From the world of general insurance
AIG and other fall-out from the global financial crisis
At the end of March, New York attorney general, Andrew Cuomo, subpoenaed AIG for information regarding the unwinding of their financial product unit’s credit default swaps and the payment of bonuses to employees (now known to total more than US$200m, compared with the US$165m reported last month).
Meanwhile, the Wall Street Journal disclosed that the company’s central risk committee, which reviewed and approved risk-taking decisions, “remained largely unchanged” since before the expensive venture into credit default swaps, although the name of the committee has been changed to “the finance and risk committee”. Shortly afterwards, Elizabeth Warren, the chief watchdog for the US government’s bailout plan, called for the removal of various top executives of the company.
Following news that shareholders of AIG have filed a class action against the company and its former and current directors, alleging breach of fiduciary duty, gross mismanagement and corporate waste, the Federal Bureau of Investigation is considering whether Joseph Cassano, the former head of AIG’s financial product unit, committed fraud in bringing the company to the verge of collapse. Among those named in the class action is Hank Greenberg, the ex-chief executive and chairman, who left the company in 2005 – he has been quoted as saying that he bears no responsibility for these problems, which started after he left.
With regard to the sale of elements of AIG, it was reported in early April that there were a number of parties interested in purchasing the asset management business, AIG Investments, but that the prices being suggested were disappointingly low (at under US$1bn, compared with the hoped-for US$1-2bn). The sale of the aircraft leasing business is also progressing disappointingly slowly, with an apparent need to use some of the bailout funds to support this unit until the sale is completed. However, the sales of AIG Life of Canada, Hartford Steam Boiler and the credit card and banking business in Thailand were all finalised by mid-May, generating total funds of over US$1.1bn. A bigger sale followed soon after with Zurich Financial Services picking up 21st Century Insurance, a California-based automobile insurer for around US$2bn.
Marine kidnap and ransom (K&R) and piracy
The hijackings in the Gulf of Aden area continued through April with a Taiwanese fishing boat, a French yacht, a Yemeni tug-boat, a German container vessel and a 32,000 tonne British bulk carrier (the Malaspina Castle) all being seized on the 5th and 6th of the month. A couple of days later, the container ship Maersk Alabama with its crew of US citizens was hijacked and the following week four further vessels, a 35,000 tonne bulk carrier, a 5,000 tonne tanker and two small Egyptian boats, followed. It is believed that this surge of activity results from the improved weather conditions as the monsoon season ended. Some of the pirates were killed and others captured during rescue operations by French and US forces. It was then reported that the pirate gangs had threatened to take revenge on the next vessel with French or US citizens on board.
All of this led to a call for an overhaul of piracy insurance, on the basis that much of the additional premium currently being charged was for the benefit of war risk underwriters, who do not cover piracy. K&R premiums have also increased dramatically, although it is understood that no claims in the current outbreak of incidents have actually been paid by K&R policies – those actually bearing the cost are hull and cargo underwriters!
Solvency II
On 22 April, the European parliament approved the Solvency II Framework Directive – formal adoption is expected to take place on 5 May. The detailed requirements for levels 2 and 3 will now be addressed, with a view to maintaining the 2012 date for implementing the new regime. From April, the largest insurers in the UK, including Lloyd’s, started paying a Financial Services Authority levy to pay for preparation for the new Solvency II regime. The maximum payable by any one company or group in the 2009/10 year is £95,000.
As a result of the omission of the group supervision provisions from the agreed version of the Solvency II directive (as reported last month), large companies are likely to consider alternative arrangements for the improvement of the efficiency of their capital use. However, the possibility of the greater use of branches rather than subsidiaries has been largely discounted because of the tougher regulatory scrutiny now being introduced. One of the other alternatives is the use of reinsurance to move risk between different subsidiaries in the group.
In spite of the omission of the group provisions, most industry spokespeople welcomed the removal of the uncertainty which had accompanied the delay in obtaining agreement on the terms of the directive. However, Guenter Droese, the risk manager of Deutsche Bank, told the European Insurance Forum that the new regime was likely to lead to a reduction in capacity for high risk classes, and thus a reduction in competition.
Other regulatory developments
In a letter to UK premier, Gordon Brown, Michaela Koller, the director-general of the Comité Européene des Assurances (CEA), called on the UK government to participate in a global agreement to restore the world’s financial markets. The CEA also pointed out that regulatory reforms to the banking sector did not automatically apply to insurers and reinsurers, and that it is important to maintain a level playing field. She added that the new Solvency II arrangements would enhance risk management in the insurance industry and help to resist crises such as the current one.
Lord Levene, chairman of Lloyd’s, has described as “fundamentally wrong” the existing US framework for reinsurance regulation, and criticised the principle of the modernisation framework put forward by the National Association of Insurance Commissioners, which continues with the principle of having different rules for US and alien reinsurers. Under the proposed changes, Lloyd’s would have to post security amounting to 20% of premiums written, a reduction from the current 100%, but Lord Levene described this as “still not good enough”.
The Financial Services Authority is moving forward with proposed changes to the compensation limits for insurance, investment and home finance advice business in the event of a firm failing. The changes are designed to achieve greater simplicity and consistency in the Financial Services Compensation Scheme (FSCS) and will come into effect from January 2010. The proposals, which aim to help consumers understand and have confidence in the protection provided by the FSCS, include modifying protections for non-compulsory insurance provisions, with the current limit of 100% of the first £2,000 and 90% of the remainder being changed to 90% of the entire claim. There will be no change to compulsory insurance, such as motor third party and employers' liability insurance,which will remain at 100% protection.
Lloyd’s
Terrorism underwriters at Lloyd’s remain keen to write the business, in spite of the fact that £40m of capacity has been lost from the market because capital providers are supporting the UK state-run company, Pool Re instead. The Lloyd’s terrorism offering is more flexible than that of Pool Re, as the latter does not allow insureds to select which properties should be covered – it is all or none.
On 22 April, Lloyd’s offered to buy back up to £100m of subordinated debt securities – two issues due to mature in 2024 and 2025 and one perpetual security. The market is in a position to reduce its debt in this way as a result of improving market conditions and a strong capital position. The offer had a life of only a week.
Brit insurance is shifting its headquarters to the Netherlands, after contemplating such a move since summer 2008 - increased tax rates and uncertainty over the impact of proposed tax reforms in respect of companies’ foreign profits were the principal drivers of this move. Apparently, the Dutch government has given very clear guidance on the tax treatment of foreign profit for companies domiciled in Netherlands, in contrast to the UK treasury’s lack of clarity. Several other Lloyd’s insurers, including Hiscox, Omega, and Beazley, have already moved head offices abroad to take advantage of lower taxation.
UK Budget It was announced in the UK budget that the taxation of Lloyd’s will, from 1 July, be brought into line with that of general insurance companies by allowing tax relief on claims equalisation reserves established within the Lloyd’s market, and exempting from tax dividends received by corporate members of Lloyd’s from UK companies.
In addition, the Chancellor of the Exchequer announced the introduction of a government-backed trade credit insurance top-up scheme, to support the commercial market for this important class of business. This appeared to accept that the commercial market had not, as suggested in certain parts of the media, seized up due to the recession. The new scheme, which was expected to start in May, would rely on the existing market mechanisms for the acceptance and pricing of risks, but would provide additional capacity (up to $5bn in aggregate) where necessary.
Motor insurance developments
The Canadian government has introduced legislation to combat motor vehicle theft, a problem which currently costs Canadians C$1bn a year. The new measures include an increase in the consequences of motor vehicle theft, making it a crime to tamper with vehicle registration plates or to buy and sell stolen vehicle parts. It also empowers the authorities to search containers at ports throughout Canada and to seize stolen vehicles destined for export. One specific change is to separate motor vehicle theft from the theft of other property, and make it a more serious offence, in view of the dangers posed to innocent bystanders by thieves making their getaway in stolen vehicles. The proposals have received approval from the insurance industry.
The UK government proposal to encourage the use of electric or hybrid cars by providing subsidies of up to £5,000 needs to result in a major change in the insurance industry – currently there is very limited competition for the insurance of such vehicles. The amount of data available from the 1000 or so electric cars currently on the road provides a very limited basis on which to assess premium rates. According to European Commission standards, electric vehicles are not classed as cars, but electric quadricycles!
The Advertising Standards Authority has upheld viewer complaints over the latest television advertising campaign for Swiftcover, featuring Iggy Pop. As a result, the company has decided to start providing cover to musicians rather than abandoning the ‘Get a life’ ad campaign, which led to a 31% increase in revenue during the first quarter of 2009. Tina Shortle, marketing director of Swiftcover, said: “Iggy Pop and Swiftcover have made motor insurance interesting for a change. However, we appreciate that some musicians were disappointed that they could not get ‘swiftcovered’, so we are now one of the few insurers that actually insures musicians”.
Increase in UK professional negligence claims and insurance fraud
According to research by the lawyers Reynolds Porter Chamberlain, the number of professional negligence claims in UK has increased substantially from 62 in 2007 to 147 in 2008. Claims against lawyers (included within this total) have increased even more steeply, by 158%. This trend is partly explained by the recession and the fall in stock market values, and is therefore likely to be only the first phase of a bigger overall increase.
The Association of British Insurers has announced a 17% increase in the number of cases of insurance fraud in 2008 to 107,000, with an estimated value of £730m. About half of the claims related to home insurance, but almost half the cost was in respect of fraudulent motor insurance claims. Mark Jones, a consultant at EMB, called for increased investment in technology to combat the problem.
Mergers and acquisitions developments
Following the merger proposal between IPC Holdings and Max Capital, reported last month, there has been a series of further developments. First, Validus put forward an alternative merger proposal, which it described as superior, with each IPC share being exchanged for 1.2037 Validus shares. As a result 57% of the combined company would be owned by Validus’s existing shareholders and 43% by Max Re’s. It was claimed that the Validus offer could be completed by the end of June (earlier than that of Max Re), because it would not need US regulatory approval. There then followed a war of words between senior figures at Max Re and at Validus, including challenges to each other’s calculations. The IPC board then unanimously reaffirmed its intention to pursue the Max Re proposal, but Validus vowed to fight on. By the end of April, Max Re and IPC had obtained necessary permissions from the Federal Trade Commission and the Department of Justice in US, and the merger appeared on track for completion by the end of June but Validus had filed legal proceedings in the Supreme Court of Bermuda against IPC Holdings and Max Capital challenging various aspects of the latter company’s merger agreement.
The planned acquisition of Fortis’s Belgian insurance interests by BNP Paribas has become more likely to go ahead, after a group of shareholders opposed to the deal lost a court case in mid-April. As a result, all shareholders as at the date of the vote on 28/29 April are able to vote on the proposal; this includes a number of new hedge fund shareholders who are believed to be in favour of the deal.
Florida Hurricane Catastrophe Fund (FHCF)
A Florida senate committee is considering a revamp of the state’s catastrophe fund. This includes cutting back FHCF capacity (which expanded enormously in 2007) by US$12bn over a 6-year period. In addition, the proposals would allow Citizens, the state’s insurer of last resort, which is in a somewhat precarious financial condition, to charge actuarially sound premium rates. These proposals, which would be expected to increase the business written in the commercial market, met general approval from insurance industry representatives, and resulted in an early start to the renewal season for hurricane insurance.
Hurricane forecasts for 2009
Most forecasters are predicting an above-average level of hurricane activity this year. London-based Tropical Storm Risk has forecast 15 named storms, including 8 hurricanes and 3 or 4 intense hurricanes, about 35% above average. Accuweather came in with 11-13 named storms, 6-8 hurricanes and 3-4 intense hurricanes. The Colorado State University forecast was only just above the average of recent years with 12 named storms, 6 hurricanes and 2 intense hurricanes, a slight reduction on their earlier forecast. WSI also reduced an earlier forecast to 11 named storms, 6 hurricanes and 2 major hurricanes. The last two firms put their reductions down to cooler water temperatures in the Atlantic and a fading La Niña event in the Pacific.
New underwriting tool from Axa
Axa, working with Mapflow, the provider of location intelligence solutions, has developed a new underwriting tool designed to assess the risk of flood, subsidence and terrorism risks for its underwriters. It enables underwriters to assess risk for individual buildings, reducing quotation time and the number of referrals. It is understood that Axa are developing a version that will be available to brokers.
Large losses
Injuries caused by sofas purchased from (inter alia) Land of Leather in UK, 4th quarter 2008.
Land of Leather’s insurers, Zurich has claimed that it will not pay certain claims arising from blistering and skin rashes sustained by Land of Leather customers and caused by the anti-fungal agent dimethyl fumarate, because the company breached the conditions of its insurance. This is in spite of the fact that Land of Leather, along with Argos and Walmsley, has been found liable in court for the injuries to their customers. Land of Leather has been in administration since January.
Floods in North Dakota and surrounding states, US – end-March.
The position was exacerbated by further snow-fall in the area, and the last information suggests that the floods were responsible for 2 deaths and more than 60 injuries. Flood conditions remained in force until late April, with considerable tracts of the countryside still under water. No insured loss estimates are to hand even now.
Earthquake near L’Aquila in central Italy – 6 April.
This measured 6.3 on the Richter scale, making it the strongest to hit mainland Italy for nearly 30 years, and left around 64,000 people homeless. The death toll was 294, with 1500 injured, and 15,000 buildings were destroyed or seriously damaged. The quake was felt in Rome, over 60 miles away. Early estimates of insured losses are in the range €200-400m, but would be higher except for the low take-up of residential catastrophe cover in the country, since economic losses are put at up to €12bn.
Wildfires in Oklahoma, US – from 9 April.
These may have been caused by arson and were fanned by strong gusty winds and destroyed about 70 houses in the area of Midwest City, and about 100 in other parts of the state. An early estimate puts insured losses at about US$20m.
Earthquakes in eastern Afghanistan – 16 April.
Two quakes, measuring 5.7 and 5.1 respectively, struck the Hindu Kush area near the Pakistan border within 2 hours of each other. At least 22 people were killed and 200 homes destroyed. In view of the limited insurance bought in the region, insured losses are likely to be minimal.
