From the world of general insurance
Solvency II
Anthony Menzies, a partner at Clyde & Company, has refuted suggestions that the introduction of the Solvency II regime in Europe will cause an exodus of insurance captives from affected domiciles. He believes that such a move is unlikely, as the new regime will still apply if the business is conducted within the European Union. In addition, there are dangers for a company to market itself as being subject to less stringent regulatory requirements.
At the end of April, the Comité Européen des Assurances (CEA) expressed concerns over certain aspects of the new draft Solvency II regime, in particular the proportionality principle and the economic-based supervision of groups. The CEA, in their response to the consultation papers put forward by the Committee of European Insurance and Occupational Pensions Supervisors, had some worries that the objectives of the group support regime would be undermined.
Karel Van Hulle, director-general of internal markets and services of the European Union, who has described the Solvency II regime as “the new beating heart” of the European Commission, applauded the member states for their positive negotiating on the details of the regime and praised the industry for its active involvement in the process. In addition, he described the collateral rules used by regulators in the US as “medieval”, and criticised the fact that there are 52 different state regulators in the US system.
Other regulatory developments
A review of the UK Financial Ombudsman Service has recommended the introduction of a “name and shame” system, a development that has not met favour with insurers. In addition the review suggests an awards scheme which would rate companies on their performance in handling complaints. There is some concern that both of these proposals would be based on historic information and products, which may not be relevant for the future.
The Financial Services Authority has published a discussion paper on transparency in the insurance industry and this is thought likely to lead to more regulatory intervention in relation to the increasing convergence between insurers and distributors, with the resulting increase in the potential for conflicts of interest. There is some concern within the industry that such further red tape could lead to a significant increase in the risk of insolvency for high street brokers.
US sub-prime mortgage crisis
Swiss Re has reported a further loss of SFr819m on structured credit default swaps during the first quarter of 2008, plus a further SFr200m during April. This is in addition to the SFr1.2bn charge in the previous quarter, and the latest disclosures led to a sharp fall in the company’s share price. Nevertheless, the credit rating agencies Moo ratings with a stable outlook.
At an insurance conference in London in May, Stephen Catlin, the chief executive of the Catlin Lloyd’s agency, told delegates that he expected the impact of the sub-prime crisis to develop over a period of five years, and to have a potential for class actions which is double that following the collapse of Enron in 2001.
He further stated that his own company had been surprised to find that 95% of their Collaterised Debt Obligation investments had turned out to have underlying security in sub-prime mortgages, and believed this resulted from a lack of scrutiny by the investment advisors. .
American International Group (AIG) has suggested that it may suffer economic losses of up to $2.4bn from the sub-prime mortgage crisis, following stress tests carried out to estimate its exposure. This is an increase from the $0.9bn previously stated. The revised figure is more consistent with the predictions of the credit rating agencies Fitch and Standard & Poor’s. In spite of the fact that AIG has successfully completed a $20bn capital-raising exercise, another credit rating agency (Moody’s) has lowered its debt rating on the company and all its subsidiaries from Aa2 to Aa3.
Lloyd’s and Schwarzenegger
At the end of April, Lord Levene, the chairman of Lloyd’s, met Arnold Schwarzenegger, the governor of California, in Sacramento, as part of the market’s campaign against the US reinsurance collateral rules. These regulations require ‘alien’ reinsurers to provide collateral equal to 100% of the gross premium received for US-domiciled reinsurance business. Lord Levene is hoping to persuade US regulators to follow the recent lead of Brazil in abolishing its 100% collateral rule. It is understood that the meeting in Sacramento also included discussions on climate change, which both men see as an important issue.
A large majority (over 99%) of Lloyd’s members voted at an extraordinary general meeting in mid-May in favour of the UK Treasury’s proposed amendments to the Lloyd’s Act 1982. The changes would, among other things, abolish the requirement for insurance business placed in the Lloyd’s market to be handled by an accredited Lloyd’s broker.
Pollution developments
The UK implementation of the EU Environmental Liability Directive, scheduled for December 2008, will significantly extend the legal requirements on how companies respond to incidents which involve environmental damage. In addition, it is believed that the legislation will increase the cost of environmental clean-up in the UK.
The new legislation (now in a draft form for consultation) is a complete rewrite of the law, rather than an amendment to existing rules, and will be the primary regime, in place of the existing Contaminated Land Regime, Waste Regime and others. In addition, it is stronger than the previous consultation, in that it has extended the scope of the regulations to include species and habitats in sites of special scientific interest, and also imposes a legal duty on the regulator to investigate any notified allegation of environmental damage by interested parties. It is estimated that the new regime will significantly increase the cost to businesses, especially those in the farming, water and waste disposal industries.
The imminent implementation of these rules means that liability policies being renewed at the present time will need to cater for the revised arrangements.
SCOR/Converium
SCOR announced in early May that it had achieved a 63% increase in its profits in the first quarter of 2008, aided by the acquisition of Converium last year. In addition, they announced the resolution of a long-standing legal dispute between Converium and US shareholders. This dispute, launched as a class action by the shareholders in 2004, has now been settled for €74m before tax and recoveries from directors’ and officers’ liability policies - it is expected to have no impact on the parent company’s 2008 earnings. Subsequently, SCOR completed the cancellation of the Converium shares, and providing compensation to the remaining shareholders. This was completed after receipt of a decision of the Commercial Court of Zurich in support of the move. The affected shareholders have received 0.5 fully paid SCOR shares plus SFr5.50 for each cancelled Converium share, mirroring the terms of the tender offer made (and accepted by the majority of shareholders) last year.
Royal Bank of Scotland (RBS) insurance subsidiaries
Whilst no concrete approaches by potential acquirers have entered the public domain as at the date of writing (late May), it is understood that a number of companies have made preliminary enquiries. For some possible acquirers, such as Aviva and Royal and Sun Alliance, objections may arise on anti-monopoly grounds in the UK motor market, whereas for others there may be difficulty in raising fresh capital for an acquisition in the current financial marketplace. Berkshire Hathaway are the only major player to have publicly stated that they would not be pursuing an interest in a deal. Initial bids are required to be made to RBS by 28 May.
Scheme of arrangement for EW Payne underwriting pools
In early May, the English High Court granted leave to convene scheme meetings in connection with a proposed EW Payne pools scheme of arrangement. If this scheme goes ahead, it would be the largest ever attempted in terms of the number of companies involved (82) and the number of separate underwriting entities (120). The business covered by the four pools was largely London market excess of loss reinsurance business and was written between 1960 and 1985; it has been in run-off since the end of this period. The required 82 scheme meetings are scheduled for 4 July, and subject to the outcome of these, a further submission will be made to the High Court for approval of the scheme. It is understood that an innovative approach is proposed by the KPMG administrators for the estimation of incurred but not reported claims, in place of the traditional complex actuarial methods.
Jobs
The trend for the increasing use of risk-based capital assessment by various regulators in Asia has increased the demand for general insurance actuaries in these markets. These additional demands are being felt by both insurers and brokers in the region. General insurance actuary David Ibeson is the latest member of the profession to take a senior role in general management following his promotion to chief executive of Catlin UK, the Lloyd’s based group.
Climate change
Lawyers are claiming that there has been a surge in litigation against greenhouse gas emitters, some part of the cost of which (including defence costs) is falling on the insurance industry. Part of the trend is attributed to shareholder pressure groups. Although many liability policies exclude pollution coverage, there are often ways in which climate change claims can be presented to avoid these pollution exclusions – can naturally occurring greenhouse gases like carbon dioxide be described as pollutants?
Large Losses
Storms and floods in southern US – 3-5 April.
These (reported last month) are now estimated to have cost insurers US$245m.
Storms in Arkansas, Texas and Oklahoma – early to mid-April.
These involved two separate series of incidents, the earlier of which is estimated to have an insured loss of US$190m, and the later, which took place between 9 and 11 April, involved 70mph winds, rain and hail, and is estimated to have resulted in an insured cost of US$650m. Hailstorms in Texas – 17/18 April. This was believed to be the worst outbreak of hailstorms ever seen in the area, with stones the size of baseballs. The insured loss is estimated to be US$300m.
Closure of oil refinery and pipeline, Grangemouth, Scotland - 26 April.
The closure was in preparation for a two-day strike at the refinery owned by Ineos Oxide Ltd over a dispute relating to pensions. The pipeline is operated by British Petroleum. The closures affected production for 3-4 weeks, generating potential for business interruption claims of up to £50m per day. However, BP does not purchase such insurance and it is unclear whether any Ineos claims are covered.
Bribery scandal at Siemens in Germany - reported 29 April.
The conglomerate is under investigation by both German and US authorities for the alleged payment of hundreds of millions of euros in bribes to win contracts. The issue was investigated internally, and there was found to be evidence of corruption and violation of regulations involving a number of staff in several countries. The problem has been notified to directors’ and officers’ liability insurers, led by Allianz – the sums insured are understood to be €250m. Whether these insurers will have to pay out will depend on whether the staff are found to have acted deliberately, as the policy is not likely to cover deliberate acts.
Tornadoes in south-eastern Virginia, US – 28 April.
The three tornadoes destroyed a number of homes and cars and caused injury to over 200 local residents. The largest, which hit the town of Suffolk, is believed to be the most powerful in Virginia for 60 years. The insured cost is estimated at around US$80m.
Plane crash in southern Sudan – 2 May.
This involved a Southern Sudan Air Connection Beechcraft 1900C plane carrying a high-level Sudanese government delegation, including the minister of defence, from Khartoum to Rumbeck. All 21 people on board were killed in the crash, which is understood to have followed an engine problem. The hull and liability coverage was placed with Regent Insurance in South Africa, and there is also believed to be products liability insurance written in London for the manufacturers, Raytheon, by Global Aerospace Underwriting Managers – this could be relevant if investigators blame the crash on a plane defect.
Cyclone Nargis, Burma (Myanmar) - 2/3 May.
This category 4 storm made landfall in the Irrawaddy delta region of the country on 2 May, with peak sustained wind speeds estimated at 132mph and produced heavy rain, storm surge and severe flooding. The economic and humanitarian cost is enormous with damage estimated to be over US$10bn and over 100,000 lives lost (believed to be the worst in the country’s history). A United Nations report has estimated that, overall, at least 1.5m people have been “severely affected” and up to a further million affected to a lesser extent. Insurance losses are expected to comprise a very small element of the overall cost as a result of the minimal insurance penetration. The lack of any evacuation (in spite of accurate forecasting of the storm) and the unwillingness of the Burmese government to allow foreign aid workers into the country undoubtedly exacerbated the human cost. Incidentally, it is unclear why most press reports on the subject have reverted to the name Burma nearly 20 years after this was officially changed to Myanmar.
Tornadoes in central US – 10/11 May.
This incident involved a series of 34 tornadoes which affected Oklahoma, Missouri, Georgia and Alabama, with winds of up to 175mph and hailstones the size of tennis balls. The tornadoes caused at least 23 deaths and many more injuries. It flattened many properties and damaged even more. An early estimate of the overall cost is in excess of US$250m.
Earthquake in Sichuan province, south-western China – 12 May.
This measured 7.9 on the Richter scale and caused major destruction and loss of life, especially in the mountainous regions of Beichuan county. Latest available estimates suggest that approaching 100,000 people died in the quake and significant aftershocks – there have been at least 7000 aftershocks, over 150 of them of magnitude 4 or higher. More than five million homes are understood to have been destroyed and around 21 million damaged. Rescue work was hampered by heavy rainfall and the risk of landslides and dam failures. The area is heavily industrialised which results in potential for additional pollution risks; as an example, two chemical factories in Shifang were destroyed releasing 80 tons of toxic liquid ammonia and additional amounts of sulphuric acid. An early estimate of the economic loss is around US$20bn, but only around 5% of this is believed to be covered by insurance, which is mainly retained within the local market.
