Reinsurance market rates / Brokers / UK floods / Concordia losses / Earthquake insurance / Aon HQ / ABI and transport / Regulation
Reinsurance market rates
Guy Carpenter said that reinsurance rates rose by 9.5% for global property catastrophe contracts that renewed on 1 January 2012. The increases were driven by
* Record catastrophe losses in 2011, many in areas not previously considered critical risk. Insured losses were in excess of US$100bn with reinsured losses in excess of US$50bn.
* Implementation of important catastrophe model changes in 2010 and 2011
* Continued lack of investment income or reserve releases to compensate for underwriting weakness
Many reinsurers reviewed their use and implementation of market and internal models prior to this renewal, making significant changes to their methodologies. This has meant that, whereas previously rates tended to move across the board, there has been significant fragmentation in the market's pricing of risk.
The rest of the reinsurance market has remained subdued with Casualty largely flat. Willis Re commented "it is surprising that lower returns have not fed through to the rating of long-tail classes.
Despite this, the reinsurance sector remains fully functional and adequately capitalized. The losses of 2011 have largely affected earnings and not capital. Dedicated reinsurer sector capital finished 2011 near the same level as where it began.
Brokers hit harder than insurers
Insurance brokers' profitability fell after an unexpectedly strong fall in the volume of business and value of premium income, according to the latest PwC survey for the Confederation of British Industry (CBI). Overall operating costs for brokers fell but average costs per transaction rose due to the impact of reduced volume.
According to the quarterly survey, sentiment among general insurers suffered a steep fall in September 2011 but has since stabilized. This has not been the case for brokers. PwC stated that "competitive forces are combining with the impending introduction of the Retail Distribution Review regime at the end of 2012 to put the sector under exceptional pressure. The result is the lowest level of broker sentiment for several years, coupled with an extremely strong decline in profitability."
Up to 200,000 homes will face insurance problems when a government agreement ends next year, the Association of British Insurers (ABI) has said. It mapped neighbourhoods with the highest risk of flooding in England and Wales (defined as a greater than one in 75 chance of flood in any given year), and where residents may struggle to insure their homes. Boston and Skegness in Lincolnshire headed the list, with 7,550 homes facing significant risk.
The government said it was working with the industry to try to make sure the arrangement continues after June 2013. The agreement obliges insurers to provide cover for high-risk properties while the government continues to improve flood defences.
The ABI wants the government to share the risk for the most vulnerable properties. "We are frustrated with the progress of our talks with the government on this issue and want it to look urgently at a model that would allow flood cover to remain widely available and competitively priced," said ABI director general Otto Thoresen. "Action is needed now to avoid 200,000 high-risk homes struggling to afford cover."
Environment Minister Richard Benyon said "We live in difficult times, it is wrong to impose impossible burdens on the taxpayer, but we do want to make sure that insurance continues to be available for the vast majority of households. We will assist particularly households on low incomes". The Department for Environment, Food and Rural Affairs (Defra) said that further announcements would be made in the spring.
Meanwhile a committee of MPs has raised concerns about what funds are available to maintain flood defences. The current bill is at least £1.1bn a year, according to the committee of MPs, and this is set to rise owing to climate change. A recent assessment for the government claimed that this could go up to between £1.5bn and £3.5bn a year by the 2020s. "Flood protection is a national priority. Yet it is unclear where the buck stops and who is ultimately responsible for managing the risk of flooding," said Margaret Hodge, who chairs the Public Accounts Committee (PAC).
It has been suggested that the loss for the industry from the Concordia sinking ship could be as much as US$1bn (Moody's Investors Service). This could make it the largest insured loss in maritime history. The ship ran aground and capsized off the island of Giglio, Italy, on the 13 January, resulting in several deaths and many still missing.
Moody's has suggested that losses that are insured are likely to arise from four factors:
1 Marine hull insurance, which covers damage to the vessel, with coverage an industry-estimated US$513m - the owners say that this exceeds the net value of the vessel which they put at US$490m.
2 Liability insurance claims from passengers of the ship
3 Costs associated with recovery of the wreck.
4 Possible environmental liability claims related to any fuel spillage that occurs.
Since the marine insurance market is widely syndicated, losses will be spread among primary insurers that write marine business, insurance syndicates operating at Lloyd's of London and global reinsurers.
Seismic zones need better quake insurance
Many areas are extremely underinsured against the risk of earthquakes, according to a report released by Swiss Re recently. The report titled "Lessons from recent major earthquakes" refers to the last two years of earthquake activity worldwide.
"The cumulative catastrophic impact of earthquakes on society is overwhelming. Seismic events caused economic losses of over US$276bn in 2010 - 2011, yet highly earthquake-prone countries remain underinsured," says the report.
Swiss Re has also said that the "The low frequency of earthquake events, compared to other natural catastrophes, tends to shape the perception that earthquake risk is much lower than it actually is, even in places where there have been very deadly and damaging occurrences, like California".
The insurance industry's contribution to cost and reconstruction is greatly different between countries, For the New Zealand 2011 loss, the insurance industry is expected to take 80 percent of the loss compared to 17 percent in Japan. For Haiti's 2010 earthquake, causing economic damage worth 121 per cent of its gross domestic product, the insurance industry is contributing only one percent to reconstruction and cost. So far, where the insurance cover is insufficient, the government has been made or is obliged to pay for reparations.
Aon to relocate headquarters to London
Aon is to shift its' headquarters from Chicago to London, being the first US S&P500 company to do so.
Aon has 59,000 employees globally and a market capitalization of US$15bn. This comes at a time of rumours that HSBC Bank will shift its' headquarters to Hong Kong amidst the cost of regulation and tax in the UK.
The move to London will benefit Aon with its' closer proximity to Lloyd's of London.
Greg Case, chief executive - who plans to move to London along with about half of the group's executive committee - said the shift would "reinforce the global connectivity of the firm".
Aon has said it will remain regulated by the Securities and Exchange Commission and that the move would not result in job losses in the US. The switch is subject to shareholder approval.
John Nelson, chairman of the Lloyd's market, said: "This is saying 'we want our top management to be closer to the worldwide hub for insurance'. That does indicate that there is a real determination by the top management to internationalise themselves - and London is seen to be the best place to do it."
Aon intends to lease several floors of the Leadenhall Building development, the "Cheesegrater", currently under construction. Mark Hoban, financial secretary to the Treasury, said Aon's decision was "a strong endorsement of London and the UK".
Response by the ABI to the Transport Select Committee
Nick Starling, who is director of general insurance for the ABI, said: "We are baffled that the Transport Select Committee has again called for the transparency of referral fee arrangements of insurers. Referral fees should be banned altogether and not made more transparent - and that ban should apply to all organisations receiving them, not just insurers. Banning referral fees and, crucially, reducing legal costs will improve the situation for customers."
Starling has also said that the ABI is "pleased" that the Committee has recognised that spiralling personal injury claims are the real reason car insurance premiums have been increasing and made recommendations for meaningful reform.
He said: "It is absolutely critical that Britain's whiplash epidemic is tackled once and for all and the Select Committee's acknowledgment that the bar to receiving compensation for whiplash is too low is a step in the right direction. The Committee is also right that the fees lawyers receive need to be reviewed as they currently add unnecessary cost."
The Transport Select Committee had said insurers should be forced to demand greater proof that claimants have a whiplash injury in a car accident.
Whiplash claims currently cost the insurance industry some £2bn a year, according to the Association of British Insurers (ABI). This equates to an extra £90 being added to every driver's annual insurance premium. The number of car passengers claiming for whiplash injuries has risen by 32% over the last three years to 570,000 annually.
There has been a 70% rise in car insurance claims in the past six years, despite a 23% fall in the number of casualties in road accidents. A great deal of this rise is a direct result of the increased number of whiplash claims, according to the committee.
The Gender Directive refers to changes to be made via the UK Equality Act to implement the judgment of the European Court of Justice (ECJ) which removes the ability of insurers to use gender as a factor in pricing and benefits from 21 December 2012.
HM Treasury has recently (in December) published a consultation that acknowledges that UK legislation will seek to apply the judgment only to new contracts entered into after 21 December 2012. It also seeks views on other areas including the continuing collection of gender data, defining a new contract, indirect discrimination and application to group schemes.
Increased regulatory levies for UK general insurers
At the beginning of February, the FSA announced a 36.7% increase in the levy on UK general insurers to £40.1m in 2012/13. This was partly to pay for the proposed "more intensive and intrusive" supervision, the restructuring of the department into the Prudential Regulation Authority and the Financial Conduct Authority, the upgrading of the IT systems and the implementation of Solvency II.
By contrast, insurance brokers would pay a reduced levy, down by 3.1% from the level of 2011/12 under the proposals.
The Financial Services Compensation Scheme also announced an increase in their levy on general insurers, up from £50.5m to £63.5m . This was necessary in light of the expected continuing increase in payment protection insurance (PPI) claims.
The increase in PPI claims in the final quarter of 2011 over that in the previous quarter was 57% according to figures released by the Financial Ombudsman Service. The number in the three month period was 30,301, bringing the total for the year to 104,597.