AIG / Asbestos / Solvency II / PPI / Regulatory / Deepwater Horizon / Protection & indemnity / Marine piracy / Aviation / Catastrophe / Hastings Direct and Equity Red Star / Climate change / Large losses
American International Group (AIG) and fallout from the global financial crisis
In early November, AIG made a US$972m payment to the US Department of the Treasury, its sixth repayment during 2011, reducing its debt to the Government to US$83.4bn. The payment was partly funded by a release from the escrow fund held in connection with the sale of American Life Insurance Company to MetLife in 2010.
Towards the end of November, Hank Greenberg (former president and chief executive of AIG) and Starr International (his present company) filed lawsuits against the US Department of the Treasury and the New York Branch of the Federal Reserve. These allege that the Government bail-out of AIG in September 2008 was unconstitutional and caused a breach of duty to AIG shareholders. They claim US$25bn in damages, representing the value of shares in AIG held by Starr before the rescue, and say that the Government discriminated against AIG by charging onerous interest rates and taking an initial 80% stake in the company.
A New York appeals court has reversed a lower court ruling in a case between JP Morgan Securities and Vigilant Insurance and other insurers, which originally had found in favour of JP Morgan. The suit had attempted to recover US$250m which a Bear Stearns banking subsidiary (subsequently acquired by JP Morgan), had paid out in a settlement with the US Securities and Exchange Commission (SEC) in 2006. The appeals court said that that the insurers were not responsible for the loss, as the bank had intentionally engaged in law-breaking. The original settlement with the SEC related to hundreds of millions of dollars, alleged to have been made at the expense of mutual fund shareholders by late trading and deceptive market timing (both illegal practices) between 1999 and 2003.
In early December, a lawsuit was filed by the liquidators of M-Invest Ltd (a feeder fund for Bernard Madoff's bankrupt investment firm), against Ernst & Young (E&Y) in the New York State Supreme Court, claiming US$900m. The suit accuses E&Y of negligence, breach of contract and malpractice in its audits of the Cayman Islands-based fund.
Asbestos and pollution developments
Eaglestone Reinsurance Company, an AIG subsidiary, has reinsured the majority of AIG's remaining US asbestos liabilities with Berkshire Hathaway. Under the deal, a premium of US$1.7bn provides cover for the liabilities, currently valued at US$3.5bn, as they fall due.
Third quarter results at Liberty Mutual were adversely impacted by a US$339m charge for the deterioration in its reserves for asbestos and pollution reserves. This charge resulted from a major reserve review of such prior-year claims.
The UK Supreme Court has decided that the Scottish Parliament acted within its powers in passing the Damages (Asbestos-related Conditions) Act 2009 - this legislation provides the possibility of compensation for those with pleural plaques. The legality of the Act had been challenged by insurers on the basis that it ignores medical evidence that pleural plaques are symptoms rather than physical harm, the latter being required for the payment of compensation.
The Health & Safety Executive (HSE) in UK has provided an analysis of mesothelioma deaths - this shows the number to have increased from 153 in 1968 to 2321 in 2009, with more than 80% of the deaths being males, many of them having been employed in the building industry when asbestos was still widely used. HSE projects that male deaths from mesothelioma will peak at around 2,100 in about 2016, whereas those for females will peak later at a much lower level.
In early November, the head of the European Captive Insurance and Reinsurance Owner's Association asked the European Union to clarify the Solvency II regulations as they apply to captives, stating that there was currently far too much complexity for companies whose failure, he claimed, would only impact on their parents and not on third parties. Whilst the European Commission had agreed to consider the request for moderation in the requirements, they had only talked in terms of "proportionality" without any indication of what this meant in practice. This lack of clarity made the running of, and particularly the setting up of, captives almost impossible, as even the capital requirements are unclear.
In mid-November, Gabriel Bernardino, head of the European Insurance and Occupational Pensions Authority (Eiopa), called for changes in Solvency II in relation to the European sovereign debt crisis. At present, Solvency II does not require additional capital in relation to investment in Government bonds, irrespective of the strength of that nation's security. He advocated a flexible approach which did not encourage insurers to invest in riskier assets or maintain an inappropriate business model.
Towards the end of November, the Financial Services Authority (FSA) in UK estimated the cost to UK insurers of implementing the new Solvency II regime at £2.04bn, an increase of £200m since their previous estimate last June. It has been suggested that even this latest figure may be an under-estimate given the Lloyd's estimate of £300m, whereas only £213m has been included for London market commercial insurers. The increase since the previous estimate, which is based on a recent survey of companies, is put down to higher than expected technology costs and a greater use of external consultants.
Disagreements between UK regulators and those from continental Europe emerged at the Association of British Insurers' Solvency II conference in December. Kathryn Morgan of the FSA described the solvency capital requirements (SCR) as crucial, being the point where intervention starts, whereas Karel van Hulle, head of the European Commission's insurance and pensions unit, believed that more focus should be placed on the minimum capital requirements (MCR), believing that a breach of the SCR only called for an informal chat with the regulator. The executive director of Eiopa,Carlos Montalvo Rebuelta, took a similar stance, stressing the importance of the MCR.
The FSA has confirmed it will allow firms to use their Solvency II internal models to meet the Individual Capital Adequacy Standards requirements prior to the introduction of the new regime, and not have to use the two different models together. Shortly afterwards, Lloyd's announced that they will require their participants to use the new models for 2013, prior to the EU-wide implementation of Solvency II, declaring that they were pleased to receive this clarification from the FSA. An International Underwriting Association spokesman also welcomed the FSA move, but indicated that they would leave it to individual companies to decide on their approach for 2013.
Payment protection insurance (PPI)
At the beginning of November, the UK Court of Appeal dismissed an appeal in a test case on the mis-selling of PPI. The case related to the failure of the lender to disclose to the borrower that it would receive commission on the sale of the insurance, which was actually provided by another member of the same group as the lender. The lender in this case retained 87% of the premium as commission. The lower court found that the lender made an appropriate assessment of the borrower's needs, provided adequate disclosure of the terms of the policy, and did not pressurise the borrower into taking out the policy. In the Court of Appeal, it was found that the Insurance Conduct of Business rules did not require disclosure of commission to a customer. Whilst this case is a relatively rare one in the overall PPI mis-selling scandal, the decision should terminate claims for mis-selling based on non-disclosure of commission.
Other regulatory developments
The US Department of the Treasury announced at the beginning of November a list of 15 members of the federal advisory committee on insurance, which will advise the newly established Federal Insurance Office (FIO). Seven of the fifteen are involved in state regulation of insurance and/or financial services, six are recruited from roles within the insurance industry (including a consultant) and the remaining two are academics. The only non-US representative is Sean McGovern, the Lloyd's general counsel, who hopes to add an international perspective to the committee. The FIO is going to play a significant role in identifying issues which may contribute to systemic risk in the insurance industry, and will advise the US Treasury Secretary on insurance policy decisions.
The US National Association of Insurance Commissioners has unanimously passed amendments to the collateral requirements for foreign reinsurers, leaving the way open for other states to follow Florida, New York, New Jersey and Indiana in relaxing their collateral requirements. The move was welcomed by industry representatives in London and Bermuda.
Eiopa has published the findings of its consumer protection and financial innovation committee and issued a number of guidelines arising from these findings. The guidelines require supervisory bodies to have a clear expectation regarding the effectiveness of insurers' internal control systems for handling complaints, and give them guidance on the adequate treatment of complaints, including best practice.
The UK Treasury Committee has launched an investigation into credit rating agencies and, in particular, the transparency and soundness of their methodologies. Written submissions have been sought, covering such matters as accountability, the justification for the recent downgrades of sovereign debt and conflicts of interest - the deadline is 2 February.
At the end of October, Transocean sued BP in a Louisiana court demanding that the oil company "honours its contractual obligations to defend, indemnify and hold harmless" Transocean in relation to the Macondo well failure in 2010. Transocean's 40 liability insurers at the time of the incident provided coverage totalling US$750m, and most, if not all, of this is at stake in the lawsuit.
In mid-November, a New Orleans court rejected an application by BP to use Transocean's liability insurances to help to offset some of the costs associated with the Deepwater Horizon claims. The grounds for this decision were that the oil spill resulted from a sub-surface release and, as such, Transocean did not assume the pollution liability from the incident. The insurances in question were a primary US$50m policy written by Ranger Insurance Company and a further US$700m placed in international markets, much of it written in the Lloyd's market.
In December, BP filed a motion for sanctions against Halliburton, the contractor involved with the Deepwater Horizon oil well, accusing the company of destroying evidence of post-incident tests of the foam cement slurry used in the well. Halliburton refutes the allegation. Halliburton is understood to have liability insurance with a total sum insured of more than US$1bn.
Protection & Indemnity (P&I) market developments
During the fourth quarter of 2011, a succession of International Group P&I clubs announced a general increase in subscription rates for the year commencing on 20 February 2012. Gard, Britannia, North of England, West of England, Steamship Mutual, Standard, American, Swedish and London all announced increases of 5%, with the Japan and UK Clubs settling for a 3% increase. Of those making an announcement, only Shipowners' Club is not imposing an increase on its members - Skuld does not make a general increase but analyses members' premiums on an individual basis. The reasons given for increases were generally a significant claims deterioration in earlier policy years, general claims inflation and significant changes in investment markets. Swedish Club, Steamship Mutual, North of England and West of England also announced increases in deductibles.
The South of England P&I Association (Sepia) was served with a winding-up order by the Supreme Court of Bermuda on 22 November over problems with its solvency and corporate governance, giving members only a couple of weeks to find a new P&I insurer. It is believed that a significant proportion of Sepia's members may be taken up by the East of England P&I Club, subject to the approval of the latter's reinsurers, but the remainder may have great difficulty in finding cover.
Marine piracy developments
By the beginning of November, it was estimated that the proportion of vessels passing through the Gulf of Aden region which were employing armed guards had risen to 20%, and this was considered likely to increase further as more nations approved their use. However, insurers have voiced some concern regarding the quality of the guards and whether they may escalate the violence when they come face-to-face with pirates. Nevertheless, up to the current time, no vessel carrying armed guards has been taken by the Somali pirates.
At the beginning of November, the 20,586 dwt Algerian bulk carrier Blida was released by Somali pirates after 10 months in captivity. It is understood that the owners paid a ransom of US$3.5m, half what the pirates originally demanded - it is not known whether any insurance money is involved.
Premium rates for airline insurances during the busy fourth quarter renewals season (when 80% of the premium is written) have been quite depressed, with many accounts showing a single-figure percentage reduction in October and by November reductions were often in the 10-15% range. Largely, however, this has been offset by increased fleet values, so overall premium income has held up pretty well. In the earlier months of the year, fleet values increased by 9% and passenger numbers by 15%, according to figures published by the brokers Aon, but much of the growth in exposure has been in relation to the smaller airlines. The reduced premium rates are largely due to the exceptionally low claims experience during 2011, with only an estimated US$481m in hull and liability losses in excess of US$1m by the end of October, well under two-thirds of the long-term average. Allowing for the minor losses, total claims of US$1.03bn in the first 10 months of 2011 are little more than half those in the equivalent period of 2010.
Just before year-end, Swiss Re announced their expectations for activity in the insurance-linked securities market in 2011. This indicates that new issues and the risk outstanding are slightly lower than in the preceding year. New issues are believed to be US$4.16bn, compared with US$5.03bn in 2010, reflecting a considerable drop following the catastrophes (especially the Japanese earthquake and tsunami) in the early part of the year, and the uncertainty caused by the significant change in US hurricane projections after the revised model from Risk Management Solutions. However, the fourth quarter has seen some recovery and the outstanding risk capital has only reduced from US$14.04bn at the end of 2010 to an estimated US$13.57bn, a figure which Swiss Re expect to increase to around US$14.5bn by the end of 2012.
Hastings Direct and Equity Red Star
At the beginning of January, Hastings Direct, the insurer of (mainly) UK motor risks, announced that following a successful 2011, when they expanded by 30% and recruited 400 additional staff, they planned a further expansion in 2012, creating another 200 jobs. At much the same time, the Lloyd's enforcement board announced that it would interview the current Hastings Direct chairman over reserve inadequacies at Equity Red Star during his period of tenure as chief executive of Equity Insurance Group - the company subsequently made losses of over £300m arising from correcting the situation. This followed a Lloyd's investigation into Equity Red Star's underwriting standards, which concluded with a censure and an order that the company should pay a contribution towards costs, rather than the fine of up to £1m which Lloyd's could have levied.
The latest round of talks under the United Nations Framework Convention on Climate Change took place in Durban, South Africa in early December. Whilst only partial consensus was achieved on a successor to the Kyoto Protocol, agreement was reached on a work programme for 2012, and this will include a range of possible risk management approaches. In particular, an international mechanism, probably including some form of risk transfer, is due to be researched and reported back at next year's meeting in Qatar. The insurance industry is among the likely contributors to this research, with views and recommendations required by 17 September 2012. This area is one of particular interest to the Alliance of Small Island States, who are seeking help from insurers in reducing catastrophe risks.
Earthquakes, Christchurch, New Zealand.
The total insured losses from the entire series of quakes from September 2010 onwards have now been put at over NZ$30bn, which is considerably more than the projected cost of reconstruction. The figure includes business interruption claims, temporary accommodation costs and claims handling expenses. Aftershocks continued to occur at regular intervals, including two major ones (magnitude 5.8 and 6.0 respectively) on 23 December. The New Zealand Earthquake Commission, in its annual accounts, has shown an overall loss of NZ$7.1bn from the series of quakes, wiping out its funds of NZ$5.9bn and leaving a deficit of NZ$1.2bn which will have to be bridged by the Government.
Floods in Thailand - from late July.
These continued through the autumn, with ever-increasing estimates of the overall losses. By the beginning of November, Aon Benfield were estimating sums insured of US$11bn in the area most seriously affected by the flooding, US$4.9bn of it in a single industrial park - at this stage the Federation of Thai Industries believed 30-40% of this park's sum insured would be called on. Much of the cost at these industrial parks is understood to be insured in Japan, with several Japanese industrial companies or their local subsidiaries being located here, but there is also likely to be exposure in international markets, either directly or through reinsurance.
In early November, there was concern for the Bangkok underground train system and the governor ordered the evacuation of 11 of the capital's 50 districts and the partial evacuation of seven others - many inhabitants ignored these calls, preferring to protect their homes and businesses. Overall economic losses have been put at well over US$40bn and total insured losses of US$4-20bn have been estimated, with current best estimates in the range of US$6.5-10bn and the death toll has risen to at least 823. Over the entire period of the floods, four million households, involving 13.4 million people, have been affected. Indirect business interruption claims have been reported from many countries across the world - in particular, computer firms have suffered from lack of delivery of hard disks, many of which are assembled in Thailand.
Hurricane Irene, Caribbean and eastern states of US - 21-29 August.
Property Claims Services has increased its overall loss estimate in US to US$4.3bn, an 18% increase over the original estimate. There have been nearly 855,000 claims in 14 states, with New Jersey and North Carolina having the largest losses at US$900m or more each.
Wildfires in Texas - from 4 September.
The insured cost of the Bastrop fire alone is now estimated to be US$325m, 1673 homes having been destroyed.
Grounding of container ship and oil pollution, North Island, New Zealand - 4 October.
It was disclosed near the end of November that there were as many as 32 containers containing dangerous material on board, well in excess of the original figure. In mid-December salvors started a major exercise to remove the 1115 containers still on board the ship, with an oil slick 3 kilometres long still visible.
Earthquake, eastern Turkey - 23 October.
Around 60,000 people were left homeless by the original earthquake. A further quake of magnitude 5.6 occurred on 9 November with an epicentre 10 miles south of Van, and this caused a further 40 or more deaths and hundreds of injuries, including some people involved in rescue work after the original incident.
Floods in southern France and northern Italy - late October/early November.
These were caused by a low pressure area which resulted in extreme rainfall and the overflow of some major rivers including the Po in Italy and the Var in France. The Po rose by 13 feet and at least seven people died in the area in and around Genoa, although no estimate for the Italian insured losses is to hand. The Var floods (a repeat of similar floods 18 months earlier) are believed to have caused at least six deaths and insured losses in the region of 550-800m. These costs are likely to be reinsured by the Caisse Centrale de Réassurance under the country's natural catastrophe indemnification system.
Tropical storm Washi, Philippines - 16-18 December.
This brought 10 hours of torrential rain to (mainly) the island of Mindanao, an area which rarely experiences cyclones. The rainfall reached eight inches in places, but fell on land already saturated, causing flash flooding. The suddenness of the floods which rose by up to 11 feet in an hour, trapped many people in their homes. The death toll is believed to be around 1300. Whilst there was significant damage to the infrastructure and agriculture, insured losses are expected to be small.