Status & Future of Binding Authorities in the US

1. Status & Future of Binding Authorities in the US Presented at the: North American Binding Authorities Conference September 25, 2014 By: Bernd G. Heinze, Esq. AAMGA Executive Director

2. Agenda State of the Surplus Lines Market Events Impacting Wholesale Insurance Professionals Federal & State regulatory developments Overview of US excess and surplus lines market Issues and Opportunities Open discussion

3. North American Binding Authorities 2014 External Market Environment

4. Current Market Conditions • E&S Market Outperformed P&C Market in 2013 • 92.4% combined vs. 95.8% • Doubled net income over 2012 • 19 of top 25 markets grew by more than 10% • Top 25 produce 75% DWP • Lloyd’s & AIG = 30% • Berkshire Hathaway = 39% growth • Berkley moves from 5th to 4th ahead of Zurich • Premium increased => sustainable (?) • Return to underwriting profitability • Low interest rates

5. Current Market Conditions • E&S Market Outperformed P&C Market in 2013 • Adequate pricing and underwriting integrity • Growth in unique and creative product lines • Stable for now…but caution on diminishing average rate increases • A/Y reserve development more favorable than P&C market • Gap shrinking: • excess capacity • low interest rates and • capital outlays to enhance operational efficiencies • Transformative phase of consolidation and specialization

6. Largest E&S Premiums by State (Top 5) Largest growth State (2013): North Carolina $822.3 million – increase of 42.8%

7. 2013 S/L Stamping Office Premium * Total of all 14 State Stamping and Surplus Lines Offices

8. 2013 S/L Stamping Office Premium * Total of all 14 State Stamping and Surplus Lines Offices

9. 2013 S/L Stamping Office Premium 51.7% of all US S/L Premium written in 14 states with stamping offices * Total of all 14 State Stamping and Surplus Lines Offices

10. Largest US MGA’s/Wholesale Broker/Lloyd’s Coverholders

11. Premium Volume of 10 Largest US MGA’s

12. US MGA’s Most Common Classes of Business General Liability: 92% Commercial Property: 92% Professional Liability: 86% Commercial Auto: 86% Employment Practices: 83% Directors & Officers: 83%

13. Largest US Property & Casualty Wholesalers

14. Premium Volume of 10 Largest P&C Wholesalers

15. US P&C Wholesalers Most Common Classes of Business General Liability: 90% Inland Marine: 86% Umbrella/Excess: 86% Commercial Auto: 86% Commercial Liability: 83% Employment Practices: 80% Directors & Officers: 80% Product Liability: 80%

16. AAMGA Membership Composition - 2014 258 Wholesale Insurance members 132 US and international risk bearing (80%) and non-risk bearing (20%) Associate members 59 Business service members 14 US State Stamping & Surplus Lines Offices 463 Total Corporate Members 38,511 employees 407 Under Forty Organisation Members

17. The Present • 258 Wholesale Insurance/Coverholder members • 78% transact business as wholesale MGA/MGU with binding authority • 29% transact business as Program Administrators/Managers with binding authority • 22.5% transact business as Aggregators with binding authority • 20% transact business as Broker Producers without binding authority

18. The Present • 258 Wholesale Insurance/Coverholder members • 70 members each with 20 or less employees • 81 members each with between 21 and 50 employees • 35 members each with between 51 and 125 employees • 72 members each with > 126 employees • 21,877 employees • 227 branch offices

19. AAMGA Membership Composition • 258 Wholesale Insurance member demographics • 31.2% are 20 – 30 years old • 26.7% are 31 – 40 years old • 28.4% are 41 – 50 years old • 13.7% are over 50 years old • 57.9% are under the age of 40 years old

20. The Present • 258 Wholesale Insurance members • Underwriting facilities with delegated binding authority • Total AWP: • 2013: US$22.4 billion • 2012: US$20.6 billion • 2011: US$19.2 billion • 2010: US$16.4 billion • AWP Broked into Lloyd’s: • 2013: US$3.26 billion • 2012: US$2.73 billion

21. AAMGA Member AWP Broked Into Lloyd’s • Risks placed through Lloyd’s Brokers • 2013: US$3.26 billion • 2012: US$2.73 billion Weighted Average

22. AAMGA Coverholders AWP vs. Total Lloyd's US AWP

23. E&S Market Rates and Movements • Data – Data – Data • Those who are not up-to-date with automation will have increasing difficulties • Harmonization of: • Predictive analytics and risk models, and • underwriting discipline • Coverholder Audits • Regulatory compliance and guidance • Big data and large scale aggregation of information • Disintermediation

24. E&S Market Rates and Movements • Standard markets will back out of accounts that are hard to price and service • Succession & Disaster Plans • Business Plans by line of business • Continuing Education and professional development • Increasing need for new talent, enhanced training and retaining existing professionals • AAMGA’s 2015 Gamma Iota Sigma Presentation: “Welcome to the New E&S” • Differentiation & Remaining Relevant • M & A

25. Current Forces Impacting S/L Insurance • Continued mergers and acquisitions / consolidation • M&A deals of P&C entities • 2014: 141 YTD • 2013: 62 • Aggregate deal value: $6.4 billion • Small to Medium-sized deals • 2012: 73 • Aggregate deal value: $7.4 billion • Various-sized deals • Influx of non-traditional sources of capital increases competition and adds pressure on rates

26. Current Forces Impacting S/L Insurance • Continued mergers and acquisitions / consolidation • Appetite is still strong • More players in the M&A space, especially for MGA and Program operations • Still lots of potential candidates • Aging owners • Many do not have good succession plans • Size matters more than ever to markets.

27. Current Forces Impacting S/L Insurance • Continued mergers and acquisitions / consolidation • Technology and data are expensive and critical • Many of the smaller firms cannot afford to keep up • Value is driven by: • Specialization • Profit margin • Market and territorial access • Talent within the operation

28. Industries Poised for Growth Next 10 Years Insurers’ ability to capitalize on these industries varies widely Health Care Health Sciences Energy (Traditional) Alternative Energy Petrochemical Agriculture Construction Natural Resources Tech & Bio Tech Light Manufacturing Insourced manufacturing Export-Oriented Industries Shipping (Rail, Marine, Trucking & Pipeline)

29. Current Forces Impacting S/L Insurance • Increasing volatility in US investment market, political atmosphere of dissention and stagnation • Increasing regulatory environment • Federal • State • International • Increasing proliferation of regulatory activities across borders • Risk-based capital standards • Cooperation & Competition among regulators • Global capital standards • Implementation of enforcement standards

30. US Federal & State Regulatory Developments Impacting Wholesale Insurance Business

31. FIO Report 24 September 2014 “…the insurance industry showed increasing resilience through 2013, with strong financial performance and expanded overall growth. While the insurance market is becoming ever-more global, the U.S. domestic market remains highly competitive and an important cornerstone of the national economy.” Michael McRaith, FIO Director

32. Regulatory Developments Reauthorization of TRIA/NARAB II Legislation to allow E&S market to write private flood cover NAIC uniform eligibility standards for surplus line carriers NRRA implementation

33. US Legislative & Regulatory Activity • Post Dodd-Frank Era of Insurer Regulation • Non-Admitted & Reinsurance Reform Act (NRRA) • Home State Retention of 100% of Surplus Lines Premium • Increased accuracy of premium and tax revenue • Non-Admitted Insurance Multistate Act (NIMA) • Five States Participating: • Florida, Louisiana, Utah, South Dakota and Wyoming + Puerto Rico • Florida Clearinghouse • Surplus Lines Insurance Multistate Compact (SLIMPACT) • “Uniform” Eligibility Standards & Market Security • Joint Industry Letters • NAIC International Insurers Department (IID) List • State White Lists

34. S/L Premium Tax Pre - NRRA Broker Policyholder Home State: 22.8% A: 1.7% B: 13.5% Surplus Lines Premium tax allocated by state by share of risk proportionately calculated to reside in each state L: 15.47% C: 2.87% K: 11.9% D: 6.4% J: 6.9% E: 0.46% F: 5.37% I: 7.1 H: 1.6% G: 3.9%

35. S/L Premium Tax Post - NRRA Broker/MGA Policyholder Surplus Lines Premium tax calculated at and paid to Home State’s based on tax rate and rules Home State: 100%

36. Legislative & Regulatory Activity • OFAC, FATCA, COI & AML Regulations • Impact on domestic vs. Lloyd’s market placements • Forced Place Insurance • National Association of Insurance Commissioners • Transparency & Regulatory Issues • Surplus Lines Task Force • NCOIL International Regulatory Task Force • Regular liaising with US House & Senate, and all governmental agencies

37. US Litigation, Regulatory & Amicus Curiae Activity Hull & Company v. Superior Court of CA Gold & Silver v. Lexington Insurance Company Essex Insurance Company v. Zota WA Department of Transportation v. James River Insurance Company WI, CO, NJ, NY, MA, FL, OK, CA challenges to freedom of rate and form

38. US Litigation, Regulatory & Amicus Curiae Activity “Faulty workmanship” constituting a covered “occurrence” under CGL policies - cases and regulations in CO, GA, SC & HI Delaware retroactive increase to surplus lines tax Utah premium audit law Illinois increase in surplus lines tax

39. Legislation & Regulatory Affairs • International: • Lloyd’s Audit Scope • Central Services Refresh • Tribunalization process of new coverholders • Coverholder guidance • TCF Standards & Policyholder Complaint Procedures • AML/Conflict of Interest Guidance • Lloyd’s Meet the Market: Boston, Chicago, Toronto • Canadian MGA’s

40. Collaborative Efforts with Lloyd’s Regular communications / joint presentations with Lloyd’s and Lloyd’s US on matters impacting Coverholders and domestic wholesale market LMA, LiiBA, MGAA reciprocal membership in AAMGA

41. 10th February 2014 LMA Presentation at Lloyd’s

42. North American Binding Authorities 2014 Internal Market Developments

43. Automation & Technology • Increasing investment in automation • Agency management systems to drive efficiencies • Excess & Surplus Lines Working Group • Vision for straight through processing • Web service • ACORD XML – Property & G/L • ER3001 Reporting standard for XML with some modifications • Validation at time of processing

44. Automation & Technology • Benefits: • Validation completed at time transaction is processed • Time saved preparing month-end bordereaux • Access to data is in real-time • Themes: • Faster: • Real time XML exposure reporting • Smarter: • Built-in rules and validation • Together: • Keeping respective interests harmonized and synchronized

45. Automation & Technology • AAMGA Automation Conference • 21-23 March 2015 – Seattle, WA • AAMGA Automation Committee • Monthly conference calls • Working group • Liaising with other industry automation entities • IIABA Agent’s Council on Technology • E&S Joint Working Group • Lloyd’s Automation Conference

46. Emerging Risks, Issues &Trends Foresight and knowledge sharing are essential to navigate a future in which change is the only constant

47. AAMGA Initiatives • Emerging Risks Committee • Drones • Autonomous cars • 3-D Printers • CME’s

48. AAMGA Initiatives • Outreach to entire wholesale market and related affinity groups • Latin American Association of Insurance Agents • Chinese American Insurance Agents Association • National African American Insurance Agents • Lloyd’s Market Association • Managing General Agents Association (UK) • London & International Insurance Brokers Association • Bringing wholesale insurance network under common umbrella

49. Issues & Opportunities

50. Issues & Opportunities • Balancing: • Lloyd's objectives in establishing model Wordings that will protect the franchise and ensure uniform interpretation and application of compliance standards, with • Coverholders in the United States being afforded the opportunity to access the Lloyd's trading platform without burdensome/non-essential regulations that do not add to the operational transfer of risk or the quality of underwriting