The Lloyd's Risk Blog

Marine insurers get that sinking feeling

Garry Booth — Thu, 28 Jan 2010 10:36:58 +0000

Marine insurers whose premium income has been hit by the devastating fall in volumes and values in global trade and by the dramatic drop in ship values, must be on watch for more risks on the horizon, according to the executive committee of the International Union of Marine Insurance (IUMI).

At the group’s annual winter meeting at Lloyd’s, IUMI president Deirdre Littlefield of Starr Marine outlined a catalogue of problems facing the industry, which could feed through to insurers.

She said: “Newbuild cancellations and deferments are increasing, but a huge amount of tonnage still is due to be delivered this year and next. Regrettably, we have not seen a significant leap in the scrapping rate of old ships, which is almost beyond belief in the present crisis.”

Owners and charterers are doing all they can to reduce costs possibly leading to skimped maintenance and deferred repairs, Ms Littlefield warned. “It’s bad news for insurers who cover hull, cargo and liability risks. The situation is compounded by the emergence of new problems.”

These are mainly technical but could lead to big headaches for underwriters, she suggested. Fuel management is becoming an urgent issue as more stringent MARPOL rules for reducing emissions mean that the type and quality of bunker fuels are of vital concern. If onboard fuel management goes wrong, there can be potential catastrophic consequences.

Of equal concern is the impact on machinery from the growing trend of slow steaming, now being implemented by a number of operators to cut fuel costs. Large, high-speed diesel engines are designed to operate only at sustained high service speeds.

In another area, underwriters, through surveyors, need to monitor the standard of repairs carried out at yards which have been equipped for new construction only but which are now desperate for work, Ms Littlefield said.

Laid-up ships are another worry and underwriters need to pay close attention to the conditions of cover for vessels which have been idle without being deactivated, or just lying at anchor or drifting awaiting firm orders, often with minimum maintenance and prone to collisions or typhoon damage.

More than ever, the IUMI president concluded, there is an acute need for underwriters to focus clearly and selectively on the risks presented to them, and aim for a price that is realistic yet fair.

Future Processing in the London Market

Carl Phillips — Wed, 27 Jan 2010 11:36:07 +0000

You may remember that back in November of last year, I blogged about the Future of Central Services processing work that Market Operations had presented to the London Market Group. Since then, the LMG have appointed Tim Carroll, Underwriting Director at Canopius, as the Project Sponsor to provide direction and report to them on the project’s progress. Tim comes with a wealth of experience in both the Companies and Lloyd’s markets, so is ideally suited to spearhead a cross-market initiative.

To quickly recap, the Future of Central Services project will define an optimum processing model for the London market beyond the “Finish What We’ve Started” workstreams. Throughout 2010, various working groups will design and review new ways of processing business that uses modern technology and data standards (ACORD). One of the key goals of the project; to provide insurers with choice in the central services that they utilise, will be at the front of everybody’s minds when designing these processes. The project team will be liaising significantly with the market to seek insurers’ views on whether the provision of services should be lightweight or heavyweight; in other words: to what extent should market infrastructure (e.g. document repositories) and business services (e.g. policy checking) be provided ‘on a one size fits all’ basis? Heavier provision of central services obviously runs contrary to enabling a choice of services and of service providers; therefore we expect the project to strike a balance between maintaining the economies of scale and efficiencies that we currently enjoy for subscription risks and enabling insurers to perform some processing in-house or with a third-party outsourcer. Additionally, we would be keen to hear the extent to which insurers would like to invest in internal infrastructure.

If you would like to share your views on this particular topic, please do not hesitate to contact me. Alternatively, please contact the Project Manager, Simon.Collins@lloyds.com.

I will be updating my blogs with the progress of this project, and the others that Market Operations are involved with, throughout the year, so please check back regularly to be kept informed.

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And now an early storm warning

Garry Booth — Fri, 08 Jan 2010 11:23:56 +0000

Did you see the weather forecast? I mean the long range forecast for Atlantic hurricane activity.

In the US, highly respected wind watchers Philip Klotzbach and William M Grey of the University of Colorado department of atmospheric science have put their money on the 2010 hurricane season being “somewhat more active” than the average 1950-2000 season.

After the lull of 2009, Klotzbach and Gray predict that activity will return to levels more typical of recent times. They expect to see between one and 16 named storms, six to eight hurricanes and three to five major hurricanes.

Over in London, fellow scientists Adam Lea and Mark Saunders of the Aon Benfield UCL Hazard Research Centre also predict an active hurricane season. They reckon there will be 13.9 (+/- 4.9) tropical storms, 7.4 (+/- 3.1) hurricanes, 3.4 (+/- 1.8) intense hurricanes. Or put another way, the University College London team thinks there is a 62% probability that the hurricane season will be above average and only a 14% chance that it will be below normal.

The thinking behind Klotzbach and Gray’s early prediction is that 2010 is unlikely to be an El Nino year. (El Nino refers to the warming of the sea in the Eastern Pacific.) The absence of big windstorms in 2009 was attributed to the moderate to strong El Nino event.

According to the latest research from the US Climate Prediction Center, the current El Nino will persist into the Spring – but peak before June 1, the official start of the US hurricane season.

The odds on there being a consecutive 2010 El Nino are very low based on previous experience, Klotzbach and Gray say, so conditions are ripe for a return to hurricanes.

Lea and Saunders take a similar tack citing weaker than normal trade wind speed over the Caribbean and North Atlantic and higher than normal sea surface temperatures in the North Atlantic as key predictors.

Both sets of forecasters admit that the precision of such an extended outlook is low. But some insurers need reminding how lucky we were in 2009. A big insured event would have shaken the industry to its capital foundations in 2009, at a time when the financial markets were in recovery mode.

How will the markets respond if the wind blows a hole in insurers’ balance sheets in 2010? Has the insurance industry really reloaded sufficient capital?

http://www.tropicalstormrisk.com/

http://www.cpc.noaa.gov/products/analysis_monitoring/enso_advisory/

Liability prices: a case of arrested development?

Garry Booth — Tue, 29 Dec 2009 13:21:09 +0000

Liability insurance is growing all over the world. In 2008, businesses spent around USD142bn on liability insurance worldwide, around half of which originated in the US.

Importantly, emerging countries’ share is expanding. China generated USD1.2bn in 2008 with its market growing at an annual average rate of 22% per annum since 2000. Other emerging markets grew at an average annual rate of 10% over the same period. Central and Eastern European markets generated an additional USD2bn and have grown at an annual average rate of 19% since 2000.

These numbers come from a Swiss Re sigma study, which warns that there are challenges as well as opportunities in commercial liability insurance. Swiss Re’s researchers are worried that insurers are underpricing and under reserving the business. “Commercial liability rates are declining in all markets especially in the US, since 2004” according to Swiss Re’s Thomas Holzheu. “Because interest rates are low, business cannot be cross subsidized with investment results… prices should instead be increasing.”

Liability business, whether it relates to products, pollution or professional services, is a longtail business. Unlike property insurance it provides broad coverage often with high limits. It is affected by inflation which can send losses soaring.

Also, emerging risks to do with technological and social developments are a constant challenge and insurers have to closely monitor changing standards around food safety, employment practices and financial loss compensation, for example – compensation culture is another growing problem.

The big challenge for insurers (and governments and businesses) is keeping liability risks insurable in this complex environment. It means insurers monitoring drivers of liability claims and building them into actuarial models. But most important, Swiss Re stresses, is maintaining prices that reflect claims trends.

Liability premiums and GDP (USD bn), 2008:
Source: Sigma no. 5/2009

2009: bumper year for Market modernisation

Carl Phillips — Tue, 22 Dec 2009 09:48:41 +0000

As we approach the end of 2009 it seems an ideal time to reflect on the year – and what a bumper year we as a market have had! It has certainly been challenging and one that has been packed full of major developments helping to modernise the market, so let me begin….

The Lloyd’s Exchange

We have delivered the Lloyd’s Exchange which is essentially a messaging hub - it supports the face to face process of doing business in the room with information and documents being exchanged electronically using ACORD standards.

By the end of the year we expect over 50 organisations to have connected and we are currently working with the LMA to promote the completion of endorsements via the Lloyd’s Exchange – this is primarily being driven by the market with significant involvement from Aon, Marsh and Willis in addition to Beazley, Brit and Catlin amongst others.

-What’s in store for 2010? Initially we are focusing on exchanging placement messages; however the Exchange has the potential to support the complete end to end business process electronically. As such, we will explore with the Market how other message types could benefit from being passed over the Exchange. The technology has been proven and now the emphasis is on helping the Market realise the benefits of exchanging information electronically.

Lloyd’s Information Project

Part of this project aims to offer choice in how information is provided to Lloyd’s and I’m pleased to say that we have successfully delivered a solution that will allow a pilot group of Managing Agents to report their Service Company business directly.

Work has also been carried out behind the scenes to ensure standardisation in the information that we store and use for tax and regulatory reporting purposes, to prevent, on an ongoing basis, any duplication or inconsistency in the data captured. This will also facilitate the reduction in the number of reports needing to be produced and in time, reduce the reporting burden.

The Future of Central Services
We are working with the market to define a future model for the provision of central services, which reduces risk & costs, or increases processing efficiencies. We have been working closely with the London Market Group (LMG) & a cross market group which is made up of Managing Agents, IUA companies, brokers, IUA, LMA & LIIBA. They have reviewed the proposed model and agreed the next steps, which are to conduct detailed design work to support the Future London Market Process Model which we will complete throughout 2010 through the Future Processes Steering Group.

ACORD Standards

The progress in the market uptake of ACORD standards in 2009 has been encouraging. One of the highlights is the agreement on implementing one version of the standard for placing (2009.1) for the first time without customisations to suit individual’s processing needs.

Development of e-Accounting is well underway too – with some brokers hoping to send premium information to the bureau using ACORD accounting messages early in 2010.

There is more to look forward to in 2010. One of the ECF2’s (Electronic Claims File) project’s remits is to agree how the ACORD claims standard is to be used for the advice and management of multi-party claims using ACORD messages. For placing, apart from meeting the 2009.1 implementation deadline in February, the New Year will also be kick-starting with applying the standard in the Endorsement Pilot (via the Lloyd’s Exchange). We really are moving to an electronic world and a more efficient market place – let’s keep up the momentum!

London Market Group (LMG) (formerly Market Reform Group)
The change of name and extension of remit for this group is truly significant; it is a reflection that the market has been reformed through the implementation of Contract Certainty, ECF, A&S and Electronic Policies and now it is about wider collaboration and continuously improving the market through modernisation. This will ensure that London remains at the forefront of the global insurance industry, enhancing the competitiveness of the London market.

So, to everyone out there in the London market please pause for a moment to reflect on these achievements – congratulations are truly deserved for the progress that we have made together – this really is a time to celebrate! Particular thanks to the 100 or so individuals from over 30 firms that have been instrumental in delivering these achievements.
This is my last blog of 2009 but I look forward to blogging again soon in 2010 – if you would like further information on any of these subjects or would like to suggest a future topic for me to blog about please do get in touch. In the mean time, may I take this opportunity to wish Season’s Greetings to you all.

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Shaping climate-resilient development – the case for utility theory

Trevor Maynard — Mon, 21 Dec 2009 09:19:04 +0000

The Economics of Climate Adaptation (ECA) Working Group has published a report titled “shaping climate resilient development“. It is an excellent report and focussed around a series of case studies. It proposes that decisions on which of the many adaptation options to adopt should be taken using detailed cost benefit calculations. A sensible suggestion at face value; but there are problems which I’ll describe below.

Before I do, I wanted to note that the report itself considers some of these issues though not quite the way Im describing it below.

Lets consider why people buy insurance. From a cost benefit point of view its an odd product. How many other products do you pay money for something you expect to be less valuable than the price?

It comes down to the word “expect”. In the context of cost benefit analysis, you compare the expected cost with expected benefits. The argument is that you chose the option where expected benefits outweigh costs. So that means you should not choose insurance, right?

We’ll no, probably not. People buy insurance to protect against extremes. They are willing to pay more than their expected benefits because, just occaisionally they’ll receive much more back than they put in.

Mathematically, the way round this is to introduce the concept of “utility“, this is just a obscure way of saying “happiness”. We shouldn’t be trying to maximise expected benefits but to maximise utility. To aim to be “happier”.

This is why insurance works. An insurer is happier selling you an insurance policy, because, by the law of averages (and providing premiums are based on the level of risk), we expect to make a profit; but simultaneously the policyholder is happier buying it, because they prefer a small guaranteed loss (the premium) against an uncertain very large loss that may lead to financial ruin.

Its a classic, win-win.

So I like the ECA’s new report; and it does indeed discuss the case for insurance – but I’d have preferred a more direct discussion of utility. Cost benefit may not be the best way to consider adaptation; concepts such as “resilience”, “no regrets” and “utility maximising” may be far more relevent. A robust policy in the face of great uncertainty may be far better than an “optimal” one. Because to truly optimise things you need to be really sure of your facts – and with climate risk we just aren’t.

Nevertheless I commend the report to you – it’s case studies are very interesting.

Climate change does not equal global warming

Vinay Mistry — Fri, 18 Dec 2009 13:19:31 +0000

I was recently asked why there was a conference taking place in Denmark about Global Warming. This is a question that pains me every time that I hear it – and emphasises the requirement to communicate the message about climatic change!

Climate change does not = global warming.

The headlines of newspapers relating to temperature changes – oft quote the range of 1.1.to 6.4degC temperature increases by 2100 sourced from the IPCC. The Press rarely delve to the level of detail below the headlines to explain how this average change is manifest across different geographical regions. This point was further highlighted yesterday during a talk with Pen Hadow who, as part of ClimateWise week, was addressing a Lloyd’s audience about his recent findings with the Catlin Arctic Survey.

Surface air temperatures here in the northern hemisphere are distinctly higher than the reference 1961-90 period. Indeed, the annual mean Arctic temperature for the year 2008 was the fourth warmest year for land areas since 1990. These changing temperature regimes are resulting in a marked decrease in the level of sea-ice thickness in this area.

In the early part of this decade, there were suggestions that the summer sea-ice extent in the Arctic may disappear by the end of the 21st century – it now appears that there may be no summer sea-ice within a decade. The rate of warming here is alarming.

Whilst we are witnessing decreasing sea-ice in the northern hemisphere, we are observing some distinct differences in Antarctica. The British Antarctic Survey recently published the first comprehensive review of the state of Antarctica’s climate. Since 1980 there has been a 10% increase in Antarctic sea-ice extent, particularly in the Ross Sea region, as a result of the stronger winds around the continent (due to the ozone hole). In contrast, regional sea-ice has decreased west of the Antarctic Peninsula due to changes in local atmospheric circulation and this has also been linked with the very rapid warming seen over land on the west coast of the Peninsula.

The picture is confused? Or is it? Regional climate change impacts will be varied – we know this – but does the wider public? On a relatively local scale, the UK Climate Impacts Programme (UKCIP) published a set of probabilistic scenarios for changes in projected UK climate – with distinct regional differences.

On a global scale all of these changes will be further magnified. BUT, this is not what is reported in the press – and does not help to inform the public debate. The impacts of climate change will not necessarily result in uniform warming across the entire planet. This has to be recognised as part of the outcome from COP15. Today is the last day of negotiations in Copenhagen. We await with baited breath as to what the outcome(s) will be. Fingers crossed for a number of positive steps forward.

My other pleas:

1. better communication around the regional dimension of climate changes, and that the planet will experiemce differemt changes as wego forward

2. Improved information arpound the rate of some of these change s- notabl y in the Arctic

Climate data galore

David Baxter — Wed, 16 Dec 2009 15:16:02 +0000

With all of the statistics being thrown about during the COP15 Climate talks you may find yourself wanting to get to the bottom of some of the numbers yourself. Well, if you are one of those people you’re in luck as www.realclimate.org are tackling the question of “where’s the data?” with their own collection of data sources. Not only that, but for the really adventurous they have links to code that allow you to run your own models.

My personal favourite is the www.WoodForTrees.org website that includes an interactive graph that allows you to view the various data that scientists have used to understand climate change including information on temperature, solar activity, ice and the atmosphere and ocean.

COP15: Week 1 Roundup

Paul Nunn — Wed, 16 Dec 2009 09:22:58 +0000

After week one of the Copenhagen climate summit disagreement still remained as to the overarching objective of limiting global warming to 1.5° or 2°C? While G8 and major developing nations endorsed 2°C as a target in July this year, Tuvalu, a small island in the Pacific with very real existential concerns, led the charge for members of the Alliance of Small Island States (AOSIS) calling for a legally binding agreement along with a target of 350 ppm of CO2 and 1.5° of warming with the backing of over 100 delegations.

Neither target is going to be easy according to the UK Met Office which released analysis showing that 1.5°C would be “almost impossible” to meet without implementing measures to take carbon dioxide out of the air, and that even if emissions peaked by 2020 there was only a 50:50 chance of holding temperatures to 2°C.

On a positive note, some progress has been made on short-tem funding commitments to help developing countries adapt, with the EU making up a large part of a $10bn annual global package. On longer term finance a consensus is emerging among developed countries around $100bn per annum, although developing countries say it needs to be more.

So the stage is set for Week 2 of the Conference of the Parties, with heads of state descending on Copenhagen for the final stages of negotiations. Optimists still hope for historic agreement. With President Obama set to join the fray later this week let’s hope that negotiators can “put their hands on the arc of history and bend it once more toward the hope of a better day.”

Strong medicine for longterm cure?

Garry Booth — Wed, 16 Dec 2009 09:22:09 +0000

One of the recurring industry stories of 2009 was how insurance bosses were becoming increasingly alarmed about oversight. Broadly, there was a growing concern that the insurance industry was going to suffer under tighter regulation prompted by the financial crisis.

Despite having stood firm while the rest of the financial services industry wobbled, insurers were going to be tarred by the same brush as banks, it seemed – and they didn’t like it. But all is not as it seems, according to a KPMG survey that says many insurance executives actually believe that increased regulation will be positive for the insurance industry in the longterm.

“As the dust settles following the financial crisis, the reality of the long road to recovery has become clear to the insurance industry,” Frank Ellenbürger, global sector leader of KPMG’s insurance practice told Reactionsnet.com in a commentary to the findings. “Many executives have come to the conclusion that new regulation may not be a pleasant medicine in terms of short-term growth but ultimately it’s good for the industry,” he said.

In conjunction with the Economist Intelligence Unit (EIU), KPMG asked about the possible effect of expected increased regulation for the industry over the next three years: 62% of respondents felt that it would help improve risk management, 56% felt it would create better financial stability, while 55% felt it would encourage a longer-term view of business.

The majority of respondents did cite increasing regulatory intervention as the biggest barrier to growth, however, the main impact being increased capital requirements.