American International Group/ Asbestos developments/ Solvency II/ Lloyds/ UK motor insurance, and more
American International Group (AIG)
In early September, the US Treasury Department announced plans to sell about US$18bn worth of AIG shares in what will be the fifth reduction in the stake it acquired as part of its US$182.3bn rescue of the company. About $13bn will be sold to private investors, while AIG will buy back $5bn worth of shares. AIG shares have risen almost 50% this year, a gain that is likely to have encouraged officials to dispose of more of the stake. The US needs to sell its stake at an average price of almost US$29 a share to break even. The first two sales were at US$29 per share, and its subsequent two have been at US$30.5.
Australian research published in August has indicated that children exposed to blue asbestos may face more wide-ranging health problems in adulthood than mesothelioma and lung cancer, the well-known asbestos-related diseases. This is based on health data from children who lived at Wittenoom, a now-abandoned Western Australian town where blue asbestos was mined for nearly 20 years. Among women who spent a childhood at Wittenoom, there was a roughly four-fold increase in risk of brain cancer and three-fold increase in the risk of ovarian cancer. Men who spent their childhood there also showed an increased risk of brain, colorectal and prostate cancer, and leukaemia, although the total number of cancers was still small. The data also suggested a slightly elevated risk of heart disease and 'nervous disorders' among children exposed to blue asbestos.
Towards the end of August, the European Commission confirmed that a technical assessment of the impact of the long-term guarantees package (the issue which is threatening the implementation date for Solvency II) will be carried out during the autumn. Details of the assessment are expected to be finalised at the next political trialogue scheduled for 18 September. A spokesman indicated that, at this time, the trialogue parties continue to work on the basis of 1 January 2014 as the first date of application of Solvency II. A number of other political issues, including third country equivalence, will also be discussed at the trialogue.
At the end of August, a report published by Guy Carpenter on the Lloyd's market reported on Vision 2025, the new market strategy under which Lloyd's is looking to improve its global competitiveness despite mounting challenges including low investment returns, record catastrophe losses, subdued economic growth in developed markets, and uncertainty over the future of the Eurozone. The report details how emerging market expansion, coupled with consolidation of its presence in established markets, will be the key driver in positioning Lloyd's to remain the industry's pre-eminent global hub for specialist insurance and reinsurance.
On 28 August, Standard & Poor's (S&P) affirmed Lloyd's A+ rating and revised its outlook from stable to positive on the basis that Lloyd's competitive position has improved relative to its peers. The decision comes from its view of Lloyd's meeting expected operating performance in 2011 (despite record losses), an improved competitive position and progress toward implementing an internal model to address Solvency II. S&P added that the continual flow of new entrants and capital providers to the market in recent years is clear evidence that Lloyd's continues to remain highly attractive as an operating platform. S&P's base-case projection for Lloyd's operating results is a combined ratio in the 93%-95% range for full years 2012 and 2013, with pre-tax profits of at least £1.5 billion and return on revenues of 8%-10%, assuming catastrophe losses are in line with the historical average.
UK motor insurance
In August, the Royal Society for the Prevention of Accidents (RoSPA) issued a report commenting on the use of telematics in premium rating for motor insurance and the theory that better understanding of driver behaviour should reduce risk, drive down premiums for safer drivers and even improve the overall quality of driving. But RoSPA maintain that driver behaviour is about far more than excessive braking, over-enthusiastic acceleration and speeding. They state that the best drivers will adapt to circumstances and make decisions that are right for the conditions rather than simply obeying fixed rules, behaviour that is reflected in space between cars, consistency of driving and adopting speeds that reflect the immediate conditions. They express some concern that current telematics-based insurance systems are simply not equipped to measure these critical factors. Leading UK insurers are piloting telematics in order to identify good and bad drivers and set appropriate premiums that reflect the risk presented by the individual. RoSPA applaud the principle of this approach, but believe the subtleties of driving need to be incorporated to improve the accuracy of the model. Their concern relates to the critically important question of what is a good and safe driver, which is ultimately a judgment to which the current measurements used by insurers contribute, but only in part. RoSPA is currently embarking upon a telematics project to capture the driving behaviour of its own advanced drivers, using second-by-second driver analysis information to create a credible and objective benchmark against which other drivers can be measured.
UK Riot Damages Act (1886) (RDA)
At the beginning of August, a year after the UK riots, the Association of British Insurers (ABI) published claims data and called on the government to simplify and streamline the RDA. The insurance industry has dealt with 3,000 claims for riot damage, and policyholders have received around £200m in compensation. The vast majority (over 95%) of claims have now been settled in whole or in part. However, the ABI said that over half of claims submitted by insurers to police authorities under the RDA have been declined. This indicated that insurers are doing all they can to look after their customers, despite not getting their claims settled by the police authorities. The ABI requested that the RDA be amended to provide a clear, more modern, legislative definition of a riot, a streamlined and standardised claims process for local police authorities and an increase in the time period for notification of claims under the act from 14 to 90 days.
In a report published towards the end of August, Fitch Ratings indicated that capital market alternatives to reinsurance, such as catastrophe bonds, collateralized quota-share reinsurance vehicles (sidecars), and other risk transfer structures represent an increasingly viable alternative to the use of traditional reinsurance. However, to the extent that hardening insurance market conditions diminish into 2013, Fitch expects less overall utilisation of capital market reinsurance alternatives than recent experience in 2011/2012. The report suggests that the acceptance of alternative reinsurance represents an option to manage reinsurers' exposure and capital and serve as a source of fee income. However, it also represents competition for traditional reinsurers that, in conjunction with the strong overall capitalization of the reinsurance industry, has worked to dampen reinsurance pricing momentum in 2012. Fitch believes that the comparatively high potential returns on cat bonds and sidecar investments, and the lack of correlation between catastrophe losses and returns on other major asset classes, should continue to contribute to strong demand from certain investors, including hedge funds, private equity, and institutional investors. Over the last decade, Fitch states that the sidecar has emerged as a more efficient and flexible option to traditional start-up (re)insurers, especially in the case of the retrocessional property catastrophe market, where short-term pricing opportunities can be very advantageous after catastrophes, but are short lived. Fitch also notes that most of the recent start-up reinsurers were created and funded by well-known hedge fund managers seeking a longer-term asset management vehicle, and believes that the long-term future of this approach ultimately depends on its relative success over the entire market cycle.
In the next few weeks, Royal Bank of Scotland (RBS) is expected to file a formal intention to float Direct Line, whose brands include Churchill, Privilege and Green Flag, although a final decision has not been taken at the time of writing. Following its bailout by the UK government, European regulators have forced RBS to sell Direct Line by the end of 2014, in order meet the European rules for state aid. When RBS first put Direct Line up for sale in 2008 it was hoping to achieve a price of around £7bn, but in today's climate, suggestions are that Direct Line might fetch closer to £3bn. Ahead of its planned flotation, Direct Line has announced plans for 900 redundancies, setting itself a target of delivering £100m worth of cost savings by the end of 2014.
Large loss updates include:
Drought in North America - from spring 2012. This started because of the record low snowfall over the winter 2011/12, leading to minimal melt-water being absorbed into the soil - this was then exacerbated by continuing low rainfall and a summer heat-wave. In July over 4,300 temperature records were set, and over 100 deaths were attributed to the excessive heat. The affected area includes most of US, eastern and central Canada and parts of Mexico. At the end of August, around 90% of the US mainland is said to be exceptionally dry or worse, with extreme drought or exceptional drought affecting states from Georgia in the east to Nevada in the west and from South Dakota in the north to Texas in the south, a situation not seen since the 1950's. 1,692 counties (over half the total) have been declared primary natural disaster areas. The impact has largely been in crop failure or very low yield, which is already leading to a significant rise in food prices. In economic terms, it is on track to become the costliest natural disaster in US history, at many billions of dollars, but the insurance impact is likely to be relatively limited, with little relevant coverage available. Federal aid is likely to be provided, as necessary, in counties declared disaster areas and surrounding "contiguous" counties.
Floods in Krasnodar, Russia - early July. Flash floods caused by torrential rain (up to 11 inches during a few hours) swept the southern Russian Krasnodar region to the north of the Black Sea, killing at least 171 people and injuring a further 584. The floods, which were the worst there in living memory, struck the area around the town of Krymsk (population 57,000) at night, without warning. Thousands of houses in the region were almost completely submerged and many of the victims were elderly people who had been asleep at the time. The transport system in the region is said to have collapsed and there was no electricity supply throughout the affected region. Total economic damages were said to be US$280m but the majority of this is likely to be uninsured.
Floods and landslides in China - during July. These floods and landslides, which included the major incident in the Beijing area from 21 July (see these columns last month), were caused by an active weather pattern across China, as extended periods of heavy rainfall spawned flooding and landslides in nearly two-dozen provinces. In total, 324 people died and, according to the Ministry of Civil Affairs, the floods and landslides damaged or destroyed at least 475,000 homes and affected more than 1.66m hectares of cropland. Total combined economic losses were listed at US$8.3bn. The China Insurance Regulatory Commission noted that 47,000 claims were filed with payouts in excess of US$176m, suggesting that only a very small part of the damage was covered by insurance.
Earthquakes, north-western Iran - 11 August. Two quakes measuring 6.4 and 6.3, plus numerous aftershocks struck with epicenters about 30-35 miles north-east of Tabriz, leaving at least 250 people dead and more than 1,300 injured. 16,000 people were given emergency shelter after they were forced to leave their homes. Most of the casualties were in outlying villages, at least 20 of which were destroyed, with another 130 sustaining more than 50% damage. Most of the houses in rural areas are built of mud, and can crumble when even a moderate quake hits. Telephone communication in Tabriz and to the villages was seriously disrupted, hampering rescue efforts. In view of the area hit, it is unlikely that any significant insurance losses will arise.
Wildfires, Canary Islands -early to mid-August. These hit Tenerife and La Gomera, cutting off roads and electricity supplies, and leading to the evacuation of 5,000 people. The blaze on La Gomera burnt for more than a week, consuming around 11 square miles including ancient woodlands designated as a UNESCO World Heritage Site. About 2,500 residents were evacuated from 13 villages in the south of the island, some of whom were forced to flee by boat. In neighbouring Tenerife, the fire covered around 500 acres, and more than 2,200 people were moved from their homes in eight villages as a precautionary measure. No estimate of economic loss is available, but insurance losses are not expected to be material.
Hurricane Isaac, Dominican Republic, Haiti and southern US - 24-30 August. As a tropical storm, Isaac hit Hispaniola causing at least 34 deaths (5 in the Dominican Republic and 29 in Haiti) and resulting in the evacuation from their homes of at least 35,000 people. The storm reached hurricane strength over the Gulf of Mexico shortly before making landfall on 28 August near the mouth of the Mississippi. It then moved along the coast to make a second US landfall near Port Fourchon in Louisiana on 29 August, before moderating back to a tropical storm. Seven deaths were caused in US (five in Louisiana and two in Mississippi) and power cuts were experienced by 900,000 customers over five states. Significant rainfall and some flooding occurred in Florida. In Louisiana, high winds gusting to 85mph brought storm surges of up to 11 feet, and New Orleans suffered badly from power cuts and some flooding (although nothing like as severe as Hurricane Katrina in 2005). At least 13,000 homes in the state were damaged. An early estimate put total economic losses from the storm at around US$3bn, and insured losses at around half of this.
Wildfires, southern Spain - late August/early September. These were caused by the hot summer, strong winds and high temperatures, although there may have been a helping hand from an arsonist. The fires affected the wealthy coastal resort town of Marbella, causing the evacuation of around 6,000 people (4,000 from the village of Ojen and 2,000 from the eastern part of Marbella), many of them tourists. At least one person died in Ojen and a few others were injured. To date, no major damage to residential property has been reported, so insurance claims are unlikely to be material.