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

Solvency II
Towards the end of August, Insurance Day published a special report on reactions to the equivalence consultation carried out by the European Insurance and Occupational Pensions Authority (Eiopa). This indicated that Bermuda, Japan and Switzerland were well advanced in their preparations for the introduction of Solvency II, although there remained uncertainties with regard to the regulation of captives. Also, Eiopa had indicated the need for improved disclosure and internal audit procedures in Japan and Switzerland. One of the major concerns is the lack of depth of actuarial expertise in the Bermudian supervisory system, given the highly concentrated reinsurance community. It is understood that the Bermudian regulator, the Bermuda Monetary Authority is attempting to recruit more actuaries, although the situation has been alleviated by the recruitment from Deloitte in London of David Theaker as Chief Actuary. Meanwhile in the US, there are continuing signs of reluctance to accept some of the Solvency II concepts, especially the fact that Solvency II is designed to provide protection to many stakeholders, and not just policyholders.

Inky Stephens, senior vice-president for claims at Ruxley Ventures Ltd, has suggested that insurers with asbestos, pollution and health hazard (APH) claims will need to review their data systems in light of the more stringent requirements of Solvency II. Although the details have not yet been disclosed, it is expected that there will be a requirement for more detailed data than previously. Stephens expressed concern that significant items of historic claims data are lost as systems are updated, and that this could adversely impact on the ability of insurers to meet the requirements of the new regime.

Greek debt crisis
One of the recent consequences of the Greek sovereign debt crisis is the acquisition of Eurobank by Alpha Bank SA, which is valued by Bloomberg at around €750m. Eurobank holds more than €8bn of Greek bonds and failed the European stress test last month. Alpha Bank, which is among the largest Greek lenders, wants to increase capital to strengthen the private sector economy, and is supported by the three core shareholders among which are a Qatari family.

The latest developments in the insurance sector arising from the Greek debt crisis are the write downs in investment portfolios to market value in the second quarter closing. In particular, Munich Re and Royal Bank of Scotland wrote Greek sovereign debt down to 55% of nominal value. In contrast, other companies such as BNP Paribas reduced their nominal value by 21%. The International Accounting Standards Bureau criticised this inconsistency of treatment applied by the banks and insurance companies.

The write down affected Munich Re’s entire Greek sovereign debt portfolio, resulting in a market value of €800m compared with €1.1bn at the end of March. Moreover, Fitch judges the Munich Re’s exposure to Greece, Italy, Portugal and Spain, which corresponds to 14% of its total government bond portfolio, relatively high but manageable.

Downgrading of US debt
For the first time in the history of ratings, the United States’ credit rating has been downgraded by Standard& Poor (S&P) from AAA to AA+. Currently, none of the other rating agencies have followed S&P. Downgrading the credit rating typically results in an increase of the interest rates on (e.g.) newly issued U.S. government bonds. The economy would be highly impacted by such a development as the market value of existing U.S. government bonds would drop. The impact on property and casualty business should be manageable according to various analysts. Guy Carpenter estimates through an S&P European model, that if a rating falls to AA-, the capital charge moves up by about 0.3 points.

Payment protection insurance (PPI)
At the end of July, Santander UK became the latest bank to establish a fund to cover its exposure to the PPI mis-selling saga, with a provision of €620m. Santander did not participate in the failed British Bankers’ Association judicial review of the Financial Services Authority rules, which resulted in the surge of claims provisions by the banks – Santander claims to have “consistently settled claims over the last two years as they have arisen”. Nevertheless the bank acknowledged a recent surge in the volume of claims received after the result of the judicial review was published. Meanwhile, Northern Rock Asset Management has commenced a programme of inviting customers who believe they may have been mis-sold PPI to ask for a review of their cases with a view to obtaining reimbursement – they expect this to take several months.

The Financial Ombudsman Service (FOS) has disclosed that 69% of the 81,000 complaints it received in the first quarter of 2011 related to PPI mis-selling – the overall number was more than double that in the previous quarter as a result of the surge in PPI claims. However, this surge slowed down somewhat following the result of the judicial review, which forced banks to contact customers with a view to compensating those who had been mis-sold PPI. Nevertheless, the FOS expects a high level of PPI complaints for the foreseeable future as some customers will undoubtedly be dissatisfied with the response from the banks.

Ireland’s central bank has launched a probe into the mis-selling of PPI, on fears that thousands of Irish bank customers have been mis-sold PPI on loans, and have been unable to make claims despite losing their jobs.

Deepwater Horizon
In mid-August, in a report commissioned by the Marshall Islands (the Deepwater Horizon was registered under a Marshall Islands flag) the disaster was blamed on lack of adherence to standard well-control engineering and failure to react correctly to signs of problems. The report also placed some blame on the failure to follow the approved well-abandonment plans. However, the report does not name any of the companies involved in the incident as primarily responsible for it – it therefore makes little contribution to finalising the ultimate insurance exposure.

Marine and energy developments
Protection & Indemnity (P&I) clubs are apparently suffering an increase in the cost of pollution claims over the last couple of years, with the number involving a cost of over US$1m being subject to a particularly strong upward trend. Some of this increase is being put down to over-enthusiastic deployment of clean-up vessels on a precautionary basis when they are not actually required. Such deployment, which is increasingly possible as more coastal nations have the equipment available, immediately involves costs which are generally recovered from the P&I club involved.

Energy reinsurers are reacting to a spate of losses hitting the primary markets for both onshore and offshore risks by proposing increases of around 15% in reinsurance premium rates. In addition to the Deepwater Horizon incident, there have been a number of other major losses, such as Gryphon Alpha, Aban Pearl and the Canadian Natural Resources Horizon facility, as well as numerous smaller losses arising from accidents and natural catastrophes.

Space insurance
It is understood that Roscosmos, the Russian federal space agency, is investigating the purchase of insurance for some of its future launches, following the loss of 3 uninsured satellites last December and is currently identifying insurers which it considers appropriate for this purpose. The satellites, which were intended to form the final element of Russia’s navigation system, were lost when the Proton rocket carrying them crashed into the Pacific Ocean – the incident is believed to have cost around US$85.5m. It is relatively unusual for major countries to purchase such insurance as most consider that insurers will require a profit margin making it more cost-effective for the government to bear its own risks.

UK Insurance Fraud Register (IFR)
In July, the Association of British Insurers announced the formation of the IFR, noting that insurance fraud costs an estimated £2bn annually, with over half of it being in relation to motor insurance. However, some experts believe that more sophisticated methods are needed to tackle the problem. In particular, Larry Jacobson, an insurance consulting engineer with FICO, points to the benefits obtained by such methods in reducing credit card fraud in the US, where analytics-based fraud detection have reduced the level of fraud losses by two-thirds in 10 years. Jacobson advocates the use of such techniques, which are often based on neural networks, before a claim is paid. It is understood that Admiral is one of the first UK insurers to adopt this approach.

Clapham JunctionRiots in English cities
Damage caused by the riots in various English cities in early August are likely to be paid by most standard property insurance policies, although there is greater doubt whether these will cover business interruption claims, especially any resulting from denial of access to the property. However there are also expected to be claims under the Riot (Damages) Act 1886 (RDA) – this legislation imposes strict liability on police authorities for riot damage in their area, although it specifically excludes the costs involved.

Claims under RDA can be made by those suffering from riot damage or their insurers, but there is normally a 14-day time limit, although this was extended up to 42 days by the Prime Minister on 11 August (as permitted by the legislation). However, the legal issues involved in successfully pursuing an RDA claim (in particular the proof that the loss was caused by a “riot”) may severely limit the numbers. For instance, the Public Order Act 1986 implies that a riot involves “12 or more persons together, using or threatening violence for a common purpose”. There is also doubt as to whether RDA losses can include business interruption claims as this is not specifically mentioned in the legislation although it does refer to “any person who has sustained loss”.

It is believed that some police authorities have no insurance for any RDA losses for which they may be found liable and these would then effectively be met by taxpayers. The Metropolitan Police, whilst not acknowledging that there had been a riot in the legal sense, is understood to have no relevant insurance coverage, but confirmed that it had a reserve of over £70m to provide cover for any RDA claims successfully brought against it in London. In his House of Commons speech on 11 August, the Prime Minister stated that the government would make funds available for police to meet any legitimate RDA claims as necessary.

Estimates of the insured cost of the riots have been put at up to £750m, (although the estimate by the Association of British Insurers is “more than £200m”) but with significant uncertainty especially with regard to the amount for business interruption. The vast majority of the cost will be in relation to commercial risks, much of it for small businesses, especially outside London – these insureds tend not to buy business interruption cover. Even those small and medium-sized with adequate insurance coverage may suffer severely from the impact of the riot damage and business interruption on their cash-flow.

In the days and weeks following the incidents, there were growing calls for a review or repeal of the RDA, to reduce the uncertainty surrounding the applicability of the legislation to particular events. These calls came from both insurance industry representatives and the Association of Police Authorities. Insurers point out that many insurance products have been introduced in the 125 years since the legislation was enacted, so that their treatment is necessarily unclear.

Catastrophe bonds
At the beginning of August, Standard & Poor downgraded five more natural catastrophe cat bonds in reaction to the release of version 11 of Risk Management Solutions’ US hurricane model. The affected bonds attach to three special purpose vehicles (SPVs), Foundation Re III, Lodestone Re and Calabash Re III issued for Hartford Financial, Chartis and Swiss Re respectively. These downgrades follow six announced in the previous month.

Take-over battle for Transatlantic Re
In mid-August, Berkshire Hathaway entered the battle with a US$52 a share cash offer for Transatlantic and this was met with a request for discussions. A few days later, Validus sued Transatlantic and offered to open its books to Transatlantic, without requiring Transatlantic to reciprocate. This is understood to have the aim of delaying any further progress in the deal between Transatlantic and Allied World. The law suit seeks to obtain a legal declaration that Validus does not need to sign a two-year standstill agreement on share purchase as a pre-condition of talks with Transatlantic – it also alleges that the agreement presented to Validus for signature shows there is no commonality of interest between the Transatlantic board and its shareholders.

Munich Re fraud allegation
At the end of July, Munich Re announced that it had filed criminal charges against an unnamed Greek loss adjuster and a former employee after an internal probe discovered evidence of fraud. The problem came to light during a review of service provider fees, and the company had incurred a loss in excess of €10 million. The adjuster was said to have received unjustifiable amounts of money by making false declarations and manipulating accounts. A substantial bribe was said to have been paid to the employee in Munich to ensure that the fraud was not detected by Head Office management.

Large losses
Michael Jackson tour cancellation, UK – 2009. A US$17.5m contingency policy was taken out on behalf of the singer in April 2009 in respect of his This is it concerts in London providing cover against non-appearance and cancellation, including cover for accidental death. This was written by Cathedral and Talbot syndicates at Lloyd’s. The insurers have refused to pay out on the policy on the grounds that Jackson lied about his medical history and alleged drug addiction, and that he did not have a medical examination as required under the policy conditions.

There is also a question as to why his death certificate refers to the cause of death as homicide when the claim is on the grounds of the death being due to an accident. In June 2011, the insurers filed papers at the Los Angeles Superior Court to nullify the policy on these grounds. Michael Jackson’s estate has now filed a counter-claim seeking the full US$17.5m sum insured plus punitive damages. With regard to the cause of death issue, the estate argues that the singer did not plan to die, so his death was an accident.

Air crash, Democratic Republic of Congo – 8 July.
This involved a Hewa Bora Airways Boeing 727 attempting to land at Kisangani airport in bad weather, following its internal flight from Kinshasa. Considerable doubt surrounds the numbers of passengers and crew, but it is believed that around 74 died and about 50 survived the immediate crash although many of these were critically injured. Insurance arrangements for the airline, which is on a European Union blacklist, are not known.

Explosion, southern Cyprus – 11 July.
This occurred at Evangelos Florakis naval base when 98 barrels containing confiscated Iranian explosives and ammunition caught fire at the base, adjacent to Vassiliko power station, which produces over half the electricity supply for Cyprus. The barrels had apparently been stored in the open in full sunlight for over two years since they were seized from a ferry. 13 people died including two senior naval commanders, and another 62 were injured. Extensive damage was caused to nearby buildings including the power station, which was closed temporarily, leaving much of Cyprus without power - rolling blackouts were initiated in order to conserve supplies. The cost of reinstating the power station was put at around €650m, and the overall cost of the incident to the island could be as much as €2bn, over 10% of its gross domestic product. It is not known how much of this is insured.

Oil leaks in North Sea off Scottish coast – 10 August.
These took place at Shell’s Gannet Alpha platform, 112 miles east of Aberdeen, where an undersea pipeline developed a leak. In tracing and repairing this, a second leak was discovered, and the oil spillage, which was stopped after approximately one week from its discovery, is estimated to involve an overall 1500 barrels, making it the largest in the North Sea for over 10 years. Shell operates the platform, but has only a 50% ownership, the remainder being held by Esso, which is mainly insured in Bermuda as part of the ExxonMobil insurances. Shell has a captive insurer, and the commercial market does not expect to be involved in paying its claims from the incident.

Hurricane Irene, Caribbean and eastern states of US – 21-29 August.
This principally affected Puerto Rico and Hispaniola in the Caribbean and then the states from South Carolina northwards. In Puerto Rico heavy rainfall (up to 22 inches in places) caused serious damage to roads, and hurricane-force winds caused power cuts to over a million homes. Serious flooding affected agricultural areas with particular damage to the banana crop, and the overall economic loss has been estimated at “up to US$500m”, although it is not known how much of this is insured.

In Hispaniola, Irene had some impact on both the Dominican Republic and Haiti, mainly in the forms of heavy precipitation and flooding. At least five deaths resulted, but little is known about the cost of damage, either economic or insured. Due to the size of the storm, although it did not make landfall in either of these states, both Florida and South Carolina suffered a degree of impact from heavy rainfall, high winds and storm surge, although the financial impact was relatively minor. Landfall occurred as a category 1 hurricane in the Outer Banks area of North Carolina and this state suffered at least six fatalities and extensive damage from flooding following up to 14 inches of rain and waves up to nine feet high.

In addition, the storm gave rise to a small but powerful tornado in Columbia. At least a further 12 fatalities and severe damage occurred in Virginia, Maryland, Delaware and Pennsylvania, with many power cuts as well as damage to homes and vehicles from the high winds, rainfall, flooding and more tornadoes. The storm then alternated between land and sea making at least a further two landfalls in New Jersey and the Coney Island area of New York City, although by the last of these it had moderated to a tropical storm.

As a result of the reduced wind-speed, the major problem in these more northern states was flooding, and a major programme of evacuation was carried out in advance in the more flood-prone areas of the metropolis to limit the impact. Nevertheless, major flooding problems did arise in these states and in New England as several rivers burst their banks after up to 11 inches of rain. The storm then petered out as it made its way into Canada. The overall fatalities in US have been put at 45 by the time of writing (making over 50 including those in the Caribbean), and early estimates of the cost of damage are in the range US$10-40bn, although it is not known how much of this is insured.