Market trends update Matt Keeping, head of Broking for Willis Towers Watson, observed in the April 6, 2016 Marketplace Realities report, “At the macro level, the satellite view, much remains the same for insurance buyers: capacity remains plentiful, low interest rates invite alternative sources of capital to explore the insurance industry (which further increases overall capacity), and so far, 2016 appears to be another relatively light year for catastrophic loss. The result: for most buyers, soft market conditions prevail.” Matt also noted, “A line-by-line look at the industry reveals further complexity. While a slight majority of lines are still seeing decreases, the level of those decreases is smaller. In property insurance, for example, rates are expected to fall for most buyers, but some will find decreases in the single digit, where last year they might have enjoyed double-digit reductions. In the case of auto coverage for businesses, decreases have given way to small increases for the typical buyer. The same is true for trade credit insurance. Meanwhile the increases that have held sway for companies renewing cyber and errors and omissions (E&O) policies are getting steeper.” These trends are discussed in detail in the report, which can be found at http://www.willis.com/What_We_Think/Publications/Marketplace_Realities/.

However, we continue to monitor the financial results reported by the carriers with whom we do business to determine potential changes in their approach to pricing. As always, a major caveat remains with respect to the impact that large catastrophic losses could have on industry profitability, surplus and the direction of rates.

The following chart summarizes our rate expectations by line of coverage for 2016.

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In this issue, we:

…review the latest trends in the insurance market as the soft market continues with smaller decreases experienced for most lines compared to the recent past.

…explore the non-cost advantages that employers and employees experience through the administration of benefits through private health exchanges.

…investigate the changing landscape for cyber risks as they apply to real estate operations and the coverage limitations presented by traditional insurance policies.

…review the overtime regulations that were recently finalized by the Department of Labor, their potential impact on employer payroll costs and the options available to employers.

…reintroduce hail monitoring technology that is available to asset owners and managers to assist them in mitigating the costs associated with potential hail damage to their properties.

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Commercial insurance rate predictions for 2016Insurance product Range of change (%)

Cyber for POS Retailers

E&O, Poor Loss Experience

Environmental: Combined with Casualty

Cyber

Casualty: Primary (with losses)

Casualty: Auto

E&O, Good Loss Experience

Employee Benefits: Insured Plans

Employee Benefits: Self-insured Plans

Construction: XS

Fidelity

Kidnap & Ransom

Employment Practices Liability

Casualty: Workers’ Comp

Construction: CIP

Construction: GL

Construction: WC

Fiduciary

Trade Credit

Casualty: Primary

D&O

Political Risks

Health Care Professional

Surety

Construction: CIP (GL-only non-condo)

Aerospace: Airlines

Aerospace: Products/Services/Airports/Municipalities

Casualty: Umbrella & Excess

Construction: Builders Risk

Environmental: CPL

Environmental: PLL/EIL

Marine

Property: Non-CAT Risks

Property: CAT-Exposed Risks

Terrorism

Aerospace: General Aviation

Aerospace: Financial Institutions/Lessors

-25 -20 -15 -10 -5 0 5 10 15 20 25

-25 -20 -15 -10 -5 0 5 10 15 20 25

Outlook for private health insurance exchanges Many employers interested in private health insurance exchanges were initially intrigued with the prospect of saving money by offering plan choices that meet employees’ needs more cost-effectively and by introducing high-performing prescription drug programs, network options and funding strategies (e.g., defined contribution and account-based plans) into their benefits programs. As the exchange market evolves, employers increasingly are drawn to other advantages as well.

According to a recent Willis Towers Watson survey, nearly three-fourths (72%) of U.S. employers believe that a key value of private exchanges is being able to offer employees more choices. A growing number also see the value of offering employees a more satisfying benefits experience through a more consumer-like shopping experience and the chance to build personalized benefits portfolios that better meet their individual needs.

With more choices available in and outside of exchanges, the process of evaluating and selecting benefits has also become more complex for employees. Here, too, exchanges can help. Through advanced decision support and recommendations, exchanges help employees navigate complex options and make good decisions based on their needs. Through education, employees better understand their benefits and are therefore able to derive more value from them.

Post-enrollment surveys of employees using Willis Towers Watson’s OneExchange private exchange solutions for the plan year 2016 confirm that employees like selecting benefits through an exchange and choosing benefits for themselves, and that they are happy with the choices they’ve made. For example:

�� 95% like choosing their own benefits.

�� 90% were satisfied with their benefit choices one year later.

�� Nine of 10 understand their benefits as well or better than last year.

�� 83% are more aware of the costs of medical care.

�� 83% are more engaged in their health care decisions.

Employers also gain from offering benefits through an exchange. For example, for many employers, managing benefits programs has become increasingly complex. Exchanges simplify benefits administration by offloading day-to-day management, reporting and compliance burdens. In fact, a number of the employers that have adopted OneExchange made the decision based on what they don’t want to do and have found that using a private exchange has enabled them to deploy their internal HR resources on more strategic priorities.

As more employers choose to offload benefits administration, the idea that new benefits options can be added quickly and easily relative to self-managing also becomes more attractive. Employers that have adopted OneExchange can choose from a number of pre-configured options in areas such as pharmacy management, wellness and disease management, high-performance (narrow) networks and others — all based on the best practices of high-performing employers that are our consulting clients.

With OneExchange, employees get expanded choice to build a personalized health, wealth, lifestyle and protection portfolio, while employers accelerate their benefits strategy and manage costs. In addition, only Willis Towers Watson brings 70 years of benefits innovation, 30 years of benefits administration outsourcing, and 10 years of exchange delivery and operating experience to the private exchange industry. For more information contact Rob Harkins, Practice Leader, Private Exchanges at +1 617 351 7470 or rob.harkins@willistowerswatson.com; or Megan Montgomery, Senior Private Exchange Consultant at +1 763 302 7181 or megan.montgomery@willistowerswatson.com.

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The cyber landscape and real estate companies It’s no secret that the cyber landscape changes rapidly. Companies that have traditionally purchased cyber (FIs, health care, retail, etc.) continue to do so at ever increasing rates, and companies that traditionally didn’t consider themselves risky cyber ventures are starting to explore how they may in fact have some exposure. Cyber is becoming a valuable enhancement to a company’s network security culture and can provide board satisfaction that a company is covered for gaps posed in traditional E&O or GL policies.

Real estate is an industry that previously relied on E&O and GL policies for coverage of “cyber-type” events. In reality, the only way a cyber breach is going to be covered by an E&O policy is if it occurs due to a failure in the rendering of professional services. These policies are very specific in what those services are and how coverage responds. Conversely, a typical GL policy would cover physical data lost due to very specific physical triggers (think fire, wind or rain) but would not cover intangible data or network compromises. Reasons for real estate companies to consider purchasing cyber:

�� Breaches of customer personally identifiable information (PII) or employee information caused by a security failure (hacking or virus) would not be covered under a GLor E&O policy.

�� Even E&O policies that extend some form of cyber coverage will tie it back to the rendering of professional services. A network security failure or virus is not considered part of the rendering of services and is therefore declined from coverage.

�� Denial of service/transmission of virus or malware to a third party is not covered in a GL or E&O policy unless, again, it is during the course of rendering professional services.

�� Business interruption or network interruption — there are significant gaps in coverage for the business interruption coverage found in a GL policy. Cyber dovetails these coverages for the nonphysical perils — e.g., virus or hacking. The coverage applies to a company’s own network restoration, irrecoverable revenue and their own digital asset restoration. Examples:

�� A virus creates a denial of service; the company is unable to operate for two days: the cost to restore the network and the fixed operating costs are both recoverable from a cyber policy.

�� Ransomware is one of the fastest increasing perils to a company. We saw an 89% increase in ransomware claims in the first quarter of 2016 alone. Phishing emails are usually the culprit and all it takes is one person to click on the link.

�� Board satisfaction — boards are taking a more active role in most companies’ security cultures. Cyber breaches are known to lead to board upheaval and significant PR issues that result in derivative claims against board members. Consequently, most boards are focusing on how to satisfy shareholders’ inquiries on network security.

At Wills Towers Watson, we have 25 global FINEX professionals who specialize in cyber and can help evaluate your company’s exposure to cyber risks and place coverage on your behalf. Post-policy ancillary services can be found through many of our carrier partnerships and may include tabletop workshops, access to eRisk websites and training tools/tips for employees. If you are interested in exploring how a cyber policy might benefit your company, please contact Heather Wilkinson, Vice President, FINEX Cyber/E&O at 1 714 840 3454 or heather.wilkinson@willistowerswatson.com.

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New overtime regulations — the wait is over! Since July 2015, when the Department of Labor (DOL) issued proposed regulations under the Fair Labor Standards Act (FLSA) that significantly changed how to determine if an employee is eligible for overtime, employers have been anxiously awaiting the final rules. That wait is over! On May 18, 2016, the DOL issued the long-anticipated final regulations updating the overtime pay rules.

The final regulations are largely concerned with updating the salary thresholds needed to qualify as exempt employees, although certain other important changes are also included. The following is a list of some of the significant changes in the new rules:

�� The standard salary level for an employee to be exempt will be increased to $913 per week ($47,476 annually), which is at the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region (currently the South).

�� The total annual compensation requirement for purposes of a highly compensated employee (HCE) will be increased to $134,004 annually, which is the equivalent of the 90th percentile of full-time salaried workers nationally.

�� The annual salary requirements will be updated every three years.

�� Nondiscretionary bonuses, incentive pay and commissions can count toward up to 10% of the new minimum-salary threshold for non-HCE employees, provided they are paid at least quarterly.

�� Finally, the increased salary level and raise in the HCE total compensation thresholds for exempt status go into effect on December 1, 2016.

Although the DOL sought comments on the adequacy of the current “duties tests” during the proposal phase, the final regulations did not change any of the existing requirements. As a result, employers will continue to use the same duties test in determining whether or not an employee is entitled to overtime pay (however, fewer employees will be subject to this requirement as the salary test must be met first).

The DOL also provided a chart summarizing the major provisions under the current, proposed and final versions of these regulations, which is available at: https://www.dol.gov/WHD/overtime/final2016/faq.htm#8.

Implications for employers and options for responding to new salary/compensation levelsThese rules will have a major impact on most employers as they extend FLSA overtime protection to 4.2 million employees who weren’t previously covered (based on estimates from the DOL). Employers should begin considering which employees/jobs are affected and if changing the exemption classification and/or pay is the desired approach going forward. Furthermore, employers should analyze current pay vis-à-vis expected overtime under the new rules and be careful when crafting communications about any changes brought about because of this rule to various stakeholders.

NOTE: These changes are to federal law. Employers must be mindful of how these new rules interplay with any state wage and hour laws, especially those that have traditionally been stricter than the federal requirements with respect to overtime eligibility (such as those in CA, NY and PA, to name a few).

Additional details and analysis of the final rules will be distributed in the coming days. In the meantime, please refer to our previous communications regarding these changes on the Willis Towers Watson Wire, What Will the New Overtime Rules Mean for US Employers and Employers Be Prepared - Updates to the Overtime Exemptions Are Changing.

The Willis Towers Watson Human Capital Practice offers a variety of health care reform-related tools, publications and presentations. We invite you to click here to review the archive of available information.

We update our site as new developments occur and new guidance published, so please check back often.

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Is your company overlooking a majority of hail claims? Did you know that 40% of hail-related losses are never discovered by real estate owners and never reported to their insurance carriers? In a recent groundbreaking study, two well-respected Fortune 1000 real estate companies discovered that their managers only inspected 9-13% of their buildings impacted by hailstorms containing 2” or larger hail stones. That begs the question… Why?

The primary reason was that 65% of hail falls outside of the 8 a.m.-5 p.m. M-F work week — times when commercial buildings are often unoccupied and local managers and tenants are offsite or even sleeping. Even when hail falls during the day, the likelihood of a manager being onsite to witness the event is low because today most managers are responsible for multiple properties. And when hailstorms go unnoticed, no roof inspection is ordered and the damage goes undiscovered. This oversight leaves property owners eventually footing the bill to replace hail damaged roofs using their own capital dollars instead of insurance-claim proceeds. So what exactly can you do to prevent this from happening in your company? This is where Hail Alert Technologies™ comes in….

HailFlash™ is their revolutionary new automated hail monitoring and alerting service. It pinpoints exactly when and where hail falls throughout the entire U.S. Every time one of your properties is hit, a HailFlash report is immediately sent to your key personnel detailing the date of the hailstorm and the size of the largest hailstones that struck each of your properties.

This immediate HailFlash notice allows real estate owners to:

�� Immediately know every time hail hits any property

�� Quickly inspect roofs for hail damage while the signs are fresh and visible

�� Mitigate additional consequential damages through immediate response

�� Avoid costly and unnecessary business interruptions for tenants

�� Promptly file claims for every loss And most importantly

�� Preserve capital dollars

HailFlash is much more than a convenient service; it is powerful risk mitigation and cost savings tool for your company. For the majority of owners, the avoidance of just one overlooked loss pays for the monitoring and alerting service on their entire portfolio of buildings for 10-25 years.

Contact Hail Alert Technologies, LLC (www.HailAlerts.com) at +1 877 775 4245 or info@HailAlerts.com today to learn more about how HailFlash preserves your capital dollars. Make sure to mention that you are a Willis Towers Watson client, and you will receive a 20% discount on your first year monitoring fee.

About Willis Towers Watson

Willis Towers Watson (NASDAQ: WLTW ) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 39,000 employees in more than 120 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com.

Copyright © 2016 Willis Towers Watson. All rights reserved.WTW-NA-2016-15892

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Willis Towers Watson is an insurance consulting and brokerage firm. We are not attorneys and this publication is not to be considered legal advice. Please consult with your attorneys prior to incorporating any of our suggestions into an actual contract or agreement.

ContactsFor additional information on this issue’s topics, or any others for which our Real Estate & Hotel Practice might provide assistance, please visit our website at willistowerswatson.com.

Brian RuaneDirector, Real Estate Practice+1 212 915 7971brian.ruane@willistowerswatson.com

Steve SachsDirector, Real Estate Practice+1 410 584 8935steve.sachs@willistowerswatson.com