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The Actuary The magazine of the Institute & Faculty of Actuaries

General insurance news round-up

Asbestos and pollution developments
In mid-April, the Scottish Inner Court of Session rejected the appeal by a group of insurers (Axa, Aviva, RSA and Zurich) against Scottish legislation allowing claims to be brought for asbestos-related conditions, such as pleural plaques. The decision means those who were exposed to asbestos in Scotland, regardless of whether it was by a Scottish or English employer, may still have a case for compensation. Nick Starling, the ABI’s Director of General Insurance and Health claimed that there are fundamental legal principles at stake in the Damages (Asbestos-related Conditions) (Scotland) Act, and the insurers remain confident that there is significant substance in their grounds for challenging it. As a consequence, the insurers are preparing to appeal the decision to the Supreme Court on the grounds that pleural plaques are symptomless, and the well-established principle of negligence is that compensation is payable only when there is physical harm.

Chartis, the rebrand of AIG, has agreed a US$1.7bn reinsurance deal to transfer the majority of its legacy asbestos liabilities to the Berkshire Hathaway subsidiary National Indemnity Company. This follows substantial reserve strengthening in relation to this business in the second half of 2010. The deal, when finalised, will be backdated to 1 January 2011, and will provide the cedant with an aggregate limit of US$3.5bn, including any failure to recover reinsurance recoveries. It is understood that this retroactive reinsurance will lead to a profit of around US$200m in the second quarter Chartis results.

Solvency II
In research conducted by the Economist Intelligence Unit on behalf of Deloitte, it was found that confidence that the insurance industry will achieve Solvency II compliance by 1 January 2013 has dropped significantly. Only 46% of respondents were confident or very confident about the prospects for industry compliance, compared with 63% in 2010. However, insurers were more optimistic about their own chance of achieving compliance than for the industry as a whole. In relation to non-life insurers, 36% said they may need to reorganise or restructure for the new regime, also an increase from last year.

The Association of British Insurers (ABI) has stated that it was in the interests of the UK insurance industry for Solvency II to be implemented on time but that, in order for this to happen, the main outstanding issues need to be resolved this summer. A spokesman for the ABI added that the UK had committed more resources to the new regime than any other country in the European Union, and that the UK industry enjoyed a strong dialogue with the Financial Services Authority (FSA). He called for ’effective and fair’ requirements to be agreed as soon as possible. However, other industry leaders questioned whether the FSA had enough resources to address all the outstanding matters, particularly the approval of insurers’ internal models.

On 18 April, at its conference on Solvency II, the FSA announced its timeline for implementation of the new regime. This includes the distribution of a work-plan to companies seeking approval of an internal model which would outline the level of interaction that such companies could expect to receive from the FSA – this would be sent out in the next few weeks. In addition, in July they would provide details of new tools and techniques they would be using, and there would be a further consultation in December 2011, and possibly more during 2012.

In order to deal with the expected volume of internal model applications, the regulator would concentrate its resources on the firms representing the biggest challenge in the internal model approval process, including major companies, Lloyd’s underwriters and subsidiaries of major European groups. However, they admitted that they could not guarantee to make a decision on every application in time for implementation by 1 January 2013. Internal model applications could be submitted from 30 March 2012, a 5-month slippage on the date originally announced.

Regulatory and legal developments
HM Treasury’s consultation paper on building a stronger regulation system has closed. The British Insurance Brokers Association (BIBA) has submitted its response reiterating its support for a single regulatory body for the insurance intermediary sector. Whilst supporting the principle of proportionate, appropriate and cost-effective regulation, BIBA have some serious concerns regarding the proposed supervisory approach, which looks very similar to the current regime. They are certain that insurance brokers pose very limited risks, and called on the Government and regulator to ensure that the approach being developed for insurance brokers is more appropriate than it has been in the recent past, and more in line with the rest of Europe.

The Lloyd’s Market Association (LMA) has called on the UK government to explain a discrepancy of up to £190m (from £50m to £140-40m) in the cost of replacing the Financial Services Authority with two new regulators. In addition, the LMA described the plans as ’over-engineered’ and ’bankcentric’, and expressed concern that the timing of the changes clashed with preparations for the new Solvency II regime. They also pointed out that the changes would be diametrically opposite to those being adopted in the rest of Europe which is moving to a sector-specific form of regulation.

The Lloyd’s underwriting group Kiln has announced that it is to merge its Lloyd’s syndicates 807 and 510 with effect from 1 January 2012. According to Kiln the merger will "simplify the company’s structure and realign its capabilities to realise enhanced value for both clients and capital providers". Over time, the differentiation in product range and capital base between Syndicates 807 and 510 has reduced significantly. The larger and more diverse syndicate will be better placed to take advantage of opportunities that arise when the market turns and will also simplify the structure and enable Kiln to utilise better their capabilities.

It has been announced that John Nelson, retired chairman of Credit Suisse First Boston Europe, will succeed Lord Levene as chairman of Lloyd’s in October, serving for an initial period of three years at an annual salary of £525,000. Mr Nelson spent most of his career in investment banking and has been a non-executive director of a number of major corporations, making him the second consecutive chairman without an insurance background. Lord Levene has been chairman since 2002. The Massachusetts-based company Hanover Insurance is to buy the Lloyd’s group Chaucer Holdings for a sum estimated at £313m. The deal, which has been recommended by the Chaucer board, involves a payment of 53.3p per share plus the payment of the 2.7p final dividend for 2010. On announcement of the prospective deal, Hanover was able to confirm acceptances representing over 23.5% of the shares. The deal is expected to be finalised by July. Earlier this year, Chaucer had fought off an approach from Brit Insurance.

Payment protection insurance (PPI)
On 20 April, the High Court in UK dismissed the British Bankers Association’s legal challenge to the complaints handling procedures used by the FSA in relation to PPI mis-selling complaints – the verdict is not going to be appealed. The judicial review was requested on the grounds that the assumptions used by the FSA did not reflect the conduct of business rules in force at the date of sale of the insurance. The FSA expressed satisfaction at the decision, adding that they had received more than 1.5m PPI complaints since 2005 – firms had rejected around 60% of these complaints overall, although the percentage varied considerably between firms.

About three-quarters of the cases which had subsequently been referred to the Financial Ombudsman had been found in favour of the complainant. The decision is expected to cost banks something like £8-10bn. This was reflected in the £3.2bn charge announced by Lloyds Banking Group when it announced its first quarter results on 5 May and in the following day’s statement by Royal Bank of Scotland that they may face a £1bn charge in the second quarter. Subsequently, Barclays announced a charge of £1bn and HSBC one of £269m.

UK motor insurance
In mid-April, the Automobile Association published figures showing that the average UK motor insurance premium has increased by 40% in the last year. This is, once again, the highest annual increase on record, and brings the average Shoparound premium (average of the three cheapest quotes) for comprehensive insurance to £892. In response, the Association of British Insurers (ABI) called for a ban on referral fees, under which details of potential personal injury claimants are sold on to solicitors and claims management firms.

However, the Confused and Towers Watson car insurance price index has shown that the average price of a comprehensive car insurance policy rose by 3.8% in the first three months of 2011, compared to 7.1% in the final quarter of 2010, as a result of which the annual rate of increase dropped for the first time since the middle of 2008 to 35.7%. Their index for third party, fire and theft cover rose by 6.3% in the quarter and 53.6% over the 12 months to the end of March, with an average premium of £1121.

In a press release on 26 April, the Insurance Fraud Bureau (IFB) announced that the value of detected motor insurance fraud in 2009 was £410m, according to the ABI, and that the IFB estimate the insurance industry’s exposure to fraudulent organised motor insurance claims per year is around £350m. In addition, the cost to an insurer of a single ‘Crash for Cash’ (staged motor accident) fraudulent claim can reach £30,000.

Solicitors’ Professional Indemnity
The Solicitors Regulation Authority has announced that it will abandon the Assigned Risks Pool (ARP) from October 2013, as part of a programme of sweeping changes, resulting in the ultimate system under which insurers offer a three-month extended policy period to firms who cannot obtain professional indemnity insurance for the following year. The ARP is the temporary fund of last resort for firms unable to find commercial cover. As interim measures, from October 2011 firms will only be allowed to spend 6 months (instead of 12 months) in the ARP and, from October 2012 the ARP will be jointly funded by qualifying insurers and solicitors.

The changes follow extensive consideration of the consultation responses received and constructive discussions with stakeholders and are considered to be the best way of ensuring client protection through a competitive insurance market.

Deepwater Horizon
At the end of April, a US Coast Guard initial report was published into the joint investigation of the incident which they have carried out with the US Interior Department. This criticised the rig owner Transocean for poor maintenance of electrical equipment, by-passing of alarm and safety shutdown systems and a lack of training, all of which contributed to the disaster. Transocean disagreed with some of the key findings, saying that the US Coast Guard had passed the rig as ’fully compliant’ only 7 months before the incident. A final report is expected by late July. These reports are likely to be major factors in on-going litigation between the various parties involved in the explosion and subsequent pollution, which could continue for many years – insurance market sources are drawing a parallel with the Exxon Valdez incident in 1989, which was only finalised in January 2011.

Marine piracy
Marine piracy was at an all-time high in the first three months of 2011, with 142 attacks worldwide, according to the International Chamber of Commerce International Maritime Bureau (IMB). The sharp rise was driven by a surge in piracy off the coast of Somalia, where 97 attacks were recorded in the quarter, up from 35 in the same period last year. Overall, 18 vessels were hijacked, 7 crew members were killed and 34 injured. In addition, 344 were taken hostage and six kidnapped, with a further 45 vessels boarded, and 45 more reported being fired upon. As at 31 March, IMB figures showed that Somali pirates were holding captive 596 crew members on 28 ships. Other countries involved in piracy in the quarter include Malaysia, Nigeria and Benin.

Airline premium rates
Premiums in the aviation market continued to fall in April, the first month of any real note for renewals, with a drop of around 3% in the premiums written in the year to date for both hull and liability covers. This is in spite of increasing exposures, and reflects underlying rate reductions of 13% for hull and more than 15% for liability according to brokers JLT. The April renewals include that for the newly formed International Aviation Group, consisting of British Airways, Iberia and other ancillary operators, with a combined fleet value of over US$29bn. In contrast to the direct market, the aviation reinsurance market has managed to increase reinsurance rates in light of the increase in large airline losses, exacerbating the problems for direct insurers.

Employers’ liability deafness claims
The UK Supreme Court has overturned, by a three-to-two majority, a Court of Appeal judgment making employers liable for noise induced deafness caused by noise above 85 decibels from 1978 onwards. The Court of Appeal made their ruling, despite the fact that the Noise at Work Regulations 1989, which came into effect in 1990, was the first regulation to recognise the potential affect of exposure to noise below 90 decibels. The Supreme Court ruling restores the original 2007 High Court judgment where the claimants failed to establish employers’ liability for their alleged noise induced deafness at either common law or under the Factories Act 1961, and thus no liability exists for exposure prior to the implementation of the 1989 Act. While it applies immediately to industrial deafness, it is also likely to have broader application in relation to employers’ liability claims.

Quinn Insurance
In mid-April, Liberty Anglo (a joint venture of Liberty Mutual and Anglo Irish Bank) was announced as preferred bidder for the general insurance business of Quinn subject to approval from the relevant authorities. In a complex deal, Liberty Mutual would be responsible for the operation of the new joint venture and the majority partner; Anglo Irish Bank would have no involvement in the day to day operation of the new company but would act in a loan recovery capacity. There will be a new insurer, Liberty Mutual Direct Insurance Company Limited, 25% of the profits from which will be used to reduce the €600m call by Quinn on the Insurance Compensation Fund.

The business will continue to operate existing product lines in the Republic of Ireland and the United Kingdom. Current customer policies are unaffected by the announcement, and the company will continue to offer quotes and renewals as normal. There will be no loss of jobs in either the Republic of Ireland or Northern Ireland as a result of the sale process, although the company’s Navan and Manchester sites will close, with all 100 staff in Navan relocating to other offices. Completion of the deal is expected to take place by about the end of July.

Kieran Wallace of KPMG was appointed as share receiver to Anglo Irish Bank (AIB) and will take control of the Quinn family’s equity interest in Quinn Group. He recruited a number of non-executive directors to the board of Quinn Group, and as a result, Sean Quinn and the Quinn family will no longer have any role in the management, operations or ownership of the Quinn Group. A five-year debt restructuring plan has been agreed in principle between AIB and the group’s lenders. AIB is owed a large sum by Sean Quinn and his family which they are not in a position to repay - the security on these loans is the family’s equity in the Quinn Group, and it is in the interest of the Bank that the businesses in the group are healthy and produce profits for years to come. This, ultimately, paves the way for maximising the repayment of debt to the taxpayer over time.

Climate change
The Lloyd’s insurer Kiln, working together with Perhelion underwriting, has become a pioneer of a new insurance product aimed at reducing the political uncertainty surrounding the sale and purchase of carbon credits. Carbon credits are financial assets obtained by companies which remove carbon dioxide emissions from the environment - they can be sold to other organisations, both sovereign and corporate, which need to increase their own emissions above their allowable quotas.

Currently, almost 200 countries have committed to reduce their greenhouse gas emissions from 1990 levels under the Kyoto protocol. There remains a risk that credits could become ineligible as a result of an EU decision on future carbon credit legislation, and this has caused corporations to be wary of investing in this process to the full extent possible. By removing this risk through an insurance product, it is hoped that more businesses will consider adopting carbon credits in a fight against climate change. The product should then bring liquidity to the market and encourage trade by protecting the value of these credits.

Large losses
Aircraft disappearance, Atlantic Ocean – 1 June 2009.
This was Air France flight 447 which disappeared en route from Rio de Janeiro to Paris with the loss of 228 lives. During April 2011, significant debris from the aircraft was found on the sea-bed, and on May 1 and May 2 the two flight data recorders were recovered. Subsequent attempts are now being made to retrieve bodies from the wreckage. The recovery of the flight data recorders, which are being shipped back to France, may affect liability claims in relation to the crash if they are in an operable condition.

Earthquake, Christchurch, New Zealand – 22 February.
By early April, the number of claims filed with the New Zealand Earthquake Commission had risen to over 108,000 – the commission had managed to renew its reinsurance coverage from 1 June 2011 in spite of the two major losses in the last year.

Tohoku earthquake and tsunami, northern Japan – 11 March.
Risk Management Solutions has estimated the total insured property loss from these events at between US$18 and $26bn. After combining this with expected payouts by the life and health insurance sector for deaths and injury, the total insurance loss from this event is likely to be between US$21 and $34bn, making it the largest insurance loss for more than five years. International property/casualty insurers have so far announced total losses to their companies of over US$6bn.

Residential earthquake insurance in Japan is subject to the provisions of the Japan Earthquake Reinsurance Company (JERC) and is not reinsured outside Japan – by mid-April, JERC were preparing to pay out an initial US$2.4bn to insurers to ensure that they were in a position to pay claims promptly. Premium rates for Japanese earthquake cover are said to have increased by up to 50% since Tohoku.

The greatest uncertainty in loss estimates relates to the degree to which corporations are successful in claiming under contingent business interruption protection in relation to global supply chain problems. Tokyo Electric Power Company (TEPCO), the owners of the severely damaged Fukushima nuclear power plant is faced with payouts of billions of dollars, and there is the possibility that the Japanese government may establish a state –backed insurance fund to assist them in this case and any future disasters. A collapse in the TEPCO share price (by the end of April it had reduced to 25% of its 1 January level) will impact seriously on Japanese insurers (mainly life insurers) which hold significant amounts of investments in the company.

Tornadoes, southern US – 14-16 April.
This event consisted of at least 240 separate tornadoes affecting 14 states, and causing at least 43 deaths, the highest death toll from a system of hurricanes for over three years. The principal areas affected were in a swathe from Oklahoma to North Carolina and Virginia. One individual tornado which hit Sanford and Raleigh in North Carolina, causing severe property damage, is understood to have cost around US$215m, but it is not known how much of this is insured. The overall damage may well be double this figure. This event and the one below have been deemed by Property Claims Services to be a single event for insurance purposes.

Tornadoes, southern and eastern US – 25-28 April.
At least 426 separate tornadoes were reported in an area including the southern and eastern states and the mid-west. The severity of the event was due to the exceptionally warm humid air over the Gulf of Mexico moving north and colliding with the jet stream over the southern states. Particularly destructive tornadoes hit Alabama, Arkansas, Georgia, Mississippi, North Carolina, Virginia and Tennessee. In some places rainfall reached 15-20 inches in the storms.

In addition to widespread property damage and power cuts, the death toll is believed to be more than 350, although communications problems in the areas affected make the precise figure uncertain – these figures are likely to make it the most deadly outbreak for 75 years.

The worst affected state was Alabama, which was mainly involved on April 27, where around 250 of the deaths were recorded and where a federal state of emergency was declared by President Obama. Governors of at least six other states declared states of emergency in light of the tornado damage and/or associated flooding. An early estimate of insured losses suggests a range of US$2-5bn. For insurance purposes, this event has been deemed to be a continuation of that from the 14-16 April.