From the world of general insurance
Terrorism limit
Larry Silverstein, the chairman of Silverstein Properties, has revived a 2004 legal action under which he is attempting to obtain a further $12.3bn from the airlines and security companies involved in the terrorist attacks of 11 September 2001. In order to reverse the decision in the original case, Silverstein will need to prove that the airlines owed a duty of care to a third party, and that they should have foreseen the terrorist acts. In addition, there will be an overall limit on the amount available, as the US government passed a law after the attacks to limit the airlines’ liability to the amount of insurance coverage available — this was to prevent the bankruptcy of the airlines. Therefore, a long, drawn-out legal battle is likely before any payment could result.
Solvency II will lead to consolidation
It has been predicted by two accounting partners at CLB Littlejohn Frazer that the introduction of the new Solvency II regime will result in a further bout of consolidation of small insurers across Europe, in an effort to limit the cost of them meeting the new regulatory requirements. Such a development is also encouraged by the existence of diversification credits within the new regime. The accountants also suggested that some insurers (particularly those that write short-tail commercial business) may re-domicile to alternative jurisdictions.
Karel Van Hulle, head of the European Commission’s development work on insurance and pensions, told delegates at the European Insurance Forum in Dublin in early April that Solvency II is likely to become a model for regulatory capital systems for the remainder of the world. As an example, in Bermuda, the regulators are preparing their own risk-based capital regime, although this is understood to be much less comprehensive than the European Solvency II regulations. Even in the US, regulators were looking at their rules to see how they would interact with the new framework, although Patrick Brady, head of insurance at Ireland’s financial regulator, thought that it was difficult to see equivalence tests being passed in the US, unless the Americans improved their organisation.
The results of the third qualitative impact study (QIS3) indicate that 84% of insurers could meet the regulatory capital requirements from existing funds, with only 16% facing a serious problem. It is expected that the new regime will have minimal impact on the market’s overall capitalisation. The results also show the importance of product mix within the proposed regime.
Hector Sants, chief executive of the UK’s Financial Services Authority, revealed in mid-April that political consensus on the high-level framework directive was likely to be achieved before the end of 2008. A report by the credit rating agency Standard & Poor’s attributes a substantial increase in the use of enterprise risk management systems by European insurers to the approach of the new Solvency II regime. The agency found that the number of insurers using these techniques had increased from 60 in 2006 to 96 in 2007.
US insurance regulation
The US Treasury Department has put forward proposals for an option to regulate insurance business on a federal basis, rather than the current state-by-state level, claiming that this would enhance competition in national and international markets. The detail includes the establishment of an Office of Insurance Oversight within the Treasury. The proposals have been welcomed by Lloyd’s and many European insurers and reinsurers but met with criticism from the National Association of Insurance Commissioners (NAIC). The NAIC claimed that the proposals would be detrimental to consumers and would be unable to allow adequately for local nuances.
UK corporate manslaughter
The new offence of corporate manslaughter came into being in the UK on 6 April, making it easier for the authorities to prosecute large organisations whose ineffective management had led to a death or deaths. This offence is defined within the Corporate Manslaughter and Homicide Act 2007, and requires a “gross breach of a relevant duty of care” by an organisation, arising from “the way in which its activities are managed or organised”. It is expected that this may lead to a greater number of claims under directors’ and officers’ liability policies.
Protection and indemnity clubs
The international group of protection and indemnity (P&I) clubs has been having a very bumpy ride recently, and this has been summarised in a recent report by ratings agency AM Best. The lower credit ratings to which the clubs are now subject reflect the increased volatility of equity markets, the credit crunch and fears of an economic slowdown, at the same time as they suffer from a high level of large claims. The claims problems are particularly severe in the layer $23m excess of $7m, where the clubs pool their risks. The impact of Solvency II is also likely to be relatively severe on these clubs, which rank as small to medium in size, and will also be adversely impacted by the treatment of the asset represented by future supplementary calls from their members, on which they have historically placed reliance to balance their books.
Trading abuses — Bear Stearns
The New York Court of Appeals ruled in March that Bear Stearns could not recover from its insurers any part of the $80m regulatory settlement that it agreed in April 2003. The settlement was part of a market settlement in respect of conflicts of interest involving research analysts and investment bankers in relation to Initial Public Offerings, and followed investigations carried out by the New York attorney general and the Securities and Exchange Commission. The reason for the decision was that, contrary to policy conditions, Bear Stearns agreed the settlement before advising its professional indemnity insurers (Vigilant and Gulf) — the policy explicitly stated that the insurers would not be liable for any settlement in excess of $5m entered into without their consent.
Lloyd’s in Brazil
Lloyd’s received approval in mid-April to operate as an admitted reinsurer in Brazil, following the opening of the Brazilian market to foreign companies. A number of companies are also applying for similar status as admitted reinsurers but at the time of writing only SCOR is known to have received approval. Prior to 17 April, the state-controlled IRB-Brasil Reasseguros had a monopoly on Brazilian reinsurance business but, after that date, 40% of cessions can be written by foreign reinsurers. From 2011 onwards, this proportion will rise to 60%.
General Re – fall-out from the trial
Following the guilty verdicts against five former executives of General Re and American International Group, as reported in these columns last month, Joseph Brandon, chairman and chief executive of General Re Corp. has resigned with immediate effect. Mr Brandon was identified by the prosecution during the trial as a possible co-conspirator, but was not charged with a crime and cooperated with the prosecutors.
HIH Insurance Ltd
The House of Lords ruled on 9 April on the distribution of the UK assets of the failed Australian insurer HIH. The decision was that, contrary to that at first instance and to that of the appeal court, the UK assets involved in the company’s scheme of arrangement should be distributed in accordance with Australian insurance insolvency law, as proposed by the New South Wales Supreme Court. This will result in a reduced allocation to those creditors holding liabilities that are not classified under Australian law as liabilities in Australia, but no other impact is foreseen.
Royal Bank of Scotland (RBS) insurance subsidiaries
RBS announced towards the end of April that it was intending to sell its insurance subsidiaries, including Direct Line, NIG and Churchill, for an estimated £5bn. The sale appears to be necessary in light of the bank’s exposure to capital market volatility, particularly through its acquisition of ABN AMRO last September. RBS indicated that it would prefer to sell the insurance unit, which includes an estimated 32% of the UK motor market, as a single entity. Various potential purchasers were rapidly identified in the press, including American International Group, Allianz, Aviva, Royal and Sun Alliance, Berkshire Hathaway, Generali , Zurich and various insurers with executives who were previously in senior positions within the RBS insurance companies.
Climate change
At the end of February, the US National Association of Insurance Commissioners (NAIC) put forward proposals for mandatory disclosure of insurers’ assessments of climate change in their annual financial statements. These proposals were given a very negative reception by two insurance trade associations, the American Insurance Association (AIA) and the National Association of Mutual Insurance Companies (NAMIC). The AIA said that the proposals would “create unnecessary friction and unproductive controversy between regulators and insurers”. It appears likely that, if the NAIC does not act in some serious way on climate change, some individual states will do so. The next NAIC meeting in June is likely to produce some clarification of the issue.
Large Losses
Beaching of container ship MSC Napoli off coast of Devon – 20 January 2007.
The long-running saga of the disposal of the hull of this vessel appears to be drawing to a close, with all but the stern section having been removed by mid-April, 15 months after it was originally beached. This will enable the liability insurer, London Steamship Owners’ Mutual Insurance Association to bring the claim against them to finality. In a report issued in April, the cause of the original problem has been attributed to a design fault in the ship, exacerbated by overloading – this may provide the cargo insurers with a right to recover their claims from the ship-owners, on the basis that the owners are required to exercise due diligence to ensure the vessel is seaworthy.
Floods – 14/15 January and monsoon rain– 15 February in Queensland, Australia.
The combined estimated cost of the two flooding events at the BHP Billiton mines (originally reported in the large losses in April) has increased substantially from the initial A$1.05bn to a massive A$1.7bn. It is understood that the loss will be shared between the company’s captive insurer, Stein Insurance, and international reinsurers.
Windstorm Resi, northern Europe - 31 January-2 February.
The ferry (the Riverdance) which ran aground off the coast at Blackpool, Lancashire in this storm is now expected to be a US$50m total loss for its hull insurer, the Norwegian Hull Club.
Flooding, hail and wind damage, north-eastern United States – 8/9 March.
The estimated insured cost has now increased to US$100m.
Tornadoes in Georgia and South Carolina, US – 14 March.
The estimated insured cost has now increased to US$700m. Satellite launch failure – 15 March. In mid-April, the owners gave up their attempts to get the satellite into a useable orbit and declared it a total loss; they expect to receive a payment of the order of US$150m from their insurers, led by Munich Re and Brit Insurance.
Explosion and fire at fireworks factory in Dubai – 26 March.
This is the largest material damage loss ever experienced in the United Arab Emirates, estimated to cost £100m, and resulted in 2 deaths and the destruction of 70 warehouses in the immediate vicinity. Details of the ownership of the factory, and hence its insurers, were not made public, but it was thought likely that the size of the loss would result in it being reinsured into international markets.
Storms and floods in southern US – 3-5 April.
The storms included hail, tornadoes and wind damage and affected Arizona, Louisiana, Mississippi and Texas. The event has been designated as a catastrophe which means it is estimated to cost insurers at least US$25m, but no more precise figure is currently to hand.
Series of earthquakes in the Vanuatu/Loyalty Islands area of South Pacific during April.
This commenced with a burst of 9 quakes on 9/10 April, the largest of them reported to be of magnitude 7.6 on the Richter scale. This was followed by a further couple of tremors on 29 April of magnitude 6.0 and 6.4 respectively. The great depth of the earthquakes, however, appears to have resulted in minimal damage and no injuries being caused. A tsunami warning was raised along coastlines in the region, but no noticeable tsunami ensued.
Typhoon Neoguri, China – 19 April.
This is the first cyclone of the season, (and occurred at a record early date) but was of relatively minor impact, although it did result in 3 fatalities , strong winds and heavy rain in Guangdong province, especially around Yangjiang city. Its early arrival has been attributed to the unusually high sea temperatures in the area. No insured loss estimates are to hand.
