Reinsurance Supported Innovation Reinsurance Thought by alicejenny


Supported Innovation
Profitably Insure New Risks

September 2010

Capital | Access | Advocacy | Innovation
Reinsurance Supported Innovation
The global insurance market is now highly competitive in almost every sector of the industry.
Insurance for personal and commercial lines in most developed nations is a mature industry.
Product innovation has had little noticeable impact on industry premiums. Very few truly new                        Reinsurers as Insurance
insurance products have been added to the industry landscape and 2010 and 2011 appear to be                         Product Innovators?
headed for net decreases in industry-wide premiums for core non-life premiums.
                                                                                                                    Aon Benfield understands that
What does this all mean? Insurers likely will be spending much more time on product
innovations in an attempt to reverse the negative premium trends and to gain competitive                            reinsurers are not necessarily
advantages in their selected markets.                                                                               known for helping insurers to
Management will likely need to address questions such as:                                                           innovate their original policies.
                                                                                                                    What is different now? Reinsurers
> What new or changed risk exposure(s) do our insureds face that a new insurance, savings or
  risk management product may eliminate, mitigate or finance?
                                                                                                                    have seen significant declines in
                                                                                                                    assumed premiums from insurers,
> What product or coverage additions or enhancements to currently offered products would
                                                                                                                    especially from casualty and
  be necessary to stop the decrease in on-level premiums earned from the insured?
                                                                                                                    specialty insurers. Leading reinsurers
> What product or coverage enhancements would be necessary to increase the on-level                                 engaged by Aon Benfield on
  premiums earned from the insured?
                                                                                                                    product innovation-related matters,
We believe that the answers to these fundamental innovation questions will require the                              have proven to be open-minded,
consideration of insuring new risks that are less well understood than those currently insured.
                                                                                                                    creative and willing to reinsure a
Aon Benfield, and like-minded innovative reinsurers, can be helpful in assessing, transferring,
mitigating, or financing these new risks. There has never been a better time to ask your                            range of uncertainties associated
reinsurers to participate in the new risks and opportunities associated with the innovations that                   with new product innovations.
will be required to grow the insurance market.

Personal Insurance
 Line         New / Changed Exposure                                                  Likely Innovations
Motor         > Lease and loan leverage has increased                                 > Incorporation of Gap coverage
              > Fewer financing options                                               > Reasonably priced optional endorsements for most dealer sold
                                                                                      > Post-catastrophe government assessment coverage
Home          >   More mobile population                                              > Death/Disability linked leverage reduction and management riders
              >   Less owner equity / higher leverage in home                         > Event linked equity protection products protecting the homeowners'
              >   Homes less resistant to catastrophes than previously believed         interests rather than lender interests
              >   Flood risks more severe than previously considered                  > Excess and integrated flood coverage
              >   Fewer financing and refinancing options                             > Severe catastrophe temporary or permanent relocation policy options
              >   Greater role of governments in homeowners' insurance                > Post-event government assessment coverage
              >   Better understanding of post-catastrophe long-term                  > Blanket brown and white goods (home appliances) warranty and
                  assessment risk                                                       extended warranty coverage
              >   Better understanding of community collapse risk post-
Liability     >   Greater personal liability expected or assumed from more            > Higher limits available through core motor and homeowners policies
                  "entitled" societies                                                > Higher personal liability umbrella limits offered
              >   More transparency to personal wealth
Health        >   Medical tourism                                                     > Defined benefit supplementary coverage sold to the individual
              >   Greater participation in healthcare costs incurred as a result of   > Private healthcare insurance products for severe illness and trauma
                  employer coverage cutbacks
              >   Greater government involvement in health care delivery
Life          >   Higher homeowner and consumer credit leverage                       > New life products focused on leverage reduction in the event of death
              >   Reduction in coverage and policy accumulation benefits                that are not focused on a specific lender
              >   Greater transparency on term and whole life policy costs and        > New savings products with life contingencies
                  comparative features
Identity      >   Internet transparency and public record access enable               > Insurance and services contracts restore personal credit and financial
                  impersonation and related financial fraud                             histories
              >   Misuse of voluntarily disclosed but private data supplied to        > Insurance and services contracts to remove false or unintended data
                  public websites is common                                             from public websites
                                                                                      > Insurance contracts to cover legal costs from alleged misuse of data
                                                                                      > Insurance contracts to cover damages from alleged misuse of data
Savings       >   Increased investment volatility                                     > Savings products with any number of life and catastrophe event
              >   Much lower fixed income securities yields                             related contingencies
              >   Much lower bank saving products yields
              >   Perception that municipal bonds may be more risky
              >   Record bank failures
                                                                                                                                                         Aon Benfield

Commercial Insurance
Line           New / Changed Exposure                                                                       Likely Innovations
Property       > Over $50 billion in paid commercial losses from recent events have provided great > Insurance coverage that more carefully differentiates
                 insight to the risks associated with natural catastrophe models                             resistive qualities of specific physical structures insured
               > Physical structures much more vulnerable to damage from natural catastrophes              > Insurance products that provide differentiated
                 than previously considered                                                                  coverage for progressively higher quality levels of
                                                                                                             underlying structural details
Business       > Greater appreciation for the potential duration of business interruption from large > Contingent BI products with even more transparent
Interruption     natural and man made events                                                                 event triggers
               > BI limits tied to a physical loss are often insufficient to sustain the full business     > Parametric payment or settlement options in
                 interruption impact from even widespread events                                             addition to indemnity coverage if speed to
               > Lower access to bank short-term financing as banks continue a massive global                settlement outweighs the benefit of full indemnity
                 deleveraging push and face uncertainty about absolute capital levels                        coverage
                                                                                                           > Liquidity facilities (with interest) built into BI clauses
                                                                                                             that allow the insured uncontested access to funds
                                                                                                             while the claim is being adjudicated
Workers'       > Low interest rate environment means premiums cover less of the ultimate costs             > Workers' compensation program endorsements to
               > Much higher worker productivity and thin staffing mean worker injuries and                  cover higher replacement and retraining costs
                 outages cost employers more than they have previously                                     > Workers' compensation loss funding options
               > Very high training costs and time to temporarily or permanently replace injured             embedded in the insurance product
                 workers                                                                                   > Excess employer payments for business interruption
               > Financial crisis and bank deleveraging has reduced the sources and increased the            due to multiple and simultaneous injuries to workers
                 cost of loss funding by insureds
General        > Greatly expanded potential corporate liability and the need for much greater              > Greatly expanded limits for higher risk and premium
Liability        limits than the insurance market has historically supplied                                  levels
               > Greater respect for the substantially higher cost of capital in the event that tail risks > Contingent liquidity facilities from insurers
                 occur during a sustained period of deleveraging                                           > Policy provisions that serve to help insureds prevent
               > Potential for government takeover of the claims adjudication and payment process            the government takeover of the claims adjudication
                 for mass torts                                                                              and payment process for mass torts
Products       > Greatly expanded potential corporate liability for products and the need for much > Greatly expanded limits for higher product liability
Liability        greater limits than the insurance market has historically supplied                          risk and premium levels
               > Greater respect for the substantially higher cost of capital in the event that            > Contingent liquidity facilities from insurers for
                 products liability tail risks occur during a sustained period of deleveraging               products liability
               > Potential for government takeover of the claims adjudication and payment process > Policy provisions that serve to help insureds prevent
                 for mass torts                                                                              the government takeover of the claims adjudication
                                                                                                             and payment process for multiple claimant product
                                                                                                             liability situations
Commercial     > Technology advances have continued to give fleet operators real time insight to           > Development of more comprehensive exposure and
Motor            exposures                                                                                   rating plans that further differentiate the insured
               > Driver monitoring has become a very important component to managing risk                    based on the additional available data
                                                                                                           > Fleet-performace based predictive models
Professional   > New, higher and more transparent levels of professional responsibility /                  > Broadening of interest in material risk transfer and
Liability        accountability under Dodd Frank Act and other similar measures still under                  risk financing products for all professional liability
                 consideration globally                                                                      and E&O for those dealing in securities, mortgages,
               > General public outrage about the extent of financial institution bailouts and               derivatives and consumer financial products
                 relatively high level of intolerance for more entity specific relief                      > Systemic risk transfer and risk financing products for
               > Pooled financial institution failure plan for next crisis                                   pooled failure risk for the next crisis
               > Concern over ultimate cost of potential D&O and E&O claims arising from the               > Higher D&O and E&O limits and generally more
                 financial crisis                                                                            interest in individual and per professional coverage
               > Uncertainty around the pace of economic recovery and the potential for greater            > Supplemental individual professional coverage for
                 D&O and E&O claims as the expected recovery materialized more slowly than                   hospital provided medical professional liability
                 hoped                                                                                     > New products related to the new U.S. government
               > Greater differentiation of the acts of individual directors and individual officers         led healthcare system
                 and the greater potential for a shared limit to become unsuitable for a collection of
                 directors and officers
               > Greater hospital control or involvement in medical professional liability coverage
                 provisioning and claims adjudication
               > Leveling of claims frequency of claims from nearly a decade of decreasing claims
Trade Credit   > Realization that trade credit markets nearly stopped and in some cases required           > Insurance products that differentiate the provision
                 government assistance                                                                       and cost of protection when granular and
               > Recognized need for greater transparency into individual credits and possibly               transparent data is made available to underwriters
                 independent credit assessments to efficiently support the credit risk underwritten > Systemic risk transfer and risk financing products
                                                                                                             from insurers
Energy         > Significantly change landscape for potential liabilities given the scale of the           > Substantially higher limits for substantially higher
                 deepwater horizon case                                                                      premiums reflecting the new realities
               > Realization that not even the most financially secure organizations can sustain
                 similar events without quadrupling their cost of capital, suffering material
                 downgrades and needing to sell even strategic assets
Marine         > Substantial volatility in volumes of shipping                                             > Product features that reflect up-front the notion of
               > Potential for rapid increase in exposure if global recovery continues                       paying for actual shipping volumes
Surety         > Massive infrastructure projects globally struggle to find sufficient surety capacity      > New capacity from nontraditional sources to
               > Contractor concentrations are significant                                                   complement leading sureties
               > Sureties are much more sensitive to concentrations in projects and contractors            > Project sponsor support of surety commitments
For more information please contact your Aon Benfield broker or:

Mike Bungert                                                   Dominic Christian
co-Chief Executive Officer, Aon Benfield                       co-Chief Executive Officer, Aon Benfield
+1.312.381.5301                                                +44 (0)20 7522 3866                      

Bryon Ehrhart                                                  Stephen Mildenhall
Chairman, Aon Benfield Analytics and                           Chief Executive Officer, Aon Benfield Analytics
Aon Benfield Securities                                        +1.312.381.5880

John Moore
Head of International, Aon Benfield Analytics
+44 (0)20 7522 3973

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