2011 U.S. Industry Report:

Transcription

1 Aon Risk Solutions 2011 U.S. Industry Report: Retail

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3 Table of Contents Foreword....2 Executive Summary....4 Key Findings Risk Insights....7 Top 10 Risks Risk Preparedness for the Top 10 Risks Losses Associated With Top 10 Risks Identification and Assessment of Major Risks External Drivers Strengthening Risk Management (past two years) Client Insights Priorities in Choice of Insurer Desired Market Changes Risk Management Department Retentions/Deductibles Limits Global Programs Use of Captives Market Insights Coverage Terms and Conditions Carrier/Marketplace Participation Premium Rates Financial Insights Industry Data Methodology, Notes and Disclaimers Aon at a Glance Key Contacts Retail Industry Report

4 Foreword Aon is pleased to present the findings of the U.S Retail Industry Report. The retail sector has faced many risks and challenges in recent years, all of which have changed the way companies must view and prioritize their resources in response to risk. As such, we have highlighted some of the key findings and observations of our recent survey to guide you through the array of interesting risk management facts and figures in this report, specifically: Economic slowdown remains the number one risk for the retail sector. Companies are still concerned over the weak recovery and the prospect of a long-term slow growth period. These concerns impact the level of discretionary income available to consumers and could result in inventory levels growing faster than sales, putting increased pressure on financial results. Reputation/damage to brand is ranked second on the list. Fueled by intense competition in the retail industry, a company s reputation/brand has become an invaluable asset that can take years to build, but could be destroyed overnight. Reputation can be seen as a risk in its own right or as a consequence of other risks, however it is clear that this risk has a significant impact upon the retail sector. Loss of consumers and revenue due to reputation is a critical area of focus. Computer crime/hacking/viruses/malicious codes have risen sharply in ranking, from 19 th in 2009 to fifth overall in This increase is driven by more frequent, sophisticated, and financially damaging attacks against retailers. Once a breach occurs, the company faces a public relations crisis, loss of sales, potential litigation, and investigations by regulators and government agencies. Failure to attract or retain top talent has also jumped up in ranking from 19 th to eighth this year. With the current high unemployment rate, this may seem counter intuitive. However, it corresponds with the changing business environment. Businesses are now straining to manage the recruiting of top industry talent and develop strategic plans to address demographic shifts in the workforce, talent shortages, economic pressures and globalization. Retail Industry Report

5 Distribution or supply chain failure remains a key issue for retail companies. In an industry that relies on having the right products, in the right place, at the right time, disruptions can have a direct impact on revenues. Technology failure/system failure has dropped in ranking from fourth in 2009 to eighth in While still a key risk, we find this drop surprising, especially considering the dynamic growth and increasing reliance of retailers on technology from traditional forms such as inventory management, credit card processing and e-commerce to newer forms such as cloud computing and m-commerce. It could be that retailers are more aware of the risk and have more preventive measures in place. There is an undeniable interdependency among many of the top identified risks, making it critical for organizations to embrace an enterprise-wide approach to managing risk and optimizing strategies on a global basis. To effectively manage risks, organizations must assess the likelihood and potential impact of all viable risk events in order to be prepared for the next catastrophe and maximize future growth opportunities. If you have any comments or questions about the survey, or wish to discuss the findings further, please contact your Account Executive. Best regards, Madeline H. Serpico MaryAnne Burke Managing Director Deputy Retail Practice Leader National Retail Practice Leader Aon Risk Solutions Aon Risk Solutions maryanne.burke@aon.com lynn.serpico@aon.com Retail Industry Report

6 Executive Summary Organizational sustainability in the retail industry demands proactive understanding and management of risk. In the current fast-changing economic, legal and regulatory landscape, the risk profiles of retail companies evolve quickly. Recent challenges such as the slow economic recovery, property losses and network security breaches remind us that threats to organizations increasingly come from all directions and in many different forms and the ability to manage these risks is key to survival and success. Staying fully informed and up-to-date with the latest trends around risk is the best way to remain competitive and relevant in the changing global market. We have prepared this report for this very reason to keep you informed of emerging issues and provide you with benchmarking data and analyses so you can learn what your peers are doing to manage risks, overcome challenges and capture opportunities. The report is comprised of four main components: RISK INSIGHTS include top 10 risks faced, reported readiness, losses related to risks, how organizations are identifying and assessing risks, and external drivers affecting risk management. CLIENT INSIGHTS include priorities in choice of insurer, desired market changes, risk management departments, retentions, limits, global programs and use of captives. MARKET INSIGHTS include discussions of coverage terms and conditions, carrier/marketplace participation, and changes in premium rates over the past year. FINANCIAL INSIGHTS include analyses of market environment for the retail sector. Retail Industry Report

7 Key Findings Risk Insights Greatest risks The two greatest risks indicated by respondents to Aon s 2011 Global Risk Management Survey are economic slowdown and damage to reputation/brand. Risk preparedness for the top 10 risks The retail industry s overall preparedness for the top 10 risks has improved from 58 percent in 2009 to 79 percent in Respondents rate regulatory/legislative changes as the least prepared risk, at 64 percent. Losses associated with top risks For the retail industry, economic slowdown tops the list of risks with the most losses in the past 12 months, at 87 percent. Identification and assessment of major risks Survey respondents cite senior management s intuition and experience as the primary method to identify and assess major risks facing their organizations. In practice, respondents are probably using a combination of risk registers, a structured enterprise-wide approach and senior management s intuition and experience. External drivers strengthening risk management Economic volatility and increased regulatory scrutiny remain the most important external drivers strengthening risk management for the retail industry. Client Insights Priorities in choice of insurer Retail respondents rank value for money/price as the most important standard in selecting an insurer, followed by financial stability/rating and claims service. Desired market changes Surveyed retail organizations are looking for increased ability to recognize internal risk management through lower premiums, broader coverage/better terms and conditions, and more flexibility for the insurance market. Risk management department Seventy-seven percent of retail respondents indicate that they have a formal risk management department. Among those, 53 percent say their risk management department reports to the CFO/ Finance. In the case where no formal risk management department exists, 40 percent say their CFO handles risk management. Retentions/deductibles Overall, the majority of retailers have not changed their retentions compared to their prior policy period. Umbrella/excess liability limits The average limit purchased by surveyed retail companies is USD 138 million. The highest limit purchased stands at USD 500 million, while the lowest limit purchased is USD 10 million. Directors & Officers (D&O) liability limits The average limit purchased by retail companies is USD 82 million. The highest limit purchased amounts to USD 500 million, while the lowest limit purchased is USD 2 million. Global programs When retailers operating in more than one country are asked how they purchase/control their insurance programs, 59 percent indicate that their corporate headquarters controls procurement of all of their global and local insurance programs while 41 percent say their corporate headquarters purchases some lines and leaves local offices to handle other lines. Among the global policies that organizations have purchased, the most common types indicated are related to general liability, including public/product liability, D&O liability and property damage/business interruption. Use of captives Twenty-two percent of retail companies surveyed report having an active captive or Protected Cell Company (PCC) with 22 percent also indicating a plan to create a new or additional captive or PCC in the next three years. The most common coverages currently underwritten are general/third party liability auto liability, employers liability/workers compensation and property. Market Insights Coverage terms and conditions Overall, the majority of retail respondents indicate that the terms and conditions for all surveyed lines of coverage remain unchanged or improved in comparison with programs in prior years. The coverage line that has experienced the most improvement in coverage terms is D&O liability, which has improved by 41 percent. Premium rates We anticipate that in the near future, carriers will continue to defend and expand their market shares with strong market capacity and aggressive strategies. Therefore, the market will continue this downward trend in rates for all reviewed lines, except for 5 Retail Industry Report

8 property. The rates for property are expected to remain under moderate pressure and rate levels should be flat to +10 percent for most renewals. Financial Insights Financial insights Over the past 12 months, the share prices of retail companies have generally outperformed the Russell 3000 Index. If we compare employment numbers for the retail industry and the overall non-farm sectors in the same time period, we see that retail suffered more job losses throughout the recession. Since October 2010, employment in the retail industry has seen positive growth. In terms of annual revenue change, the Russell 3000 Index has outperformed the retail sector in the last five quarters. Revenue forecasts for the next three quarters show doubledigit growth. The average Consumer Confidence Index for 2011 stands at 61 percent. However, consumers short-term outlook deteriorated sharply in August 2011, hitting its lowest point since April If we examine the month-onmonth percentage change figure, we will notice that retail sales (excluding auto) have been in positive territory for all of Retail Industry Report

9 Risk Insights General Introduction In today s global environment, retail companies are facing increasingly complex challenges food safety and supply chain management, extensive regulatory and compliance changes, a global economic slowdown, rising employment-related litigation, natural disasters, and network security breaches, all of which could potentially cause tremendous disruptions to a business. The stakes for the retail sector are high. With thin operating margins, it is critical to access accurate and timely information, and proactively address risk at every level of the organization. In this section of the report, we provide industry specific insight into: Top 10 Risks Risk Preparedness for Top 10 Risks Losses Associated with Top 10 Risks Identification and Assessment of Major Risks External Drivers Strengthening Risk Management Top 10 Risks Respondents are provided a list of 49 risks and asked to select 10 that they believe to be the top risks facing their organizations. Economic slowdown remains the number one risk for the retail sector as organizations are wrestling with the slow economic recovery and the potential of a double-dip recession a key impact on the level of discretionary income available to consumers. Ranked second on the list is damage to reputation/brand. Fueled by intense competition, retail organizations reputation/ brand has become an invaluable asset, one that takes years to build but could be destroyed overnight. Reputation can be seen as a risk in its own right or as a consequence of other risks. However, it is clear that this area of risk has a significant impact upon the retail sector. Computer crime/hacking/viruses/malicious codes have risen significantly in ranking, from 19 th in 2009 to fifth overall in The increase is driven by more frequent, sophisticated, and financially-damaging attacks that have plagued retail organizations in recent years. Once a breach occurs, the affected organization faces a public relations nightmare, loss of business, potential litigation and liability, investigations by regulators and government agencies, as well as significant costs related to risk mitigation. Failure to attract or retain top talent has also jumped up in ranking, from 19 th to eighth. With the current highunemployment rate, this change seems counter intuitive. However, it does reflect the changing business environments demographic shifts in the workforce, talent shortages, economic pressures and globalization, all of which are straining the process of recruiting and retaining top industry talent. Securing, retaining and maximizing talent require a thoughtfully 7 Retail Industry Report

10 designed talent strategy one that includes rigorous and appropriate recruitment, assessment and development. As the global pool of available candidates becomes increasingly smaller, the ability to attract top talent has significant bottom-line implications. When we look at the top 10 risks as a whole, there is an undeniable interdependence among many of these risks as well as economies around the globe. It is more important than ever for organizations to embrace an enterprise-wide approach to managing risk, and optimize their strategy on a global basis. Top 10 Risks - Retail Rank Retail 2011 Top 10 Risks 1 Economic slowdown 2 Damage to reputation/brand 3 Increasing competition 4 Distribution or supply chain failure 5 Regulatory/legislative changes 5 Computer Crime/Hacking/Viruses/Malicious Codes 7 Failure to innovate/meet customer needs 8 Technology failure/system failure 8 Failure to attract or retain top talent 10 Crime/Theft/Fraud/Employee Dishonesty Data Source: 2011 Global Risk Management Survey Where ranking numbers are duplicated that indicates a tie Retail Industry Report

11 Risk Preparedness for the Top 10 Risks Preparedness for risk is evidenced by having a plan in place to address the risk or having undertaken a formal review of that risk. Compared to the 2009 survey, overall preparedness for the top 10 risks has improved, from 58 percent to 79 percent. Top 10 Risks Reported Readiness - Retail Economic slowdown 33% Damage to reputation/brand Increasing competition Distribution or supply chain failure Regulatory/legislative changes Computer Crime/Hacking/Viruses/Malicious Codes Failure to innovate/meet customer needs Technology failure/system failure 73% 52% 77% 62% 53% 64% 58% 71% 76% 67% 62% 84% 84% 91% 89% Failure to attract or retain top talent Crime/Theft/Fraud/Employee Dishonesty 43% 72% 80% 82% Data Source: 2011 Global Risk Management Survey Economic slowdown and distribution or supply chain failure have experienced the greatest change in risk preparedness among the top 10 risks from 2009 to 2011 preparedness for economic slowdown has improved by 51 percent and that for distribution or supply chain failure 31 percent. These improvements in preparedness reflect the increasing awareness of risk and loss potential from suppliers as well as the retail industries ability to adapt themselves to the financial crisis and the ensuing recovery. Retail respondents rank regulatory/legislative changes as the least prepared, at 64 percent. In the past, regulatory and legislative changes normally took shape gradually allowing companies some time to formulate responses or coping strategies. This is not always the case now. For example, the regulatory changes in the U.S. following the credit crunch in 2009 have demonstrated the fast speed at which important regulation with far-reaching impacts can be enacted. Of particular concern for retailers are the Medicare Secondary Payer Act and the Food Safety Modernization Act. With the general trend towards risk management becoming more embedded in an organization s culture, we expect a continued upward trend in risk preparedness over the next two years. 9 Retail Industry Report

12 Losses Associated With Top 10 Risks Among the top 10 risks, economic slowdown is cited as causing the most losses in the past 12 months, at 87 percent. On an aggregated basis, the average percentage reported by this industry for losses related to the top 10 risks has decreased slightly, from 31 percent in 2009 to 30 percent in Compared to the 2009 results, six out of the 10 top risks have experienced fewer losses in the past 12 months. Failure to innovate/meet customer needs and economic slowdown have experienced the greatest increases in losses, at 25 percent and 20 percent respectively. Losses Associated with Top 10 Risks - Retail 0% Damage to reputation/brand Increasing competition Distribution or supply chain failure Regulatory/legislative changes Computer Crime/Hacking/Viruses/Malicious Codes Failure to innovate/meet customer needs Technology failure/system failure Failure to attract or retain top talent Crime/Theft/Fraud/Employee Dishonesty Economic slowdown 67% 14% 54% 38% 16% 24% 27% 33% 5% 14% 33% 8% 11% 15% 17% 14% 53% 82% 87% Data Source: 2011 Global Risk Management Survey Identification and Assessment of Major Risks Retail respondents quote senior management s intuition and experience as the primary method to identify and assess major risks facing their organizations. In practice, respondents are probably using a combination of risk registers, quantitative analysis, a structured enterprise-wide approach and senior management s intuition and experience. Should organizations relying predominantly or exclusively on management experience and intuition for their major risk decisions be concerned? In today s fast evolving business environment, where the past may not always be the best predicator of the future, exclusive reliance on senior management s intuition and experience to identify and assess risks could result in a significant loss to an organization. Some of the reasons include: Risk identification based on experience tends to miss emerging or new risks. Risk identification based on intuition may be inconsistent and may not be given credence by others. There may be a tendency toward risk aversion by managers with the view, better safe than sorry. Retail Industry Report

13 On the contrary, the use of risk registers, quantitative analysis and an enterprise-wide approach to identifying and assessing risk is desirable, adding consistency to the process and enabling the organization to more effectively assess the potential impact of an identified risk on the organization so it can deploy appropriate resources for mitigation. As risks increase in complexity, retail companies must integrate intuition and experience with sophisticated analytics to make the most informed objective and predictive decisions. Identification of Major Risks Assessment of Major Risks Other 5% Board level discussion and analysis 9% Other 5% Board level quantitative analysis 11% Structured enterprise-wide approach 18% Structured enterprise-wide approach 16% External service provider/advisor 0% Consult with external service provider/advisor 2% Business unit risk registers or key risk indicator worksheets 20% Senior management intuition and experience 48% Business unit quantitative analysis 23% Senior management intuition and experience 43% Data Source: 2011 Global Risk Management Survey Data Source: 2011 Global Risk Management Survey 11 Retail Industry Report

14 External Drivers Strengthening Risk Management (past two years) Economic volatility and increased regulatory scrutiny remain the most important external drivers strengthening risk management for the retail industry. Following the financial crisis, there has been a greater awareness in the retail industry of the need to protect assets and the balance sheet from unexpected loss. They also have to ensure full compliance with both new and existing regulations and disclosure requirements. External Drivers Strengthening Risk Management (past two years) Increased focus from regulators Economic volatility 38% 36% 50% 50% Political uncertainty Natural weather events 5% 11% 14% 18% Demand from investors for greater disclosure and accountability 16% 22% Pressure from customers 2% 18% Pressure from suppliers/vendors 6% 7% Workforce issues 13% 23% Large third party liability losses/litigation Other 19% 18% 14% 14% 0% 10% 20% 30% 40% 50% 60% All Industries Retail Data Source: 2011 Global Risk Management Survey Retail Industry Report

15 Client Insights General Introduction The right knowledge at the right time can literally change the world. The retail industry has been capitalizing on timely information made available to consumers and enterprises alike for some time. Similarly, the value Aon offers through content is empowering clients with relevant and timely risk insights that can help them make better decisions. In this section, we provide industry-specific data and analyses into: Priorities in Choice of Insurer Desired Market Changes Risk Management Department Retentions/Deductibles Limits Global Programs Captives Priorities in Choice of Insurer Value for money/price is ranked the highest priority among retail respondents in the choice of an insurer, followed by financial stability/rating. This illustrates that concerns over financial stability of a carrier may be somewhat tempered by competitiveness of pricing. We expect that value for money/pricing will continue to be an important factor for the foreseeable future and especially during the economic recovery, when organizations seek to save cost wherever possible. Of interest, the retail industry appears to have lowered its priority on capacity, which was ranked high in the 2009 survey, reflecting the record level of capacity currently available in the marketplace for most lines of coverage. Priorities in Choice of Insurer Priorities in choice of insurer 2011 Retail 2009 Retail Value for money/price 1 2 Financial stability/rating 2 1 Claims service 3 4 Flexibility/innovation/creativity 4 5 Prompt settlement of large claims 5 6 Industry experience 6 8 Capacity 7 3 Long-term relationship 8 7 Speed and quality of documentation 9 9 Ability to deliver a global program 10 9 Data Source: 2011 Global Risk Management Survey 13 Retail Industry Report

16 Desired Market Changes When asked what changes retail organizations would most like to see in the insurance market, the majority of respondents desire: Recognition of investments in internal risk management efforts through lower premiums Broader coverage/better terms and conditions More flexibility Desired Market Changes Broader coverage/better terms and conditions Recognition of investments in internal risk management efforts through lower premiums 58% 63% 68% 70% Increased capacity 13% 18% More flexibility 52% 53% More sophisticated information technology (IT) systems 28% 43% Better quality of service More product innovation 32% 35% 42% 43% Other 7% 10% 0% 10% 20% 30% 40% 50% 60% 70% 80% All Industries Retail Data Source: 2011 Global Risk Management Survey Risk Management Department Seventy-seven percent of retail respondents say they have a formal risk management department. Among those, 53 percent indicate that their risk management department reports to the CFO/Finance. In the case where no formal risk management department exists, 40 percent say their CFO handles risk management. Those with an in-house risk management department typically maintain a staff of one to five people. Retail Industry Report

17 Formal Risk Management Departments Department Staffing Over 12 29% No 23% % Yes 77% % % Data Source: 2011 Global Risk Management Survey Retentions/Deductibles Overall, the majority of retail companies did not change their retentions during their prior policy period. The driving factors behind this include: Continued soft market A general sense of comfort with historical retention levels Trade-offs in premium offered by carriers (either up or down) are not deemed to yield meaningful savings Similar to 2009 and 2010, we believe there will be little pressure on insureds to amend their current retentions/deductibles in Changes in Deductibles/Retensions 3% 3% Workers Compensation 94% General Liability 91% 9% Auto/Motor Vehicle Liability 6% 85% 9% Directors' and Officers' Liability 6% 91% 3% Property 16% 72% 13% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Lower Same Higher Data Source: 2011 Global Risk Management Survey 15 Retail Industry Report

18 Limits Umbrella/Excess Liability When it comes to selecting the appropriate level of excess liability limits, organizations utilize many different methods. An optimal program design, characterized by broad coverage and efficient use of insurance funds, is driven by a number of factors: risk severity, risk mitigation measures already in place or under consideration, the regulatory environment in which companies operate, historical trend of loss activities, the insurance marketplace and appetite for risk. For umbrella/excess liability, the average limit purchased by surveyed retail companies is USD 138 million. The highest limit purchased stands at USD 500 million, while the lowest limit purchased is USD 10 million. The level of limits purchased by retail companies is in direct proportion to a company s revenue size - a larger company with a higher profile can represent a bigger target for legal actions. Eighty-eight percent of all retail companies feel their umbrella/excess liability limits are adequate while 12 percent believe they should be higher. No respondents feel it should be lower. Umbrella/Excess Liability Limits Revenue Minimum 1 st Quartile Average Mode Median 3 rd Quartile Maximum All $10,000,000 $75,000,000 $138,828,125 $100,000,000 $100,000,000 $156,250,000 $500,000,000 <$500M $10,000,000 $11,250,000 $20,833,333 $15,000,000 $15,000,000 $22,500,000 $50,000,000 $500M-$1B $50,000,000 $75,000,000 $100,000,000 $75,000,000 $75,000,000 $100,000,000 $200,000,000 $1B-$2B $50,000,000 $67,500,000 $85,000,000 $100,000,000 $100,000,000 $100,000,000 $125,000,000 $2B-$5B $25,000,000 $100,000,000 $95,000,000 $100,000,000 $100,000,000 $100,000,000 $125,000,000 $5B-$10B $25,000,000 $100,000,000 $153,235,294 $100,000,000 $125,000,000 $150,000,000 $500,000,000 $10B-$25B $100,000,000 $115,000,000 $200,714,286 N/A $175,000,000 $275,000,000 $350,000,000 >$25B $150,000,000 $237,500,000 $295,625,000 $400,000,000 $275,000,000 $400,000,000 $415,000,000 Data Source: 2011 Global Risk Management Survey and other Aon proprietary databases Directors and Officers Liability For D&O liability, average limit purchased by retail companies is USD 82 million. The highest limit purchased amounts to USD 500 million and the lowest limit purchased USD 2 million. Based on the 2011 Aon s Global Risk Management Survey, 69 percent of all retail companies feel their D&O liability limits are adequate while 22 percent believe they should be higher and 9 percent feel they should be lower. Directors and Officers Liability Revenue Minimum 1 st Quartile Average Median 3 rd Quartile Maximum All $2,000,000 $30,000,000 $81,985,417 $50,000,000 $125,000,000 $500,000,000 $1M - $1B $10,000,000 $25,000,000 $38,730,093 $35,000,000 $50,000,000 $150,000,000 $1B - $5B $25,000,000 $51,000,000 $101,840,000 $80,000,000 $135,000,000 $300,000,000 >$5B $35,000,000 $137,500,000 $167,826,087 $160,000,000 $195,000,000 $500,000,000 Data Source: Global Risk Management Survey Retail Industry Report

19 Employment Practices Liability Similar to umbrella/excess liability and D&O liability, employment practices liability limits purchased appear to have a direct correlation to their exposure basis. As the exposure basis increases so do the limits purchased. Employment Practices Liability Employee Count Minimum 1st Quartile Average Median 3rd Quartile Maximum 100 5K $1,000,000 $3,000,000 $5,833,333 $5,000,000 $6,250,000 $15,000,000 5K $10K $10,000,000 $10,000,000 $16,250,000 $12,500,000 $20,000,000 $35,000,000 >10K $7,000,000 $21,250,000 $61,807,692 $40,000,000 $75,000,000 $300,000,000 Data Source: Aon Financial Services Group Database Global Programs With the prolonged economic downturn and increased globalization, the way retail companies handle their insurance programs and control overall cost has come under greater scrutiny. However, many organizations with cross-border operations maintain a combination of local and global insurance policies implemented without much central oversight. This has created overlapping policies which may involve multiple brokers, consultants and insurance carriers (each with individual service fees) that are disconnected from the overall global goals and program structure. In addition, the lack of visibility on international premiums, service fees or self-insured loss costs has made achieving placement efficiency and effective administration a greater challenge. Retail respondents with operations in more than one country are asked how they purchase/control their insurance programs; 59 percent indicate their corporate headquarters controls procurement of all of their global and local insurance programs while 41 percent say their corporate headquarters purchases some lines and leaves local offices to handle others. None of surveyed retail companies allows each operation to buy their own insurance with no coordination from corporate headquarters. Global Insurance Purchasing Habits Category Retail All Industries No, each operation buys its own insurance with no coordination from corporate headquarters Corporate headquarters controls some lines and leaves local office to purchase other lines Corporate headquarters controls procurement of ALL insurance programs (global/local) 0% 3% 41% 38% 59% 59% Among retail organizations that control procurement of insurance for cross-border operations from their corporate headquarters, 41 percent indicate they purchase programs which have global policies issued to parent and local policies issued to local operations and 41 percent indicate they use a combination of multiple methods. While it is encouraging to see that retail companies are in control of their global and local programs, the key words are coordination and central oversight. As companies increasingly rely on foreign resources, it becomes more important for them to take a holistic view of their risk finance strategies, ensuring global optimization of program cost and structure while addressing evolving compliance and regulatory concerns. 17 Retail Industry Report

20 Global coordination and administration ensures consistency, transparency, security, and ultimately peace of mind. Organizations with a centralized operating structure that can track and coordinate the procurement of all insurance programs (global/local) achieve the following benefits: Reducing total cost of risk Identifying coverage gaps or unnecessary retentions Maximizing local and global compliance Avoiding redundant coverage Global Insurance Buying Patterns Category Retail All Industries Buy global policies issued to the parent with no local policies 12% 8% Buy programs which may include global policies issued to parent and local policies issued to local operations 41% 50% Buy local policies only 6% 4% Combination of two or more of above 41% 37% Among the global policies that organizations purchased, the most common types indicated in the survey are: Property General liability including public/product liability D&O liability Traditionally, most companies simply considered general liability including public/product liability as well as property damage/business interruption insurance for their global insurance purchase. However, in recent years, globally administered D&O programs have gained popularity. This is because local insurance and indemnification regulations and requirements have evolved and carriers abilities to administer these programs have strengthened. Types of Global Insurance Coverages Purchased Category Retail All Industries Property Damage/Business Interruption 100% 81% General Liability including Public/Product Liability 81% 89% Directors and Officers Liability 69% 68% Auto/Motor Vehicle Liability 50% 46% Workers Compensation/Employers Liability 38% 45% Crime 31% 38% Other 13% 9% Data Source: 2011 Global Risk Management Survey Retail Industry Report

21 Use of Captives A pure captive is a special purpose insurance or reinsurance company formed primarily to (re)insure the risks of its owner and related parties. In addition to pure captives, group and mutual captives with multiple owners and a range of cell company structures minimize the barriers to entry into captives. Twenty-two percent of retail companies surveyed report having an active captive or PCC with 22 percent also indicating a plan to create a new or additional captive or PCC in the next three years. Only three percent of respondents report having a captive or PCC that is in run-off or dormant and eight percent indicate a plan to close a captive in the next three years. Organizations with a Captive or PCC Category Retail All Industries Plan to create a new or additional captive or PCC in the next 3 years 22% 12% Currently have an active captive or PCC 22% 26% Have a captive that is dormant/run-off 3% 6% Do you plan to close a captive in the next 3 years 8% 8% Of the retail companies that report having a captive or PCC, the most common coverages currently underwritten are general/third party liability, property, auto liability and employers liability/workers compensation. Retail respondents indicate they have the greatest interest in expanding underwriting for the following risks over the next five years: Warranty 21 percent Property 16 percent Life 16 percent The above facts are interesting and tie in with a general trend captive owners are seeking opportunities to create diversity across their portfolios and maximize their captives strategic impact. Current and Future Coverage Underwritten Coverage 2011 Currently underwritten 2011 Continue/plan to underwrite same/new risk in next five years 2011 Percentage of projected change General/Third Party Liability 26% 37% 11% Property 26% 42% 16% Auto Liability 21% 32% 11% Employers Liability/Workers Compensation 21% 32% 11% Product Liability and Completed Operations 16% 21% 5% Terrorism 16% 26% 11% Credit/Trade Credit 11% 11% 0% Crime/Fidelity 11% 11% 0% Employee Benefits (Excluding Health/Medical and Life) 11% 21% 11% 19 Retail Industry Report

22 Coverage 2011 Currently underwritten 2011 Continue/plan to underwrite same/new risk in next five years 2011 Percentage of projected change Environmental/Pollution 11% 11% 0% Marine 11% 21% 11% Third-Party Business 11% 11% 0% Catastrophe 5% 16% 11% Cyber Liability/Network Liability 5% 11% 5% Directors and Officers Liability 5% 11% 5% Employment Practices Liability 5% 5% 0% Financial Products 5% 5% 0% Health/Medical 5% 16% 11% Professional Indemnity/Errors and Omissions Liability 5% 16% 11% Warranty 5% 26% 21% Other 5% 5% 0% Aviation 0% 5% 5% Life 0% 16% 16% Owner Controlled Insurance Program/Contractor Controlled Insurance Program 0% 5% 5% Sub-contractor default insurance 0% 0% 0% Data Source: 2011 Global Risk Management Survey Retail Industry Report

23 Market Insights General Introduction Access to timely insights on policies, premiums and carriers allows retail clients to make faster and more accurate decisions while seeking to obtain the best coverage and rates. Aon has invested resources to develop the industry-leading research and platforms, ensuring that our clients have access to the data they need, when they need it. Findings by line of coverage include: Coverage Terms and Conditions Carrier/Marketplace Participation Premium Rates Aon GRIP Dashboard 21 Retail Industry Report

24 Coverage Terms and Conditions Overall, the majority of retail respondents indicated that the terms and conditions for all surveyed lines of coverage had remained unchanged to improving in comparison with programs in prior years. The coverage line that experienced the most improvement in coverage terms was D&O liability (improved 41 percent). Some key enhancements that are now available in the D&O marketplace include improved follow form language in the excess policy forms, moving from an Insured versus Insured exclusion to an Entity versus Insured exclusion, continued narrowing of the Conduct exclusions and the introduction of coverage for pre-claim inquiries of an individual director or officer by a regulatory agency. Changes in Coverage Workers Compensation/Employers Liability 81% 19% 3% General Liability/Public Liability 73% 24% 3% Auto/Motor Vehicle Liability 75% 22% 3% Directors' and Officers' Liability 56% 41% Property 86% 14% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Significant More Restricted Coverage Conditions Somewhat More Restricted Coverage Conditions Unchanged Policy Coverage Conditions Improved Policy Coverage Conditions Data Source: 2011 Global Risk Management Survey Retail Industry Report

25 Carrier/Marketplace Participation The exhibits shown below are based on information from Aon GRIP SM. Data shown in this section provides insights into carrier/marketplace participation for casualty/liability, automobile liability, workers compensation, financial lines and property. This data is based on Aon placements only. Top Carriers by Premium Volume U.S. (Alpha Order) Casualty/Liability Automobile Workers Compensation Financial Lines Property Chartis (AIG) Chartis (AIG) ACE ACE ACE Chubb NKSJ Chartis (AIG) AXIS Chartis (AIG) Swiss Re Tokio Marine Liberty Mutual Chartis (AIG) FM Global Travelers Travelers Travelers Chubb Travelers Zurich Zurich Zurich Zurich Zurich Data Source: Global Risk Insight Platform Common Reasons for Carriers not Quoting Casualty/Liability Automobile Workers Compensation Financial Lines Property Exposures Class of Business Class of Business Uncompetitive - Price Uncompetitive - Price Uncompetitive - Price Exposures Uncompetitive - Price Exposures Exposures Class of Business Uncompetitive - Price Exposures Premium Threshold Class of Business Loss Experience Timing Timing Quoted Elsewhere Geographic Concerns Premium Threshold Loss Experience Client Financials Client Financials Premium Threshold Data Source: Global Risk Insight Platform Common Reasons for Rejecting a Carriers Quote Casualty/Liability Automobile Workers Compensation Financial Lines Property Inferior Pricing Inferior Pricing Inferior Pricing Inferior Pricing Inferior Pricing Incumbent Relationship Incumbent Relationship Incumbent Relationship Inferior Terms/Conditions Inferior Terms/Conditions Inferior Terms/Conditions Inferior Terms/Conditions Inferior Terms/Conditions Incumbent Relationship Incumbent Relationship Data Source: Global Risk Insight Platform 23 Retail Industry Report

26 Premium Rates Commercial insurance in the retail industry is considered to have been in a soft market for many years. Based on current analytics available for the first of half of 2011, this trend appears to be continuing. We anticipate that in the near future, carriers will continue to defend and expand their market shares with strong market capacity and aggressive strategies. Therefore, the market will continue this downward trend in rates for all reviewed lines, except for property. Currently, the property market is less stable. Global property losses from the first quarter were the largest ever (exceeding USD 50 billion) from winter storms, floods, U.S. tornado activities, a very significant earthquake in New Zealand and a catastrophic earthquake/tsunami in Japan. Risk Management Solutions (RMS) issued version 11.0 of its U.S. hurricane model at the end of February This is a wind-only update and initial guidance from RMS is that it will result in higher modeled outputs for Probable Maximum Loss or PML and Average Annual Loss or AAL by an average of 25 percent to 30 percent. The greatest impact is expected to be for more inland exposures, with the highest impact in Texas, the Mid-Atlantic and Northeast U.S. As a result of these changes in the marketplace, we expect property rates will be flat to +10 percent on average for the remainder of 2011 with the absence of a significant industry wide loss (es). If 2011 has significant hurricane losses, market capacity could be negatively impacted and we could see even more significant rate pressure for the remainder of 2011 and into the first half of Changes in Premium Rates 5% 0% -5% Property 3.2 Casualty/Liabilty Auto/Motor Vehicle Liability -3.8 Workers Compensation/ Employers Liability Directors' and Officers' Liability -10% % % Q1'11 Rate Change Q2'11 Rate Change Data Source: Global Risk Insight Platform, Aon Financial Services Group and other Aon proprietary databases Retail Industry Report

27 Financial Insights Understanding current performance and perception of the future financial strength of a sector are important factors in any analysis. In this section, we provide brief insight into market environment for the retail sector. Industry Data Over the past 12 months, the share prices of retail companies have generally outperformed the Russell 3000 Index. If we compare employment numbers for the retail industry and the overall non-farm sectors in the same time period, we see that the retail sector suffered more job losses throughout the recession. Since October 2010, employment in the retail employment has seen positive growth. In terms of annual revenue change, the Russell 3000 Index has outperformed the retail sector in the last five quarters. Revenue forecasts for the next three quarters show double-digit growth. The average Consumer Confidence Index figure for 2011 stands at 61 percent. However, consumers short-term outlook deteriorated sharply in August 2011, hitting its lowest point since April If we examine the month-on-month percentage change figure, we will notice that retail sales (excluding auto) have been in positive territory for all of Share Price Performance Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Russell 3000 Index Retail and Wholesale Data Source: Bloomberg 25 Retail Industry Report

28 % Change in Annualized Employment 2% 1% 0% -1% Aug'08 Sep'08 Oct'08 Nov'08 Dec'08 Jan'09 Feb'09 Mar'09 Apr'09 May'09 Jun'09 Jul'09 Aug'09 Sep'09 Oct'09 Nov'09 Dec'09 Jan'10 Feb'10 Mar'10 Apr'10 May'10 Jun'10 Jul'10 Aug'10 Sep'10 Oct'10 Nov'10 Dec'10 Jan'11 Feb'11 Mar'11 Apr'11 May'11 Jun'11 Jul'11 Aug'11-2% -3% -4% -5% -6% -7% Non Farm Payrolls Retail and Wholesale % Change in Annualized Revenue 25% 20% 15% 10% 5% 0% -5% Q4'09 Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11(f) Q4'11(f) Q1'12 (f) -10% -15% -20% Russell 3000 Index Retail and Wholesale Trade Retail Industry Report

29 Consumer Confidence Index and Retail Sales (MoM%) 80.0% 2.0% 70.0% 60.0% 1.0% 0.0% 50.0% 40.0% -1.0% 30.0% -2.0% 20.0% 10.0% -3.0% 0.0% -4.0% Jun'08 Jul'08 Aug'08 Sep'08 Oct'08 Nov'08 Dec'08 Jan'09 Feb'09 Mar'09 Apr'09 May'09 Jun'09 Jul'09 Aug'09 Sep'09 Oct'09 Nov'09 Dec'09 Jan'10 Feb'10 Mar'10 Apr'10 May'10 Jun'10 Jul'10 Aug'10 Sep'10 Oct'10 Nov'10 Dec'10 Jan'11 Feb'11 Mar'11 Apr'11 May'11 Jun'11 Jul'11 Aug'11 Consumer Confidence Index Retail Sales (ex-auto) MoM% 27 Retail Industry Report

30 Methodology, Notes and Disclaimers This report is based on data from Aon s 2011 Global Risk Management Survey, Aon GRIP SM, Aon Financial Services Group and other proprietary databases Global Risk Management Survey retail trade data shown in this report is based on 44 global company responses. Breakdown of respondent base is as follows: Revenue Range % of Respondents < USD 1B 27% USD 1B USD 4.9B 32% USD 5B USD 9.9B 20% USD 10B USD 14.9B 7% USD 15B USD 24.9B 2% USD 25B+ 9% Cannot disclose 2% D&O information from the Aon Financial Services Group database for retail is based on the S&P Sector Consumer Discretionary. Aon GRIP is the world s leading global repository of global risk and insurance placement information providing fact-based insights into Aon s USD 54 billion in global premium flow. Results shown in this report based on Aon GRIP data represent placements in the United States effective dates from July 01, 2010 to June 30, Bloomberg Data incorporated pursuant to license. Aon takes no responsibility as to the accuracy of any of the reported information. Along with the support of other Aon insurance and industry specialists, Aon Analytics has collected and tabulated results, provided analysis and interpretation of findings, and prepared this report. This report is furnished for informational purposes only. Do not distribute or copy. Aon has endeavored to confirm the correctness of the data and opinions expressed in this report, however, neither Aon nor its employees make any representation or warranty as to the accuracy or completeness of the data or opinions expressed herein. Aon has no liability to the recipient or any other party resulting from the use of, or reliance upon, the contents of this report. Copyright 2011 Aon Corporation. Retail Industry Report

31 Aon at a Glance Aon Corporation (NYSE:AON) is the leading global provider of risk management services, insurance and reinsurance brokerage, and human capital solutions and outsourcing. Through its more than 59,000 colleagues worldwide, Aon unites to deliver distinctive client value via innovative and effective risk management and workforce productivity solutions. Aon s industry-leading global resources and technical expertise are delivered locally in over 120 countries. Named the world s best broker by Euromoney magazine s 2008, 2009 and 2010 Insurance Survey, Aon also ranked highest on Business Insurance s listing of the world s insurance brokers based on commercial retail, wholesale, reinsurance and personal lines brokerage revenues in 2008 and A.M. Best deemed Aon the number one insurance broker based on revenues in 2007, 2008 and 2009, and Aon was voted best insurance intermediary , best reinsurance intermediary , best captives manager , and best employee benefits consulting firm by the readers of Business Insurance. Visit com for more information on Aon and manchesterunited to learn about Aon s global partnership and shirt sponsorship with Manchester United. The Aon Centre for Innovation and Analytics Aon Analytics provides clients with forward-looking business intelligence, comprehensive benchmarking and total cost-of-risk analysis as well as global market insights using proprietary technology like the Aon Global Risk Insight Platform to enable more informed and fact-based decision making around risk management, risk retention and risk transfer goals and objectives. Based in Dublin, Ireland, the Aon Centre for Innovation and Analytics provides Aon colleagues and their clients around the globe fact-based market insights. As the owner of the Aon Global Risk Insight Platform (GRIP), one of the world s largest repositories of risk and insurance placement information, the Centre analyzes Aon s USD 54 billion global premium flow to identify innovative new products and to provide Aon brokers insights as to which markets and which carriers provide the best value for clients. Aon Global Risk Insight Platform (Aon GRIP SM ) is the world s leading global repository of global risk and insurance placement information. By providing fact-based insights into Aon s USD 54 billion in global premium flow, Aon GRIP helps identify the best placement option regardless of size, industry, coverage line or geography. The Web-accessible data produced by Aon GRIP helps Aon brokers evaluate which markets to approach with a placement and which carriers may provide the best value for clients. It also gives Aon brokers a leg up when it comes to negotiations, making sure every conversation is based on the most complete, most current set of facts. As the world s leading insurance broker and risk advisory firm, Aon is committed to helping clients respond quickly and effectively to changing market conditions that may impact their businesses. The Aon Situation Room, accessible at provides clients with factbased information to help guide their businesses through this volatile period. In the Aon Situation Room, clients will find current insurer financial strength ratings and the most recent updates from Aon s Market Security Committee on specific carriers. The latest news, legislative action, and earnings information is included on the site as well. Clients can also register to receive up-to-date alerts. 29 Retail Industry Report