Cyber, Terrorism, New Compensation Structures Highlighted as Critical Emerging Risks

New York, NY (Sept. 16, 2014) – Guy Carpenter & Company, LLC, the leading
global risk and reinsurance specialist and a wholly owned subsidiary of Marsh & McLennan Companies,
has published a new report highlighting emerging risks facing the (re)insurance sector, including
cyber-attacks, terrorism and new compensation structures for long-term bodily injuries. The report
seeks to identify and categorize these risks that are now confronting the sector, as well as analyze
their implications on businesses and (re)insurers.

In this report, Guy Carpenter places emerging risks in three categories: technological,
crystalizing and aggravating; and also discusses reserving and modeling as part of the emerging risk
management process.

The first category of emerging risk – technological – includes risks that
are genuinely new and that emerge from new technologies and processes. Guy Carpenter takes an in-depth
look at cyber risk as an example of a technological emerging risk. The crystalizing category contains
those risks that are not novel but whose implications are evolving. The report assesses emerging
compensation structures for long-term bodily injuries in the form of periodic payment orders as an example
of a crystalizing risk. In the final category of emerging risks – aggravating – are those perils
that are relatively well-known but their incidence and impact are becoming potentially more serious, such as

The rise of casualty catastrophe models that have been developed to quantify these risks is also
examined in the report. The final section looks at reinsurance responses to the threat of emerging
risks, their impact on loss reserving cycles and how to mitigate those cyclical effects.

“Uncertainty can be lurking on an insurer’s balance sheets in the form of a casualty catastrophe or an
emerging and not as yet fully understood risk such as cyber,” said Morley Speed, Managing Director,
GC Securities. “Whatever the category of emerging risk, the main challenge lies in modeling and
quantifying the potential impacts. Only in this way can insurers leverage their key capability, which is
the creation of value by risk management,” Mr. Speed said.

Cyber Risk

According to Guy Carpenter, cyber-attacks are now seen as one of the most serious economic and
national security challenges facing governments around the world. They also present a set of
aggregations/accumulations of risk that spread beyond the corporation to affiliates, counterparties
and supply chains. Companies are uncertain of how much coverage to acquire and whether their
current policies provide them with protection.

Marsh, a global leader in insurance broking and risk management, estimates the US cyber insurance
market was worth USD$ 1 billion in gross written premiums in 2013 and could reach as much as
USD $2 billion this year. The European market is currently a fraction of that, at approximately USD
$150 million, but could reach as high as EUR900 million by 2018, according to some estimates.

Earlier this year, Guy Carpenter announced the launch of its Cyber Solutions Specialty Practice,
which focuses on the development and delivery of innovative cyber reinsurance solutions to address
the rapidly increasing risks associated with cyber security. Guy Carpenter’s Cyber Solutions
Specialty Practice has assisted in placing standalone cyber liability treaties for mature and emerging
portfolios, and created innovative solutions for regional and mutual carriers. Guy Carpenter’s industry
leading practice has been successful in helping clients assess cyber portfolio volatility, and structure
reinsurance solutions that address this in the most cost-effective manner.

Emerging Compensation Structures

In its report, Guy Carpenter found that compensation for provision of long-term care for bodily injury
is becoming an increasingly challenging problem for society in general and insurers in particular. For
severe bodily injury cases in the United Kingdom, claimants are now highly likely to opt for an
annuity/periodic payment order (PPO) rather than a lump sum. As a consequence, the uncertainties
that previously had been transferred to the claimant are now retained by the insurer and to a certain
extent, its reinsurers.


Given the growing population, regional conflicts, the expansive reach of social media for extremists
to spread their messages and recruit, as well as the diversity of possible attack modes to cause
human and economic loss, Guy Carpenter cites terrorism as an emerging risk. Currently, there is
uncertainty in the US terrorism market coming from the fact that the Terrorism Risk Insurance
Program Reauthorization Act (TRIPRA) is scheduled to expire on December 31, 2014 and US
lawmakers have not yet authorized a renewal program.

Casualty Catastrophe Risk Modeling

According to Guy Carpenter, casualty or liability-based catastrophes have become increasingly
frequent and severe over the past decade, exposing (re)insurers to more risk than they may have
realized and reserved for. Until recently, casualty insurers had little choice but to accept this risk as
losses emerged. The maturation of enterprise risk management practices and the development of
new niche, open platform and casualty-specific catastrophe models signal a change. It is becoming
possible to model the accumulation of an increasing number of casualty risks, whether technological,
crystalizing or aggravating, both knowable and manageable.

Reserving Risks

The final section of Guy Carpenter’s report looks at reinsurance responses to the threat of emerging
risks and their impact on reserve cycles. “In assessing the impact that emerging risks could have on
insurance cycles there has to be an understanding of the magnitude of any change in ultimate loss
and the likely timing of the recognition of that change,” stated Victoria Jenkins, Managing Director,
Head of Technical Innovation EMEA. “A reconsideration of the construction of reinsurance buying
strategy is needed to mitigate the effects of the insurance cycle.”

The full report, Ahead of the Curve: Understanding Emerging Risks, is available for download at

About Guy Carpenter

Guy Carpenter & Company, LLC is a global leader in providing risk and reinsurance intermediary services.
With over 50 offices worldwide, Guy Carpenter creates and executes reinsurance solutions and delivers capital
market solutions* for clients across the globe. The firm’s full breadth of services includes line-of-business
expertise in agriculture; aviation; casualty clash; construction and engineering; cyber solutions; excess and
umbrella; excess and surplus lines; life, accident and health; marine and energy; medical professional liability;
mutual insurance companies; political risk and trade credit; professional liability; property; retrocessional
reinsurance; surety; terrorism and workers compensation. GC Fac® is Guy Carpenter’s dedicated global
facultative reinsurance unit that provides placement strategies, timely market access and centralized
management of facultative reinsurance solutions. In addition, GC Analytics®** utilizes industry-leading
quantitative skills and modeling tools that optimize the reinsurance decision-making process and help make the
firm’s clients more successful. For more information, visit

Guy Carpenter is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global
professional services firm offering clients advice and solutions in the areas of risk, strategy and human capital.
Marsh is a global leader in insurance broking and risk management; Mercer is a global leader in talent, health,
retirement, and investment consulting; and Oliver Wyman is a global leader in management consulting. With
annual revenue exceeding $12 billion, Marsh & McLennan Companies’ 55,000 colleagues worldwide provide
analysis, advice, and transactional capabilities to clients in more than 130 countries. The Company prides itself
on being a responsible corporate citizen and making a positive impact in the communities in which it operates.
Visit for more information.

*Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US
registered broker-dealer and member FINRA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000.
Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities
(Europe) Ltd. (MMCSEL), which is authorized and regulated by the Financial Conduct Authority, main office 25 The North Colonnade,
Canary Wharf, London E14 5HS. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC
Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan
Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument,
reinsurance or insurance product. **GC Analytics is a registered mark with the U.S. Patent and Trademark Office.

**GC Analytics is a registered mark with the U.S. Patent and Trademark Office.

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