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The Actuary The magazine of the Institute & Faculty of Actuaries

From the world of general insurance

Asbestos and pollution developments
At the end of July, Royal & SunAlliance Insurance Group (RSA) reached agreement with General Motors Group (GM) over coverage for the latter’s asbestos and pollution claims. The settlement amounts were not made public, but the agreement ends years of uncertainty for the insurer following GM’s 2005 lawsuit claiming hundreds of millions of dollars said to be covered under various liability policies issued by RSA subsidiaries between 1954 and 1971. In particular, the settlement brings finality to the substantial outflow of legal costs incurred by RSA in defending its position.

Contingent commissions
In late July, New York state officials held legal hearings on remuneration for insurance brokers. Mixed views were expressed, with a Willis representative insisting that contingent commissions create conflicts of interest and should be phased out, while other senior broking figures, particularly those from smaller firms, believed no such conflicts are created by this form of remuneration. The hearings follow the penalties imposed on several large brokerage firms over the last few years for their use of contingent commissions and the subsequent amendment to the regulators’ stance, as reported in July.

American International Group has acquired the remaining 60% of the shares of Ascot Underwriting Holdings, the Lloyd’s managing agency, which manages syndicate 1414. The company thus accelerated the purchase of the balance of the agency’s capital, which it already had an option to do in 2012. The terms of the purchase were not disclosed.

The credit rating agency Fitch has confirmed its insurer financial strength rating of A+ on the Lloyd’s market. This follows Lloyd’s strong results in 2007, with record profitability of £3.85bn. The rating agency also predicted that the market’s strong results would continue in 2008, although it expected some reduction in the level of profit.

US sub-prime mortgage crisis
At the end of July, XL Capital Corp (XL) completed a major commutation with Security Capital Assurance (SCA), the financial guarantee insurer. This is understood to result in a reduction from $65.7bn to $1.1bn in the maximum exposure of XL to losses from SCA. XL announced that the settlement would result in a charge of between $1.4bn and $1.5bn in their third quarter accounts. XL is funding the commutation through a major issue of shares, but considers the move necessary to protect its security rating, which was beginning to concern its customers.

Following losses of $18bn over the past three quarters, blamed on credit default swaps linked to the sub-prime mortgage market, US insurer American International Group (AIG) has been saved from bankruptcy by a US Federal Reserve loan of $85bn in exchange for an 80% public stake in the company. The loan is over a 24-month term and the Federal Reserve describes it as a ‘liquidity facility’ to enable AIG to ‘sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy’.

Citigroup analysis of Aviva and RSA
A Citigroup report has suggested that both Aviva and RSA will need to rely on significant releases from prior year reserves to maintain a reasonable level of profitability over the next couple of years. This reflects the analysts’ perception that premium rates are weakening in the main lines of UK business. Specifically, they point out that, excluding the June/July floods, RSA had an underlying combined ratio of 103% for the pure year 2007, which was only made better by significant prior year releases in the year.

The analysts estimate that, while strong, the RSA reserves are not pitched at quite the level they had been previously — a fairly common situation as a company moves out of a hard market. The position at Aviva is estimated to be similar in terms of reserving and the need for releases, but the report suggests that Aviva is less well prepared for the next hardening of the market than RSA, and is concerned about its short-term future profitability, particularly in 2009.

US workers compensation claims
National Council on Compensation Insurance, Inc. (NCCI), the manager of the largest database on US workers compensation business, announced in August that the claims frequency for the class had reduced by 2.5% in 2007, compared with 2006. This is the third consecutive year of reducing claim frequency. The average cost per claim, however, showed a 4% increase, and medical costs increased by 6%, albeit this is the smallest increase in medical costs for 12 years.

Regulatory developments
Towards the end of July, the UK government published revised plans for a new claims process from road traffic accidents, in an attempt to speed up payments for injured parties and reduce unnecessary administrative costs. The proposal involves an increase in the scope of so-called “fast-track” claims to include all those up to £25,000.

The new government proposal has excluded from the scheme injury claims arising from employers’ and public liability policies and clinical negligence claims and, following pressure from (particularly) the “after the event (ATE)” insurers, it has abandoned suggestions that ATE premiums should not be recoverable.

The UK Financial Services Authority (FSA) has disclosed that only 13% of assessed companies met the March deadline for demonstrating that they had management information systems in place to test whether they are treating customers fairly (TCF). By the end of this year, they will be required to show that they are consistently observing TCF principles – the FSA still believes that, with greater focus on the issue, 80% of sampled businesses could meet this later deadline.

UK solicitors’ professional indemnity premium rates
As October 1 approaches for completion of the renewal of solicitors’ professional indemnity business, concerns were being expressed in the market at the continuing inadequacy of the premium rates, especially in light of the likely increase in claims against solicitors during the economic downturn. Those solicitors engaged in property conveyancing are expected to be particularly exposed to increased claims frequency. In fact, the total premium income for the class is now some 22% lower than it was in 2000.

Hurricane forecasts 2008
By early August, hurricane forecasts for the current season were being increased, with the Colorado State University forecasting team suggesting that nine rather than eight hurricanes will form by the end of the season, with five, rather than four, of them being intense. This reflects the significant activity seen during June and July, and the high sea surface temperature in the tropical Atlantic. Meanwhile the National Oceanographic and Atmospheric Administration projected an 85% probability of an above-average level of hurricanes in 2008, with an increase in the number of named storms to 14-18 from their previous estimate of 12-16, and an increase in the projected number of major hurricanes from 2-5 to 3-6.

Large Losses

Fire at Universal Studios, California – 1 June. This is now estimated to have cost over US$500m.

Hurricane Dolly, Guatemala, Mexico and southern Texas – 20-23 July.
Latest estimates of insured losses are around US$0.5bn, of which something under US$100m is from Mexico, the majority of the remainder from USA.

Typhoon Kalmaegi, Taiwan and China – 17-19 July.
This produced heavy rainfall (up to 44inches in places in Taiwan) which caused flash floods and landslides and resulted in over 20 deaths. Significant damage was caused to crops, including orchards, but these are largely thought to be uninsured. The storm had become significantly less severe by the time it reached Zhejiang province in China. No insured loss estimate is to hand.

Typhoon Fung-Wong, Phillipines Taiwan and east China – 26-29 July.
This storm, the second on a similar track in a few days, caused widespread flooding, with over 26 inches of rain recorded in parts of Taiwan. Over 390,000 people were evacuated from coastal regions of China’s Fujian province, and loss of life does not appear to have been as severe as for the earlier Kalmaegi. Estimated insured losses are put at under US$100m.

Tropical storm Edouard, Texas – 5 August.
This looked likely to reach hurricane strength at one time, and threatened the main Texas oil port at Galveston. However, it reduced in intensity before striking the coast in an undeveloped area. As a result, insured losses are thought to be relatively minimal.

Hurricane Fay, Caribbean and Florida – 16-23 August.
Like Eduoard, this storm was less severe than predicted, partly due to the fact that it tracked along the line of islands including Puerto Rico, Haiti and Cuba, and thus spent much of its time over land, where it tended to ease in intensity. Nevertheless, it made no less than four landfalls in different parts of Florida, so its relative lack of strength was extremely important. Rainfall of up to 25 inches was recorded and considerable flooding was caused throughout the affected region, with at least 87 lives lost, 73 in the Caribbean (mainly in Haiti) and 14 in Florida. No insured loss estimates are to hand.

Air crash, Madrid – 20 August.
This involved a Spanair McDonnell Douglas MD82, which crashed in flames on take-off en route to Las Palmas in the Canary Islands. 153 of the 172 on board were killed in the crash. It is understood that the insurance on the plane was placed in London and led by Allianz, although sums involved are not yet to hand.