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The Actuary The magazine of the Institute & Faculty of Actuaries
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General insurance news round-up - July

Solvency II
Towards the end of June, the Council of the European Union suddenly proposed a one-year delay in the implementation of Solvency II, to 1 January 2014, after significant media speculation and adverse industry comment on the practicality of the originally planned date. This delay would require the legal framework to be in place by the end of March 2013, with existing capital and solvency requirements continuing until the end of 2013.

The situation remains uncertain pending a recommendation from the European parliament and probable negations between the council and the parliament. However, a few days later, Carlos Montalvo Rebuelta, executive director of the European Insurance and Occupational Pensions Authority (Eiopa), maintained that no delay would take place, although a one-year transition might be introduced, a suggestion that Eiopa had raised with the European parliament. During such a transition year, regulators would collect Solvency II data, but not automatically intervene if companies fail to meet the full Solvency II criteria, although action would be taken against a company having less than the minimum capital requirement.

At the beginning of July, Eiopa announced the results of the second European insurance stress tests carried out between March and May. The tests covered 221 insurers representing over 50% of the premium income by country, and overall about 60%. The exercise confirmed that the market covered by the test is robust, with only 10% of the insurers covered failing to meet the Solvency II minimum capital requirements even under the most adverse stress scenario. Overall, it was found that the adverse stress scenario reduced the solvency surplus by 35% compared with that before applying the stress scenario, and the inflation scenario reduced it by 14%. Eiopa disclosed that the main drivers of market risk are equity prices, interest rates and sovereign bonds and that the main insurance risks are claims inflation and natural disasters.

In early June, Matthew Elderfield, deputy governor of the Central Bank of Ireland, described Solvency II as the most pressing issue facing captive insurers at the present time. He called for proportionality and flexibility in the implementation of the new regime. In particular, he advocated a pragmatic approach to proportionality in relation to governance in Pillar two and in relation to disclosure and transparency in Pillar three. He suggested that captives could be allowed to limit disclosure of relevant data to the small number of market counterparties with which they transacted business.

Clem Booth, member of the Allianz management board, stated at a conference in mid-June that he feared that the introduction of Solvency II would impair the competitiveness of the European insurance industry relative to those in US and Asia. He described the new regime as onerous, both in time and effort in preparing for its introduction and in satisfying its requirements when it is up and running. Nevertheless he believed the European industry would rise to the challenge.

Lloyd's is to continue lobbying European regulators on the calibration of the Solvency II standard formula even though they propose to use an internal model for capital calculation purposes. This is to counter the risk that European regulators impose the standard formula on UK regulators - on the basis of the QIS5 calibration, this would impact on the Lloyd's market to the extent of a 150% increase in the capital against catastrophe risk. Lloyd's suggested that this higher reserve would only be justified on the basis that the 25 biggest losses in the last 10 years all occurred in a single year.

According to business and technology staffing firm Rethink Recruitment, actuaries working on Solvency II projects are being awarded contracts worth £1100 per day (equivalent to around £275,000 a year) as insurers rush to become compliant with the new rules. Candidates on contracts worth £900 per day are now receiving offers from rival firms of up to £1100 a day and many are also being offered bonuses of up to 25% just to stay in their current job for six months. Rethink said the shortage of qualified candidates has become so acute that insurers are increasingly sponsoring non-EU workers to fill roles.

Other regulatory and legal developments
Towards the end of June, some information was provided as to the way in which UK regulation would work under the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA) after the abolition of the Financial Services Authority at the end of 2012. Every UK insurer will have its own named supervisor at the PRA, who will be the primary point of contact. Lloyd's and its managing agents will have a dedicated supervisory team.

The supervisors stated their intention to intervene at an early stage when they perceive a company's financial position to be becoming precarious. Their assessment will commence with analysis of the company's business model especially in areas having a concentration of risk, and will include some forward-looking stress tests, where they would use their own judgement rather than taking the results on a pass or fail basis. They would consider input from third party professionals, such as auditors and actuaries. With regard to governance, the PRA will focus on the quality and competence of senior management.

At the end of May, Lloyd's temporarily withdrew its application for eligible admitted alien reinsurer status in Florida, the original application having been made in late March. The temporary withdrawal, whilst not fully explained, is said to be whilst Lloyd's completes its discussions with New York Insurance Department on its application for similar status in that state - the intention is to continue with its Florida application on completion of those with New York. Attainment of eligible admitted alien reinsurer status would reduce its collateral requirements from 100% to 20% of liabilities, and bring Lloyd's broadly into line with its US competitors.

Hector Sants, chief executive-designate of the PRA has announced that a memorandum of understanding will be published showing how the PRA and the FCA will work together in regulating the industry. He admitted that companies may feel overwhelmed by the number of regulatory changes, but urged them to keep concentrating on their important obligations to consumers and society at large. A few days later, it was disclosed that the government will impose a legal duty on the FCA to coordinate its activities with the PRA. In addition, the membership of the boards of the two bodies will include cross-membership, with the chief executive of each also sitting on the board of the other body, again supported by legislation.

A survey of consumers carried out by the Association of British Insurers (ABI) has indicated that the respondents do not envisage that there will be any benefit arising from the replacement of the FSA by two regulatory bodies - only 9% saw any benefit although a further 37% were unsure about the impact of the change. This supports the feeling in the industry as illustrated by comments from both the ABI and the International Underwriting Association.

The UK government has indicated its intention to amend UK law to clarify the position for insurers over the use of gender as a risk factor in light of the European ban, especially regarding the timing of the change. This will be done under schedule 3 of the Equality Act 2010. Mark Hoban, the government minister involved, claimed that the wording of the gender directive was inconsistent with the European Court of Justice ruling, and that the government would be seeking a change to the gender directive to rationalise the matter.

Deepwater Horizon
The report on an internal investigation by Transocean has blamed the Deepwater Horizon incident on a series of decisions in the two weeks prior to the event. They claim that the interrelated decisions on the design, construction and temporary abandonment of the well compromised its integrity and compounded the likelihood of its failure. The report suggests that these decisions were driven by BP's knowledge that the geological window for safe drilling was narrowing. Specifically, Transocean claimed that BP failed properly to assess, manage and communicate the risk to its contractors, and that the precipitating cause of the disaster was the failure of the down-hole cement to isolate the reservoir, which allowed hydrocarbons to enter the well-bore. The situation was exacerbated by the misinterpretation of the critical negative pressure test and the failure of the blow-out preventer.

Weatherford, the manufacturer of the float collar used on the Macondo oil-well, has agreed a US$75m final settlement with BP in respect of its liability for the disaster. In return, BP will indemnify Weatherford for any compensation claims arising from the incident. The settlement will be funded by the company's insurers.

Marine piracy
Several large ransoms have been paid recently for the release of vessels hijacked by Somali pirates. These include an amount rumoured to be US$12m for the release of Zirku, a 105,846 dwt United Arab Emirates crude oil tanker hijacked in March en route from Sudan to Singapore - this is believed to be the highest ransom paid to the Somali pirates.

In addition a ransom of US$4.5m was paid in May for the release of the general cargo vessel Sinar Kudus, hijacked on 16 March and another substantial ransom was paid for the release of Yuan Xiang, a 22,356 dwt Panamanian general cargo vessel which was hijacked towards the end of 2010. The European anti-piracy task force said that as at 9 June there were still 21 vessels with an estimated 464 crew on board held by the Somali pirates, and that three of them had been held for more than a year.

UK motor insurance
A study by Deloitte has estimated that UK motor insurance premiums increased by 10% from 2009 to 2010, but that this leaves the industry far from delivering an underwriting profit. In fact the industry average combined ratio in 2010 was 120%, even worse than the 119% experienced in 2009. This resulted in underwriting losses of over £2bn, partly due to reserve strengthening - this was the first reserve strengthening in the industry for nearly 20 years. A poll of market participants predicted an average expected improvement of 7% in 2011, but this was subject to significant spread between different respondents.

Referral fees in UK personal injury claims
French insurer Axa, which owns the Swiftcover brand, announced at the end of June that it will no longer accept referral fees in personal injury claims; it also called on the government to reform whiplash damages and the compensation culture. The company claimed to be taking the moral high ground because it wanted to be able to lobby the government on the escalating cost of whiplash claims. This is the first company to back publicly the Association of British Insurers' call (in March) for a widespread ban on such payments. Justice Minister Jonathan Djanogly also spoke out against Britain's compensation culture, saying it represented a very serious problem that would be addressed in the government's Legal Aid bill. However, he refused to use the legislation to ban referral fees.

Catastrophe bonds
Argo Group has unveiled its first catastrophe bond, a US$100m deal through Loma Reinsurance Capital, providing protection to the group against multiple occurrences of such perils as hurricanes, US and Japanese earthquakes and European windstorms. Coverage will be triggered by the second loss from covered perils.

Typhoon and hurricane predictions
In mid-June, the Guy Carpenter Asia-Pacific Climate Impact Centre predicted that there would be 31 cyclones in the North-West Pacific during the 2011, with China likely to be particularly hard hit with an estimated seven landfalls, and Japan and Korea also having above average frequency of landfalls with six. If this is borne out by the facts, it will be one of the worst years for some time, as only two of the previous 13 years have experienced above average activity in the region.

Large losses
Explosion and fire at oil sands processing facility, Alberta, Canada - 6 January.
This incident, which appeared relatively minor at the time, has been steadily increasing in its impact on insurers. The initial scenario was that four workers were injured in the incident at the plant owned by Canadian Natural Resources (CNR). However, the cost of repair and rebuild has been steadily increasing and by early June had reached US$450m.

In addition, the business interruption element of the insurance is triggered after 90 days of lost production and pays C$30 per lost barrel from that time. As a result it is now estimated that the overall loss will be between US$750m and US$1.2bn. CNR has a C$2bn umbrella insurance, which is placed in international markets, much of it believed to be in the London market.

Earthquake, Christchurch, New Zealand - 22 February.
By mid-June, the number of claims filed with the New Zealand Earthquake Commission had risen to nearly 160,000, which exceeds the number from the previous quake last September. Aftershocks continue to occur, including a severe (magnitude 6.0) one on 13 June - these are being treated as separate events.

Tohoku earthquake and tsunami, northern Japan - 11 March.
By mid-June, the Japanese non-life insurance industry had already paid out the equivalent of US$12.4bn on nearly 555,000 claims in relation to these events. Over 130,000 further claims remained to be settled and new claims are still being reported at the rate of around 20,000 a week.

The Japanese government has assessed the economic property loss from the events at US$210bn - this does not include the costs of disruption caused by the damage to the Fukushima nuclear power station. It is believed that the German market may experience claims under directors' and officers' liability policies triggered by the earthquake and tsunami on the basis that the interruption in supplies from the Japanese market had caused losses to the company in Germany, but the company should have had alternative sources of supplies identified for such a crisis.

Tornadoes in US - April.
The tornadoes during April are estimated to have resulted in insured losses of US$502.5m in Kansas alone, there having been 66,000 claims - this is the highest amount ever recorded in a single month in the state.

Wildfires, Arizona, US - from 8 May.
At least 4 major fires have ravaged the state over recent weeks, the largest being Wallow Fire which has burned over 538,000 acres on the New Mexico border during the period from 29 May until early July. 10,000 residents were evacuated from the area, and the number of fire-fighters involved in tackling the blaze reached 2,300 at one time. Several hundred buildings are understood to have been destroyed, but the impact has been mainly on the forests and bush. At least another 250,000 acres have been burnt by the other major fires over the last few weeks. Even by mid-June claims amounting to US$26.5m had been submitted.

Wildfires, Alberta, Canada-from mid-May.
These caused considerable destruction in the Slave Lake area, and caused temporary closure of various oil facilities in the area. Several of these are owned by Penn West Exploration, and are understood to be covered by business interruption insurance - an early estimate puts the likely loss to Penn West insurers in the C$60-70m range.

Volcanic eruption, Chile - 4 June onwards.
This involved the Cordon Caulle volcano and resulted in major clouds of volcanic ash, initially across South America, but subsequently spreading to other parts of the southern hemisphere. Considerable disruption occurred to air travel, but the costs involved are not known at this time.

Air crash, Petrozadovsk, Russia - 21 June.
This involved a RusAir Tupolev 134A which crashed in bad weather on approach to landing at the capital of Karelia republic at the end of a flight from Moscow, killing 44 of the 52 people on board, the others being seriously injured. It is understood that the aircraft is insured in international markets, much of it in London, although no loss estimates are to hand.