The Willis Index

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Market Conditions and Survey Results 1

Trustee ExemptionClauses – Any Change? 1

Financial Institutions – Mitigating Electronic and Privacy Exposures 2

Provider Liable for Unauthorised Investment Advise on Unsuitable Product 3

Protecting you personally and professionally 3

Meet the Team 4

Breaking News 4

Financial Institutions Newsletter

The Willis Index is a quarterlypublication reporting on the relevantissues affecting the insurance industryand the impact they have upon theFinancial Institutions sector. The mainfeature is an extensive market surveytaken from over 50 insurers, providingresponses on key indicators includingpremium, excesses and cover.

Our quarterly analysis providesbuyers with an overview of insurancemarket conditions and our assessment of the future outlook.

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eçï=içï=`~å=fí=dç\This quarter’s Willis Index suggests that the averagepremium discount for the last quarter was around10%. 55% of markets suggested a figure of between0-10% and 45% between 10-20% discounts.Underwriters are predicting that this state of affairs will remain unchanged for the next quarter too, whichseems logical given that there are no obvious factorsthat could affect rates in the short term.

Much conversation in the Financial Institutions Market is now centred on how long these favourableconditions will last. Firstly, the effect of this year’swidespread floods across England (thought to exceedGBP3Bn in insurer payout) is unlikely to have any impact on premiums for financial institutions, as thisclass is well ring-fenced from the flood-affectedbusiness lines. What is becoming clear is that it will not be long before premiums are starting to approachthe levels seen in 1999 and 2000. This was the peak of the last soft market, leading some observers toventure that market premiums will level out in 2008.It’s not an argument entirely without merit but also notone that we subscribe to fully as whilst there areseveral factors which could shorten the duration of thissoft market, it is too early to say with any certaintywhich these will be.

The Atlantic hurricane season officially reigns from the 1st June to 30th November. Whilst at the time of writing there have been no significant events, official reports suggest that this season has a 75%chance of being ‘above normal in activity’. In 2005 the insurance market settled the largest ever claimspayments in respect of hurricanes Katrina, Rita andWilma but this had no effect on Financial Institutionsinsurance premiums because insurers were able toraise fresh capacity easily in the aftermath. In 2007though, we have a backdrop of turmoil in the creditmarkets as a result of US subprime mortgage portfoliosand concern of an imminent US economic and globalequity downturn. Pessimists might point out that if theinsurance market were to make large hurricane-relatedpayments, combined with investment losses, it mightnot be able to replace capital with ease.

Regardless of the above factors, FinancialInstitution underwriters are still posting healthy, oftenrecord, results and we continue to observe a strongcompetitive environment amongst underwriters. Thisleads us to a cautious prediction that excepting aglobal recession combined with market-wide losses we will continue to enjoy a buyers’ market that will last well into 2008 and possibly beyond.

Market Conditions and Survey Results

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The new Solicitors' Code of Conduct which came intoeffect on 1 July 2007 expressly states that a solicitorshould not cause to be included an exemption clause in a Trust instrument where the solicitor or their firm isconsidering acting as a paid Trustee, unless reasonablesteps are taken to ensure that the Settlor is aware ofthe effect and meaning of the clause and that there is evidence that the Settlor understands that meaning.

This change arguably goes further than even thecurrent duty imposed on members of STEP (the Societyof Trust and Estate Practitioners) and marks a furthersmall step back towards the position which mostSettlors and Beneficiaries would expect when dealingwith professional Trustees, namely that unless it can be demonstrably shown that the Settlor instructed and

accepted an exclusion or limitation on the professional Trustee's liability going beyond the statutory protectionof s.61 of the Trustee Act 1925, then the professionalTrustee should not be excused neglect and lack ofdiligence by relying on a blanket exemption clause,particularly where that Trustee is charging for theirservices, holds themselves out as competent and hasdrafted the Trust instrument in the first place.

The lesson for professional Trustees is a clear one – make sure that the precise scope and meaning of an exemption clause is spelt out to a Settlor andtheir express consent and confirmation of theunderstanding of its extent obtained and clearlyrecorded, or risk the exemption clause being struckdown in its entirety. AR/JM: 13 August 2007

Trustee Exemption Clauses – Any Change?

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2 táääáë The Willis Index: Financial Institutions Edition 3 2007

Financial Institutions – Mitigating Electronic and Privacy Exposures

lìê=^ééêç~ÅÜUtilising our expertise in the banking sector, we take a “risk-based”, rather than “product-based” approach tothe mitigation of the riskexposures:

– We conduct interviews withour clients, overlaying theirsecurity concerns with our risk matrices based on our knowledge of thebusiness in which theyoperate. Our approach takes into consideration the differences betweendifferent geographical areas in respect of litigiousness and regulatory influence over the consequences of a privacy breach.

Additionally, weunderstand that there is an economic decision to bemade between additionalexpenditure on IT security and additional expenditure on insurances.

However, for banks whose operations fall withinthe remit of the European Union, privacy legislation is in a stage of relative immaturity. It is for this reasonthat Willis has an ongoing dialogue with the specialistlawyers in this field. Understanding the legislativeenvironment and financial consequences of a breach(in terms of both damages and the precedents ofregulator fines) enables us to discuss appropriatelimits/coverages with you. The well-publicised fine ofalmost £million levied on Nationwide providestangible evidence of increased regulatory attention.

oáëâ=jáíáÖ~íáçåThe insurance market has responded to the high levelof attention these subjects are receiving, through therelease of off-the-shelf cyber and privacy policies.Willis has considerable experience in this field, and inunderstanding the various coverage forms available.

In particular, there are two distinct areas ofcoverage that must be understood:

1st Party – the losses that óçì will experience as a direct result of a network security breach.

3rd Party – the legal liabilities that you will have to ÉñíÉêå~ä=é~êíáÉë as a result of a security or privacy breach.

The key features of the coverage available include:– Indemnification for loss of revenue arising

from network security breach and unplanned systems outage

– Indemnity for you in respect of your liabilities to third parties following your negligenttransmission of a virus

– Indemnity in respect of defence costs/settlementcosts incurred as a result of your failure to protectthe confidentiality of customer records andinformation

– Indemnity against your liabilities resulting fromdefamatory comments made by staff membersover email

– Payment of fees to a public relations firm to assist you in re-establishing your businessreputation and those of a security consultant toreview your electronic security measures, following a successful hacking attack.

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_~ÅâÖêçìåÇThe dependence upon information networks withinFinancial Institutions means that the impact of anetwork security breach may be severe. A networksecurity breach may result in business interruption toyou, or in theft of confidential information from yoursystems. The issues that are most frequently discussedin this arena relate to Denial of Service Attacks,phishing, pharming, identity theft, and malicious code.

The severity of a possible business interruptioncan be evaluated through scenario-planning and byreference to business continuity plans. We employ a“consultative” approach, discussing such issues withboth your risk management experts and your ITsecurity specialists.

In respect of a privacy breach, the consequencesvary according to the jurisdiction involved.Commentators refer to the severity of the Gramm-Leach-Bliley Act of 1999, which imposes major privacy/security requirements on FinancialServices companies and their transactions. Reference isalso made to the privacy requirements in the State ofCalifornia, and the costs associated with notificationof individuals whose information is compromised. Theexperience of T.J.Maxx has drawn attention to this issue, with some commentators estimating a cost of around $100 per record lost (or a total of $4.5bn), based on estimated accumulatedcosts of fines, legal fees, notification expenses, andbrand impairment.

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táääáë The Willis Index: Financial Institutions Edition 3 2007 3

– Following these discussions, we conduct a “GAP” analysis to identify areas of risk notcovered under existingProfessional Indemnity,Comprehensive, Crime,Liability and Propertyplacements. We express our conclusions in plainEnglish, identifying clearly to our clients which risks are uninsured.

– We work with the markets on your existing insurances to extend coverages wherepossible, and to obtainindications for a bespokepolicy to fill any gaps.

Willis has specifically positionedour cyber specialists as an integralpart of our Financial InstitutionsTeam. This means that we wellplaced to deliver an integratedsolution, rather than placing stand-alone cyber coverages thateither duplicate existing coverages,or that do not achieve best valueas a result of a lack of explorationof options under your existinginsurance programme.

If you are an existing client ofours, please contact your AccountExecutive to discuss the serviceswe can provide to you.

Alternatively, please contactthe individuals detailed on page 4,who will be able to explain moreabout our approach in the cyberfield, as well as in the field ofFinancial Institutions moregenerally.

The e-Solutions experts withinour Professional Risks team canalso assist you. For furtherinformation please contact:

Graham Nagusnagusga@willis.com0207 975 2074

Steve Bonningtonbonningtons@willis.com0207 975 2086

Protecting You Personally and ProfessionallyMany of our Financial Institutions clients have beensurprised to learn that Willis can help with theirpersonal insurance covers. The Willis Private ClientsGroup manages personal insurances for high-net-worthindividuals and affinity groups.

The growth of on-line direct insurers, their callcentres and standardised personal insurance productshas brought some price competition but often at theexpense of quality and functionality.

Fortunately, Willis Private Clients focus their service delivery on partnership and personal attention.Our high standards of communication, stewardship and individual skill and care have made Willis a leaderin the field of personal insurance protection.

We undertake a detailed review and evaluation of your personal exposures and create a tailoredinsurance policy that will not only protect your assetsfrom physical loss and potential liability but alsoprovide you with peace of mind.

The main types of cover that can be provided are:– Residential property– Antiques and collections– Fine art– Jewellery– Vehicles– Watercraft– Travel– Horses and livestock

Willis has managed individual personal insurancepolicies for more than 100 years. We help thousands of individuals in the UK and Ireland with their personal insurance needs everyday.

If you would like to discuss how you and your family could be protected by Willis please call us today, 0800 7315869 or by email on personalrisks@willis.com.

In jáÅÜ~Éä=t~äâÉê=î=fåíÉêJ^ääá~åÅÉ=dêçìé=~åÇpÅçííáëÜ=bèìáí~ÄäÉ (July 2007) the High Courtordered Scottish Equitable to pay damages provisionallyassessed in the sum of £700,000 to an IFA's client,Michael Walker. The decision is welcome news forfinancial advisers and their professional indemnityinsurers because it means that product providerscannot necessarily escape liability by hiding behind IFAs if their broker consultants wander into investmentadvice territory.

Mr Walker was entitled to a valuable, inflation-linked final salary pension. However, following meetingswith his financial adviser and a representative fromScottish Equitable Plc, Mr Walker decided to transfer his benefits to a Scottish Equitable Plc deferred phased retirement and draw-down plan.

When the value of Mr. Walker's pensionplummeted, he realised he had been mis-advised and issued proceedings against his IFA and Scottish Equitable Plc. Mr Walker alleged that his IFA and the Scottish Equitable consultant bothadvised him to transfer out of his final salary scheme.Following Inter-Alliance entering administration, Mr Walker proceeded against Scottish Equitable alone.

The High Court accepted Mr Walker's evidencethat his financial adviser and the representative from Scottish Equitable had both separately assuredhim that transferring out of the final salary scheme was the right thing for him to do. Having made that finding of fact, the Court determined that Scottish Equitable Plc provided Mr Walker withunauthorised investment advice.

This case indicates that where product providers'broker consultants go beyond simply confirming factsand dealing with technical queries, the Courts will nothesitate to hold them liable for unsuitable investmentadvice, even where they are not authorised to do soand the client is also being advised by an IFA.

Jonathan NewboldSolicitorBrowne Jacobson LLP

3 August 2007

Provider Liable for UnauthorisedInvestment Advice on Unsuitable Product

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Meet the Team

FIN/5649/09/07

Willis Limited, Registered number: 181116 England and Wales.Registered address: Ten Trinity Square, London EC3P 3AX.

A Lloyd's Broker. Authorised and regulated by the Financial Services Authority.

Breaking News

Derek ReevesTel: +44 (0)20 7975 2944Email: reevesd@willis.com

Duncan HolmesTel: +44 (0)20 7975 2708Email: holmesdn@willis.com

Hugh Wilson Tel: +44 (0)20 7975 2898 Email: wilsonh@willis.com

Willis is one of the world’s leading risk management and insuranceintermediaries. We have approximately 16,000 professionals in over 300 offices around the world.

cçê=ÑìêíÜÉê=áåÑçêã~íáçå=éäÉ~ëÉ=Åçåí~ÅíW

cfkbu=_êÉ~âÑ~ëí=_êáÉÑáåÖ=pìÅÅÉëë=E_~ëÉä=ffW=~=o~íáåÖ=^ÖÉåÅó=mÉêëéÉÅíáîÉF=On 19 September, 2007 FINEX held a breakfast briefing as part of the ongoing FINEX (Financial and Executive Risks) Seminar Programme entitled Basel II: a Rating Agency Perspective. Speakers included Nick Hill from Standard & Poor's (S&P) who provided his perspective of the impact of Basel II on banks, and commentary on how S&P considers operational risk as a factor in its credit ratings. Duncan Holmes from Willis provided an update on current insurance trends for financial risks.

For more information on the FINEX seminar programme, or to receive slides from the recent seminar, please contact Claire Hall at hallc@willis.com.

Tel: +44 (0)20 7975 2098Email: rootc@willis.com

`Üêáë=oççíbñÉÅìíáîÉ=aáêÉÅíçê=Chris is an Executive Director within the Willis Financial InstitutionsPractice and part of the management team for FINEX, the WillisFinancial and Executive Risks Division.

With over 27 years’ experience in the insurance industry, Chris began his career with a Lloyd's broker in 1979. Afterspending 10 years working in the general insurance sector hejoined Aon in 1990 specialising in Crime, Professional Indemnityand Directors’ & Officers’ liability solutions for financial institutionson a global basis.

Prior to joining Willis in February 2004, Chris had executiveresponsibility for the direction and management of the financialinstitutions team at Aon, where he was the relationship managerfor a number of key UK financial institutions.

In his spare time Chris enjoys track days and off-road cycling.He recently appeared with clients and colleagues in an Auto SportMagazine article featuring the Goodwood Revival.

qÜÉ=táääáë==fåÇÉñ==The Willis Index provides quarterly updates on the ever-changing FI Insurance Market, including commentary on market conditions, case studies andinsurance product developments. FINEX also produces newsletters reporting on Mergers & Acquisitions, Directors' and Officers' Liability, Political Risks,Professional Indemnity and Environmental Liability. For further information or if you would like to receive these publications please contact us.

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