percent of global property and casualty reinsurance premium on a combined basis.

122 138

114 146 148 150

174 175 185 180 184 191

130 146

122

152 157 162

185 187 198 194 201 207

0

50

100

150

200

250

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 1H 2017

USD

(bill

ions

)

Common equity Preferred shares Minorities Total equity

H1 2017


Alternative capital At the same time, the low interest rate environment has prompted investors to seek returns from alternative asset classes, particularly those that exhibit low correlation with the broader capital markets. This has resulted in new inflows of often lower-cost capital to the sector.

Capacity provided directly by capital markets investors has more than tripled since 2011. The bulk of this capital is being provided via dedicated ILS funds, the largest of which are shown below.

Exhibit 3: Leading ILS fund managers

Manager Assets under management (USD billion)

January 2015 January 2016 January 2017 June 2017 Nephila Capital 10.0 9.5 10.2 10.5 Credit Suisse ILS 6.5 6.5 7.5 8.6 LGT ILS Partners 4.1 5.2 6.5 7.0 Stone Ridge Asset Management 3.0 4.4 5.1 5.7 Fermat Capital Management 5.1 4.8 5.2 5.4 Securis Investment Partners 3.2 3.5 4.1 4.6 Markel CATCo 2.8 3.2 4.3 4.5 Leadenhall Capital Partners 1.8 2.4 3.5 4.2 Twelve Capital 3.5 3.5 3.5 4.0 Aeolus Capital Management 2.7 2.5 3.0 3.2 AlphaCat Managers 1.9 2.4 2.7 3.1 Elementum Advisors 1.9 2.5 2.9 3.0 Schroder Investment Management 1.4 1.7 1.9 2.5 RenaissanceRe Holdings 1.8 1.5 1.8 1.7 Pioneer Investments 1.0 1.4 1.7 1.7

Total 50.7 55.0 63.9 69.7 Source: Company data

Since the financial crisis, the investor profile has shifted away from investment banks and hedge funds seeking opportunistic returns, towards pension funds, sovereign wealth funds and high net worth individuals viewing insurance risk as a long-term, diversifying strategy. Meeting their broader needs has obliged ILS fund managers to invest in personnel with technical underwriting backgrounds and strong market relationships. As a result, the sector is showing increasing maturity and sophistication.

Aon Benfield 5

Alternative capital plays a significant role in the global retrocession market and its influence is growing in the global property catastrophe reinsurance market. Deployment is also being seen in specialty lines and the US commercial property insurance market, as larger ILS fund managers look to achieve cost savings and build a larger investible universe.

Exhibit 4: Deployment of alternative capital

Source: Aon Securities Inc.

0

10

20

30

40

50

60

70

80

90

Lim

it (U

SD b

illio

ns)

Catastrophe bonds Sidecars ILWs Collateralized re


Catastrophe bonds Rule 144A catastrophe bonds securing USD6.2 billion of limit matured in the first half of 2017. Strong investor appetite for new issuance drove returns on expected losses to near all-time lows, attracting three new sponsors and allowing new and renewing transactions to grow in size. As a result, more than USD8.5 billion of limit was placed, beating any prior full-year total, taking limit outstanding to a new high of USD26.1 billion at June 30, 2017. This growth has been supplemented by further expansion of private catastrophe bonds, as flexibility and cost savings attract new sponsors to this area of the market.

Exhibit 5: Catastrophe bond issuance

Source: Aon Securities Inc.

Peak zone exposure in the US continues to dominate. Almost two-thirds of the new issuance related to some type of aggregate structure and a similar proportion was placed on an indemnity basis. Six different public entities returned to the market, demonstrating alternative capital’s continuing role in supporting the privatization of public risks. Evolution continues, with new perils and structures being tested, including for example European flood.

Collateralized reinsurance Catastrophe bonds have gained all the recent headlines, but collateralized reinsurance has been the real area of growth over the past ten years. In various different forms, this product now supports more than USD50 billion of annual limit placed.

The expansion reflects investors’ demand for broader risk exposure, coupled with cedents’ desire for diversification of reinsurance arrangements beyond the ‘promise to pay’. For buyers, these deals look and feel similar to traditional placements (particularly if fronted by a rated carrier) and tend to offer broader coverage than catastrophe bonds, at lower cost. The complication is that the actual risk-bearers tend to be non-rated, thinly-capitalized special purpose vehicles and that the availability of the supporting collateral is dependent on the language in a separate trust agreement.

Sidecars utilized by reinsurers to enhance their business positions and lower their overall cost of capital, currently engage around USD8 billion of alternative capital. A further USD4 billion is committed to supporting industry loss warranties (ILWs).

2,650 1,757

3,588 3,973 5,902

4,656 3,015

8,547 2,625 2,843

2,692 3,498

2,325

2,175

2,775

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2010 2011 2012 2013 2014 2015 2016 H1 2017

USD

(mill

ions

)

January - June July - December

Aon Benfield 7

Reinsurance Demand A modest upturn Global demand has remained broadly flat over the last decade. Developed economies have seen limited underlying exposure growth and rationalized buying approaches among larger cedents have taken risk out of the market. However, the need for greater capacity in developing economies has provided an offset, driven by infrastructure spending and increasing insurance penetration.

More recently, a modest upturn in global demand has been noted, influenced to some extent by the improved economics of reinsurance-purchasing. This can be seen in the development of non-affiliated reinsurance cession ratios in the US market, as shown below.

Exhibit 6: US cessions to non-affiliated reinsurers

Source: S&P Global Market Intelligence

A principal driver has been the introduction of Solvency II and other risk-based capital regimes, which fully recognize the beneficial impact of reinsurance on cedents’ capital positions. As well as bringing a more strategic approach to reinsurance-buying, this has sharply increased demand for retroactive solutions that mitigate charges for reserving risk, in both the life and non-life markets.

Another factor has been new and emerging areas of risk transfer. Aon Benfield continues to play a leading role in generating reinsurance capacity to support mortgage credit and cyber business. Most ceded cyber premiums currently relate to US-domiciled risks, but regulatory pressure and heightened risk awareness are now expected to drive significant primary growth in Europe and Asia. Other areas of expansion include agriculture (particularly in India), flood and annuity reinsurance.

317 355

406 446

467 479 496 499 489 475 477 495 516 539

564 586

608

56 68 73 78 68 65 64 65 68 66 63 70 71 72 73 80 83

0%

5%

10%

15%

20%

25%

0

100

200

300

400

500

600

700

USD

(bill

ions

)

Direct premiums written Ceded premiums written (non-affiliates) Ceded (percent)


Recent demand growth in the US market has been focused in casualty lines, as shown below.

Exhibit 7: US non-affiliated cessions by class of business

Source: S&P Global Market Intelligence

Two additional factors are expected to stimulate additional demand for property reinsurance going forward. The first is A.M. Best’s transition to a new methodology and stochastic-based BCAR model by the end of 2017. Companies most likely to be affected include those with low current BCAR scores relative to their rating level, higher-rated companies whose current catastrophe reinsurance program exhausts near the 100-year return period, companies with aggressive investment strategies or high asset leverage, thinly-capitalized health companies and annuity writers.

The second factor is the inclusion of a specific catastrophe charge in the US Risk Based Capital model, which will apply from 2017 full-year reporting. This will lower RBC for most catastrophe-exposed companies, but is expected to have a meaningful impact in only a limited number of cases.

23 22 24 28 30

35 39 42

37 34 31 29 27 26 26 27 28 31 32 35 39

11 11 12 13 13

16

18 19

19 18 21 23 28

26 24 29 28 27 27

30 29

3 3 3

3 4

4

5 5

5 6 6 7

8 9 9

10 10 10 9

10 10

7 7 7

8 9

13

11 11

8 6 6 5

5 5

4

4 4 4 4

5 5

0

10

20

30

40

50

60

70

80

90

USD

(bill

ions

)

Casualty Property Homeowners' Other

Aon Benfield 9

Growing the market Fundamentally, significant growth in reinsurance demand is dependent on increasing the relevance of insurance to the global economy. Huge swathes of uninsured risk in both developed and developing markets present a tantalizing opportunity for the industry to fully deploy its capital and risk management know-how, over the longer-term.

Uninsured populations exposed to natural disasters and severe weather events are growing, increasing the post-event refinancing burden for hard-pressed national governments. At the same time, commercial insurers are adjusting to a world in which corporate buyers are just as worried about supply chains, intellectual property and reputational risk as they are about tangible assets.

Awareness of the economic damage resulting from natural disasters is growing. The private sector has had some recent success in assisting individual governments and supra-national agencies with the creation of schemes that expand insurance coverage and provide risk transfer. Potential opportunities for further involvement are summarized below.

In the US, the federally-backed National Flood Insurance Program is due to expire at the end of September. The already heavily indebted scheme will be heavily impacted by Hurricane Harvey.

In August, the Monetary Authority of Singapore reported that member states of the Association of Southeast Asian Nations aim to substantially liberalize access to catastrophe reinsurance by 2019. Less than 5 percent of economic losses in developing Asia were said to be insured.

Also in August, it was disclosed that a new catastrophe risk insurance program was being launched by the Government of the Philippines, supported by the World Bank and the UK Department for International Development.

In July 2017, it was announced that the World Bank was working with the UK and German Governments to set up the London Centre for Global Disaster Protection, with a view to fostering insurance solutions and risk management for developing countries. This coincides with the introduction of a new regulatory framework governing London-based ILS business.

In June 2017, the Chinese authorities called for improved catastrophe risk management in China, underpinned by both traditional and alternative risk transfer. The government subsequently disclosed that natural disasters in July alone had cost USD20 billion.


Outlook for January Renewals Alternative capital competing strongly Growing investor engagement allowed the alternative capital sector to compete strongly at the mid-year renewals. Against a backdrop of record catastrophe bond issuance, ILS fund managers offered increased collateralized capacity at decreased pricing margins and expanded coverage relative to prior years, with pressure exerted internationally, as well as in the US. At the same time, there were few signs of withdrawal in the traditional market. Absent further extreme events, and based on the capital position of the industry and results in the first half of 2017, most cedents are likely to find the marketplace accommodating at the January 1 renewals.

What could change the dynamics? Only a fundamental shift in the balance of supply and demand will drive higher reinsurance pricing on a sustainable basis. Given that the expected increase in demand is expected to take time to materialize, this will only happen if a significant amount of capacity is forced to leave the market. There are three main ways in which this can happen: substantial losses, rapid movement in interest rates, or changes in market structure that cause constraints in supply.

Insured losses Balance sheet impairment can result either from adverse prior year reserve development, or from very large catastrophe events. Low inflation and generally benign loss trends have allowed most major reinsurers to establish long-term track records of favorable reserve development over the past decade. The level of release is now dwindling, but there is little sign of near-term stress from this direction.

Based on preliminary figures pre-Hurricane Harvey, insured losses during the first eight months of 2017 totaled USD24.5 billion, representing only 56 percent of the prior 10 year average for this period. Severe weather continued to generate the largest share of losses at USD18.7 billion, of which nearly 90 percent occurred in the US. Typically relating to smaller events, this loss activity tends to be more heavily contained within insurer retentions, resulting in lower loss levels ceded to reinsurers.

Exhibit 8: Global insured losses

0

20

40

60

80

100

120

140

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 August2017

USD

bill

ions

DroughtEarthquakeEU windstormFloodingOtherSevere weatherTropical cycloneWinter weatherWildfire

Source: Impact Forecasting

Aon Benfield 11

While the last 10 years have resulted in below average tropical cyclone insured losses, August and September remain the peak periods for this activity. The three leading commentators recently revised their forecasts and now expect this year's Atlantic hurricane season to see above-average levels of activity, as shown below.

Exhibit 9: Atlantic hurricane predictions Named storms Hurricanes Major hurricanes TSR (May 2017) 1950-2016 average 11 6 3 2017 17 (+3) 6 (same) 3 (same) CSU (June 2017) 1981-2010 median 12.0 6.5 2.0 2017 16 (+2) 8 (+2) 3 (+1) NOAA (May 2017) 1981-2010 average 12 6 3 2017 14-19 (+3-2) 5-9 (same) 2-5 (+0-1)

Note: Values in parentheticals indicate the change since the predictions included in our July Reinsurance Market Outlook Sources: Tropical Storm Risk (TSR), Colorado State University (CSU), National Oceanic and Atmospheric Administration (NOAA)

The industry has proved itself to be very resilient over the last decade, a period that includes a major global financial crisis and the all-time record year for insured catastrophe losses (2011). Reinsurers are actively managing their catastrophe exposures and most of the larger players currently trade with extremely strong capital adequacy. It will therefore require an extraordinary loss event, or combination of events, for capacity to be materially impaired.

For context, Standard & Poor’s (S&P) recently estimated that, across companies they rate, the 1-in-250-year modelled annual aggregate net loss had declined to an average of 30.0 percent of total equity in 2017, from 31.5 percent in 2016. Higher reliance on retrocession has contributed to this trend, with around 40 percent of exposure being retroceded, on average, at this return period. S&P’s stress tests indicate that such a loss could reduce the capital adequacy of the reinsurance industry to a level commensurate with a rating in the 'A' category, from its currently extremely strong (‘AAA’) position.

The pricing impact of any major loss is determined largely by its timing and the extent to which it was previously contemplated. Losses that challenge modelling assumptions and/or tie-up material amounts of collateral have the potential to create the most disruption. Material capital waiting on the side-lines is likely to be deployed quickly should such an opportunity present itself.


Interest rates The capital markets appear calm, but uncertainty is widespread, geo-political risk has increased and central bank policy is beginning to diverge.

The International Monetary Fund (IMF) continues to expect a pick-up in global growth, from 3.2 percent in 2016, to 3.5 percent in 2017 and 3.6 percent in 2018. Growth projections for the US and the UK have declined since April, while those for the euro area, Japan and China have been revised upwards. Excluding the effects of Brexit-related devaluation in the UK, inflation in advanced economies remains subdued and generally below target.

The US Federal Reserve has implemented two rate rises so far in 2017. A third is expected before the year-end and initial moves towards a normalization of monetary policy are possible within the same timeframe. On July 11, JPMorgan Chase CEO Jamie Dimon warned that the unwinding of quantitative easing had never been attempted on this scale (the Federal Reserve’s balance sheet has ballooned by USD3.3 trillion since late 2008) and could be more disruptive than envisioned. Market volatility is likely to increase and interest rates may rise more quickly than expected.

In July 2017, the European Central Bank (ECB) left its key policy rates unchanged and signaled that they would remain at present levels for an extended period of time. The commitment to maintain net asset purchases at EUR60 billion per month until at least the end of 2017 was also reaffirmed. This additional liquidity will keep prices high and yields low, particularly in the case of short-term bonds.

Market structure The principal driver of changes in reinsurance market structure in recent years has been merger and acquisition (M&A) activity. However, consolidation has not materially reduced industry capital, as many transactions are motivated by a desire to achieve scale and remain relevant. Insurance M&A activity has declined in 2017, due to uncertainty created by Brexit and temporary monetary controls imposed in China. High valuations are also acting as a constraint, partly due to the embedded takeover premium in smaller companies’ stocks. The principal deals since the beginning of 2015 are summarized on the next page.

Aon Benfield 13

Exhibit 10: Reinsurance-related M&A activity

Announced Completed Buyer Target Target GPW

(USD billions) Value

(USD billions) Price to book (x)

Nov-14 Mar-15 RenRe Platinum 0.5 1.9 1.13 Jan-15 May-15 XL Catlin 6.0 4.1 1.21 Feb-15 Jul-15 Fairfax Brit 1.9 1.9 1.63 Mar-15 Jul-15 Endurance Montpelier Re 0.7 1.8 1.21 May-15 Nov-15 Fosun Ironshore 2.2 2.3 1.12 Jun-15 Oct-15 Tokio Marine HCC 3.0 7.5 1.90 Jul-15 Jan-16 ACE Chubb 13.6 28.3 1.70 Jul-15 Apr-16 China Minsheng Sirius 1.1 2.6 1.43 Aug-15 Mar-16 EXOR PartnerRe 5.5 6.9 1.11 Sep-15 Feb-16 Mitsui Sumitomo Amlin 3.8 5.3 1.93 Apr-16 Nov-16 AmTrust ANV 0.7 0.2 Aug-16 Jan-17 Arch United Guaranty 1.0 3.4 1.01 Sep-16 Dec-16 Canada Pension Plan Ascot 1.1 1.1 Oct-16 Mar-17 Sompo Endurance 2.0 6.3 1.36 Oct-16 Apr-17 PartnerRe Aurigen 0.1 0.3 Oct-16 Shenzhen Qianhai Asia Capital Re 0.8 1.0 1.25 Nov-16 Feb-17 Argo Ariel Re 0.4 0.2 1.45 Dec-16 May-17 Liberty Mutual Ironshore 2.2 3.0 1.43 Dec-16 Jul-17 Fairfax Allied World 3.0 4.9 1.35 Mar-17 Jul-17 Hannover Re Argenta 0.4 0.1 Jul-17 AXIS Novae 1.2 0.6 1.53 Jul-17 Markel State National 1.3 0.9 2.90 Aug-17 Centerbridge Sompo Canopius 1.4 1.0

Source: Aon Benfield Analytics

Scale has advantages, but can result in the loss of the agility and underwriting focus necessary to respond to changing market needs. This has provided an opportunity for growth and innovation in the managing general agency (MGA) sector. MGAs are typically streamlined operations with preferential access to business, on either a geographic or relationship basis. The attraction for capacity providers is that they can offer cost and capital efficient access to new markets. Regulation can have a significant impact on market structures and the way in which reinsurance capacity is supplied. In recent times, the industry’s ability to deliver risk transfer on a cross-border basis has been threatened by a growing tendency towards protectionism. This may alter risk-reward dynamics and the extent of foreign interest in local markets, limiting the diffusion of knowledge, pricing know-how and risk diversification – key ingredients for stable long-term market expansion. The authorities in the US and the European Union finalized a ‘covered agreement’ in the last days of the Obama administration, the intent being to create a level playing field between the regulatory regimes in the two markets. Both sides recently confirmed that this agreement would be implemented. Brexit is adding cost to the industry, but is not expected to have a material impact on the way in which reinsurance capacity is supplied. US tax reform could potentially have more of an effect, depending on how it impacts the relative attractiveness of the US and Bermudian markets. A final area to consider is the exponential advance of technology, which is ultimately expected to have a profound impact on business models, the efficiency of the industry and service delivery to clients.


Reinsurer Results A decade of strong performance The Aon Benfield Aggregate (ABA) reported an average combined ratio of 93.7 percent and an average return on equity of 9.9 percent over the decade to the end of 2016, representing attractive performance relative to many other sectors. Reinsurers have adapted to the changed operating environment by diversifying their underwriting portfolios, seeking operating efficiencies and leveraging third party capital to expand their business positions, earn fee income and lower their cost of capital. To some extent, this process has been accelerated through consolidation.

First half 2017 results Major reinsurers continued to produce solid results in the first half of 2017, despite the impact of the unexpectedly harsh Ogden discount rate cut, driven by a relatively benign loss environment and stabilized investment returns. Impact Forecasting estimates global economic and insured losses in the period at USD53 billion and USD22 billion, representing 44 and 65 percent of the 10-year averages. The reinsured proportion of these losses was relatively low, as the major cause was severe convective storms in the US.

Gross property and casualty (P&C) premiums written by the ABA companies totaled USD90 billion in the first half of 2017, up 1 percent relative to the prior year period. The reinsurance cession ratio increased to 17.7 percent, from 15.6 percent previously, partly reflecting greater utilization of retrocession and third party capital. Net premium earned rose by 2 percent to USD69 billion.

The combined ratio was flat at 94.7 percent and underwriting profit rose by 5 percent to USD3.6 billion. The contribution from favorable prior year reserve development halved to USD1.5 billion, mainly reflecting the impact Ogden on UK liability reserves. Disclosed major losses fell by 30 percent to USD2.5 billion.

Exhibit 11: ABA combined ratio composition

-4.0 -2.7 -3.5 -3.3 -4.4 -4.5 -2.2

30.0 30.5 30.6 31.2 32.5 32.8 32.6

58.8 59.9 57.7 59.4 60.6 61.2 60.5

30.5 4.1 5.8 3.9 2.9 5.4 3.7

115.3

91.9 90.6 91.3 91.5 94.8 94.7

-10%

10%

30%

50%

70%

90%

110%

130%

H1 2011 H1 2012 H1 2013 H1 2014 H1 2015 H1 2016 H1 2017

Major loss ratio Attritional loss ratio Expense ratio Prior year reserve adjustment

Source: Company results, Aon Benfield Analytics

Aon Benfield 15

The total investment return reported by the ABA companies stood at USD14.0 billion in the first half of 2017, representing an annualized return of 3.6 percent on average cash and investments of USD789 billion. Excluding realized and unrealized gains, the underlying yield held steady at 2.6 percent.

Exhibit 12: ABA investment yield


Other expenses increased by USD1 billion in the first half of 2017, partly due to foreign exchange losses, and as a result overall pre-tax profit fell by 6 percent to USD10.4 billion.

Exhibit 13: ABA pre-tax profit


4.7 4.8

2.1

3.8 4.1

3.7 4.0

3.4 3.8

3.0 3.4

3.6

3.8 4.3

3.9 3.6

3.3 3.5 3.1 2.9 2.9 2.7 2.6 2.6

1%

2%

3%

4%

5%

6%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 H12017

Total investment return (including capital gains) Underlying investment return

0.1

12.4 11.8 14.4

12.5 11.0 10.4

-20

-15

-10

-5

0

5

10

15

20

25

1H 2011 1H 2012 1H 2013 1H 2014 1H 2015 1H 2016 1H 2017

USD

bill

ions

Other Pure life technical result P&C underwriting resultInvestment income Capital gains/losses Pre-tax profit

H1 2011 H1 2012 H1 2013 H1 2014 H1 2015 H1 2016 H1 2017


Total net income reported by the ABA companies fell by 3 percent to USD8.6 billion in the first half of 2017. Net income attributable to common shareholders fell by 2 percent to USD7.9 billion, representing an annualized return on average common equity of 8.4 percent. This represented a reduction from 8.7 percent in the first half of 2016, but was in line with the outcome for the full year.

Exhibit 14: ABA return on equity


As always, results for the full year are heavily dependent on the outcome of the Atlantic hurricane season. Increased utilization of retrocession and third party capital has allowed reinsurers to contained modelled exposures relative to capital, but current earnings provide less of a cushion that has been the case in the past and future results are likely to be more volatile as a consequence.

The timing is uncertain, but the UK government appears committed to reforming the methodology for setting the discount rate used in large bodily injury claims settlements (Ogden). If the new discount rate is higher than the current -0.75 percent, it may result in a reversal of newly-constituted reserves.

15.5 16.2

3.7

12.9

10.1

4.4

11.5 10.7 11.3

10.1 8.4 8.4

0%

5%

10%

15%

20%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 H12017

Aon Benfield 17

Appendix Exhibit 15: Largest global reinsurers – total reinsurance gross premiums written (USD millions)

No. Reinsurer 2015 2016 No. Reinsurer 2015 2016 1 Swiss Re 27,958 31,032 26 Validus 1,762 1,821 2 Munich Re1 30,559 29,473 27 Pacific Life 1,453 1,570 3 Hannover Re 18,957 18,102 28 Arch 1,419 1,494 4 SCOR 14,079 14,555 29 CCR 1,429 1,456 5 Lloyd's 13,137 12,758 30 IRB Brasil Re 1,324 1,421 6 Berkshire 12,236 12,709 31 Aspen 1,249 1,413 7 RGA 9,249 10,107 32 Liberty Mutual4 1,687 2,075 8 Great-West Lifeco 4,710 8,517 33 Deutsche Ruck 1,197 1,301 9 China Re 8,819 8,407 34 Qatar Insurance 1,218 1,300

10 Korean Re 5,580 5,691 35 Taiping Re 1,033 1,184 11 PartnerRe 5,548 5,357 36 Markel 965 1,041 12 GIC Re 2,878 4,994 37 QBE 954 1,026 13 Alleghany 3,662 4,330 38 Sirius 867 900 14 Everest Re 4,359 4,247 39 W.R. Berkley 837 896 15 XL Catlin 2,273 3,975 40 Allianz 1,064 887 16 Mapfre 3,619 3,873 41 American Agriculture 805 856 17 Fairfax2 2,915 3,562 42 Chubb 883 739 18 Maiden Re 2,663 2,831 43 Peak Re 583 698 19 AXIS 2,021 2,250 44 Hiscox 586 671 20 Sompo3 295 2,202 45 African Re 689 642 21 Tokio Marine 2,156 2,176 46 Third Point Re 702 617 22 Mitsui Sumitomo 2,317 2,162 47 Nacional Re 569 589 23 RenRe 1,846 2,125 48 Asia Capital Re 734 588 24 Toa Re 1,845 2,063 49 Hanover Insurance 633 571 25 R+V 1,706 1,942 50 Greenlight Re 502 536

Source: Company reports, Aon Benfield Analytics 1 Excluding Risk Solutions 2 Pro forma for Allied World in 2016 3 Pro forma for Endurance in 2016 4 Pro forma for Ironshore in 2016


Exhibit 16: Largest property & casualty reinsurers – gross premiums written (USD millions) No. Reinsurer 2015 2016 No. Reinsurer 2015 2016

1 Swiss Re 16,656 18,822 24 Validus 1,762 1,821 2 Munich Re1 14,082 14,418 25 Arch 1,419 1,494 3 Lloyd's 13,137 12,758 26 Aspen 1,249 1,413 4 Hannover Re 10,371 10,189 27 Toa Re 1,331 1,409 5 Berkshire 7,049 8,037 28 IRB Brasil Re 1,260 1,325 6 SCOR 5,530 5,492 29 CCR 1,326 1,317 7 Korean Re 4,705 4,762 30 Qatar Insurance 1,218 1,300 8 GIC Re 2,507 4,645 31 Deutsche Ruck 1,151 1,249 9 Alleghany/TransRe 3,662 4,330 32 Markel 965 1,041

10 Everest Re 4,359 4,247 33 QBE 954 1,026 11 PartnerRe 4,277 4,189 34 Sirius 867 900 12 XL Catlin 2,273 3,975 35 W.R. Berkley 837 896 13 China Re 5,128 3,683 36 Allianz 1,064 887 14 Fairfax2 2,915 3,562 37 American Agriculture 805 856 15 Mapfre 2,952 3,156 38 Chubb 883 739 16 Maiden Re 2,663 2,831 39 Peak Re 583 698 17 AXIS 2,021 2,250 40 Hiscox 586 671 18 Sompo Japan3 295 2,202 41 African Re 689 642 19 Tokio Marine 2,156 2,176 42 Taiping Re 594 639 20 Mitsui Sumitomo 2,317 2,162 43 Third Point Re 702 617 21 RenRe 1,846 2,125 44 Asia Capital Re 734 588 22 Liberty Mutual4 1,687 2,075 45 Hanover Insurance 633 571 23 R+V 1,706 1,942 46 Greenlight Re 502 536

Source: Company reports, Aon Benfield Analytics 1 Excluding Risk Solutions 2 Pro forma for Allied World in 2016 3 Pro forma for Endurance in 2016 4 Pro forma for Ironshore in 2016

Exhibit 17: Largest life & health reinsurers – gross premiums written (USD millions) No. Reinsurer 2015 2016 No. Reinsurer 2015 2016

1 Munich Re 16,477 15,055 9 Pacific Life 1,453 1,570 2 Swiss Re 11,302 12,210 10 PartnerRe 1,271 1,168 3 RGA 9,249 10,107 11 Korean Re 875 929 4 SCOR 8,549 9,062 12 Mapfre 667 717 5 Great-West Lifeco 4,710 8,517 13 Toa Re 514 654 6 Hannover Re 8,586 7,913 14 Taiping Re 439 545 7 China Re 3,691 4,724 15 GIC Re 371 349 8 Berkshire 5,187 4,672

Source: Company reports, Aon Benfield Analytics

Aon Benfield 19

Contact Information Paul Mang Global Chief Executive Officer of Analytics Aon Benfield +65 6812 6193 [email protected] George Attard Head of Analytics, International Aon Benfield +65 6239 8739 [email protected] Tracy Hatlestad Global Chief Operating Officer of Analytics Aon Benfield +65 6512 0244 [email protected] John Moore Chairman of International Analytics Aon Benfield +44 0(20) 7522 3973 [email protected]

Greg Heerde Head of Analytics & Inpoint, Americas Aon Benfield +1 312 381 5364 [email protected] Kelly Superczynski Head of Analytics, EMEA Aon Benfield +1 312 381 5351 [email protected] Mike Van Slooten Head of Market Analysis, International Aon Benfield +44 0(20) 7522 8106 [email protected]

mailto:[email protected]






Aon Benfield 1

About Aon Benfield Aon Benfield, a division of Aon plc (NYSE: AON), is the world’s leading reinsurance intermediary and full-service capital advisor. We empower our clients to better understand, manage and transfer risk through innovative solutions and personalized access to all forms of global reinsurance capital across treaty, facultative and capital markets. As a trusted advocate, we deliver local reach to the world’s markets, an unparalleled investment in innovative analytics, including catastrophe management, actuarial and rating agency advisory. Through our professionals’ expertise and experience, we advise clients in making optimal capital choices that will empower results and improve operational effectiveness for their business. With more than 80 offices in 50 countries, our worldwide client base has access to the broadest portfolio of integrated capital solutions and services. To learn how Aon Benfield helps empower results, please visit aonbenfield.com.


© Aon Benfield 2017. | All rights reserved. This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Benfield’s preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. Aon Benfield disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Benfield reserves all rights to the content of this document. © Aon Securities Inc. 2017 | All Rights Reserved Aon Securities Inc. is providing this document and all of its contents (collectively, the “Document”) for general informational and discussion purposes only, and this Document does not create any obligations on the part of Aon Securities Inc., Aon Securities Limited or their affiliated companies (collectively, “Aon”). This Document is intended only for the designated recipient to whom it was originally delivered and any other recipient to whose delivery Aon consents (each, a “Recipient”). This Document is not intended and should not be construed as advice, opinions or statements with respect to any specific facts, situations or circumstances, and Recipients should not take any actions or refrain from taking any actions, make any decisions (including any business or investment decisions), or place any reliance on this Document (including without limitation on any forward-looking statements). This Document is not intended, nor shall it be construed as (1) an offer to sell or a solicitation of an offer to buy any security or any other financial product or asset, (2) an offer, solicitation, confirmation or any other basis to engage or effect in any transaction or contract (in respect of a security, financial product or otherwise), or (3) a statement of fact, advice or opinion by Aon or its directors, officers, employees, and representatives (collectively, the “Representatives”). Any projections or forward-looking statements contained or referred to in this Document are subject to various assumptions, conditions, risks and uncertainties (which may be known or unknown and which are inherently unpredictable) and any change to such items may have a material impact on the information set forth in this Document. Actual results may differ substantially from those indicated or assumed in this Document. No representation, warranty or guarantee is made that any transaction can be effected at the values provided or assumed in this Document (or any values similar thereto) or that any transaction would result in the structures or outcomes provided or assumed in this Document (or any structures or outcomes similar thereto). Aon makes no representation or warranty, whether express or implied, that the products or services described in this Document are suitable or appropriate for any sponsor, issuer, investor, counterparty or participant, or in any location or jurisdiction. The information in this document is based on or compiled from sources that are believed to be reliable, but Aon has made no attempts to verify or investigate any such information or sources. Aon undertakes no obligation to review, update or revise this Document based on changes, new developments or otherwise, nor any obligation to correct any errors or inaccuracies in this Document. This Document is made available on an “as is” basis, and Aon makes no representation or warranty of any kind (whether express or implied), including without limitation in respect of the accuracy, completeness, timeliness, or sufficiency of the Document. Aon does not provide and this Document does not constitute any form of legal, accounting, taxation, regulatory, or actuarial advice. Recipients should consult their own professional advisors to undertake an independent review of any legal, accounting, taxation, regulatory, or actuarial implications of anything described in or related to this Document. Aon and its Representatives may have independent business relationships with, and may have been or in the future will be compensated for services provided to, companies mentioned in this Document.

Aon Benfield 3

Advisen Property Front Page News - Wednesday, September 6, 2017

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Covering water damage - flood insurance aroundthe world

PublicationDate

09/01/2017

Source: Associated Press

THE HAGUE, Netherlands (AP) - The catastrophicflooding unleashed on Texas by Harvey wasunprecedented. Elsewhere in the world, floodingassociated with wild weather is a challenge confronting alltypes of communities from coastal cities in Asia tomountain villages in Europe.

In the last two months alone, floods have killed more than1,000 people across India, southern Nepal and northernBangladesh. Some 40 million more have seen theirhomes, businesses or crops destroyed.

Compounding the misery is the fact that many don't haveaccess to insurance and even if they do, it can beprohibitively expensive. At least in the United States,there is a government-backed program that provides floodinsurance to residents. But in the Houston area, whichbore the brunt of Harvey, many residents didn't have theflood coverage and could have to dip into savings to payfor repairs.

Maryam Golnaraghi, director of the extreme events andclimate risk program at global insurance think tank, TheGeneva Association, said governments and the insuranceindustry have to work together to make insuranceaffordable and give people incentives to buy it.

"In the past, that marriage did not work," she said. "Nowthey've realized that neither the industry nor governmentcan do it alone. They have to work together on provisionof insurance."

Here is a glance at how other flood-prone regions dealwith insurance.

Page 1 of 4Advisen Property Front Page News

9/6/2017http://www.advisen.com/tools/fpnproc/news_detail3.php?list_id=3&email=ewhitehead@loc...

ASIA

Of all natural calamities, floods are the most frequent andcostly in Asia due to the combination of monsoonalweather and burgeoning populations in coastal cities andriver flood plains.

Rising sea levels linked to global warming are alsoexpected to increase the frequency of so-called once in acentury floods such as those that swept through Thailandin 2011, costing tens of billions of dollars.

In Asia's developing countries, which make up the bulk ofthe region's population, private insurance against floodingand other natural calamities is beyond the reach of most.

From Bangladesh to Indonesia and India, the burden oflosses as well as the costs of relief and reconstructionfalls on individuals, businesses and the already over-stretched budgets of governments and charities.

The Geneva Association estimates that in 2014 only 10percent of losses from all types of natural disasters inAsia were insured compared with 60 percent in NorthAmerica.

In China, government-subsidized insurance againstnatural calamities has been available for farmers since2007 but crucially only covers crops and livestock. Privateinsurance is negligible with only 1-2 percent of floodlosses insured and flood insurance for property notavailable at all in rural areas, according to the GenevaAssociation.

Thailand's government set up a National CatastropheInsurance Fund after the 2011 floods with the intention ofbacking up hard-pressed domestic insurance companiesso they would continue to offer natural disaster insurance.However participation is not compulsory and according tomedia reports, local premiums have still soared, counterto the government's intention, while insurers havereduced the amounts they'd pay out.

EUROPE

The 28-country European Union has a fund to helpmember states tackle natural disasters like floods andearthquakes. However, the so called EU Solidarity Fundis intended to help governments meet the cleaning-upcosts and rebuilding. It is not meant to cover privateinsurable losses that is down to homeowners in memberstates.

There's perhaps no country in Europe more alert to thethreat of flooding than the Netherlands. The low-lyingnation of 17 million has a well-developed network of



dikes, dunes and water barriers that have largelysucceeded in containing the water.

For a country constantly battling the elements, it maycome as a surprise that flood insurance is not so well-advanced. Only one Dutch insurer offers it.

The national association of insurers wants to change thatand has long called for a mandatory scheme that wouldinvolve adding a small amount 50 cents to a euro toexisting homeowner insurance premiums.

"England, France, Belgium have flood insurance. It iscrazy that a delta country like the Netherlands doesn't,"the association's spokesman Rudi Buis said.

"Maybe people think we are so good with our dikes andeverything else we can fix it, it won't happen. But we thinkthat's an illusion, particularly in light of climate change."

The country's Consumer and Markets Authority rejectedthe proposal back in 2013, however, arguing thatconsumers must have a choice of whether or not theyinsure against flooding.

Now, if there is a flood, Dutch homeowners who sufferdamage have to hope that the government activates anational program that pays out for damages suffered inmajor natural disasters or serious accidents.

In France, all insurance contracts covering houses,businesses, public entities or vehicles must by law includeprotection against natural disasters, including floods, saidStephane Penet of the French Insurance Federation.

Insurers must cover flood losses up to a certain amount,above which a state fund kicks in, he said.

"If there is a huge catastrophe in France from a certainamount of losses it's no longer the insurers that pay, it'sthe state," he said.

In Romania, fewer and fewer people are insuring theirhomes against flooding. The National Pool againstNatural Disasters reported that at the end of July about1.7 million homes were insured, down 4 percent on theprevious year.

Of those homes that were covered, only 24.4 percentwere in rural areas, which face the highest risk offlooding. It is not clear if the cost of policies is preventinglocals, who are generally less well off than those in thecities, from taking out insurance.

In Britain, several damaging floods prompted thegovernment to step in to make insurance more affordable,



flooding consultant Mary Dhonau said in a telephoneinterview.

The government launched Flood Re, a not-for-profitscheme funded by insurers that covers flood losses.

"Over time, we estimate that Flood Re will benefit over350,000 households by having access to those moreaffordable policies," the organization says on its web site.

Associated Press writers Stephen Wright in Bangkok,John Leicester in Paris and Alison Mutler in Bucharest,Romania, contributed.Copyright 2017 The Associated Press. All rights reserved. This material may not bepublished, broadcast, rewritten or redistributed.

Page 4of 4Advisen Property Front Page News


Advisen Property Front Page News - Wednesday, September 6, 2017

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Important insurance coverage considerations forlosses caused by Hurricane Harvey

PublicationDate

09/04/2017

Source:Mondaq BusinessBriefing

By Mr John R. Hardin

While the full extent of damages caused by HurricaneHarvey is unknown at present, the storm has alreadycaused unprecedented damage in Texas. That damagearises in the midst of pending legislative change that mayaffect significantly losses governed by Texas law.

Specifically, for losses governed by Texas law, a recentchange in Texas law thrusts an immediate decision uponpolicyholders. The Hailstorm Bill signed into law earlierthis year and effective September 1,2017,will thereafterapply to all first-party claims under a policy providingcoverage for real property or improvements to realproperty that "arises from damages to or loss of coveredproperty caused, wholly or partly, by forces of nature,including ...a hurricane." While the Hailstorm Bill containsmany substantive changes, 1 a notable change is thereduction in the 18% penalty under Chapter 542 of theTexas Insurance Code (the "Prompt Payment Statute") ifan insurer fails to timely pay a covered claim. Any claimmade before September 1, 2017, however, is governedby the current law, including the 18% penalty in thePrompt Payment Statute. Thus, for claims governed byTexas law, policyholders must file a claim on or beforeThursday,August 31, in order to benefit from the current18% penalties (and other provisions) provided under pre-September 1, 2017 Texas law.

As policyholders begin to evaluate their losses, carefulconsideration will need to be given not only to directdamage or destruction of insured property, but also fromthe interruption of business resulting from that property


9/6/2017http://www.advisen.com/tools/fpnproc/news_detail3.php?list_id=3&email=ewhitehead@ loc...

damages, contingent business interruption caused bydamage to the property of important suppliers, customers,and other business partners;extra expenses incurred toresume normal operations;lack of access to property dueto damage to buildings, roads, docks, etc.;interruptedelectric, gas, and water services;and other circumstancesdepending on the particular business involved.

For all losses, it is vital for affected businesses to reviewall relevant or potentially relevant insurance policiespromptly, including excess-layer policies, and to complywith notification procedures. Affected businesses mustalso prepare and maintain detailed loss information. Whilethere will be a variety of individualized issues that ariseout of Harvey and depend on an insured's particularcircumstances, below is a general overview of selectissues that policyholders should consider.

Identifying Possible Coverage

A common source of responsive coverage for mostbusinesses will be the first-party coverage insuring theassets of the insured entity. Such policies may be in theform of broadly worded "all risk," "difference inconditions," or "inland marine" first-party property policies.Most of these policies also provide so called "timeelement" coverages, including "business interruption" and"extra expense" coverages that cover loss resulting fromthe company's inability to conduct normal businessoperations. While there are standard insurance industryforms for the coverage, some insurers issue tailoredpolicies to meet an insured's particular risk scenarios.Also, in many cases, this insurance is supplemented byspecialty coverages applicable to specific situations.

Businesses should start by evaluating the followingcoverages:

Property DamageCommercial property insurance typically providescoverage for loss or damage to real and personalproperty. Insured property is often broadly defined, and inaddition to providing coverage for real property, i.e., abuilding, it may include coverage for furniture and fixtures,machinery or equipment, newly acquired or constructedproperty, or property of third parties in the care, custody,or control of the insured.

Preventing or Mitigating Insured LossMany coastal businesses took preventive measuresbefore Harvey to minimize loss. Property policiescommonly contain a provision that allows an insured to bereimbursed for costs and expenses in taking preventativemeasures.



Business InterruptionBusiness interruption coverage generally covers aninsured for lost revenue or earnings resulting fromproperty damage caused by an insured peril. Generally, inorder to trigger business interruption coverage, theremust be a covered cause of loss that results in physicaldamage to insured property that also causes asuspension or interruption of operations resulting in lossof income.

Contingent Business InterruptionContingent business interruption provides coverage forlosses as a result of damage to "dependent property,"such as that of customers, suppliers, or other businesspartners, which renders that entity unable to conductnormal business operations. This coverage is not focusedon whether an insured's own property is damaged, but,instead, looks to damage that occurred to a third-partylocation and resulted in the insured suffering economiclosses.

Extra ExpenseExtra expense coverage may apply when an insuredincurs expenses to minimize loss in an effort to resumenormal operations.

Actions of Civil AuthorityCivil authority coverage can apply when a businesssuffers economic loss when an order of civil or militaryauthorities prevents or limits access to the property.Similar to contingent business interruption coverage, civilauthority coverage may apply even when there is nodamage to an insured's own property. Some policies mayrequire that there be damage to property of otherssurrounding the insured premises, while others mayprovide broader coverage for mandatory evacuations,curfews, or airport closures.

Lack of Access to Insured PremisesIngress and egress coverage is similar to civil authoritycoverage and may provide coverage for economic lossessustained when access to an insured's premises isblocked by a covered peril.

Service InterruptionService interruption coverage covers loss due to lack ofincoming utilities.

Claim PreparationClaim preparation coverage generally provides coveragefor the costs associated with compiling and certifying aclaim.

Advance PaymentsBusinesses often cannot afford a protracted adjustmentperiod. Many policies expressly require that insurers pay



losses as incurred while the full extent of the loss is beingadjusted.

Flood InsuranceCoverage for damage directly caused by flooding shouldbe covered under an insured's flood insurance policies.Flood coverage may be included in a private insurancepolicy or through the National Flood Insurance Program.

Presenting a Claim

Most policies identify specific procedures to be followed inpresenting a claim, and some of these procedures mayhave timing deadlines associated with them. Failure tocomply with these procedures may give insurers a basisto attempt to deny an otherwise covered claim. Also, asnoted above, a policyholder must submit a claim on orbefore August 31, 2017, to avoid application of theHailstorm Bill's amendments to Texas law.

In addition to notification and claim submissionprocedures, policyholders should also consider how aclaim is presented (for example, as a flood, serviceinterruption, or civil authority claim). This can sometimesimpact the ultimate recovery, particularly in the context oflimits of liability and deductibles, which may be expressedto be "per occurrence" or "per loss."

Where policies have specific exclusions applicable tocertain perils or circumstances, it is important the insuredtakes these into account when presenting its claim.

In all cases, an insured should promptly collect anddocument its loss information, evaluate the information inlight of the policy wording and applicable law, and presentit to the appropriate insurers in a timely and coverage-promoting manner.

Advance Payments

Businesses often need insurance to resume normalbusiness operations and cannot afford a protractedadjustment period. Indeed, an insurer's delay in makingappropriate and periodic payments may cause anincrease in the covered timeframe for businessinterruption and extra expense purposes. Importantly,many policies expressly require that insurers pay lossesas incurred while the full extent of the loss is beingadjusted.

Common Insurer Responses

Faced with a large claim after Harvey, insurers may raisea number of potential limitations or restrictions oncoverage. In our experience, some of the most commonissues raised by insurers include the following:



Was the damage to insured property caused by aninsured peril?It is important to properly characterize the cause of lossas policies may exclude or limit coverage for certaincauses. For example, many first-party policies are writtenon an "all risk" basis but may exclude or limit damagecaused by flood. Courts have taken different approachesin evaluating coverage when a loss is concurrentlycaused by covered and noncovered events. State lawsvary and causation issues can be, and often are, nuancedand complex.

Did an interruption of business result?An insured may have a claim, depending on thecircumstances, any time its income is adversely affectedby an insured event. Insurers often take a narrow view ofwhat constitutes an interruption.

Was the interruption necessary?Insurers may argue that at least some part of theinterruption or reduction in a policyholder's business wasthe result of a normal business decision by thepolicyholder, or the consequence of an economicdownturn, and was not made necessary solely because ofdamage to insured property.

Does the loss meet any requirements the policy may haveregarding duration of the interruption?Some policies have language limiting coverage tointerruptions that extend for longer than a specified periodof time.

How long is the allowed recovery period?Policies sometime include provisions specifying that it willonly cover loss of income and related expenses for aspecified period of time after an insured event occurs.Where this time is not specifically defined, it may be tiedto the time it would take the insured, employingreasonable mitigation efforts, to resume normal businessoperations under the circumstances. In view of themagnitude of some natural disasters and the number ofbusinesses affected, the length of time it will take to repairproperty and resume normal business operations may belonger than had the claim been an isolated event affectinga single facility.

How many occurrences are implicated by the allegedloss?Many policies have a per-occurrence deductible or otherself-insurance features that may reduce the amount ofcoverage available, depending on how the number ofoccurrences issue is addressed. This issue can alsoimpact the amount of per-occurrence policy limits thatmay be available to the insured.



Did the interruption result from damage by an insuredperil to property of the provider of the service?In the case of a claim resulting from loss of income orextra expenses associated with loss of electrical power orother services, did the interruption result from damage byan insured peril to property of the provider of the service?Some policies purport to exclude business interruptioncoverage arising from interruptions in electrical service.Other policies have language explicitly promisingbusiness interruption coverage for losses arising out ofservice interruptions (including service interruption tosuppliers of the insured) but purport to require that theinterruption resulted from damage to property of theservice provider. Policy language in this context variesconsiderably, and an insured must review carefully itsown policy's wording to assess the availability of businessinterruption coverage arising out of the interruption ofservices.

Evaluating and Challenging Insurer Positions

The validity of any defenses or limitations to coverageraised by insurers may vary depending on the lawgoverning the policy. Moreover, the applicability ofdefenses as to liability or valuation depends to a greatextent on specific language used in the policy and theapplicable law. Experienced insurance coverage counselis often needed to assess the viability and strength of apolicyholder's claim, in dealing with the insurers' lossadjusters, and in maximizing the policyholder's potentialinsurance recovery.

Footnote

[1] See John R. Hardin & Gilbert A. Perales, SB 10: AThreatened Setback For All Corporate Policyholders, K&LGATES INSURANCE COVERAGE ALERT (March 8,2017), http://www.klgates.com/sb-10--a-threatened-setback-for-all-corporate-policyholders-03-08-2017/; JohnR. Hardin & Gilbert A. Perales, Texas' Hailstorm BillThreeTakeaways for Policyholders, K&L GATES U.S.INSURANCE COVERAGE ALERT (July 24, 2017),http://klgates.com/texas-hailstorm-bill-three-takeaways-for-policyholders-07-24-2017/.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should besought about your specific circumstances.

Mr John R. HardinK&L Gates599 Lexington AvenueNew YorkNY 10022-6030UNITED STATES



(c) Mondaq Ltd, 2017 - Tel. +44 (0)20 8544 8300 -http://www.mondaq.com(c) 2017 Mondaq Ltd



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