From the world of general insurance

Asbestos and pollution developments
In February, the Scottish government issued a consultation document on a proposed bill to overturn the House of Lords ruling on pleural plaques (see these columns in the December edition of The Actuary), and a similar move is being pursued by trades union lobbyists in England. The principal argument being put forward is that although there are often no serious physical symptoms from plural plaques, there is scarring of the lung membranes and they should be treated as an injury in the same way as any external scars.

The European Environmental Liability Directive, which is the first EU law to be based on the ‘polluter pays’ principle, and which came into force early in 2007, has had a significant impact on the demand for environmental protection insurance, for which premium income is believed to have topped £60m. It is expected that, if the legislation is enforced rigorously, the frequency of claims will increase substantially.

The breadth of the liability imposed on companies under the directive means that many previous general insurance policies did not provide adequate coverage. However, differences in the way the directive has been implemented in different member states could cause problems for insurance customers, as noted by a workshop of the Comité Européen des Assurances.

These differences also make it difficult for insurers to develop appropriate products for policyholders, especially those with multi-national interests.

A Wisconsin jury decided in mid-March that nine insurers were liable for the costs assessed to Appleton Papers for the clean-up of polychlorinated biphenyls at a site in the Lower Fox River. This decision follows a 2005 suit brought against Appleton by Columbia Casualty Company and eight other insurers (including London market underwriters), who claimed that Appleton had not provided timely notice of the claim and did not have the right amount of cover. The jury decided that the notice given by Appleton in 1998 was sufficient. The clean-up costs involved in the case amount to $730m. It is expected that the insurers will appeal against the decision.

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Terrorism
Silverstein Properties has placed liability coverage for the three towers being built on the site of the World Trade Center in New York. In particular, the policies include workers compensation, general and environmental liability. The broker involved is, once again, Willis, which was at the centre of the disputes between Silverstein and the insurers involved in the policies on the World Trade Center destroyed in the terrorist attacks of 11 September 2001.

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Solvency II
A report by Peter Skinner, a British member of the European parliament, has backed the idea of a multi-national insurance group being regulated by a group supervisor in the group’s home country, with this supervisor setting margins to apply in each country where the group is active. In this way, greater co-ordination of the financial security of the group would be obtained, to the benefit of investors and consumers.

The report has been welcomed by experts as a major step towards achieving the basic Solvency II requirements, and towards reducing expenses for multi-national insurance groups. At a similar time in March, Charlie McCreevy, the European Commissioner for internal markets and services, said that it was important that the 2012 deadline for the implementation of Solvency II should not be deferred any further.

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Bid-rigging and finite risk reinsurance
Two executives of Marsh Inc, the major brokerage firm, have been found guilty of violating New York’s anti-trust laws by a state judge. The two, William Gilman and Edward McNenney, were convicted for their role in the bid rigging for excess casualty coverage, but were acquitted of charges of fraud and grand larceny.

The two were due to be sentenced in April. The trial resulted from the earlier investigations by the then New York Attorney General, Eliot Spitzer, into various allegations of bid-rigging and the use of contingent commissions by various major brokerages, including Marsh.

In late-February, five former executives of General Re and American International Group (AIG) were found guilty by a federal court in Connecticut of conspiring to arrange a scheme to manipulate the accounts of AIG. The five, who include Ronald Ferguson of Bornhuetter-Ferguson fame, were found to have used finite risk reinsurance to make AIG appear more secure than was actually the case. Sentencing is expected to take place in May. This trial also originated from the Eliot Spitzer investigations. The UK budget The Chancellor of the Exchequer, Alistair Darling, in his budget on 12 March, announced a simplification of the Insurance Premium Tax (IPT) rules applying to overseas insurers. He expected IPT to raise £2.4bn in 2007 and 2008, an increase from £2.3bn in 2006 and 2007. He also extended the tax rules on claims equalisation reserves to Lloyd’s corporate measures, a move for which the market had been lobbying for some time.

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US sub-prime mortgage crisis
MBIA, one of the US bond insurers worst-affected by the sub-prime mortgage crisis, as reported in these columns in recent months, has asked credit rating agency Fitch to withdraw the financial strength ratings on six of its subsidiaries.

The company said that the ratings provided extremely limited value to shareholders and involved considerable and increasing cost in analyst fees. A letter to shareholders detailed the issues with Fitch’s rating model which, unlike those of Moody’s and Standard & Poor, have resulted in a continuing threat of a possible downgrade of the ratings.

Two of the other major bond insurers, FGIC Corporation and PMI Group, have announced losses of $1.89bn and more than $1bn respectively, in the fourth quarter of 2007. FGIC suggested that there is further bad news to come over the next few years; their principal problems arose from “exposure to certain collateralised debt obligations of asset-backed securities”.

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Lloyd’s refusal
In early March, the House of Lords refused a group of Lloyd’s Names leave to appeal to the Lords in relation to their earlier loss of the case that they had brought against the UK government.

In this, they had alleged that it was the failure by the government to implement the European directive relating to insurance which had caused the substantial losses they had suffered. The reasons for the refusal were that the Names’ petition did not raise any points of law of general public interest, and that there was no reasonable doubt that European Community had been correctly applied.

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New US tax rules
In proposals put forward in March, the US Internal Revenue Service (IRS) is attempting to levy a 1% federal excise tax on reinsurances and all subsequent retrocessions of US risks placed with non-US insurers and reinsurers. These proposals raise a number of practical issues, such as how the tax could be enforced if the insurers involved have no presence in, or direct link to, the US and the difficulty in ascertaining the taxable element where the US risk is just one part of the exposure under a treaty of reinsurance or retrocession. It is understood that the proposals are an attempt by the IRS to prevent insurers from reducing their tax bills by the use of cross-border transactions as a form of fronting.

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UK coal miners’ claims
A report issued by a government committee in early March has been extremely critical of the slow speed of settlement of industrial injury claims brought by coal miners, and also of the proportion of the claims paid which ended up in the hands of solicitors. The three-quarters of a million claims in question include those for chronic obstructive pulmonary disease and vibration white finger. Commonly, the injured parties (or their estates) have had to wait 10 years for compensation, and overall it is estimated that 56% of the cost is in respect of legal fees.

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Aviation business
Renewal premiums for aviation business fell by up to 11% in 2007, according to one of the major brokerage firms. The airline sector was the one with the greatest average reduction, with premiums for airports falling by an average 4%. Aircraft manufacturers had an average premium reduction of 3%. The reduction reflects the high level of competition in the market, and the relatively low level of losses during the last 5 years.

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Climate change
A report by the Centre for Ecology and Hydrology (CEH) has stated that there is no evidence that the exceptional rain which led to the summer floods in England last year were related to global warming. CEH added that the research data shows no significant increase in levels of rainfall, in spite of the fact that June and July 2007 contained the heaviest downpours since records began in 1879. They attribute the event to the inherent variability of the UK climate, and the level of the flood damage principally to the extent of floodplain development.

The World Glacier Monitoring Service has disclosed that glacial melt in 2006 (the most recent year for which the data are available) was at a record level, the third such record in four years. In particular, there has been considerable melting of the Wilkins ice shelf in Antarctica, from which a 41-km long iceberg broke away at the end of February; the 16,000 square km shelf itself was said to be near collapse in March, and “hanging on by a thread”.

Speakers at the World Insurance Forum in Dubai in mid-March pressed political leaders to take action to meet the deadline of the end of 2009 for a global action plan to adapt to the challenges of climate change.

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Large Losses

Crash of Concorde, Paris – July 2000. The local prosecutor recommended in mid-March that Continental Airlines and two of its employees (a mechanic and a maintenance manager) should be formally indicted for “involuntary homicide and injuries” in respect of the airline’s role in the crash. The investigation into the cause of the crash has established that Concorde suffered a tyre explosion on take-off; this was caused by hitting a piece of metal which had fallen off a Continental DC10. Tyre debris then punctured the fuel tank of the Concorde and an engine caught fire. 113 people died in the crash. The recommendation will need to be approved by a judge if the indictment is to proceed.

Winter storms in China –mid January/early February. The latest estimates of insured losses are in the range US$600m to US$1.2bn, with over one million claims having been made.

Fire in Camden Town, London – 9 February. This caused considerable damage to about 90 stalls in the market area and took 100 fire fighters to control. It is estimated that insured losses could be as high as £30m, although this will depend on details of insurance coverage purchased by individual stall-holders.

Hail storms and tornadoes, Texas and Alabama – 16-18 February. These caused severe damage across both these states, leading to an estimated 31,000 claims, over 75% of them in Texas, with automobile damage constituting a major element of the loss. The overall insured loss is estimated to be US$230m, of which (surprisingly) two-thirds is attributed to Alabama.

Earthquake in England – 27 February. Insured losses are now estimated to have increased to between £15m and £30m, with the biggest impact being on the town of Gainsborough, 18 miles from the epicentre.

Windstorm Emma, central Europe – 1 March. This mainly affected Germany, Austria, the Czech Republic, Poland and Slovenia, and caused many thousands of claims. Nearly 30 tornadoes associated with the storm caused pockets of severe damage in Germany, including the complete removal of roofs from a number of properties. The most serious individual claim was for damage to Vienna railway station as a result of the collapse of a crane in the wind. Overall losses are still being assessed, but the early indications suggest insured losses of around €1bn, about half of it in Germany.

Flooding, hail and wind damage, north-eastern United States – 8/9 March. These hit New Jersey, New York and Pennsylvania, and are estimated to have cost insurers more than US$25m.

Windstorm Johanna, UK and northern France – 9/10 March. This principally affected Wales and south-west England, with maximum wind-speeds of 80mph. However, it proved nothing like as serious as had been forecast in the press and damage was generally relatively minor. The Association of British Insurers provided an initial assessment that the event would cost insurers “something in the low hundreds of millions of pounds”.

Tornadoes in Georgia and South Carolina, US – 14 March. This series of tornadoes included one which hit Atlanta, causing severe damage to a number of major buildings, including the Georgia World Congress Centre (where insured cost is estimated at US$100m), the Georgia Dome and Georgia State University, as well as a number of major hotels. The overall insured losses have been estimated at US$250m, most of it from the Atlanta tornado, which would become the most costly individual tornado on record.

Satellite launch failure – 15 March. This involved an AMC-14 satellite, owned by SES Americom, which failed to reach its intended orbit following launch from Kazakhstan. The owners blamed the failure on an anomaly on the Russian Proton Breeze-M rocket. It is understood that there were launch insurances in place for US$192m, led by Munich Re and Brit Insurance. Whilst at least a partial loss is inevitable, work is continuing in an attempt to get the satellite (which remains in good condition) into a useable orbit.