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2011 U.S. Industry Report: Retail

Aon Risk Solutions

1 Retail Industry Report - 2011

Table of ContentsForeword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . 4Key Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Risk Insights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Top 10 Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Risk Preparedness for the Top 10 Risks . . . . . . . . . . . . . . . .9

Losses Associated With Top 10 Risks . . . . . . . . . . . . . . . . .10

Identification and Assessment of Major Risks . . . . . . . . . . .10

External Drivers Strengthening Risk Management (past two years) . . . . . . . . . . . . . . . . . . . . .12

Client Insights . . . . . . . . . . . . . . . . . . . . . . . . . . 13Priorities in Choice of Insurer . . . . . . . . . . . . . . . . . . . . . .13

Desired Market Changes . . . . . . . . . . . . . . . . . . . . . . . . .14

Risk Management Department . . . . . . . . . . . . . . . . . . . .14

Retentions/Deductibles . . . . . . . . . . . . . . . . . . . . . . . . . .15

Limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

Global Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

Use of Captives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

Market Insights . . . . . . . . . . . . . . . . . . . . . . . . . 21Coverage Terms and Conditions . . . . . . . . . . . . . . . . . . .22

Carrier/Marketplace Participation . . . . . . . . . . . . . . . . . .23

Premium Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24

Financial Insights . . . . . . . . . . . . . . . . . . . . . . . . 25Industry Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

Methodology, Notes and Disclaimers . . . . . . . . . 28

Aon at a Glance . . . . . . . . . . . . . . . . . . . . . . . . . 29

Key Contacts . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Retail Industry Report - 2011 2

Foreword Aon is pleased to present the findings of the U.S. 2011 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:

• Economicslowdownremainsthenumberoneriskfortheretailsector.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/damagetobrandisrankedsecondonthelist.Fueledbyintensecompetitionintheretailindustry,acompany’sreputation/brandhas 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.

• Computercrime/hacking/viruses/maliciouscodeshaverisensharplyinranking, from 19th in 2009 to fifth overall in 2011. 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.

• Failuretoattractorretaintoptalenthasalsojumpedupinrankingfrom19th 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.


• Distributionorsupplychainfailureremainsakeyissueforretailcompanies. 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.

• Technologyfailure/systemfailurehasdroppedinrankingfromfourthin2009 to eighth in 2011. 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 thefindingsfurther,pleasecontactyourAccountExecutive.

Best regards,

Madeline H. Serpico MaryAnne Burke Managing Director Deputy Retail Practice Leader National Retail Practice Leader Aon Risk Solutions Aon Risk Solutions [email protected] [email protected] +1.203.326.3463 +1.203.326.3464


Executive SummaryOrganizational 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 INSIGHTSincludediscussionsofcoveragetermsandconditions,carrier/marketplaceparticipation, and changes in premium rates over the past year.

FINANCIAL INSIGHTS include analyses of market environment for the retail sector.


KeyFindings

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 2011. Respondentsrateregulatory/legislativechangesastheleast prepared risk, at 64 percent.

• Losses associated with top risks–Fortheretailindustry, 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 assessmajorrisksfacingtheirorganizations.Inpractice,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 – Economicvolatilityandincreasedregulatoryscrutinyremain the most important external drivers strengthening risk management for the retail industry.

Client Insights• Priorities in choice of insurer – Retail respondents rank valueformoney/priceasthemostimportantstandardinselectinganinsurer,followedbyfinancialstability/ratingand claims service.

• Desired market changes – Surveyed retail organizations are looking for increased ability to recognize internal risk management through lower premiums, broader coverage/bettertermsandconditions,andmoreflexibilityfor 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 theirriskmanagementdepartmentreportstotheCFO/Finance.Inthecasewherenoformalriskmanagementdepartmentexists,40percentsaytheirCFOhandlesriskmanagement.

• Retentions/deductibles –Overall,themajorityofretailers have not changed their retentions compared to their prior policy period.

• Umbrella/excess liability limits – The average limit purchasedbysurveyedretailcompaniesisUSD138million.ThehighestlimitpurchasedstandsatUSD500million,whilethelowestlimitpurchasedisUSD10million.

• Directors’ & Officers’ (D&O) liability limits – The averagelimitpurchasedbyretailcompaniesisUSD82million.ThehighestlimitpurchasedamountstoUSD500million,whilethelowestlimitpurchasedisUSD2million.

• Global programs – When retailers operating in more thanonecountryareaskedhowtheypurchase/controltheir 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,includingpublic/productliability,D&Oliabilityandpropertydamage/businessinterruption.

• 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 underwrittenaregeneral/thirdpartyliabilityautoliability,employersliability/workerscompensationandproperty.

Market Insights• Coverage terms and conditions – Overall, the majorityofretailrespondentsindicatethatthetermsand 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 mostimprovementincoveragetermsisD&Oliability,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


property. The rates for property are expected to remain undermoderatepressureandratelevelsshouldbeflatto+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 joblossesthroughouttherecession.SinceOctober2010,

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 double-digit 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 2009. 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 2011.


Risk InsightsGeneral 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.Economicslowdownremainsthenumberoneriskfortheretailsectorasorganizationsarewrestlingwiththe slow economic recovery and the potential of a double-dip recession—a key impact on the level of discretionary income available to consumers.

Rankedsecondonthelistisdamagetoreputation/brand.Fueledbyintensecompetition,retailorganizations’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.

Computercrime/hacking/viruses/maliciouscodeshaverisensignificantlyinranking,from19th in 2009 to fifth overall in 2011. 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.

Failuretoattractorretaintoptalenthasalsojumpedupinranking,from19th to eighth. With the current high-unemploymentrate,thischangeseemscounterintuitive.However,itdoesreflectthechangingbusinessenvironments–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


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 Economicslowdown

2 Damagetoreputation/brand

3 Increasing competition

4 Distributionorsupplychainfailure

5 Regulatory/legislativechanges

5 ComputerCrime/Hacking/Viruses/MaliciousCodes

7 Failuretoinnovate/meetcustomerneeds

8 Technologyfailure/systemfailure

8 Failuretoattractorretaintoptalent

10 Crime/Theft/Fraud/EmployeeDishonesty

DataSource:2011GlobalRiskManagementSurvey Where ranking numbers are duplicated that indicates a tie


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

Crime/Theft/Fraud/Employee Dishonesty

Failure to attract or retain top talent

Technology failure/system failure

Failure to innovate/meet customer needs

Computer Crime/Hacking/Viruses/Malicious Codes

Regulatory/legislative changes

Distribution or supply chain failure

Increasing competition

Damage to reputation/brand

Economic slowdown 33%84%

73%

77%

84%

64%

91%

76%

89%

72%

80%

52%

62%

53%

58%

71%

67%

62%

43%

82%

2011 2009

DataSource:2011GlobalRiskManagementSurvey

Economicslowdownanddistributionorsupplychainfailurehaveexperiencedthegreatestchangeinriskpreparednessamong the top 10 risks from 2009 to 2011 – preparedness for economic slowdown has improved by 51 percent and that fordistributionorsupplychainfailure31percent.Theseimprovementsinpreparednessreflecttheincreasingawarenessofrisk and loss potential from suppliers as well as the retail industries’ ability to adapt themselves to the financial crisis and the ensuing recovery.

Retailrespondentsrankregulatory/legislativechangesastheleastprepared,at64percent.Inthepast,regulatoryandlegislative changes normally took shape gradually allowing companies some time to formulate responses or coping strategies.Thisisnotalwaysthecasenow.Forexample,theregulatorychangesintheU.S.followingthecreditcrunchin 2009 have demonstrated the fast speed at which important regulation with far-reaching impacts can be enacted. Of particularconcernforretailersaretheMedicareSecondaryPayerActandtheFoodSafetyModernizationAct.

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.


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 2011. Compared to the 2009 results, six out of the 10 top risks have experiencedfewerlossesinthepast12months.Failuretoinnovate/meetcustomerneedsandeconomicslowdownhaveexperienced the greatest increases in losses, at 25 percent and 20 percent respectively.

Losses Associated with Top 10 Risks - Retail

20092011

Crime/Theft/Fraud/Employee Dishonesty

Failure to attract or retain top talent

Technology failure/system failure

Failure to innovate/meet customer needs

Computer Crime/Hacking/Viruses/Malicious Codes

Regulatory/legislative changes

Distribution or supply chain failure

Increasing competition

Damage to reputation/brand

Economic slowdown 67%

14%0%

38%

24%

33%

14%

8%

15%

14%

82%

87%

54%

16%

27%

5%

33%

11%

17%

53%


IdentificationandAssessmentofMajorRisks

Retailrespondentsquoteseniormanagement’sintuitionandexperienceastheprimarymethodtoidentifyandassessmajorrisks 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.

Shouldorganizationsrelyingpredominantlyorexclusivelyonmanagementexperienceandintuitionfortheirmajorriskdecisions 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:

• Riskidentificationbasedonexperiencetendstomissemergingornewrisks.

• Riskidentificationbasedonintuitionmaybeinconsistentandmaynotbegivencredencebyothers.

• Theremaybeatendencytowardriskaversionbymanagerswiththeview,“bettersafethansorry.”


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 makethemostinformedobjectiveandpredictivedecisions.

Identification of Major Risks

Board level discussion and analysis

9%

Senior management intuition and experience

48%

Business unit risk registers or key risk

indicator worksheets20%

External service provider/advisor

0%

Structured enterprise-wide approach

18%

Other5%


Assessment of Major Risks

Board level quantitative analysis

11%

Senior management intuition and experience

43%

Business unit quantitative analysis

23%

Consult with external service provider/advisor

2%

Structured enterprise-wide approach

16%

Other5%



ExternalDriversStrengtheningRiskManagement(pasttwoyears)

Economicvolatilityandincreasedregulatoryscrutinyremainthemostimportantexternaldriversstrengtheningriskmanagementfortheretailindustry.Followingthefinancialcrisis,therehasbeenagreaterawarenessintheretailindustryofthe 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)

0% 10% 20% 30% 40% 50% 60%

RetailAll Industries

Other

Large third party liability losses/litigation

Workforce issues

Pressure from suppliers/vendors

Pressure from customers

Demand from investors for greater disclosure and accountability

Natural weather events

Political uncertainty

Economic volatility

Increased focus from regulators38%

36%

50%50%

11%5%

14%18%

22%16%

18%2%

6%7%

13%23%

19%18%

14%14%



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


Valueformoney/priceisrankedthehighestpriorityamongretailrespondentsinthechoiceofaninsurer,followedbyfinancialstability/rating.Thisillustratesthatconcernsoverfinancialstabilityofacarriermaybesomewhattemperedbycompetitivenessofpricing.Weexpectthatvalueformoney/pricingwillcontinuetobeanimportantfactorfortheforeseeable 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, reflectingtherecordlevelofcapacitycurrentlyavailableinthemarketplaceformostlinesofcoverage.


Priorities in choice of insurer 2011 Retail 2009 Retail

Valueformoney/price 1 2

Financialstability/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



DesiredMarketChanges

Whenaskedwhatchangesretailorganizationswouldmostliketoseeintheinsurancemarket,themajorityofrespondentsdesire:

• Recognition of investments in internal risk management efforts through lower premiums

• Broadercoverage/bettertermsandconditions

• Moreflexibility

Desired Market Changes

0% 10% 20% 30% 40% 50% 60% 70% 80%

RetailAll Industries

Other

More product innovation

Better quality of service

More sophisticated information technology (IT) systems

More flexibility

Increased capacity

Recognition of investments in internal risk management e�orts through lower premiums

Broader coverage/better terms and conditions63%

68%

58%

70%

18%13%

52%53%

28%

43%

42%

35%

32%

43%

7%

10%


RiskManagementDepartment

Seventy-seven percent of retail respondents say they have a formal risk management department. Among those, 53 percent indicatethattheirriskmanagementdepartmentreportstotheCFO/Finance.Inthecasewherenoformalriskmanagementdepartmentexists,40percentsaytheirCFOhandlesriskmanagement.Thosewithanin-houseriskmanagementdepartment typically maintain a staff of one to five people.


Formal Risk Management Departments

Yes77%

No23%


Department Staffing

1-226%

3-524%

6-1121%

Over 1229%

Retentions/Deductibles

Overall,themajorityofretailcompaniesdidnotchangetheirretentionsduringtheirpriorpolicyperiod.Thedrivingfactorsbehind 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

Similarto2009and2010,webelievetherewillbelittlepressureoninsuredstoamendtheircurrentretentions/deductiblesin 2011.

Changes in Deductibles/Retensions

HigherSameLower

Workers Compensation

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

72%

91%

3%

16%

94%

91%

85%6%

6%

9%

9%

3%

13%

3%

General Liability

Auto/Motor Vehicle Liability

Directors' and O�cers' Liability

Property



Limits

Umbrella/ExcessLiabilityWhen 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.

Forumbrella/excessliability,theaveragelimitpurchasedbysurveyedretailcompaniesisUSD138million.ThehighestlimitpurchasedstandsatUSD500million,whilethelowestlimitpurchasedisUSD10million.

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-eightpercentofallretailcompaniesfeeltheirumbrella/excessliabilitylimitsareadequatewhile12percentbelievethey should be higher. No respondents feel it should be lower.

Umbrella/Excess Liability Limits

Revenue Minimum 1st Quartile Average Mode Median 3rd 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

DataSource:2011GlobalRiskManagementSurveyandotherAonproprietarydatabases

Directors’andOfficers’LiabilityForD&Oliability,averagelimitpurchasedbyretailcompaniesisUSD82million.ThehighestlimitpurchasedamountstoUSD500millionandthelowestlimitpurchasedUSD2million.

Basedonthe2011Aon’sGlobalRiskManagementSurvey,69percentofallretailcompaniesfeeltheirD&Oliabilitylimitsareadequate while 22 percent believe they should be higher and 9 percent feel they should be lower.

Directors’ and Officers’ Liability

Revenue Minimum 1st Quartile Average Median 3rd 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

DataSource:GlobalRiskManagementSurvey


EmploymentPracticesLiabilitySimilartoumbrella/excessliabilityandD&Oliability,employmentpracticesliabilitylimitspurchasedappeartohaveadirectcorrelation to their exposure basis. As the exposure basis increases so do the limits purchased.

Employment Practices Liability

EmployeeCount 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

DataSource:AonFinancialServicesGroupDatabase

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.

Retailrespondentswithoperationsinmorethanonecountryareaskedhowtheypurchase/controltheirinsuranceprograms; 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 0% 3%

Corporate headquarters controls some lines and leaves local office to purchase other lines 41% 38%

Corporate headquarters controls procurement of ALL insurance programs(global/local) 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 “coordinationandcentraloversight.”Ascompaniesincreasinglyrelyonforeignresources,itbecomesmoreimportantforthem 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.


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)achievethefollowingbenefits:

• Reducing total cost of risk

• Identifying coverage gaps or unnecessary retentions

• Maximizing local and global compliance

• Avoiding redundant coverage

Global Insurance Buying Patterns


Buy global policies issued to the parent with no local policies 12% 8%

Buy“programs”whichmayincludeglobalpoliciesissuedtoparentand 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

• Generalliabilityincludingpublic/productliability

• D&Oliability

Traditionally,mostcompaniessimplyconsideredgeneralliabilityincludingpublic/productliabilityaswellaspropertydamage/businessinterruptioninsurancefortheirglobalinsurancepurchase.However,inrecentyears,globallyadministeredD&Oprogramshavegainedpopularity.Thisisbecauselocalinsuranceandindemnificationregulationsandrequirementshave evolved and carriers’ abilities to administer these programs have strengthened.

Types of Global Insurance Coverages Purchased


PropertyDamage/BusinessInterruption 100% 81%

GeneralLiabilityincludingPublic/ProductLiability 81% 89%

Directors’andOfficers’Liability 69% 68%

Auto/MotorVehicleLiability 50% 46%

WorkersCompensation/EmployersLiability 38% 45%

Crime 31% 38%

Other 13% 9%



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


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%

Haveacaptivethatisdormant/run-off 3% 6%

Doyouplantocloseacaptiveinthenext3years 8% 8%

Of the retail companies that report having a captive or PCC, the most common coverages currently underwritten are general/thirdpartyliability,property,autoliabilityandemployersliability/workerscompensation.

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

Coverage2011

Currently underwritten

2011Continue/planto

underwritesame/newrisk in next five years

2011Percentage of

projectedchange

General/ThirdPartyLiability 26% 37% 11%

Property 26% 42% 16%

Auto Liability 21% 32% 11%

EmployersLiability/WorkersCompensation 21% 32% 11%

Product Liability and Completed Operations 16% 21% 5%

Terrorism 16% 26% 11%

Credit/TradeCredit 11% 11% 0%

Crime/Fidelity 11% 11% 0%

EmployeeBenefits(ExcludingHealth/MedicalandLife) 11% 21% 11%


Coverage2011

Currently underwritten

2011Continue/planto

underwritesame/newrisk in next five years

2011Percentage of

projectedchange

Environmental/Pollution 11% 11% 0%

Marine 11% 21% 11%

Third-Party Business 11% 11% 0%

Catastrophe 5% 16% 11%

CyberLiability/NetworkLiability 5% 11% 5%

Directors’andOfficers’Liability 5% 11% 5%

EmploymentPracticesLiability 5% 5% 0%

FinancialProducts 5% 5% 0%

Health/Medical 5% 16% 11%

ProfessionalIndemnity/ErrorsandOmissionsLiability 5% 16% 11%

Warranty 5% 26% 21%

Other 5% 5% 0%

Aviation 0% 5% 5%

Life 0% 16% 16%

OwnerControlledInsuranceProgram/ContractorControlled Insurance Program 0% 5% 5%

Sub-contractor default insurance 0% 0% 0%



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 andplatforms,ensuringthatourclientshaveaccesstothedatatheyneed,whentheyneedit.Findingsbylineofcoverageinclude:

Coverage Terms and Conditions

Carrier/Marketplace Participation

Premium Rates

AonGRIPDashboard


Coverage Terms and Conditions

Overall,themajorityofretailrespondentsindicatedthatthetermsandconditionsforallsurveyedlinesofcoveragehadremained unchanged to improving in comparison with programs in prior years. The coverage line that experienced the mostimprovementincoveragetermswasD&Oliability(improved41percent).SomekeyenhancementsthatarenowavailableintheD&Omarketplaceincludeimprovedfollowformlanguageintheexcesspolicyforms,movingfromanInsuredversusInsuredexclusiontoanEntityversusInsuredexclusion,continuednarrowingoftheConductexclusionsandthe introduction of coverage for pre-Claim inquiries of an individual director or officer by a regulatory agency.

Changes in Coverage

Improved Policy Coverage Conditions

Unchanged Policy Coverage Conditions

Somewhat More Restricted Coverage Conditions

Significant More Restricted Coverage Conditions

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Property

Directors' and O�cers' Liability

Auto/Motor Vehicle Liability

General Liability/Public Liability

Workers Compensation/Employers Liability 81% 19%

73%

75%

24%

22%

56% 41%

86% 14%

3%

3%

3%



Carrier/MarketplaceParticipation

The exhibits shown below are based on information from Aon GRIP SM.Datashowninthissectionprovidesinsightsintocarrier/marketplaceparticipationforcasualty/liability,automobileliability,workerscompensation,financiallinesandproperty. This data is based on Aon placements only.

Top Carriers by Premium Volume U.S. (Alpha Order)

Casualty/Liability Automobile Workers Compensation FinancialLines Property

Chartis (AIG) Chartis (AIG) ACE ACE ACE

Chubb NKSJ Chartis (AIG) AXIS Chartis (AIG)

Swiss Re Tokio Marine Liberty Mutual Chartis (AIG) FMGlobal

Travelers Travelers Travelers Chubb Travelers

Zurich Zurich Zurich Zurich Zurich

DataSource:GlobalRiskInsightPlatform

Common Reasons for Carriers not Quoting


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

LossExperience Timing Timing QuotedElsewhere Geographic Concerns

Premium Threshold LossExperience ClientFinancials ClientFinancials Premium Threshold


Common Reasons for Rejecting a Carriers Quote


Inferior Pricing Inferior Pricing Inferior Pricing Inferior Pricing Inferior Pricing

Incumbent Relationship Incumbent Relationship Incumbent Relationship InferiorTerms/Conditions InferiorTerms/Conditions

InferiorTerms/Conditions InferiorTerms/Conditions InferiorTerms/Conditions Incumbent Relationship Incumbent Relationship



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, thepropertymarketislessstable.Globalpropertylossesfromthefirstquarterwerethelargestever(exceedingUSD50billion)fromwinterstorms,floods,U.S.tornadoactivities,averysignificantearthquakeinNewZealandandacatastrophicearthquake/tsunamiinJapan.RiskManagementSolutions(RMS)issuedversion11.0ofitsU.S.hurricanemodelattheendofFebruary2011.Thisisawind-onlyupdateandinitialguidancefromRMSisthatitwillresultinhighermodeledoutputsforProbable 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.

Asaresultofthesechangesinthemarketplace,weexpectpropertyrateswillbeflatto+10percentonaveragefortheremainder 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 2012.

Changes in Premium Rates

-20%

-15%

-10%

-5%

0%

5%

Q2'11 Rate ChangeQ1'11 Rate Change

Property Casualty/Liabilty

Auto/MotorVehicle Liability

Workers Compensation/Employers Liability

Directors' and O�cers'Liability

-11.4

3.2

-8.1

-2.6-3.8

-15.4

-12.0

-2.0-1.3

1.0

DataSource:GlobalRiskInsightPlatform,AonFinancialServicesGroupandotherAonproprietarydatabases


Financial InsightsUnderstanding 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.

IndustryData

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 thattheretailsectorsufferedmorejoblossesthroughouttherecession.SinceOctober2010,employmentintheretailemployment 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 2009. 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 2011.

Share Price Performance

0

20

40

60

80

100

120

140

Retail and WholesaleRussell 3000 Index

Apr’11 May’11 Jun’11 Jul’11 Aug’11Sep’10 Sep’11Oct’10 Nov’10 Dec’10 Jan’11 Feb’11 Mar’11

DataSource:Bloomberg


% Change in Annualized Employment

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

Retail and WholesaleNon Farm Payrolls

Aug'

08Se

p'08

Oct

'08

Nov

'08

Dec

'08

Jan'

09Fe

b'09

Mar

'09

Apr

'09

May

'09

Jun'

09Ju

l'09

Aug'

09Se

p'09

Oct

'09

Nov

'09

Dec

'09

Jan'

10Fe

b'10

Mar

'10

Apr

'10

May

'10

Jun'

10Ju

l'10

Aug'

10Se

p'10

Oct

'10

Nov

'10

Dec

'10

Jan'

11Fe

b'11

Mar

'11

Apr

'11

May

'11

Jun'

11Ju

l'11

Aug'

11

% Change in Annualized Revenue

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Retail and Wholesale TradeRussell 3000 Index

Q1'12 (f)Q4'11(f)Q3'11(f)Q2'11Q1'11Q4'10Q3'10Q2'10Q1'10Q4'09


Consumer Confidence Index and Retail Sales (MoM%)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Aug'

11

Jul'1

1

Jun'

11

May

'11

Apr'

11

Mar

'11

Feb'

11

Jan'

11

Dec

'10

Nov

'10

Oct

'10

Sep'

10

Aug'

10

Jul'1

0

Jun'

10

May

'10

Apr'

10

Mar

'10

Feb'

10

Jan'

10

Dec

'09

Nov

'09

Oct

'09

Sep'

09

Aug'

09

Jul'0

9

Jun'

09

May

'09

Apr'

09

Mar

'09

Feb'

09

Jan'

09

Dec

'08

Nov

'08

Oct

'08

Sep'

08

Aug'

08

Jul'0

8

Jun'

08

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

Retail Sales (ex-Auto) MoM% Consumer Confidence Index


Methodology, Notes and Disclaimers This report is based on data from Aon’s 2011 Global Risk Management Survey, Aon GRIP SM,AonFinancialServicesGroupand other proprietary databases.

2011 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

<USD1B 27%

USD1B–USD4.9B 32%

USD5B–USD9.9B 20%

USD10B–USD14.9B 7%

USD15B–USD24.9B 2%

USD25B+ 9%

Cannot disclose 2%

D&OinformationfromtheAonFinancialServicesGroupdatabaseforretailisbasedontheS&PSectorConsumerDiscretionary.

Aon GRIP is the world’s leading global repository of global risk and insurance placement information providing fact-based insightsintoAon’sUSD54billioninglobalpremiumflow.ResultsshowninthisreportbasedonAonGRIPdatarepresentplacements in the United States effective dates from July 01, 2010 to June 30, 2011.

BloombergDataincorporatedpursuanttolicense.Aontakesnoresponsibilityastotheaccuracyofanyofthereportedinformation.

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.

Thisreportisfurnishedforinformationalpurposesonly.Donotdistributeorcopy.Aonhasendeavoredtoconfirmthe 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.


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 risktransfergoalsandobjectives.

Aon Global Risk Insight Platform® (Aon GRIPSM) is the world’s leading global repository of global risk and insurance placement information. By providing fact-based insights intoAon’sUSD54billioninglobalpremiumflow,AonGRIPhelps 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.

BasedinDublin,Ireland,theAonCentreforInnovationand 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,theCentreanalyzesAon’sUSD54billionglobalpremiumflowtoidentifyinnovativenewproductsandtoprovide Aon brokers insights as to which markets and which carriers provide the best value for clients.

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 www.aon.com, provides clients with fact-based 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 e-mail alerts.

Aon at a GlanceAonCorporation(NYSE:AON)istheleadingglobalproviderof 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. Namedtheworld’sbestbrokerbyEuromoneymagazine’s2008, 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 2009. 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 2007-2010, best reinsurance intermediary 2006-2010, best captives manager 2009-2010, and best employee benefits consulting firm 2007-2009 by thereadersofBusinessInsurance.Visithttp://www.aon.comformoreinformationonAonandhttp://www.aon.com/manchesterunited to learn about Aon’s global partnership and shirt sponsorship with Manchester United.

Innovation and Analytic

s

Th

e Aon Centre for

• •


Key Contacts RetailMadeline H. SerpicoNational Retail Practice LeaderAon Risk Solutions [email protected] +1.203.326.3464

MaryAnne BurkeDeputy Retail Practice Leader Aon Risk Solutions [email protected]+1.203.326.3463

Aon AnalyticsGeorge M. Zsolnay IVHead of Aon Analytics - [email protected]+1.312.381.3955

For Media and Press InquiresKelly DrinkwineDirector of Public RelationsAon [email protected]+1.312.381.2684

ContributorsSarah KeaneLorcan FeerickLisa YetterCathy GavinSamantha BurnsJennifer Hitt

AON CORPORATION200 East Randolph Street Chicago, Illinois 60601 T +1.312.381.1000www.aon.com

© 2011 Aon Corporation. All rights reserved.Disclaimer: No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any way or by any means, including photocopying or recording, without the written permission of the copyright holder, application for which should be addressed to the copyright holder.6995-P096315010-0811

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