ART - the client perspective

1. ART - the client perspective Sam Dell, Aon Limited Global Risks ART solutions

2. ART - the client perspective • ART / ARF • Definition & solutions • Traditionally uninsurable risks • Demand side - drivers for the corporate client • Corporate client market research • ART / ARF solutions and services in practice • Conclusion - now or never for ART?

3. ART / ARF solutions - definition ART is an evolutionary solution driven approach. It is not a product. It is the result of the buyers goal to utilise its capital to manage and take risk more efficiently than its current products allow.

4. “Alternative” can mean any of the following • Alternative Insurance Solutions • risks already insured with new programme design • an enhanced feature of an existing programme i.e. Profit Commission. • Alternative Risks • risks not traditionally insured in the (re)insurance market • Alternative Risk Financing Solutions • risk transfer solutions that are neither insurance or reinsurance contracts i.e. Funded • Alternative Markets • suppliers of risk capital that are not insurers or reinsurers In practice most deals are a combination of 2 or 3 of the above

5. Contingent liabilities Asbestos Environmental impairment Tobacco health hazard Breast implants Mould Revenue protection Debt repayment guarantee Research & development Ridership Mandatory Modifications Debt Repayment Guarantee Brand Image Economy based risks Currency / F.X. Investment and interest rates Commodity exposures Traditionally uninsurable risks

6. “Alternative” can mean any of the following • Alternative Insurance Solutions • risks already insured with new programme design • an enhanced feature of an existing programme i.e. Profit Commission. • Alternative Risks • risks not traditionally insured in the (re)insurance market • Alternative Risk Financing Solutions • risk transfer solutions that are neither insurance or reinsurance contracts i.e. Funded • Alternative Markets • suppliers of risk capital that are not insurers or reinsurers In practice most deals are a combination of 2 or 3 of the above

7. Example - alternative insurance solutions • Deductible Smoothing programmes • Use of Captive Insurers • PCC’s and Insurance Vehicles • Introduction of Multi-Line / Multi-Year deals • Finite Risk / Funded programmes • Integrated programmes

8. Demand side - drivers for corporate clients (1) • Client focus: a broader range of risks from changes in technology, legislation, social attitudes, globalisation, economic conditions etc. e.g e-risks • Trends in corporate governance demand that clients can demonstrate adequate risk management (Cadbury, Turnbull, possible introduction of Corporate Killing) • Client sophistication - use of Enterprise Risk Management techniques, segmentation, and risk management functions more closely allied to Treasury functions • Investors - more sensitive to swings in earnings - focus by management on decreasing this volatility CEO/CFO’s view on risk : “anything that hurts our earnings per share or market capitalisation”.

9. Demand side - drivers for corporate clients (2) • Demand coverage for new / broader types of business risk • Stand alone basis or integrated into a package • Mergers & Acquisitions enhance earnings, but at the same time increase potential (unknown) liabilities • Demand for integral risk management and balance sheet protection • Continuing concern over the breadth of insurance products • indemnity agreement is usually highly conditional, specific and defined • Most efficient use of capital • Issue of convergence of capital, banking & insurance markets - credit enhancement programmes

10. 2001 - Top 5 greatest risks facing organisations 1. Loss of Reputation 2. Failure to Change 3. Business Interruption 4. Product Liability 5. Computer Crime 1995 - Top 5 greatest risks facing organisations 1. Fire 2. Employers’ Liability 3. Health & Safety 4. Business Interruption 5. Product Liability Demand side - corporate client market research • Source - Aon Limited • Biennial Risk Management & Risk Financing Survey 2001

11. Solutions and services in practice (1) • Long term, integrated risk financing programme with strong emphasis on: • risk transfer and • protecting company’s balance sheet • Broad definition of risk • Innovative, flexible and financially sound security • Carefully structured programme • Tax • Accounting • Legal • Mutual trust and partnership between client and underwriters

12. Solutions and services in practice (2) • Latest 100 “ART” enquiries passed to Aon Risk Consultants in the past 12-18 months :- • Project Finance - 20 (Credit Enhancement) • Insurance company / captive (smoothing) - 20 • Loss portfolio transfer - 15 • Operational risk - 10 • Weather - 10 • Commodity price - 5 • Accident/Health insurance schemes - 5 • Pensions mis-selling - 5 • Cat bond / CatEPut - 5 • Carbon trade/renewable Energy - 5

13. Conclusion - now or never for ART? (1) • “Alternative” market is made up of various different solutions & transfer methods • There is an increase in the level of client sophistication • Demand side - increasing demand for an ART involvement & solutions • Supply side - various factors at work • Hardening market a double edged sword - may lead to underwriters withdrawing “alternative” capacity

14. Conclusion - now or never for ART? (2) • Client demands for alternative risk management may provide for growth in services/solutions offered by insurance market - not linked to market conditions • Consulting opportunities • Transactional (risk transfer) opportunities • options, trigger mechanisms etc. • ART is in its infancy - likely to evolve gradually • Client awareness and understanding needs to be raised if the potential of ART is to be fully developed and exploited

15. Future development of ART • Corporate buyers require flexible, bespoke applications. • This requires a different, solution-focused ‘mindset’ from the capital providers. • The technology will continue to evolve as demands change. • Corporate buyers will remain cautious until the techniques and instruments are fully tested in real circumstances. Issues such as accountancy treatment, taxation treatment and legal contracts need to be analysed carefully. • However, the programmes are growing in popularity with potential buyers and the major capital providers.

16. ART - the client perspective Any questions?

17. ART - the client perspective Sam Dell, Aon Limited Global Risks ART solutions