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The Actuary The magazine of the Institute & Faculty of Actuaries
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From the world of general insurance

US sub-prime mortgage crisis
Analysts at Advisen predicted in mid- November that the aggregate losses arising from the credit crisis in respect of the directors’ and officers’ liability (D&O) and errors and omissions liability (E&O) would amount to $9.6bn. They predicted that this would lead to substantial premium rating increases in these classes by the end of 2009, while E&O losses could be expected to impact mainly on mortgage brokers and mortgage lenders. The D&O losses, which could constitute more than 60% of the total, include claims in relation to securities class action suits, securities fraud suits arising from regulators and losses from bankruptcies.

AIG retains clients
American International Group (AIG) claims to have retained most of its clients at renewals since the company was bailed out by the US government. This was disclosed when they announced third quarter losses of $24.5bn. They further announced that they had negotiated an increase in the available aid package to $150bn, from the original $85bn loan. The loan had been reduced to $60bn, which AIG intends to repay in 2009, but other forms of aid, such as the establishment of a new entity to relieve AIG of up to $70bn of ‘toxic’ mortgage assets, had been negotiated with the US Treasury. The new entity is understood to have taken over $53.4bn of such assets by early December. AIG has also sold some fairly significant assets, with AIG Private Banking going to Aaber Investments in Abu Dhabi for around $250m and HSB Group (including Hartford Steam Boiler Insurance) going to Munich Re for $742m.

Hiscox accuses banks
Robert Hiscox, chairman of the Hiscox Insurance group, has accused the banking industry of doing unparalleled harm to the world economy. His company had identified various opportunities arising from the problems and the consequent premium rating increases. As a result, Hiscox had decided to increase the capacity on their Lloyd’s syndicate 33 to £750m in 2009 — they had previously intended to reduce capacity to something like £550m.

Rating agencies credibility challenge
Ludger Arnoldussen, a member of the board at Munich Re, has challenged the credibility of the rating agencies, suggesting that they should incorporate other information, such as the credit default swap spread and the quality of management into their measure of security of insurers. His comments were made at the East Asian Insurance Congress, in light of the financial crisis.

Credit guarantee
Following a widespread withdrawal of private sector credit insurance, the UK government put forward a proposal in the pre-budget statement to fill the vacuum for small to medium-sized enterprises, using the Export Credit Guarantee Department. This move reflects a statement by the Organisation for Economic Co-operation and Development that credit guarantors play a central role in reinforcing economic stability.

Terrorism
The terrorist attacks in Mumbai at the end of November are likely to cost property insurers between $300m and $600m, and are also likely to lead to strengthening of premium rates for terrorism risks in India. The claims should include a total loss for the Taj Mahal Hotel, and are shared amongst a relatively small number of insurers. Event cancellation losses, including those arising from the abandonment of the English cricket team’s one-day international series, are also likely to arise.

Asbestos and pollution development
The High Court in London has announced its decision in relation to the test cases to remove confusion on the trigger date for mesothelioma claims under employers’ liability policies. In effect, this decision has upheld the status quo and undermined the attempt by a small group of run-off insurers to avoid liabilities. The decision was based on the theory that it was assumed that injury takes place five years before it is possible to diagnose mesothelioma, based on recent medical evidence. The judge gave leave to appeal, and this is likely to be taken up to the House of Lords. Meanwhile mesothelioma claims are likely to be further delayed while the legal wrangling continues.

Another High Court decision, in mid- November, related to the Downs v Defra case, in which the plaintiff produced evidence that people exposed to crop-spraying chemicals suffered harm to their health. The Court found in favour of the plaintiff, potentially opening the possibility of a flood of pesticide liability claims against the government (for its failure to protect people in the countryside), farmers and others involved in the spraying process. It is believed that insurers will aim to obtain a decision on whether the spraying process is categorised as pollution, in order to ascertain whether they have protection from pollution exclusions under general liability policies.

Solvency II
In early November, the Committée Européene des Assurances (CEA), the CFO Forum, the CRO Forum, and the Pan-European Insurance Forum addressed a joint letter to the French Presidency of the European Union, the European Parliament and the European Commission, calling for the Solvency II Directive to be implemented without delay. This was in reaction to the perception that some parts of the industry were not showing appropriate urgency in the matter, especially in relation to group supervision, on which increased focus has been placed as a result of the sub-prime mortgage crisis. The CEA also sent a similar letter to leaders attending the G20 summit in Washington in mid-November, stressing the benefits expected from the introduction of the Solvency II regime, and the fact that these benefits may be even greater in the current economic environment.

Nevertheless, before the end of the month, European Union national representatives voted to change the treatment of groups, threatening to delay the whole process –this decision was opposed by a number of influential bodies, including the European Commission, the European parliament, the CEA and the Association of British Insurers. Several voices expressed disappointment at the decision, especially in light of the fact that the credit crisis was triggered by the collapse of high-profile multinational financial institutions with inadequate regulation at group level.

Similar concerns about the effects of potential delays have been expressed by Charl Cronje, a partner at Lane Clark & Peacock – he also stated that there was some risk that the impact on smaller companies such as captives may not be in keeping with the proportionality principle which was supposed to be one of the foundations of the proposed framework.

However, at the end of November, Jean Azéma, chief executive of Groupama, called for the framework not to be adopted as it stood, on the basis that the calculation methods were inappropriate and unduly penalised long-tail business and insurers with significant equity investments.

Other regulatory developments
The Bermuda Monetary Authority put forward amended insurance company regulation in November. The main changes involve the introduction of authority to incorporate an insurance company before it has been approved for licensing and a more sophisticated classification of insurers. The former is designed to remove administrative barriers to the rapid establishment of a new company, whilst the latter builds on an already complex structure. In particular, it analyses Class 3 insurers (those which are neither captives nor large commercial insurers) into four sub-categories. These are:

>> Captives writing unrelated business
>> Small commercial insurers
>> Larger commercial insurers
>> Special purpose insurers

These sub-categories will be subject to different reporting requirements from 31 December 2008.

Prompt and proper notification of claims
Two legal decisions in UK during November related to this matter. In the former, the Court of Appeal dismissed an appeal by the chartered accountants Kidsons against the decision of the lower court in the case HLB Kidsons v Lloyd’s Underwriters. The case related to a potential professional indemnity claim against the accountants in relation to tax schemes sold by them, but subsequently ruled inadmissible by the Inland Revenue. The professional indemnity insurance policy required the insured to give notice “as soon as practicable” of any circumstance of which it became aware which might give rise to a claim. Whilst the Appeal Court judge found this unambiguous, he did reject the lower court view that it was necessary for the notification to be “sufficiently clear and unambiguous as to leave the recipient in no doubt that a circumstance was being advised”, as this could result in the insured having to make investigations of the matter before they could notify it, thereby delaying the notification.

In the other case, Aspen v Pectel, the contractors Pectel did not notify its insurers of a claim arising from a major 2004 fire in a BT-owned communications tunnel in Manchester until 2007. This was on the grounds that Pectel say they did not know a claim would be made against them. The court found that this failure to notify promptly was contrary to a general clause in the terms and conditions of the policy and therefore found in favour of the insurers.

Piracy problems
A good deal of activity has been taking place recently in the marine insurance market in response to the continuing spate of incidents of marine piracy, particularly in the Gulf of Aden and other waters in the area around Somalia. Over 50 such incidents were reported in the Gulf of Aden during September and October. Much greater publicity was attracted to the problem by the hijacking of the Sirius Star, a giant oil tanker with a cargo of approximately US$100m worth of crude oil, on 15 November – this was the largest vessel affected to date. The total ransom payments following vessel hijacks in this area are expected to exceed US$25m by the end of the year. In addition, Munich Re have expressed concern about the possibility of a major oil spill leading to an environmental disaster from either bombs detonated by pirates, or a grounding or collision whilst a hijacked tanker is under the control of pirates unfamiliar with such large vessels.

Six or seven warships have been deployed in the Gulf of Aden area to protect shipping, particularly food convoys, but the size of the area means that this number is of relatively limited significance. Nevertheless, in mid-December, a task-force including one warship and a number of helicopters was able to rescue a Chinese ship from pirates.

The Standard Protection & Indemnity Club published a set of leaflet of special guidelines to assist ship-owners in minimising the risks involved. The leaflet contains advice on keeping at least 300 miles from the coast of Somalia, on how to make their vessels appear less attractive as piracy targets, on ways of out-manoeuvring the pirates and gives guidance on insurance and legal issues relating to the problem.

Asset Protection Jersey has developed a new Kidnap & Ransom (K&R) policy wording specifically aimed at providing protection to ship-owners faced with piracy risks. The policy which covers kidnap, extortion and hijack risks with a US$3m policy limit would effectively be a primary layer of insurance before the more traditional marine policies would be impacted. A 24-hour emergency telephone back-up is included within the policy terms. In addition, other brokers have amended their existing K&R wordings; for example, Benfield have produced a specific marine ransom and extortion policy.

Miller Insurance Services Ltd and other firms of brokers warned ship-owners in mid-November that ransom payments constitute only about 25% of the total cost involved in recovering a hijacked vessel, and that their hull and war insurances may therefore prove inadequate. Additional costs which can be involved include the hire of a vessel and crew (including a security team) to deliver the ransom, medical staff to look after the crew of the hijacked vessel after the end of the episode and the cost of transferring the ransom monies from a bank, plus cash in transit cover for these monies.

There is some speculation that the British government may introduce new legislation to give the Royal Navy additional powers to deal with hijackers.

Marine and aviation premium rates
Steamship Mutual, the protection and indemnity (P&I) club, has announced a 17.5% increase in its P&I premiums, together with increased deductibles, for the 2009-10 policy year which commences in February. This reflects the current poor economic conditions and the slowdown in shipping activity, which makes prediction of future claims very uncertain.

Energy insurance rates are also increasing following this year’s hurricane activity in the Gulf of Mexico and the problems in the capital markets, which make recapitalisation after losses very difficult.

Marine hull premiums are being renegotiated in many cases, following the collapse of ship values (by as much as 40% in some cases) consequent upon the capital market crisis. This reflects a concern by underwriters and brokers that many vessels are over-insured given the lower values now prevailing, with a resulting increase in the risk of moral hazard. This situation arises because the wording of marine hull policies bases the claim size on the sum insured rather than the market value of the vessel at the time of loss.

As the airline insurance renewals season got under way in November, there were clear signs of hardening in premium rates, with Aon reporting an average increase of 12% and Willis an average increase of 16% in hull and liability premiums. However, Aon’s figure included one contract with a 60% rise due to poor claims experience – excluding this, their average increase would be only 7%.

Motor insurance
A report published by www.NoClaimsDiscount.co.uk (NCD) suggests that up to two-thirds of drivers in Bradford, West Yorkshire are uninsured, and that overall around 20% of uninsured drivers are under the age of 20. NCD speculates that the high cost of the premiums and the relatively low fines handed down for driving without insurance are major contributory factors to the high level of uninsured driving.

The French National Bar Council (CNB) have rejected proposals put forward some months ago by insurers for the setting of an official calculation method for motor injury compensation claims, intended to make the costs more transparent and predictable. The CNB said that compensation should be tailored to each case and that only a judge could guarantee appropriate amounts for each situation. Insurers maintain that, under the current system, there are major discrepancies between the amounts awarded by judges in different cases, and the total costs have increased by 70% in the last 7 years.

Ronald Fergsuon court case
In relation to the case of the five General Re and AIG executives found guilty of conspiring to arrange a scheme to manipulate the accounts of AIG (see these columns in November), the actuary Ronald Ferguson, of Bornhuetter-Ferguson fame, has been sentenced to a fine of US$200,000 and two years in prison, followed by a further two years of supervised release.

Job cuts at AON
AON Corporation has announced that they intend to reduce their workforce by 700 following the acquisition of Benfield, a deal which was finalised at the end of November for an estimated US$1.43bn. The cuts, which are mainly in back-room service areas, are expected to save US$185m over a 3-year period.

Climate change
In a lecture to the Insurance Institute of London, Dr Jeff Fox, professor of geology and geophysics at Texas A&M University, has expressed concern that scientists do not really understand the details of how changes in the climate are affected by the various triggers which are believed to affect the process. For example, whilst there was a belief that major changes would result from increases in the concentration of carbon dioxide in the atmosphere, there was no certainty as to what the level had to be to effect that change. What is certain, based on deposits retrieved from deep-sea drilling, is that the concentration of carbon dioxide has increased rapidly since the beginning of the industrial revolution.

Also, Greenland’s ice-sheets are disappearing at an increasing rate, with twice as much ice melting in 2006 as in 2005. Dr Fox also stated that, if we immediately stopped releasing carbon dioxide into the atmosphere, the concentration would continue to increase for about a hundred years. Such factors make the projection of premiums for weather-related insurances extremely problematical.

The result of the presidential election in USA is likely to produce an administration which is considerably more proactive in its policies on climate change, President-elect Obama seeing it as a much higher priority issue than President Bush.

The Tropical Storm Risk forecasting unit has predicted another active season of Atlantic storms in 2009, with the frequency of hurricanes projected to be about 35% above average.

The World Meteorological Organisation has indicated that 2008 is likely to prove the tenth warmest year on record, based on the global mean temperature – apparently all the ten warmest years on record have occurred since the middle of the 1990’s.

Large losses
Hurricane Ike, Turks and Caicos Islands, Haiti, Cuba, Texas and Louisiana – September 6 - 13.
It is now understood that part of the discrepancy reported last month between early estimates and the likely final outcome resulted from the unusually severe inland impact in Ohio, where over US$1bn of insured losses arose after the remnants of Hurricane Ike merged with a cold front, the high winds from which caused very significant personal lines losses.

Hurricane Paloma, Cayman Islands, Jamaica and Cuba – 7/8 November.
This hurricane, which peaked at Category 4 with winds of 145mph, was the second most powerful on record in the Atlantic basin. It had minimal impact on Grand Cayman, but a direct hit on Cayman Brac caused severe damage to an estimated 90% of the buildings. Some flooding and one fatality were reported in Jamaica, which caught the edge of the storm, before it passed on to Cuba where the major problems were caused by a 14 foot storm surge which moved the coastline inland by almost a mile. Insured losses in Cayman are expected to be of the order of US$25m, which is insufficient to trigger recoveries from the Caribbean Catastrophe Risk Insurance Facility. Economic losses in Cuba have been reported to be around US$1.4bn, but little of this is likely to be insured.

Fire at Engen oil refinery in Durban, South Africa – 13 November.
This resulted in significant damage, and may cause the refinery (the largest in South Africa, 135,000 barrels per day) to be closed for three or four months at a cost estimated to be US$600,000 per day. The fire started only two weeks after the plant had been closed for maintenance.

Wildfires in Santa Barbara, Riverside and Orange counties California – 13-22 November.
This outbreak consisted of three separate fires burning a total area of 42,000 acres in the same region. They caused the destruction of over 1000 homes and damage to many others. The properties concerned are among the most expensive residential homes in the country. An early estimate of the total insured cost was in the region US$600-800m.

Storms and hail in Queensland, Australia – 18 November.
These events affected the Brisbane area, with winds up to 80mph and flash flooding due to rainfall of up to 107mm in 24 hours. The city was declared a national disaster area, and the impact is said to be the worst for more than 20 years. Agriculture was also hard hit, with local banana and sugar cane plantations severely damaged. Nearly quarter of a million homes were left without power supplies. Early insured loss estimates suggest a total figure running into hundreds of millions of Australian dollars. The position was worsened by further severe thunderstorms four days later.

Crash of XL Airways Airbus 320 off south coast of France – 27 November.
This occurred during a testing flight from Perpignan following maintenance and painting in preparation for its return from XL, who had been leasing it, to New Zealand Airways, the owners. The entire crew of 7 were lost in the crash. The hull was valued at US$43m and was insured by Global Aerospace Underwriting Managers.

Floods in Venice – early December.
This was caused by a combination of high southerly winds, heavy rain and snowfall in northern Italy which resulted in 2.6 feet of water in St Mark’s Square. It was believed to be the most severe flooding in the city for 20 years, but no insured loss estimates are yet to hand.

Ice storms in New York and New England, mid-December.
This resulted in power cuts to 1.4 million people, mainly caused by trees falling across power lines, and general property damage from ice and high winds. No insured loss estimates are yet to hand.