From the world of general insurance
Large Losses
Pollution from the wreck of the oil tanker Erika, Brittany, France – December 1999
Total have decided to appeal against the award of €192m made recently against them as charterers, and other defendants, in relation to the pollution resulting from the wreck of the tanker. They do not believe that they have any liability for the pollution, as they were only using the vessel (which had structural weaknesses), but added, however, that they would still compensate victims, provided they (the victims) withdraw from the next trial.
Failure of RASCOMSTAR-QAF satellite – 29 December 2007.
This satellite, which was said to be the first communications vehicle dedicated to Africa, failed 9 days after its successful launch from Europe’s space port in West Guinea. The failure resulted from a helium leak in the main propulsion system, and in spite of work by engineers to amend its orbit to a more sustainable one at a much greater height, it is clear that its useful life will be dramatically shortened. It is understood that the insurance cover was for US$250m, and was led by Munich Re.
Winter storms in California, Washington and Oregon – 4-8 January.
More recent estimates confirm the insured losses at around US$580m. Tornadoes in mid-west of USA – 7-10 January. These unseasonal events mainly hit the states of Missouri, Arkansas, Mississippi and Alabama. At least 72 individual tornadoes were identified and 4 deaths resulted. Insured losses are estimated at US$425m.
Floods in Queensland, Australia – 14/15 January.
These floods are now understood to have had a major impact on a mine owned and operated by BHP Billiton. This resulted in the closure of the mine and a claim initially estimated at A$650m. It is understood that the coverage is placed in the London market, where it is led by Munich Re.
Crash landing of British Airways plane at Heathrow, London – 17 January.
The plane has been declared a constructive total loss, and insurers have paid US$63m. Initial investigations of the cause of this crash have ruled out mechanical defects, or damage by ice or birds, as being responsible. This finding starts to narrow down the list of potentially liable parties, but further work clearly remains to be done to identify the actual cause.
Windstorm Paula, central Europe – 27 January.
This mainly affected Austria, but with some impact in other countries, including Poland and even Sweden. The winds, peaking at 75 mph, caused significant property damage, one death and a small number of serious injuries. Insured losses in Austria alone are estimated at €70-100m.
Winter storms in China –mid January/early February.
These involved the worst snowstorms to hit the region for more than 50 years, resulting in more than 60 deaths, the destruction of 223,000 homes and damage to a further 862,000. The storm is believed to have had a severe impact on the infrastructure, with many hundreds of thousands of rail passengers stranded, and to have affected 70 million people in 14 provinces across the country. Economic losses have been estimated at over US$15bn, but in view of the low insurance penetration in the area, insured losses are likely to be only a relatively small proportion of this, although they are known to be at least hundreds of millions of dollars.
Cyclone Gene, Fiji – 29/30 January.
This category 2 cyclone caused widespread damage, power cuts, water shortages and flash flooding, claiming 4 lives. Insured losses are not thought to be material, although no specific details are to hand.
Windstorm Resi, northern Europe - 31 January-2 February.
This hit UK, with peak gusts of around 100mph, before crossing the North Sea to hit Norway and Denmark. The worst impact was on shipping, with two ships being forced to run aground, a ferry off the Lancashire coast, and a trawler off the west coast of Scotland. In addition, a refrigerated cargo ship was damaged, lost part of its cargo overboard, and had to have its seriously injured skipper airlifted to hospital after the ship got into difficulty off the coast of Ireland. Onshore damage was relatively minor.
Tornadoes in southern USA – 5/6 February.
The states principally affected by the 82 separately identified tornadoes were Arkansas, Tennessee and Alabama. At least 59 deaths and hundreds of injuries were caused, the highest death toll in a tornado outbreak for over 20 years. Insured losses are estimated at US$850m.
Explosion and fire at sugar refinery in Georgia, USA – 7 February.
This incident, at one of America’s largest sugar refineries, left 6 employees dead and about 40 injured. It is believed to have been caused by combustible sugar dust. The owners, Imperial Sugar Company, 65% of whose production is carried out at the plant, has assets of US$360m, but whilst it has confirmed that it has insurance coverage, no details have been disclosed.
Earthquake, southern Greece – 14 February.
This measured 6.7 on the Richter scale, and was centred on a fairly sparsely populated area nearly 150 miles south of Athens. A further quake measuring 6.2 struck the same area 6 days later. Damage does not appear to have been particularly severe, and insured losses are unlikely to prove material.
Monsoon rain, Queensland, Australia – 15 February.
The greatest human impact of this event was felt in Mackay in the central part of the state, where approximately 25 inches of rain fell in 10 hours and an incredible 7 inches in a single hour. This caused the worst floods in the area for 20 years, necessitating the evacuation of 1000 homes. Problems were exacerbated by the risk that crocodiles would enter the city from nearby rivers and estuaries. Early estimates put insured losses at A$120m. The greatest insurance impact, however, is likely to be from flooding of another BHP Billiton mine (see the 14/15 January event above). The initial estimate of the mine’s loss from this second flood is A$400m.
Cyclone Ivan, Madagascar – 17 February.
This category 4 storm hit the heavily populated north of the island, with winds of up to 210kph. No loss information is to hand, although insurance penetration in the area is relatively low.
Earthquake off the coast of Sumatra, Indonesia – 20 February.
This quake measured 7.5 on the Richter scale. No tsunami arose, as the epicentre was apparently beneath an off-shore island. Whilst significant damage occurred, insured losses are expected to be minimal, due to the low insurance penetration.
Earthquake in England – 27 February. This had its epicentre near Market Rasen in Lincolnshire and measured 5.2 on the Richter scale, making it the most severe to hit UK for over 20 years. The tremor was felt up to 200 miles away, but damage was fairly limited. An initial estimate of insured losses was £10m. Current Issues Newsletter
Solvency II
At the end of January, the Comité Européen des Assurances (CEA), which represents European insurers and reinsurers, called for more impact analysis on the Solvency II proposals, and said the QIS4 study needed to align more closely with the framework directive of July 2007.
CEA also requested further discussion and analysis on the capital requirements in the framework directive itself, calling for greater consistency between the minimum capital requirement and the solvency capital requirement. Nevertheless, CEA confirmed that it supported the principle of the new regime.
Meanwhile, the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) emphasised its wish to receive feedback, within QIS4, on the proportionality of its proposals in relation to smaller insurers, such as captives.
It appears that significant lobbying is being carried out on behalf of the captive insurers to moderate the expected impact of higher capital requirements on them, bearing in mind their different risk profile and, in particular, their relatively limited spread of risk.
Other regulatory developments
The Financial Services Authority (FSA) in the UK has introduced a new Insurance Conduct of Business Sourcebook, which provides greater flexibility under a principles-based approach.
It also requires firms selling payment protection insurance (PPI) to tell customers to whom advice is not being provided that the customer is solely responsible for deciding on the suitability of the policy. In addition, the firms’ sales processes should be amended to take reasonable steps to ensure that the customer is eligible for benefits under the policy before completing the sale, and to draw their attention to the 30-day cooling-off period.
The FSA will continue mystery shopping in the PPI market, and will impose heavier fines or other regulatory measures on those firms not complying with the new standards.
US sub-prime mortgage crisis
Towards the end of January, the Massachusetts authorities commenced investigations into two major bond insurers, MBIA and Ambac, in relation to allegations of possible nondisclosure of essential information relating to their exposure to sub-prime bond losses.
Three subsidiaries of XL Capital have had their financial strength ratings downgraded by Fitch, the credit rating agency, following the disclosure that the company had suffered a net loss of $1.2bn in the fourth quarter of 2007. This loss was largely caused by the credit crunch, and in particular the company’s involvement with Security Capital Assurance, a bond insurer in which it holds a minority stake and with which it had a major reinsurance contract.
Allianz has also suffered a significant loss from the crisis, with its banking subsidiary Dresdner Bank suffering a fourth-quarter write-down of E900m on structured financial products (in addition to E575m in the third quarter).
In mid-February, all the major credit rating agencies applied negative outlooks to American International Group after reports that the company may face heavier credit-related losses than previously thought.
In spite of these and other losses within the industry, the premium rates for banks’ errors and omissions insurance, and directors’ and officers’ cover, have remained stable — it is not yet clear whether such policies will respond to claims made against the banks by, among others, their shareholders.
Lloyd’s
Further analysis of the market’s overall capacity for 2008 (reported last month) reveals that there has been a fairly significant reduction in the capacity of existing syndicates, but 11 new ones are now being established. As a result, the £15.95bn capacity for 2008 is now spread across 75 syndicates, an increase of nine from 2007. QBE Underwriting and Catlin remain the largest of the 46 managing agents. Lloyd’s also stated that it will not, in future, publish capacity figures in January, but will include them with the previous year’s premium income data in April.
Rogue trading at Société Générale (Socgen)
It is not yet clear whether the recent E4.9bn rogue trading loss at Socgen will be the subject of insurance claims by the bank — while it has rogue trading coverage, it is understood that this will only respond if the trader concerned had criminal intent or aimed to benefit from the fraud. It is also understood that the coverage is placed with a number of insurers, but neither their identity nor the extent of the coverage has been published. The fact that losses from unauthorised trading are not covered per se has already resulted in demand by a number of banks to extend the terms to include such risks in future — this may not prove to be a practicable proposition.
Marine business
Marine hull business had an awful year in 2007, and is believed to have had the highest claims ever, costing at least $1.5bn, including the cost of around 80 total losses. To some extent, this is caused by the high level of activity in what is a booming shipping market.
The International Group Protection and Indemnity (P&I) clubs, which all have a common renewal date of 20 February (apparently the date when the Baltic Sea was deemed to be free of its winter ice), have achieved premium rating increases of around 15% from their members for the 2008 renewal.
This reflects the very poor experience for 2007, which currently appears likely to be even more unprofitable than the previous year, which was itself the worst on record. As a consequence, a considerable number of ship-owners have moved their coverage from their existing P&I club — in some cases this follows many decades with the same club.
Sex abuse and negligence claims
The Law Lords in the UK handed down a decision at the end of January that effectively removed all time limits for bringing a legal case against an alleged abuser — the decision gave courts the right to extend the limit at their discretion. This compares with the previous limits of six years for abuse and three years for negligence, both periods commencing on the victim’s 18th birthday. This will inevitably increase the exposure and the length of tail of the claims experienced by liability insurers.
Climate change
According to a new survey by Professor Mark Saunders of the Benfield UCL Hazard Research Centre, the rising temperature of the surface of the sea was responsible for 40% of the increase in hurricane activity in the 10 years to 2005. A rise of only 0.5°C in the sea-surface temperature could itself cause a 40% increase in hurricanes — this is significantly more than had previously been thought.
Probabilistic event risk attribution modelling is being developed in the US to estimate how much human influence is responsible for individual weather events. This is likely to increase the potential for lawyers to pursue claims against individual corporations. Inevitably, the scientific community is divided on the validity of these developments.
