Financial crisis / Solvency II / PPI / Lloyd's / Deepwater / Aviation / Fitch reinsurance / UK motor / Aviva / Large losses
30 MAY 2012 | THE ACTUARY NEWSDESK
Fall-out from the global financial crisis
At the end of April, the Federal Reserve Bank of New York (FRBNY) said it had sold to Barclays Plc and Deutsche Bank US$7.5bn of collateralised debt obligations (CDOs) linked to commercial mortgages which was assumed in the 2008 bailout of the American International Group (AIG). This followed an invitation to purchase issued on 18 April to eight potential buyers by FRBNY, whose president claimed that the joint winning bid represents good value for the public and significantly exceeds the original price the central bank paid for the assets. The CDOs were issued in 2007 and 2008, and comprise securities of varying ratings culled from 103 commercial-mortgage bond offerings. AIG shares gained 1.7% on the announcement.
Towards the end of April, a group of Stanford International Bank Ltd. depositors asked a U.S. judge to order the appointed receiver to collaborate with rival bank liquidators selected by a Caribbean court on a process to compensate victims of Allen Stanford's US$7bn fraud scheme. According to the creditors' filing, the two sets of receivers have spent about US$150m in their efforts to recover Stanford assets and they have not agreed on a unified plan for processing victim claims and payments. It is understood that almost US$3.5bn in claims has already been submitted to the receiver appointed by the US judge without a formal claims process being in place, and it is necessary to have such a process in place before any assets can be distributed.
In mid-April, Julian Adams, Director of Insurance Supervision at the Financial Services Authority, addressed the City & Financial Conference in London on the supervisor's new approach to insurance regulation and how this relates to the implementation of Solvency II. He explained that it was expected that the Bank of England's new Prudential Regulatory Authority (PRA) subsidiary would assume its responsibilities, including monitoring the security of insurers and providing protection for policyholders, in spring 2013.
These complementary objectives would recognise the differences between different parts of the financial sector, and the different ways in which the failure of firms can affect counterparties and other stakeholders, as well as the real economy. He described this as an evolution of the prudential approach the FSA has taken to insurance supervision in recent years. Mr Adams then described a new overall framework which will replace the FSA's current ARROW framework, bringing together all the strands of regulatory activity into a single supervisory strategy.
The first stage in the new framework will be an assessment of the vulnerability of the firm's business model, which will lead to consideration of whether there is a reasonable resolution approach, such as solvent run-off or scheme of arrangement, which can be adopted in the event of the failure of the firm. The next stage will be for the PRA to undertake a detailed analysis of the firm's financial strength, based on Solvency II criteria and the final stage will be to consider the quality of the firm's risk management and governance arrangements.
The full text of the speech can be found here.
The European Commission is looking to postpone the transposition date (the date by which member states must transpose the directive into national law) by six months to June 30, 2013, as a result of the slow progress in finalising the Omnibus II Directive. However, it is insisted that this will not affect the date of introduction of the new regime, although there are mounting fears that this position is untenable. At least, the trialogue negotiations between the commission, European Council and European Parliament have now begun after much delay, but they still have to deal with such issues as the matching adjustment, the counter-cyclical premium, equivalence, transitional provisions and extrapolation of the risk-free yield curve.
Payment protection insurance (PPI)
There has been a further round of announcements by the big banks in UK of provisions for mis-selling of PPI. On 26 April, Barclays said that they had increased their provision for such claims from £1bn to £1.3bn. On 30 April, Lloyds Banking Group announced that they had set aside a further £375m to pay for compensation payouts - this is in addition to the £3.2bn charge for PPI compensation announced last year. A week or so later, HSBC increased their provision from £455m to £745m, and it is anticipated that Royal Bank of Scotland will follow suit when they announce their quarterly results in the near future, with an increase of £125m mooted.
Lloyd's specialty insurer Canopius, 85% owned by UK-based private equity operation Bregal Capital, appears to have won the battle to buy Omega Insurance after raising its early April offer by 2p a share to 67p. The offer values Omega at £163.6m, and it is understood that, by early May, shareholders controlling 49% of Omega's stock had indicated that they would accept the offer. About £38.6m in new Canopius shares will be issued. Canopius has indicated that they will merge Omega's existing business at Lloyd's and in Bermuda and the US into the Canopius brand. New York based insurer Tower Group has agreed to make a US$75m strategic investment in Canopius giving the US insurer 10.7% of Canopius' ordinary shares and the right to appoint a director to the Canopius board. This latter agreement is contingent on the completion of Canopius' agreement to acquire Omega. Michael Watson, chairman of Canopius, has indicated that further acquisitions may be considered in future.
The US Justice Department has filed the first criminal charges linked to the Deepwater Horizon oil spill, a former BP engineer (Kurt Mix) having been arrested on charges of intentionally destroying evidence. This evidence includes text messages from October 2010 between himself and a supervisor containing details about how attempts to cap the leaking well were going, in spite of being repeatedly informed of his obligation to maintain such records. Prosecutors say he deleted messages that indicated that attempts to cap the well were failing at a time when BP officials were saying publicly that it was broadly proceeding according to plan. Mr Mix resigned from BP in 2012. BP said it "had clear policies requiring preservation of evidence in this case and has undertaken substantial and ongoing efforts to preserve evidence".
On 30 April, Willis Aerospace reported that the airline and aviation manufacturing insurance sectors had made a profit in 2011, following one of the safest years in recent times in terms of aircraft losses and passenger fatalities. The broker estimated total airline insurance premium in 2011 at $1.9 billion, against claims of $1.1 billion, producing the first profitable year for the airline insurance sector in five years. There were 30 total losses of western-built aircraft last year, the lowest number ever recorded, down from 46 in 2010. In addition, passenger fatalities continued a ten-year decline with only 184 fatalities last year, compared with 648 in 2010.
Fitch report on reinsurers
In April, Fitch Ratings, the credit rating agency, published their latest report on the global reinsurance market. This indicated that there was an expectation of a marked rise in reinsurers' earnings in 2012, led by improved underwriting results. The underwriting improvement, in turn, was based on the stronger premium rates being charged on the back of the heavy catastrophe losses in 2011. The Fitch report forecast an 8.5% increase in premium income, coupled with a return to a more normal level of catastrophe losses (a 60% reduction from the 2011 level was included in their forecast), leading to an accident year combined ratio reduction from 2011's 116% to slightly under 100%. Given the way the reinsurance sector has coped with the problems of 2011, Fitch are positive about the strength of the sector going forward, whilst conceding that some reinsurers have suffered weakening of their capital base, which could make them vulnerable to another major series of catastrophe losses.
UK motor insurance
In mid-April, gocompare.com published the results of a survey they had carried out on 2,000 British drivers regarding their future plans on insurance purchase. Over half said they expect to move to a telematics-based policy within five years. The results of the survey also hinted that drivers generally thought that such policies were much fairer than the traditional rating basis, with 92% of drivers believing that their motor insurance premiums should be based largely on the way they drive. On the other hand, only 49% thought that it was fair to use age and sex in calculating the premium.
A company representative believed that, as the survey showed, many drivers, across all age groups, would happily embrace the new in-car technology in a bid to keep their premiums down.
According to the latest data from the AA Shoparound index based on the five cheapest premiums from insurers, the average premium for comprehensive car insurance fell by 1.1% to £1,132 during the first three months of this year. As a result, the index rose by 7.7% over the year to March 31, the smallest 12 month increase since 2008. The latest study also found that the average of all quotes in the index showed hardly any change, remaining at £1,452.
This reflected the fact that some insurers are heavily discounting premiums to attract new business, but others have continued to increase premiums. The research also noted some narrowing of the gap between rates for young male and young female drivers, with the former reducing slightly, but the latter increasing by almost 5% - this it attributes to insurers starting to adjust their pricing ahead of the implementation in December of the European Court of Justice ruling on the use of gender. The AA also confirmed that they expect a growth in the use of telematics-based premium rates forward particularly for young and inexperienced drivers.
In late April, in advance of an expected announcement from the UK government, the Association of British Insurers unveiled plans to deal with what it saw as a "whiplash epidemic", thought to increase the average motor insurance premium by 20%.
They contended that whiplash claimants should not get compensation for pain and suffering unless there is objective evidence that they have been injured. They believed this may involve having a panel of independent doctors to assess whiplash claims, rather than relying on the claimant's own doctor.
They also advocated capping or reducing the level of damages for whiplash claims and the greater use of bio-mechanical evidence that could identify a speed threshold under which whiplash would be unlikely to happen.
At the beginning of May, the UK transport secretary Justine Greening chaired an insurance summit on whiplash attended by the justice minister, the roads minister and the health minister among others. Other attendees included representatives of the medical profession, individual insurance companies and the British Insurance Brokers Association, but apparently neither the Association of British Insurers nor the Institute and Faculty of Actuaries, in spite of their involvement in the past.
It is understood that topics discussed included ways insurers could reject unfair whiplash claims without having to find and prove fraud, and giving guidance to doctors on identifying whiplash. The possibility of government consultations on setting up independent medical panels to judge whiplash claimants and changing the threshold of the small claims court was also mentioned.
Aviva chief executive resigns
In early May, it was announced by Aviva that Andrew Moss, their group chief executive, had resigned with immediate effect after nearly five years in the post. Mr Moss's decision followed a few days after the annual general meeting of the company, when 54% of shareholders voted against the company's annual remuneration report, which would, among other things, increased his own salary to over £1m, although he had already agreed not to take his increase in the current year.
The shareholders were apparently angry at the loss of share value, which has declined by 60% during Mr Moss's tenure, and more than 25% in the last year, fuelled by the heavy exposure to the Eurozone. It is understood that Mr Moss will receive a £1.75m payment, and that his role will be assumed by John McFarlane (the new chairman) on a temporary basis, pending a new appointment.
Earthquake, Mexico - 20 March.
This quake of magnitude 7.4 hit south-western Mexico killing at least two people and destroying or seriously damaging 30,000 homes, with tremors being felt several hundred kilometres away. An early estimate put the economic cost of the event at US$163m, but the insured loss is likely to be relatively small in view of the low insurance penetration.
Gas leak at North Sea oil platform - 25 March.
One of the world's leading "hellfighter" ships (Skandi Aker) has been hired in a bid to plug the gas leak at the Elgin platform. Well-kill equipment and materials was flown from the US and was loaded onto the vessel which is the most advanced in the field and can carry out under-sea construction and installation activities at water depths up to 3000m. The Scottish Environment Secretary said that the evidence over the first week or two after the event suggested the impact of the gas leak had been minimal.
Hailstorm in McAllen, Texas - 29 March.
By mid-April, it was suggested that the insured losses arising from the thousands of property and motor claims submitted following this event may total US$100m.
Tornadoes in mid-western and south central states of US - 13-16 April.
This system of tornadoes principally affected Oklahoma, Kansas, Iowa and Nebraska. There were at least 94 separate tornadoes, the two most severe of which affected the Wichita area of Kansas and Woodward in Oklahoma. The Wichita tornado caused injuries to 38 people, although no fatalities have been reported. There was severe damage to buildings such as hangars on McConnell Air Force base and 90 mobile homes on one park suffered at least 50% damage.
An early estimate of the cost of the damage from this tornado was US$283m, most of it believed to be insured. The tornado in Woodward resulted in 6 deaths and a few other injuries, with substantial property damage: however no estimate of the insured cost is to hand. As a result of the tornadoes, the state governors declared a state of emergency for the entire state of Kansas and 12 counties of Oklahoma.
Plane crash, Pakistan - 20 April.
This involved a Bhoja Air Boeing 737 (leased by the airline and owned by Jet Aviation Sharjah) on a domestic flight from Karachi, which crashed in a storm on its approach to the airport at Islamabad, killing all 127 people on board. It is reported that the 29-year-old plane suddenly dropped from 2,900 feet to 2,000 feet as it came in to land in the thunderstorm containing hail - it is reported to have exploded before hitting the ground. The airline had only recently recommenced operations after they had been suspended for 11 years because of financial difficulties.
A full investigation has been promised by the Pakistani authorities and the owner of the airline has been banned from leaving the country. Liability (and possibly other) insurance is with Reliance Insurance Company of Russia, through a Russian third party insurance agency - they have agreed to pay the equivalent of US$55,000 to the families of the deceased. Reliance is understood to have reinsurance cover with Ingosstrakh in the Russian market.
UK floods - from late-April.
These followed the wettest April on record for many parts of the country, which resulted in flash floods and rivers bursting their banks in many places, especially south-west and south central England and Yorkshire. One person died when his car was caught in a flooded ford. It is believed that relatively limited property damage has occurred to date (9 May), but the forecast of further rainfall onto saturated ground over the next few days and weeks makes this a potentially serious incident.