[Skip to content]

Sign up for our daily newsletter
The Actuary The magazine of the Institute & Faculty of Actuaries

General insurance news round-up May 2012

Global financial crisis / Asbestos and pollution / Solvency II / Lloyd’s / Deepwater Horizon / Protection and indemnity / Aviation / UK motor insurance / Catastrophe / QBE and Brit / Climate change / Large losses

Fall-out from the global financial crisis
By early March, American International Group (AIG) had sold 1.72bn ordinary shares in its Hong Kong life insurer AIA Group, bringing its holding in the group down to below 19%.  The buyers, in a sale through a placing arrangement, apparently comprise a broad mix of investors including long-term funds, hedge funds and sovereign wealth funds.  It is believed that the sale raised a figure approaching US$60bn, much of which will be used to pay off the outstanding balance on the US Treasury loan by which AIG was bailed out in 2008.

The financier Allen Stanford was convicted on March 6 by a Houston federal jury on 13 of 14 counts relating to what prosecutors called the sale of bogus certificates of deposit from his Antigua-based Stanford International Bank Ltd.  This was in respect of his role in running an estimated $7bn Ponzi scheme.  Stanford’s lawyers appealed on the grounds that he had been deprived of his Sixth Amendment right to a fair trial. Among the reasons they cited was a lack of time to prepare a defence, extensive prejudicial pre-trial publicity, and the potential that messages sent by reporters from the courtroom via Twitter might have reached jurors during the six-week trial.

This appeal was rejected by the judge before the end of March without any detailed explanation – Stanford is due to be sentenced in June and faces potential 20-year prison terms on several of the counts.  As these could be consecutive, he faces the possibility of spending the rest of his life in jail. The jury also found that federal authorities should try to seize US$330m of frozen funds that Stanford stashed in 29 foreign bank accounts.  The court had decided in 2010 that the Lloyd’s liability policy which had started to fund his defence was no longer required to do so, as money laundering was excluded from the cover.

Asbestos and pollution developments
At the end of March, the UK Supreme Court ruled that insurer liability was "triggered" when victims of mesothelioma were exposed to the dust, even if the symptoms developed later.  As a result, thousands of family members related to the victims (employees who inhaled asbestos fibres at work and developed an asbestos-related cancer) intend to claim on insurance policies dating from the late 1940s to the late 1990s. It is believed that the ruling could cost insurers more than £100 million, and potentially applies to thousands more insurance claims into the future. The test litigation involved identifying the appropriate "trigger" for employers' liability insurance policies related to asbestos-related mesothelioma claims, where the wording of the policy required injury or disease to an employee to be 'sustained' or 'contracted' during the period of insurance.  The judges ruled that, for mesothelioma (which has a particularly long gestation period), "The negligent exposure of an employee to asbestos during the insurance policy period has a sufficient causal link with subsequently arising mesothelioma to trigger the insurer's obligation”.  In spite of the cost to them, insurers’ representatives welcomed the additional clarity provided by the ruling.

Solvency II
There has been significant interest from European Union-based captive insurers in the possibility of re-domiciling in Guernsey, which is outside the EU.  The enquiries are mainly from captives currently domiciled in Dublin, Gibraltar and Luxembourg, and relate to the possible competitive advantage which may be obtained from a Guernsey base under Solvency II.  The captives involved are mainly small and medium-sized companies which perceive that Solvency II will saddle them with a significant cost burden.

A meeting is taking place in Miami during April between the US National Association of Insurance Commissioners (NAIC) and the European Insurance and Occupational Pensions Authority regarding the future for international solvency standards.  Whilst the majority of insurance markets see Solvency II as the way forward, the US approach is one of “constant evolution”.  However, Kevin McCarty, the NAIC president from Florida, recognises that all supervisors from different jurisdictions have a mutual interest in protecting consumers.  Following the financial crisis of 2008, the NAIC commenced an initiative to re-examine its solvency regime, especially in relation to group supervision and own risk and solvency assessment, and these matters will be under discussion at Miami.

In mid-March, the plenary vote on Omnibus II in the European Parliament was provisionally deferred until 10 September 2012, the second time this year there has been a delay. The date was said to be provisional and could move either forward or back depending on the results of the trialogue negotiations which will begin straight after the Easter break, probably on 11 April.  One concern arising from this delay is that the current Directive text states that Solvency II will come into effect on 1 November 2012 and, crucially, that Solvency I expires on the same date.  However, it is understood that there are measures that the Commission could take to avoid any confusion; for example, the Commission could publish a two-line directive with the implementing dates for Solvency II.

Lloyd's of London has announced that it made a £516m loss last year, after paying out the largest catastrophe claims total on record, at £4.6bn – this made 2011 the worst year for Lloyd’s since 2001, which was badly hit by the terrorist attacks on New York and Washington.  These catastrophe losses include those arising from earthquakes in Japan and New Zealand, storms in the US and floods in Thailand and Australia. As a result, the Lloyd’s operating ratio was around 107%.  The Thai floods, from October onwards, were the biggest disaster for Lloyd's last year in terms of cost, with total claims estimated at £1.4bn.  Richard Ward, Lloyd's chief executive, said the Thai floods were a "double whammy" for Japan because 80% of the buildings were owned by Japanese technology companies, many of which had transferred production to Thailand following the country's devastating earthquake and tsunami in March.  John Nelson, who took office as Lloyd's chairman in October 2011, said the market was still in a strong financial position with substantial capital including a £2.3bn central fund, but warned that 2012 would be another challenging year.

At the end of February, Hardy Underwriting Group announced a 2011 pre-tax loss of £42.1m, largely resulting from catastrophe losses on its property treaty account, particularly in Thailand.  As a consequence, its share price dropped nearly 8% to 184.5p.  Within a month, CNA Financial, the Chicago-based insurer with market capital of $8bn, had offered 280p cash per share in a deal that valued Hardy at £143m.  Hardy agreed the offer which was pitched at a 50% premium to its share price, and which allows senior executives to keep their jobs, although the chairman, David Mann, and four other directors, will resign.  This offer compares with the rejected offer of 350p per share from Beazley last December after Hardy had effectively put itself up for sale.  Following the CNA bid, the Hardy share price rose strongly to 276p.  CNA said it planned to retain the Hardy brand and “continue with its existing portfolio and strategy in all material respects”.  A special general meeting of Hardy’s shareholders to approve the take-over has been set for 26 April.

Deepwater Horizon
A new study, commissioned by the National Oceanic and Atmospheric Administration, of dolphins living close to the site of the Deepwater Horizon catastrophe has established serious health problems afflicting the marine mammals.  Many of the 32 dolphins studied were underweight, anaemic and suffering from lung and liver disease, while nearly half had low levels of a hormone that helps the mammals deal with stress as well as regulating their metabolism and immune systems.  The research follows the publication of other scientific studies into insect populations on the nearby Gulf coastline and into the health of deepwater coral populations, which all suggest that the environmental impact of the spill may have been far worse than previously appreciated.  Another study confirmed that zooplankton – the microscopic organisms at the bottom of the ocean food chain – had also been contaminated with oil.

Protection and Indemnity (P&I) clubs
At the end of February, the Japan Shipowners’ Mutual P&I Association announced an unbudgeted supplementary call of 10% for the 2010/11 year, but said that it would defer a decision on its previously mooted subordinated loan.  Last November, it was suggested that a supplementary call of up to 30% may be required, and that the club may seek to obtain up to US$103m in a subordinated loan.

Aviation developments
Allianz Global Corporate & Specialty is considering the possibility of bringing to the market a product which would provide coverage to airlines for business interruption arising from incidents which do not cause physical damage.  This would provide some protection from events like the eruption of the Eyjafjallajökull volcano and the Sars pandemic, both of which had a significant impact on airline profits.  However, a spokesman for the company said that there were significant problems to overcome, especially in relation to accumulation risks, as such events tended to affect all airlines at the same time.  It is likely that some sort of deductible would be required in the new product, either in terms of time or lost earnings.

UK motor insurance
The results of the Confused.com/Towers Watson car insurance price index, based on more than four million quotes, for the first quarter of 2012 reveal that the cost of comprehensive cover fell by 3.3% in the quarter, with third-party, fire and theft premiums seeing a smaller decrease of 0.4% in the same period. The average cost of a comprehensive policy at the end of March 2012 stood at £816 - a reduction of £19 over the past 12 months.   Duncan Anderson, Towers Watson's global pricing and product management leader, commented that "After several years of exceptional increases, insurers seem to have addressed profitability issues caused primarily by spiralling bodily injury claims”.
Following their introduction of the use of telematics to help in premium rating for young drivers last year, Cooperative Insurance has published some data from their “smartbox” scheme.  This shows that insurance  based on satellite technology has 20% lower cost than those without.  The “smartbox” is in-car tracking equipment which monitors driving behaviour, such as braking and acceleration, cornering, speed and at what time of day the car is driven. This data is then used to calculate insurance premiums: the better the driving, the lower the premium.  

Co-operative  has analysed the driving habits of 10,000 telematics insurance customers aged 17 to 25 across the UK, finding that they had 20% lower claims experience than those with standard insurance. Telematics customers have less serious accidents, with typical claim 30% less severe than other customers, although there is little evidence of an impact on claims frequency.  It is believed that those opting for such a scheme are likely to be self-selecting as safer drivers, rather than the existence of the monitoring having an impact on their behaviour.  Although this type of insurance accounts for less than 10% of the market at present, its attractiveness is likely to increase after the use of gender to help in rating is banned later this year.`

At the end of March, Swiss Re published their Sigma analysis of catastrophes in 2011.  This showed that last year saw the highest economic losses in history, at US$370 bn.  This led to the second-largest insured losses ever, at US$116bn, including the highest insured earthquake losses, at US$49bn and the highest insured losses ever for a single flood event (in Thailand), at US$12bn.  However, Swiss Re believes the insurance industry weathered the year well and played a key role in risk management and post-disaster recovery financing. The earthquake in Japan, the largest known in terms of magnitude to have ever hit the country, accounted for 57% of 2011’s economic losses. Altogether, natural catastrophe insured losses came to around USD 110 billion, while losses from man-made disasters were around USD 6 billion.  Both the flooding incident in Thailand and that in Australia earlier in the year were among the five most costly insured fresh-water floods in history.

The adverse 2011 experience has led to considerable strengthening of global property insurance rates in the first quarter of 2012, when catastrophe experience has been significantly more modest.  For example, in the US, rates for catastrophe-exposed risks generally increased between 10% and 20%, while property accounts with no catastrophe exposure typically rose by up to 10%. Some risks experienced higher increases depending on account specifics, geography, and the amount of catastrophe cover required. In countries affected by losses, rates for catastrophe-exposed risks continued to increase at a higher rate than risks with no catastrophe exposures.

QBE and Brit Insurance
At the beginning of April, QBE Insurance Group announced the acquisition of Brit Insurance’s £350m UK regional business – this could give QBE a 5% UK market share next year.  The acquisition took place shortly after Brit announced a 35% fall in their net profits in 2011.  Under the terms of the deal, QBE will acquire all of Brit’s renewal rights, operations and assets but there will be no transfer of Brit UK’s historic business. Following the deal, AM Best has downgraded the financial strength rating of Brit Insurance Limited (UK) to A- from A and the issuer credit rating to a- from a, and placed the ratings under review with negative implications.  The price paid by QBE is believed to be between £25m and £50m.

Climate change
A survey of investors in low-carbon energy technologies in developing countries carried out by the UN Environment Programme Finance Initiative has found that 49% of respondents consider the availability of risk mitigation measures are of major importance in their investment decisions.  Currently, most products of this nature are provided by such organisations as Multilateral Insurance Guarantee Agency, part of the World Bank, but the survey presses the need for the involvement of commercial risk-hedging instruments, especially for currencies in sub-Saharan Africa.

Large losses
Grounding of container ship Rena and oil pollution, North Island, New Zealand – 4 October 2011.  
The master and second officer are faced with potential fines in excess of NZ$300,000 and/or up to 12 months’ imprisonment in relation to the environmental damage following the vessel’s grounding.  The men have pleaded guilty to 10 of the 11 charges brought by Maritime New Zealand.  Several of the charges relate to attempting to pervert the course of justice by altering the ship’s documents after the incident.  It is not known whether these legal proceedings will impact on the insured loss.

Floods in Thailand – from late July 2011.  
In March, Standard & Poor estimated the total insured cost of these floods at between US$16bn to US$18bn.  The increase they perceive to be impacting particularly on Japanese insurers, and to be due to slow reporting through difficulty in gaining access to some of the most-affected industrial sites.  Some of the additional cost is likely to be reinsured into international markets.

Hailstorms, Melbourne, Australia – 25 December.  
By the end of February, the number of claims had risen to 104,320, with an estimated insured cost of A$669,000.

Flooding in eastern Australia – from late-January.  

By early March, insurers were expecting to pay at least A$111m in relation to the Queensland claims, but this figure will almost certainly rise as more homeowners make claims.  In addition, there are further (albeit lower) losses from New South Wales and Victoria.

Fire on cruise liner in Indian Ocean – 27 February.  
This involved the Costa Allegra (sister ship of the ill-fated Costa Concordia) on which a fire broke out in a room housing electrical generators.   Whilst the fire did not spread particularly widely, it left the vessel drifting without power or light, knocking out air conditioning, refrigeration and cooking facilities.  It took 3 days under tow by a French trawler, across around 260 miles of  seas where Somali pirates are quite active, to reach the Seychelles.  There were a few minor injuries among  the 627 passengers and 413 crew, mainly from falls in the dark.  It is understood that the owners have a US$30m deductible on their hull and machinery insurances, so it is uncertain whether insured losses will arise.  However, the company may have to suffer significant premium increases on renewal on May 1, given the proximity of the two events.

Gas leak at North Sea oil platform – 25 March.  

This affected the Total Elgin PUQ platform, 150 miles off Aberdeen and resulted in a release of inflammable toxic gas from a point 4km below the seabed.  The 238 workers on the platform were successfully evacuated from the vicinity and a two nautical mile exclusion zone was established around the area – some workers were also evacuated from nearby facilities.  A flare was left burning at the site, causing some concern that there may be an explosion but this gradually subsided and finally petered out over the next few days.  Two options were under serious consideration to stem the leak, drilling a relief well (a process which it was believed could take six months) or blocking the well with “heavy mud” (a quicker procedure, but one not guaranteed to be successful).  By early April, the latter of these options was being prepared, with experts optimistic that it would prove successful.  Total  is spending around US$1m a day responding to the leak, and is also losing about US$1.5m a day—or 60,000 barrels a day of oil equivalent—in lost output from its share of the closed field, but it is not known how much of this cost is covered by insurance.  However, Total is said to have insurance that  covers damages to third parties up to US$750m and damages to the platform and its production unit up to US$1bn.

Hailstorm in McAllen, Texas – 29 March.  
This freak storm which lasted about an hour, and was accompanied by torrential rain and winds of 70-75 mph, is understood to have damaged over 1100 buildings in the city in the Rio Grande valley.  An early estimate suggests insured losses of “tens of millions of US dollars”.