Lessons From The Trenches-Construction and Risk Trends 2012

1. Lessons From The Trenches-Construction and Risk Trends 2012 Paul Becker CPCU, ARM Chairman Willis Construction Practice September 19, 2012

2. A Few Opening Comments • Welcome! • What we focused on this year • What are the underlying trends in the construction industry? • What about the insurance market? • What’s on your mind? • Let’s get started

3. Let’s Approach This Differently • This is audience participation time! • Tell us who you are • Tell us what’s on your mind • Tell us what’s important • Turning Technologies

4. Tell Us Who You Are

5. A Few Thoughts • What are we seeing now? • Underlying construction activity still muted but signs of improvement in some sectors and geographies • Carrier movements both in Surety and P&C: New capacity and appetites coming on line

6. Value of Construction Put in Place - Seasonally Adjusted Annual Rate US Census Bureau August 2012

7. Where’s The Growth Going To Come From? Source: FMI Construction Outlook Second Quarter 2012 Reports

8. Help Us Get Better-What Are The Most Important Things Willis Should Focus On?

9. Tell Us What You Want To Hear-A Top Ten Voting List

10. Tell Us What You Want To Hear-A Top Ten Voting List

11. The Top Ten

12. 1. Is The Market Hardening? If So How Long Will It Last • Lots of talk • Some movement is clearly out there • Not everywhere on all accounts • Are seeing some increases on larger accounts (5% + or -) • Property more stressed as well as Workers Compensation • Long term sustainability of increases not certain at all • Unfortunately for insurance carriers, results still pretty good • Business is viewed as stable by investors encouraging capital infusions • New carriers believe good time to enter • Reinsurance pricing predicted to flatten for 1.1.2013 renewals* * Fitch’s 2013 Reinsurance Review

13. 1. Is The Market Hardening? Is So How Long Will It Last

14. 2. Claims-What Are The Evolving Challenges?  What Recent Court Cases Keep You Up At Nght? • Current challenges • Uncertainty on indemnity statutes • NY Labor Laws • Business Risk and what courts define as an occurrence • Lack of consistent underwriting alignment with claims • Aggressive coverage positions and use of outside counsels by carriers • Court cases that keep us up • Kvaerner • Gilbert

15. 3. Changing Exposures In Construction-What Risks Will Create The Next Coverage Issues? • Cyber: The intersection of technologies via the Web • Design teaming • IPD • Beyond BIM • Employee environment • Supply chain: Globalization driving risk • Do you know where your materials are coming from? • Who procures these? • Coverage challenges • Indirect losses/soft costs • Time • Contractual relief?

16. 3. Changing Exposures In Construction-What Risks Will Create The Next Coverage Issues? • Design Integration • Impact on legal liability-When is a professional problem a coverage challenge? • Contract Damages • Confusion on insurance coverage for consequential damages versus contractually mandated damages (liquidated damages vs consequential waivers for ex.) • Warrantees • Guaranteeing performance over time-ESCO contracts for example • Not a big market for risk transfer at present

17. 4. Project Specific Insurance-Its Grown Significantly In The Last Decade.  Where Is It Heading?  Is This Good or Bad? • Underlying driver has shifted from perceived cost savings to more coverage certainty-that’s not a bad thing • Market is adapting to new buying habits • GL only-At much lower project sizes (as low as $5 to 10 MM) • Project OPPI or CPPI programs • Statutory term coverage • Non traditional markets driving activity • Challenges • Impact on contractor programs • Lack of consistent coverage project to project • Limits purchased • Poor project administration • More demand for accountability-How did the program work? Was it a success? How do you measure it?

18. 5. New Carriers-Key National Construction Insurance Carriers-Primary Casualty • = new leadership since 2005

19. 5. New Carriers-Professional Liability

20. 5. Key National Construction Insurance Carriers-Excess Liability

21. 5. Builder’s Risk

22. 5. New Names In Surety Recent activity and new players • Lots of movement on the carrier side • New carriers getting in • Existing carriers trying to hold on to market share • Rate competition notable • Innovation for differentiation • Massive capacity Delivery methods testing sureties • Gap • PPP • IPD? • Need for increased liquidity in the products

23. 5. New Names In Surety Notable movements: • AWAC-New carrier. Leader named August 2012 • One Beacon-New carrier. Leadership from ACE September 2012 • XL-Formed November 2010 • Berkeley-New President 2012 • Torus is investigating entering the business Why do markets want to get into this business now?

24. 6. IPD, PPP, Alternative Energy, Equity Investing By Contractors-Are These Really Going To Impact The Business?  Which Ones Are We Likely To Be Still Talking About In 5 to 10 Years? • IPD: Health care driven • Will this migrate to general commercial construction? • Carriers still catching up-if you’ve seen a deal for IPD you’ve seen one deal • Significant growth in next 10 years? • Public Private Partnerships • In the US is there opportunity beyond infrastructure? Healthcare? GSA? • Big bets that this will grow-Impact of foreign investment, challenges from traditional financing • Growth likely but not a panecea

25. 6. IPD, PPP, Alternative Energy, Equity Investing By Contractors-Are These Really Going To Impact The Business?  Which Ones Are We Likely To Be Still Talking About In 5 to 10 Years? • Alternative Energy • What are we talking about here? • Alternatives Solar, Wind, Bio Fuels • Getting energy from point A to point B: Pipelines, refineries, HVT • Underlying economic drivers suspect • Impact of gas, shale, coal sources • Long term growth-uncertain • Development • Contractor involvement-lots of discussion about sharing in equity risk • Lender requirements forcing teams to look at different risk structures on financial returns

26. 7. The Trend Of Mega Jobs (over $500 MM) • Dedicated sources of funds • Ballot initiatives • Political will-both helps (TMZ) and hurts (Hudson River Tunnels) • PPP Model-using “off balance sheet funds” • Shift risk to consortiums/concessionaires • Limited pool of firms that can compete • Helping larger firms- top 30 ENR contractors, not helping middle market firms

27. 7. The Trend Of Mega Jobs (over $500 MM) • Pent up demand helping in some cases • Brickell Place, Miami • Surety is keeping pace • Capacity on a single jobs well over $1 Billion • Developing products to help protect liquidity in some cases • Insurance marketplace • Truly global especially on builder’s risk (European carriers especially have an appetite for large infrastructure jobs) • Job limits of $300,000,000 + for GL/Excess, $100MM plus for CPPI, same for Environmental • Vast majority of the mega projects are “wrapped”

28. 8. Acquisitions • Key Drivers • Geography • Financial conditions • Succession planning • Size of deals • Uncertainty about the future • Recent Deals • Wietz (Orascom) • Summit (dck) • Shaw (CBI) • All in last two months- All ENR 400 contractors.

29. 9. What’s The Latest On State Specific Challenges?   • Types of concerns • Statutes • Court interpretations • Concerns also based on who is asking • Owner, GC, Sub Contractors • Statutes focused on several key areas that impact construction • Anti Indemnity Laws • Structural work acts/Labor Laws (Such as NY 240, 241, 242) • Subrogation limitations (such as on Worker’s Compensation) • Court Cases • Business risk cases (South Carolina, Pennsylvania, Florida for ex.) • Horizontal vs. Vertical Limits exhaustion (for ex. Kajima decision in Illinois)

30. 10. Getting The Best Deal In The Insurance Marketplace • What makes a carrier look more favorably on one firm versus another? • Make it personal-Meet the underwriters face to face • Spend time selling yourselves • Why should the underwriter give you a better deal? How do your losses relate to your safety and quality programs? Is your senior management involved? • Lay out your long term plans • If you do surety meetings think in terms of the same approach • Talk about contractual controls • Are you keeping the right amount of risk via the contract or assuming the right amount?

31. 10. Getting The Best Deal In The Insurance Marketplace • Marketing every year typically does not work • Its expensive to quote a new deal-underwriters anticipate they will have a few years (3 or so) to recover these initial costs of establishing a new relationship • Collateral is cumulative and needs to be considered in all deals • Bank credit lines getting really expensive • As work picks up bank lines may become more important to ramp up work • Focus on cleaning up your data • Close as many claims as you can • Sort the claims based on work you no longer do or in states you aren’t going to be in

32. 10. Getting The Best Deal In The Insurance Marketplace • Be creative • Spend time making your company/job interesting • Set up job tours, share the things you are proud of like newsletters, awards (particularly safety awards), and employee retention, recruiting and culture • Be easy to underwrite • Share all information, be detailed and be complete • Certainly question why data is being requested but supply everything you can • Give them enough time-90 days is ideal. Also helps get them to quote early. • Meet with them before the full information is submitted and then once it is • It’s a couple of meetings but the first one sells the firm, the second shows commitment to giving underwriters what they need

33. 10. Getting The Best Deal In The Insurance Marketplace • Finally give the underwriter the opportunity to sell its services • This gives you a good idea on their value added • Also allows you to make a qualitative decision based on how the carrier aligns with your firm • Ultimately the best outcomes take time and focus will assure the best long term deal!

34. Have A Great Conference • Spend time getting to know who else is attending • Pick everyone’s brains • Tell us what you worry about • Tell us what matters-not just in this session but overall • Have some fun! Thank you for coming to San Antonio!