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The Actuary The magazine of the Institute & Faculty of Actuaries

From the world of general insurance

AIG and fall-out from the global financial crisis

AIG has agreed to sell its holding (97.57%) in Nan Shan Life Insurance Company, the Taiwanese life insurer, to Ruen Chen Investment Holding for US$2.16bn in cash. The buyer is 80% owned by Ruentex Group, a Taiwan-based conglomerate and 20% by Pou Chen Corporation, a manufacturer of footwear. Ruentex intend to retain the current management team and have given guarantees to policyholders, agents and staff.

In mid-January, AIG announced that they had executed its recapitalisation plan with various US government entities - the Department of Treasury, the Federal Reserve Bank of New York (FRB) and the AIG Credit Facility Trust. This included the repayment of its outstanding balance of approximately US$21bn on the credit facility from FRB and the conversion of various forms of government support into common shares. As a consequence, the Department of Treasury now holds 92% of the equity in the company, but is expected to gradually dispose of this shareholding over time.

Solvency II
In early January, the European Union (EU) launched its new supervisory authority, the European Insurance and Occupational Pensions Authority (EIOPA), which has three main tasks. It will monitor whether national authorities apply the EU rules correctly and could require national supervisors to take action to remedy an emergency situation. It will also deal with the final draft rules underlying the Solvency II regime and, finally, it will arbitrate in the event of disagreements between authorities. As part of this package of tasks, it will aim to prevent insurance arbitrage within the EU by ensuring standards are uniform across the Union.

The authority is led by a board of supervisors, but day-to-day executive power is vested in the 8-man management board, which consists of the chairman, 6 representative supervisors (initially from Austria, Denmark, Ireland, Italy, Poland and the UK) and a representative of the European Commission.

The new European Insurance and Occupational Pensions Authority almost immediately announced a new stress test to be conducted in cooperation with the European Systemic Risk board and national supervisors. The Europe-wide test is aiming to include 50% of insurers (by premium) in each country and is scheduled to be launched in the second quarter of 2011 – it is being run in conjunction with a similar exercise for the banking sector.

Some amendments to the Solvency II regime have been put forward by the European Commission which will allow them to specify transitional measures in areas such as equivalence, valuation, governance and regulatory reporting, if necessary to avoid market disruption. The implementation date, however, remains 31 December 2012.

Guernsey has announced that it will not be seeking equivalence with Solvency II in view of uncertainty over the treatment of captives under the new regime. The Guernsey government and the island’s insurance regulator issued a joint statement making it clear that they remain committed to meeting internationally accepted regulatory standards, amending their regime if it is necessary to do so.

The UK Financial Services Authority (FSA) has revealed plans to increase its levy for the implementation of Solvency II from £29m to £46.4m. The levy, which comes as part as the FSA’s budget proposals for 2011/12, could fall back to £34.3m due to an anticipated under-spend in 2010/11 and European Union implementation delays. The FSA claims that large firms will bear the brunt of the increase.

Regulatory developments
New York has become the second state (after Florida) to reduce its collateral requirements for alien reinsurers which are both highly rated and financially secure. As in Florida, Hannover Re is the first reinsurer to benefit from the change, and is now subject to a 20% collateral requirement, compared with the previous 100%.

The UK Financial Services Compensation Scheme (FSCS) has provisionally estimated a £240m levy for 2011/12, a big reduction from the 2010/11 figure of £240m. However, the source of these amounts is projected to be very different, with insurance brokers due to pay a greatly increased figure of £93.5m (compared with £61m), and other stakeholders having a significantly lower levy. FSCS expects a substantial increase in payment protection insurance claims. The final levy figures will be announced in March.

The proposed take-over of Brit Insurance by Achilles (a vehicle set up by Apollo Management and CVC Capital Partners, the private equity firms) has been approved by the European competition authorities. As at the beginning of February the deal remains subject to the agreement of Lloyd’s, which has given conditional approval, and the UK Financial Services Authority.

The deadline for the deal to go ahead has been extended to 18 March to allow for the remaining approvals to be obtained – subject to these, Nick Prettejohn, the former chief executive of Lloyd’s has been named as the new chairman of Brit. The offer deadline has also been extended several times, with the latest extension expiring on 5 February – as at 29 January, acceptances had been received in respect of 72% of Brit shares.

The Bermuda-based Omega has confirmed that they have received an offer from the Lloyd’s managing agency Canopius, who propose to use a mixture of cash and unquoted shares for the acquisition, which is understood to value Omega shares at £1.20, a significant mark-up on the then market price of 97.5p.

Marine and aviation developments
The International Group of P&I clubs has announced an increase in the size of its pool for the 2011/2012 year to US$60m from the previous US$50m. The additional retained US$10m will be 100% reinsured by Hydra Insurance Company Ltd, the group’s captive reinsurer. Their reinsurance layer will, accordingly become US$30m excess of US$30m. International Group premium rates for the year have also been reduced by up to 8.4% in light of the relatively favourable claims picture for recent years, the exact change depending on the nature of the vessel concerned.

A high level of price differentiation between lead aviation insurers and the following market has been observed in the recent airline insurance renewal season. The fact that the following market has, in many cases, been charging considerably more than the leader is understood to reflect variations in insurers’ risk appetites for certain airlines’ cover. This phenomenon, known as verticalisation occurs on occasions when there is significant surplus capacity among leaders.

UK motor insurance
UK motorists are faced by new rules under which they are required to insure their vehicles even if they are not being driven, unless they are covered by a statutory off-road notice – these rules arise under the Continuous Insurance Enforcement regulations and are due to be implemented over the next few months. Drivers failing to meet the new requirements are subject to a £100 fine and those prosecuted face a £1000 fine and/or wheel clamping, leading to possible seizure of the vehicle. The change has been welcomed by many within the insurance industry as a valuable step towards reducing the proportion of uninsured vehicles on the roads.

The AA average Shoparound car insurance premium (based on the average of the 3 cheapest quotes) increased by one third in 2010, the largest increase since 1994. The trend reflects the fact that recent years have seen claims well in excess of premiums for motor insurers, partly due to fraudulent or exaggerated claims. The increasing frequency and severity of injury claims, partly fuelled by the growth in accident management and personal injury no-win-no-fee firms is another contributory factor. The Actuarial Profession’s working party also reported on this issue at the 2010 GIRO conference.

Click here for more details: http://www.actuaries.org.uk/news/press-releases/articles/actuarial-working-party-establishes-bodily-injury-claims-cost-motor-pol

Reinsurance premium rates at 1 January
Major reinsurance brokers are agreed that rate reductions were the norm for 1 January renewals in international markets and also concur that this is the result of over-capacity in the market. In UK, the average fall was of the order of 5-10%, but in Continental Europe the reduction was somewhat less for catastrophe excess of loss business (Germany perhaps 4% down and France virtually unchanged). There was some tendency for primary insurers to buy less protection, but this was far from universal.

Reserve levels
There is a considerable body of opinion in the industry that reserve levels have been eroded substantially over the last few years to improve published underwriting profitability. As a consequence, reserves are now, on average, believed to be little more than adequate, with the result that profits can no longer be supported by releases from prior year reserve surpluses.

Reinsurance brokers Guy Carpenter have identified reserve-release-driven improvements in profitability stated by Bermudian companies in the region of 8 or 9% over the last couple of years, but do not believe such margins now exist for the future. They draw a parallel with the situation 10 years ago when the erosion of such margins was a major factor in the market coming out of its last soft cycle.

Workers’ compensation surcharges
Four insurance groups writing workers’ compensation business in New York State have agreed to pay surcharges which they have over-collected since 2000 to the State authorities. The total amount involved is US$120m, with US$70m of this coming from ACE companies, $37.5m from Zurich companies and smaller amounts from Pennsylvania Manufacturers and CNA groups. ACE stated that the problem arose from conflicting state rules and that they had held the disputed amount in reserve pending clarification. It is understood that other carriers will also be required to pay any over-collected amounts.

Catastrophe bonds
A surge of activity in the fourth quarter of 2010 saw the total amount issued in the year rise to US$4.8bn, a big increase from 2009’s US$3.4bn. Nearly half of the total came in the fourth quarter when there were 10 new non-life securitisations issued. Nevertheless, the total remains below those for 2006 and 2007, before the market was severely affected by the credit crisis and particularly the failure of Lehman Brothers, who were heavily involved in securitisation deals as counter-parties. A further increase is widely predicted for 2011.

Mergers and acquisitions
QBE Insurance is reported to be in talks to buy Bank of America subsidiary Balboa Insurance Group probably for around US$1.5 -2bn. It is thought that QBE would need to issue new shares to fund such a deal. In view of the reports, QBE shares were suspended pending a statement.

Climate change
A consortium led by the National Oceanography Centre (NCO) at Southampton University is to carry out a 5-year study of the past and present rise in sea level as a basis for improving the forecasting of future developments in this important area. The broker Willis is a non-academic partner in this project, which is supported by a £3.3m grant from the Natural Environment Research Council.

The 2011 Catlin Arctic Survey is carrying out two missions as part of another survey by the NCO, in each case collecting data from below the surface of the ice to help in the understanding of ice-melt. The two journeys for the explorers are across the Prince Gustav Adolf Sea (among the islands off the north coast of Canada) and between the geographic North Pole and the coast of Greenland.

Large losses
Earthquake in New Zealand – 4 September.
Estimated costs continue to escalate, with many insurers and reinsurers basing their loss estimates on a total figure of NZ$6bn (US$4.5bn). The New Zealand Earthquake Commission (NZEC), which covers homes for the first NZ$100,000 of building damage and NZ$20,000 of contents loss, estimated that its involvement amounted to between NZ$2.75bn and NZ$3.5bn, of which it had paid around 20% by the turn of the year. NZEC retains the first NZ$1.5bn of losses and reinsures a layer of NZ$2.5bn above this level. An aftershock on 26 December gave rise to at least 3500 further claims.

Floods in Queensland, Australia – late December/early January.
As the floods extended south from central Queensland into the Brisbane area, (with major devastation in the towns of Toowoomba and Ipswich), the number of people affected rose dramatically with a death toll believed to have reached 36 and over 200,000 having to leave their homes. The event has been described as a 1-in100-year loss, and the rainfall came at the end of what has been confirmed as the wettest year in Queensland’s history.

Whilst homes in some of the most flood-prone parts of the region may not be covered by insurance, there has been a significant impact on at least 40 mines, particularly in the Bowen Basin area. Claims from these mines, including those for business interruption, are extremely likely to penetrate international reinsurance markets (especially London) after the mine-owners have borne the effect of substantial deductibles.

For insurance purposes, the floods around Brisbane are likely to be considered as a separate event from those caused earlier by the remnants of tropical cyclone Tasha. The only estimate of insured losses to hand gives a total figure of “up to A$6bn”, of which a third was estimated in relation to the earlier, more northerly, event and two-thirds to the losses around Brisbane from the later rains. An estimate of economic loss from these floods and those in Victoria suggests a figure in the range between A$10bn and A$20bn.

Severe winter weather, south and east China – January.
This resulted in a small number of deaths and the reported destruction of 150,000 homes. The economic loss has been put at US$1.77bn, but it is not known how much of this is insured.

Floods and mudslides, Brazil – mid-January.
These affected the areas around Rio de Janeiro and Sao Paolo, where torrential and persistent rain resulted in a number of favelas being washed away with the loss of around 1000 lives and over 20,000 homes and commercial buildings. The insurance impact of the event is likely to be minimal in view of the extreme poverty of those affected, although it is believed that the economic cost could be of the order of US$1.2bn.

Floods in Sri Lanka – mid-January to early February.
These followed major rainfall and affected 4 provinces, mainly in the north of the country. It is understood that over 50 people died and 1.8m were displaced from their homes – vast tracts of rice fields have been destroyed. Whilst the economic losses have been put at over US$500m, most of this is believed to be uninsured.

Floods in Victoria, Australia – mid-late January.
These were caused by torrential rain and led to the evacuation of various communities. At one time the floods were said to have caused a lake 50 miles across in northern Victoria, but the problems have not been as severe as in Queensland. No insured loss estimate is currently available.

Protests, rioting and looting in Egypt – late January, early February.
International property and/or terrorism markets may be affected by destruction of, or damage to, buildings. It is understood that political risk policies may include political violence and that rioting and looting may trigger claims under such cover. Marine insurers have expressed some concern about possible risks to ships passing through the Suez Canal and to cargo in transit. However, at the time of writing, it is as yet too early to know whether the ongoing problems in Egypt are likely to lead to such insurance losses and, if so, how substantial they could be.

Cyclone Yasi, northern Queensland, Australia – 2/3 February.
This was a category 5 cyclone considered to be potentially one of the most severe storms ever to make landfall in Australia. Emergency evacuation of many coastal communities was carried out in the face of winds gusting up to 290kph.

Storm surges of up to 7 metres and rainfall of up to half a metre were also forecast. In the event, it seems to have been somewhat less damaging than feared as Yasi made landfall near the town of Tully between Cairns and Townsville, rather than hitting either of these major centres of population directly. It caused considerable damage, including major power cuts even as far away as Cairns and Townsville, and some flooding in the Townsville area. The tail of the storm caused heavy rainfall and some flooding in Victoria. Early estimates put insured losses at between A$350m and A$1.5bn.