Liberty Mutual Insurance Group

1. How is the Insurance Market Adapting to New Opportunities and Challenges? Marsh Power ForumIstanbul, October 2013 Liberty Mutual Insurance Group Mike Robertson, Senior Vice President

2. Marsh Power Forum, Istanbul Presentation Overview • Liberty Mutual Insurance Group • Security of Supply-Critical Considerations • Risk Assessment Methodology • Insurance Market Positioning • Conclusions

3. Liberty Mutual Insurance Group – Context • Liberty Mutual Insurance Group founded 1912 • 3rd largest Property and Casualty Insurer in USA • Ranks 84 in Fortune 100 • 2012 Consolidated Revenues – USD 37B • Employs 50,000 people over 900 offices globally • 2012 Energy/Construction Portfolio USD 336M • Power Generation Portfolio USD 80.6M globally

4. Underwriting Principles • Thorough understanding of our Client’s business • High ratio of Engineers to Underwriters • Specialism and understanding of Power Industry changing dynamics • Risk selection paramount • Focused on key industry risk elements of electrical/mechanical breakdown: • New plants – teething problems • Ageing plants – versus maintenance issues • Technology developments • Client-Broker-Insurer partnership sought and encouraged

5. Industry FactorsSecurity of Supply – Critical Considerations • Significant increase in material and labour costs

6. Industry FactorsSecurity of Supply - Critical Considerations “Equipment costs and lead times for building new plants have doubled”. Dorothy Thompson, CEO of Drax Power Group, UK in an interview with “Utility Week”

7. Industry FactorsSecurity of Supply – Critical Considerations • Significant increase in material and labour costs • Emerging markets influencing supply of new technologies • Replacement of aging and inefficient infrastructure • 70% of global steam cycle operations are 35 years old • More widespread use of advanced materials e.g. super critical • Competition between the leading OEM’s to continue

8. Industry FactorsSecurity of Supply - Critical Considerations • Increased levels of operating flexibility required. • Desire to meet changing regional environmental regulation e.g. fuel mix. • Market deregulation - increase investment, reduce cost to the consumer. • Weather patterns have impact on sustainability of electricity supply. • Enhanced grid interconnections to regulate fluctuations in peak demand. • Shift in generation to IPP’s is depleting experienced staff in existing generators.

9. Industry FactorsSecurity of Supply - Critical Considerations In a flyer for its conference “Skills shortages – who will keep the lights on?” the UK Institution of Engineering and Technology states: “The Energy Sector faces major challenges over the coming decades. Huge investments in new generation and network replacement are required just at a time when approximately 40% of the people with the necessary skills approach retirement”.

10. Risk Assessment Methodology • Positive information sharing at a technical and commercial level. • Account quality and receptiveness to risk engineering approach. • Confidence to self retain risk e.g. ‘captive’ retention. • Historically profitable. • Diligent emergency response e.g. business interruption. • Insurance buying characteristics in line with expectation. • Objective - mutually secure long term relationships across the insurance cycle. Operator ‘behaviour’ significantly influences insurance pricing approach through:

11. Risk Assessment Methodology • Design and Construction • Operations • Maintenance and Inspection • Safety • Performance Measurement • Loss Control and Mitigation Time Element (5 sub-categories) • Business Interruption Property Damage (6 main categories, 32 sub-categories)

12. Risk Assessment Methodology • Each sub-category is scored from 0 (poor) to 4 (excellent) • Risk Appraisal Score weighted as follows: - Design & Construction(15%) - Management systems (70%) - Loss Control & Mitigation (15%) • Risk Appraisal weighted heavily towards Machinery Breakdown • Challenging risk benchmarking given changing industry dynamics

13. Risk Assessment Methodology

14. Pricing Methodology

15. Insurance Market PositioningTechnological Advancement • Design change - output, reliability, efficiency, fuel variation • Does the modification include changes of material/design • Works testing undertaken and comparison with intended operational performance • Details of specialist monitoring anticipated by OEM • Provision of spares for new technology and delivery times • Estimate of damage potential given the degree of alteration • Align evaluation to Construction v Operational inherent hazard

16. Insurance Market PositioningEmerging Market Manufacturers • Independent Owner’s engineer embedded in design group • Deployment of independent ‘quality’ assessment inspection company • Authority to drive/influence established design approach and practice • Assessment of OEM’s capabilities and workshops • Design reviews and factory inspection tests on critical items • Inspection programme supported by regular progress reports

17. Insurance Market PositioningAgeing Plant and Equipment Maintenance and Inspection • Operational maintenance and inspection history • Control of contractors • Testing of safety devices • Experience and qualifications – operative training Performance Measurement • Physical condition • Planned maintenance/inspection frequency • Reliability/Availability • Life time monitoring Ensure that scope of maintenance and inspection activity and expenditure is commensurate with age/operating regime

18. Current Insurance Industry Focus • Valuation consistent approach & fairness to all Operators. • Cat perils - enhanced risk assessment and line structure control • Combustion Turbine - continue to review segmentation and pricing • Under-performing sectors are under review e.g. Waste • Hydro-Electric - emphasis on integrity of Civil and Infrastructure Works • Increasing frequency of loss considerations e.g. transformers • Business Interruption – balance loss scenarios with intended basis of loss settlement

19. Conclusions • Global investment levels to reach US $450B over next decade. • Application and technology challenges continue unabated • Framework to promote security of supply with investment in facilities/people. • Insurers becoming more creative in risk assessment processes • Current risk information is considered essential to underpin this process • Encourages accuracy, transparency and fairness in pricing approaches.