Your source for professional liability education and networking. Demystifying Professional Liability at Lloyd’s June 2015 Sponsored by PLUS Diamond Sponsors:

Professional Liability Underwriting Society The information and opinions expressed by our panelists today are their own, and do not necessarily represent the views of their employers or of PLUS. The contents of these materials may not be relied upon as legal advice. A copy of the presentation slides will be available following this webinar, on the PLUS website at: 2

Professional Liability Underwriting Society Meet The Presenters 3 Sarah Stephens Head of Cyber, Technology, and Media E&O JLT Specialty Hank Watkins President, North America Lloyd’s Lyndsey Bauer Partner Paragon International Insurance Brokers Chris Warrior Head of Management Liability Hiscox

Professional Liability Underwriting Society There are many misconceptions about the London insurance market…

Professional Liability Underwriting Society What our friends think we do

Professional Liability Underwriting Society What our parents think we do

Professional Liability Underwriting Society What Americans think we do

Professional Liability Underwriting Society What we really do

Professional Liability Underwriting Society …on second thought, maybe some of them are true.

Professional Liability Underwriting Society Webinar Agenda 1.About Lloyd’s 2.Meet our Insured 3.Broking 4.Underwriting 10

Your source for professional liability education and networking. About Lloyd’s 11

Professional Liability Underwriting Society Lloyd’s key characteristics Lloyd’s is a market, not a company We have a long history of helping clients manage risk taking, dating back to 1688 The Lloyd’s market insures complex and specialist risks Global licenses Performance Management Directorate that oversees responsible risk taking across the market Regulated by the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA) Chain of security and financial ratings

Professional Liability Underwriting Society The Lloyd’s market managing agents manage 96 syndicates Lloyd’s is a marketplace of independent businesses whose combined experience and expertise deliver risk transfer solutions to an increasingly complex world.

Professional Liability Underwriting Society Our business in numbers syndicates of specialist underwriting expertise years of underwriting experience 200 countries and territories 219 brokers bringing business from… coverholders offering a local route to Lloyd’s

Professional Liability Underwriting Society 15 A variety of risk appetites can be found in the Room, where business is still done face to face

Professional Liability Underwriting Society Many of the world’s leading insurers are within a stone’s throw of the Lloyd’s building… 16

Professional Liability Underwriting Society … as are many more brokers 17

Professional Liability Underwriting Society Lloyd’s + Overall London Company Market = Total 2013 income US$83.63bn 18 US$43.33bn Source: IUA, London Company Market Statistics Report, October 2014 Exchange rate as at 31 December £1 + $1.66 Overall London company market US$40.29bn US$43.33bn

Professional Liability Underwriting Society Lloyd’s syndicates - backed by some of the best known names in global insurance 19 Source: Lloyd’s Annual Report 2014

Your source for professional liability education and networking. A colorful history

Professional Liability Underwriting Society Key milestones in our history – 30s1939

Professional Liability Underwriting Society The Lloyd’s Performance Management Directorate has responsibility for overseeing syndicate performance on behalf of the Franchise Board. 22 Its responsibilities include: Reviewing annual syndicate business plans Monitoring syndicate performance against business plans Providing class of business management information and thought leadership to the market Setting a framework of minimum standards for competence and performance How does Lloyd’s manage underwriting performance?

Professional Liability Underwriting Society Realistic Disaster Scenarios = our model Careful management of catastrophe risk is a business imperative at Lloyd’s The Corporation of Lloyd’s devised a set of Realistic Disaster Scenarios (RDS) to stress test both individual syndicates and the market as a whole to see how they stand up to chains of accumulated exposure in very extreme cases – contemplating over $100bn of insurance industry losses

Professional Liability Underwriting Society Lloyd’s ratings Three of the world’s leading rating agencies validate Lloyd’s robust capitalisation and the market’s financial strength. As all Lloyd’s policies are backed by mutual security, the following ratings apply to the entire market. 24 Source: Lloyd’s Annual Report 2014

Professional Liability Underwriting Society Lloyd’s Chain of Security Lloyd’s unique capital structure, often referred to as the Chain of Security, provides excellent financial security to policyholders and capital efficiency to members. Several assets First link Syndicate level assets $70,417m Members’ premium trust funds and other assets held in trust at syndicate level. All premiums received are held in trust. Include international regulatory deposits and trust funds. Second link Members’ funds at Lloyd’s $24,498m Each member must provide sufficient capital to support their underwriting. Amounts required are calculated through syndicate individual capital assessment (ICA). Funds are held in trust for the benefit of policyholders. Mutual assets Third link Central assets $5,237m Available to meet any valid claim that cannot be met from a member’s resources in the first two links. Include the Central Fund, funded by members’ annual contributions and funds issued by the Corporation of Lloyd’s Source: Lloyd’s Annual Report 2014

Professional Liability Underwriting Society A five year view of Lloyd’s performance 26 US$m Gross written premiums 34,759 £22,425 37,339 £23,337 40,025 £25,173 39,959 £25,615 41,717 £25,283 Combined ratio 93.3% 106.8% 91.1%86.8%88.1% Investment return 1,950 £1,258 1,528 £955 2,084 £1,311 1,309 £839 1,724 £1,045 Result before tax 3,446 £2,195 (800) (£516) 4,517 £2,771 5,320 £3,205 4,931 £3,161 Return on capital (pre-tax) % 12.1 (2.8) Source: Lloyd’s Annual Report 2014

Your source for professional liability education and networking. Lloyd’s in the US

Professional Liability Underwriting Society Lloyd’s in the US – a major player Lloyd’s is eligible to write surplus lines (E&S) and is an accredited reinsurer in all US jurisdictions. In 2014, the market holds its # 1 and # 2 positions in these segments, respectively. Underwriters at Lloyd’s are licensed insurers in Illinois, Kentucky and the US Virgin Islands only. 28

Professional Liability Underwriting Society Total US Market vs Lloyd’s Source: Market Intelligence based on: Lloyd’s US reporting system, RAA Reinsurance Underwriting report, SNL Financial, (April 2015) US insurance market Lloyd’s Licensed Reinsurance Excess & Surplus lines US$ 67.9bn 2013 vs % US$ 5.3bn 2013 vs % 19% market share US$ 37.6bn 2013 vs % US$ 8.1bn 2013 vs % Note – 1) The figures above for the market include only US based entities plus Lloyd’s figures 2) The above analysis does not include exempt business 3) Market RI growth due to National Indemnity results now include loss portfolio and quota share agreements with affiliated GIECO companies, all effective 1/1/2014 US$ 180m 2013 vs % US$ 521bn 2013 vs %

Professional Liability Underwriting Society E&S - Lloyd’s vs Competitors ,032 1,190 1,204 1,486 1,763 4,678 8,166 Source: Market Intelligence based on: SNL Financials, (April 2015) and U.S Reporting System (April 2015) 15% -3% 8% 11% -2% 4% 6% 20% 48% -5% 2014 Loss Ratio 49% 72% 59% 52% 49% 45% 44% 65% 43% 58% % change from 2013 Please Note: Loss ratios are on a calendar year basis for 2014 Premiums are in US$ m and represent coverage on US exposures only

Your source for professional liability education and networking. Emerging risks Lloyd’s defines an emerging risk as… an issue that is perceived to be potentially significant but which may not be fully understood or allowed for in insurance terms & conditions, pricing, reserving or capital setting.

Professional Liability Underwriting Society Emerging Risk research reports 32 New reports coming soon… Bitcoin Food security scenario Cyber attack against US power grid Drones Selection of current reports Catastrophe Modelling and Climate Change Autonomous vehicles Solar Storm Risk to the North American Electric Grid Tornadoes: A rising risk? Feast or Famine: Business and Insurance Implications of Food Safety and Food Security

Your source for professional liability education and networking. On to a risk entering the market… 33

Your source for professional liability education and networking. So you have a risk to talk about? 34

Professional Liability Underwriting Society 35

Professional Liability Underwriting Society Capacity and How to Get It D&O - $100 / $150m / $500m Cyber - $185m / $300m / $1B E&O - $125m Open Market Lineslips & Facilities 36

Professional Liability Underwriting Society Functions and duties of a Lloyd’s broker SET UP FILE AND KEEP ACCURATE RECORDS IN A TIMELY MANNER Receive Submission Acknowledge Receipt & Establish Timeframes Discuss Placement Goals with Producer: opportunity, account history, and agree revenue split Prepare “work up” based on financials and other disclosures Consider Placement Goals against established appetite of underwriter Select and contact insurers to log submission and/or Broker of Record letter TAKE TO MARKET Create Slip - all clauses fully referenced, subjectivities & remedies highlighted Ensure insurer is fully licensed in all territories where coverage given Get in queue for insurers selected “Broke” risk to underwriters making all material disclosures / utmost good faith Secure best pricing and appropriate coverage Gain full support for quotations from Excess and follow markets All underwriters lines fully referenced, Claims agreement parties agreed

Professional Liability Underwriting Society

Underwriting Broking and Underwriting at Lloyd's has changed Underwriting at the Box- what does that mean? The Subscription Market Lloyd's Licenses Contract Certainty Claims and Underwriting

Professional Liability Underwriting Society Functions and duties of a Lloyd’s broker SET UP FILE AND KEEP ACCURATE RECORDS IN A TIMELY MANNER Receive Submission Acknowledge Receipt & Establish Timeframes Discuss Placement Goals with Producer: opportunity, account history, and agree revenue split Prepare “work up” based on financials and other disclosures Consider Placement Goals against established appetite of underwriter Select and contact insurers to log submission and/or Broker of Record letter TAKE TO MARKET Create Slip - all clauses fully referenced, subjectivities & remedies highlighted Ensure insurer is fully licensed in all territories where coverage given Get in queue for insurers selected “Broke” risk to underwriters making all material disclosures / utmost good faith Secure best pricing and appropriate coverage Gain full support for quotations from Excess and follow markets All underwriters lines fully referenced, Claims agreement parties agreed BIND & INVOICE Check that instruction to bind is all as quoted Prepare fully claused Market Reform Contract Produce premium tax schedule For underwriters / insured to agree Secure insurers stamps showing Percentage, initial and date Secure stamps and signatures of all follow and excess markets Underwriter to initial all pages of schedule and wordings All underwriters lines fully referenced Claims agreement parties agreed ISSUE POLICY Process begun upon satisfaction of Subjectivities and receipt of Premium Prepare the Wording per binding slip Take Wording with Binding Slip to Market Review Wording with Underwriters against the binding slip Submit agreed Wording to Lloyds for issuance Lloyds require 5 full working days to respond If they raise no issues, policy will be issued within 2 weeks.

Professional Liability Underwriting Society Questions 41

Professional Liability Underwriting Society Panelist Contact Information 42 Sarah Stephens Head of Cyber, Technology, and Media E&O JLT Specialty Hank Watkins President, North America Lloyd’s Lyndsey Bauer Partner Paragon International Insurance Brokers Chris Warrior Head of Management Liability Hiscox

Professional Liability Underwriting Society 43 Thank You Diamond Sponsors

Professional Liability Underwriting Society 44 Thank you for your time. A replay of this webinar will be available to PLUS Members at: