standard syndicate expands into more lines of …...standard syndicate expands into more lines of...
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MARKET NEWS, DATA AND INSIGHT ALL DAY, EVERY DAY
ISSUE 4,669
MONDAY 22 AUGUST 2016
Standard syndicate expands into more lines of businessSyndicate 1884 has added political risk, political violence and terrorism and fine art and specie to its portfolio
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Berkshire Hathaway quota-share boosts IAG capital by A$400m
Special report: Risk modelling
Celebrating excellence
24th November 2016 MEET THE 2016 INSURANCE DAY LONDON MARKET AWARDS JUDGING PANEL
Patrick LiedtkeManaging Director,
BlackRock
Steve HearnGroup CEO, Cooper Gay Swett &
Crawford
David GittingsChief Executive,
Lloyd’s Market Association
Michael MendelowitzHead of Legal and Compliance,
ERGO Versicherung AG
Jeremy PinchinChief Executive,
Hiscox Re
Peter StaddonManaging Director, Managing General Agents’ Association
Jeremy BrazilDirector of Underwriting,
Markel International
Jonny Creagh-CoenHead of Investor Relations,
Lancashire
David Croom-JohnsonManaging Director,
AEGIS London
Dominic ChristianCEO of Aon UK Ltd and
Executive Chairman, Aon Benfield International
Matthew FairfieldFounder of Exin
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NEWS www.insuranceday.com | Monday 22 August 20162
Berkshire Hathaway quota-share boosts IAG capital by A$400mFurther capital savings of A$300m expected in next two to three years
Scott VincentEditor, news services
Insurance Australia Group (IAG) said its quota-share agreement with Berkshire Hathaway had low-ered its regulatory capital require-
ment by around A$400m ($304m).The Australian insurance giant said
the agreement would bring an estimat-ed further reduction of A$300m during the next two to three years.
IAG entered into the 20% whole-of- account quota-share arrangement on July 1 last year and the arrangement will remain in place for at least 10 years.
The insurer said it would now be re-turning around A$300m to sharehold-ers through a buyback as a result of its strong capital position.
“The quota-share arrangement con-tinues to perform well for us, reducing earnings volatility and releasing capi-tal,” Peter Harmer, IAG’s managing di-rector and chief executive, said.
The insurer revealed details of the buyback after announcing its finan-cial-year earnings for the period ended June 30.
IAG’s net profit after tax was A$625m, a 14% reduction on the previous finan-cial year, with the reduction driven by lower investment income and a A$139m charge related to software assets.
The group’s underwriting perfor-mance showed a 7% improvement, with its insurance businesses delivering a profit of A$1.18bn.
Gross written premiums were large-ly flat at A$11.37bn. IAG said this reflected rate and volume growth in its short-tail personal lines business in Australia and New Zealand, offset by softer commercial market conditions in both countries.
“Our commercial businesses in Australia and New Zealand have withstood continuing price pressure and maintained their strict under-writing discipline, which has result-ed in lower business volumes as we exited unprofitable business – but we are encouraged by growing signs
of rate improvements,” Harmer said.He said Asia was also continuing to
represent an important source of long-term growth for the company.
The group’s gross written premiums in the region, excluding China, grew 7.5% to A$757m. Harmer said India in particular was performing well.
Natural catastrophes cost IAG A$659m during the financial year, exceeding its budgeted allowance by A$59m.
However, the catastrophe bill was significantly below the A$1.05bn of losses recorded during the previous financial year.
Harmer said the company will hold an investor briefing in December to provide an update on its strategy.
He said IAG was also working on ways of reducing its cost base, includ-ing a technology simplification pro-gramme which reduces 32 policy and claims platforms to two.
In addition, Harmer said IAG would be consolidating its insurance li-cences from nine to two and partnering with offshore-based global service sup-pliers to drive economies of scale.
QBE restructures leadership in Australia and New ZealandThe Australian and New Zealand arm of QBE is to restructure following the ousting of chief executive, Tim Plant, writes Rebecca Hancock.
Pat Regan, who holds the position of chief financial officer at present, will take responsibility for the Australia and New Zealand business.
Regan will retain his existing respon-sibilities while the search for a new re-gional chief executive takes place.
Plant, who held the role of chief ex-ecutive for a year, leaves the company with immediate effect.
In addition, QBE Insurance Austra-lia has appointed Declan Moore to the newly created role of chief underwrit-ing officer, effective August 22.
Moore has more than 25 years of
insurance and actuarial experience in Australia and Europe, having most recently served as group chief actuary at QBE.
Before that he served as QBE Australia operation manager for New South Wales and the Australian Capital Territory.
Kathryn Lisson also joins the busi-ness as non-executive director, effective September 1. She will be based in Can-ada and work with the insurer to drive innovation through technology and data analytics. In her new role Lisson will chair a newly formed operations and technology committee, which will support the board in monitoring QBE’s evolving digitisation and information technology strategy.
Last week QBE reported a 46% decline in net profit to A$265m ($202.3m) in the first half of 2016, reflecting an adverse discount rate adjustment of A$283m, compared with a benefit of A$45m in the previ-ous period.
The result was also affected by the disappointing performance of QBE’s Australian and New Zealand business, which suffered from pricing pres-sure and increased claims, including what the company described as an “unacceptable deterioration” in the at-tritional claims ratio.
QBE is to respond with a combination of price increases, tightened terms and conditions and improved risk selection, it said.
NEWSwww.insuranceday.com | Monday 22 August 2016 3
Standard syndicate expands into more lines of businessSyndicate 1884 has added political risk, political violence and terrorism and fine art and specie to its portfolio
Sophie RobertsDeputy editor
The Standard syndicate has added three new classes of business to its Lloyd’s platform, Insur-
ance Day first revealed.Syndicate 1884 has expanded
its presence in the marine and marine energy sectors by offering covers for political risk, political violence and terrorism and fine art and specie.
To lead the new lines, three se-nior class underwriters have been appointed. Alexandra de Souza Mattos has been appointed un-derwriter, political violence and terrorism and joins the Standard syndicate from international bro-ker RFIB, where she was division-al director.
She is a specialist in covering onshore assets at risk of political violence and terrorism from both a physical damage loss perspective and also business interruption.
Hubert Belanger has been ap-pointed class underwriter, polit-ical risk. He joins syndicate 1884 with more than 30 years’ experi-ence as an underwriter, spending the past 16 years specialising in political risk and credit insurance.
Having begun his career with Chubb Insurance in surety and specialty financial lines, with a
book of business across Canada, Belgium and the UK, during the past five years he has managed the political and credit single risk book of Atradius Credit Insurance from its Paris office.
Joshila Tailor has been appoint-ed class underwriter, fine art and specie and joins from Ironshore’s Pembroke syndicate 4000, where she specialised in fine art and gen-eral specie re/insurance.
Tailor has been an underwrit-er at Lloyd’s and in the company market for the past 17 years and has underwritten cover for a number of prestigious museums, personal art collections, exhibi-tions, classic cars, jewellery and precious commodities including gold and diamonds.
The Standard syndicate, which was established by protection and indemnity club The Standard Club and commenced under-writing on April 1, 2015, has also further strengthened its liability, directors’ and officers’ (D&O), hull
and cargo capabilities with the additional appointment of four class underwriters. Sajjad Jaffer has been appointed class under-writer, liability; Sarah McGurk, underwriter, D&O; Danielle Burr, deputy class underwriter, hull; and Michael Wilks deputy class underwriter, cargo.
Nicola Jones has also been ap-pointed as business producer for the syndicate’s Lloyd’s coverhold-er, 1884 Europe.
Robert Dorey, syndicate 1884’s active underwriter, said: “Our new political risk, political vio-lence and fine art and specie lines extend the range of covers we can offer to meet the needs of insureds and their brokers worldwide.
“I am very pleased to welcome such a talented team of under-writers to our syndicate and look forward to working with them as we deliver our plans to grow.”
The Standard syndicate is managed by Charles Taylor Man-aging Agency.
ITC 2016: Technology to play central role in London’s global competitivenessThe need for the London market to improve the way in which it uses and embraces technology in operational and transactional processes has become a matter of urgency as London fights to maintain its relevance, writes So-phie Roberts.
There is a fundamental business case for modernisation to acquire and maintain more profitable business for the London market while minimalising operational costs, with renewed infrastruc-ture supporting better collabora-tion and automated transactions.
While much remains to be done, since last year’s Insurance Day In-surance Technology Congress, a lot has already moved on. One no-table achievement this year has been the launch of Placing Plat-form Limited (PPL), a core com-ponent of the London market’s Target Operating Model (TOM).
PPL began trading on July 11, with brokers and underwriters being able to exchange informa-tion on standalone terrorism risks – the first class of business to go live on the system.
Already, progress here has been far quicker than the market imagined it would be. Following the successful “discovery phase” of finpro lines, encompassing directors’ and officers’, financial institutions and professional in-demnity, this will be the next class of business to go live on the plat-form which is expected to happen in the latter part of this year.
Marine has been announced as the third line of business, targeted for early 2017.
Also in July the TOM work-ing group published the oper-ating model’s blueprint. The set of outputs, which can be found on the isupportTom website, de-
fine the overall modernisation programme, detailing each indi-vidual solution, the possible de-liveries, their cost and benefits. These range from the current “in-flight” projects to tax calculations and exposure data management.
Technology and digital innova-tion is changing the world rapid-ly and rewriting the rulebook for business. Insurtech has rapidly become a familiar term in the boardroom as companies look to make their businesses more effi-cient in what is arguably one of the most difficult cycles the mar-ket has ever endured.
However, further insight on the technology and providers out there is necessary. With so much of it out there, it can be difficult to see the wood from the trees.
With the rest of 2016 promising to demonstrate rapid change, this year’s Insurance Technology Con-gress will cover all the latest ini-tiatives coming through and the massive opportunities they offer.
The two-day programme will give the latest information on market modernisation, innova-tion and emerging technologies which match strategic goals.
The event, which is being held at St Paul’s, 200 Aldersgate in London over September 20-21, has already attracted a host of great speakers including: Dennis Mahoney, ex-ecutive chairman of RFIB; Simon Gaffney, chief technology officer at Willis Towers Watson; Peter Mon-tanaro; head of delegated author-ity at Lloyd’s; Adrian Rands, chief executive of QuanTemplate; and Justin Emrich, chief information officer at Atrium.
For more information on the event and a detailed agenda, please visit www.itcevent.com. See you in September.
Reinsurers must embrace enterprise risk management to survive: S&PEnterprise risk management (ERM) is crucial for global reinsurers to succeed and survive, according to a report by Standard & Poor’s (S&P), writes Rebecca Hancock.
The rating agency identified global reinsurers are facing head-winds from both the asset and lia-bility sides of their balance sheets.
Traditional reinsurers are also facing increased competition
from alternative capital entering the market, as well as lower rein-surance prices in the property ca-tastrophe and specialty markets, which continue to erode under-writing income.
The ratings agency also high-light the impact of lower interest rates on investments and greater uncertainty in global equity and credit markets.
To tackle these challenges, S&P urged the reinsurance sector to differentiate itself through strong ERM frameworks.
As risks become more volatile, reinsurers must continue to sig-nificantly invest in models, tools and methodologies to understand and manage these increasing complex risks, the report said.
S&P identified appropriate in-
vestment will enable reinsurance companies to act as proactive part-ners to insurers in their manage-ment of risk through risk transfer.
The report highlighted in re-cent years reinsurers have made significant improvements in ERM capabilities, especially in the areas of risk-return optimisation, capital modelling and understanding of ca-tastrophe risk and its aggregation.
It also pointed out the impor-tance of sophisticated modelling to protect against exposure to ex-treme tail risks and dealing with aggregate risks.
S&P rated Amlin, Aspen, Han-nover Re, Munich Re, Scor and Swiss Re as having “very strong” ERM scores. Odyssey Re and Al-leghany were ranked bottom with a rating of “adequate”.
The aftermath of a car bomb in Cairo: Standard syndicate has added lines including political violence and terror
Mohamed Elsayyed/Shutterstock.com
SPECIAL REPORT/RISK MODELLING www.insuranceday.com | Monday 22 August 20164 www.insuranceday.com | Monday 22 August 2016 5
Modelling renewable energy risksWithout the availability of a comprehensive claims track record and a volume of technology-specific data, there is very little basis for insurers to adequately model the exposure presented by a renewable energy site or a portfolio
Fraser McLachlanGCube Underwriting
The risk profile for the development and opera-tion of renewable ener-gy projects worldwide is
rapidly evolving. As the market expands and moves into new ter-ritories, the insurance sector has moved with it, supporting inves-tors in the substantial logistical challenge of building projects in remote regions overseas, from Africa to South America and south-east Asia.
This challenge has been signifi-cantly augmented by an overall increase in scale that has seen a considerable ramping up in size and capacity for both projects and technology. Wind turbines are now multi-megawatt machines, 10 times more powerful than they were 10 to 15 years ago, while the largest solar developments cover tens of square kilometres.
Simultaneously, the wind ener-gy sector’s move into the testing offshore environment in Europe, Asia and the US has exposed the in-dustry to new technological risks and weather-related concerns that are fundamentally different from those experienced onshore.
Faced with this changing com-bination of risks, the task of cre-ating comprehensive models to account for the unique exposures of project developers and opera-tors in the renewable energy sec-tor is a complex one. Ultimately, there is no substitute for years of industry-specific data when it comes to determining what might go wrong and where – and pricing these risks accordingly.
Risk modelling as it pertains to renewable energy can be divided into two distinct categories: natu-ral catastrophe (nat cat) and me-chanical breakdown.
Nat cat modelling has been around for some time now in nu-merous sectors, but international expansion in renewables has led
to increased focus on this area. Two-thirds of the global solar photovoltaic market, for example, is built in countries where nat cat risks are considered above aver-age or high and this has already been borne out by recent severe claims in the solar market. This proportion is set to increase with expected growth in parts of the US and in emerging markets.
Insurers in the renewable en-ergy sector are at present using a variety of underwriting tools to evaluate the likelihood and potential severity of incidents, including (but not limited to) earthquakes, windstorms and flooding, each of which have led to high-profile losses over the past few years. Other adverse weather such as tornadoes, lightning and hail will commonly be factored in to this analysis.
Modelling local risksArguably the most sophisticated nat cat model available to the in-dustry is provided by RMS. This provides figures for mean dam-age ratio, annual average loss, oc-currence exceedance probability and aggregate exceedance proba-bility, which are highly useful for modelling local risks. In turn, this data allows us to structure nat cat pricing by region, based on the se-verity of the risk.
It is common practice to allocate a certain amount of capacity for a particular exposure to a certain area – for instance, insurers may aggregate $100m for earthquake risk in California. The more de-mand we see, the more expensive it will become for buyers to secure coverage. It is simply a capacity factor, although in the ongoing soft market cycle, the market seems to be overflowing with capacity. Con-sequently, pricing is at an all-time low and nat cat cover is sometimes offered for no charge as part of the all-risks policy.
The one downside with RMS is the absence of a dataset to model specifically for renewable energy sites. The model has been built with individual buildings and
structures in mind, whereas the typical utility-scale wind farm or solar site is spread over tens or hundreds of acres, with a much larger footprint and an altogether different risk profile.
The truth is that, while attempts have been made, the dataset re-quired to create a tailored model just does not quite exist yet. There have been a handful of record-ed nat cat incidents in the sector – notably windstorm losses in Mexico, India, Brazil and the Ca-ribbean and, memorably, tornado damage to a solar site in Califor-nia – but, ultimately, there is very little to work with.
What is more, modelling nat cat can only be accurate to a point. Increasing unpredictability in the global climate – as we have seen with the recent prolonged El Niño phenomenon in the US – is hard to account for in a model based on retrospective data analysis.
Mechanical breakdown, by con-trast, is an area where our data is very extensive. At GCube, we settle more than 400 claims on average a year, a considerable majority of which relate to mechanical break-down. Likewise, GCube has been a specialist in the renewable ener-gy market for more than 20 years and over this time has managed to build up a very large and com-prehensive dataset. This affords
us significant advantages when it comes to modelling risks of com-ponent failure.
To take wind turbines as an ex-ample, there are many different variables that drive performance and we make sure to collect very specific information in the even-tuality of a loss. This enables us to build up a highly accurate pic-ture of component loss trends. GCube has also taken this data and shared it with some of our clients by means of reports such as Break-ing Blades and Towering Inferno. In addition, GCube clients have ac-cess to advisory councils and sem-inars, where industry-specific data is shared on a confidential basis.
Our claims database factors in geography and manufacturer de-tails, running deep enough that we are now able, for instance, to give an indication a specific gear-box operating in a specific climate is likely to fail within a specific time frame. Naturally, this data is hugely valuable to the underwrit-ing process and hence our pricing.
For poorly performing equip-ment, we now have the ability to predict when failures will occur and price accordingly. Conversely, when we have the data to show that equipment is performing well, this can put us in a high-ly competitive position when it comes to pricing a risk.
PricingIn practice, this data allows us to structure pricing very effec-tively on a project-to-project ba-sis to transfer technology risks off the balance sheets of our insureds and onto ours. It also means that we can be more se-lective when it comes to “picking winners” and choosing which as-sets to underwrite.
Modelling renewable energy risks is highly dependent on the volume of technology-specific data available. As we have seen on the nat cat side, there is a de-gree to which conventional mod-els can be applied to the rapidly developing sector but without a comprehensive claims track re-cord, there is no real basis for a thorough assessment of site and portfolio exposure.
Many insurers that have recent-ly entered the sector without con-ducting substantial due diligence are essentially writing risks blind. The day will come when a large nat cat loss occurs or a whole se-ries of equipment failures affects multiple sites in various portfoli-os – and those that have not put in the hours to understand the spe-cific exposures of renewable en-ergy assets will feel the impact. n
Fraser McLachlan is chief executive of GCube Underwriting
Profiling ZikaIt is difficult for insurers to assess their exposure to the Zika virus, but the industry can look to epidemiological models of similar diseases to better understand the potential spread and financial impact of the disease
Doug FullamAIR Worldwide
The Pan-American Health Organisation first con-firmed Zika virus infec-tions in Brazil in May
2015. The Zika virus is spread mainly through the bite of the tropical mosquito Aedes aegypti. It has been suggested the mosqui-to population boom related to El Niño has exacerbated the virus’s wide and rapid spread.
Cases of Zika virus in the US have been associated with recent travel to areas with active trans-mission and most recently, local transmission in southern states. Parts of the US are home to the mosquitoes capable of spread-ing Zika and there is risk of local transmission in certain parts of the US. The virus can also spread sexually and from a pregnant woman to her fetus during preg-nancy or around the time of birth.
As healthcare providers and public health officials closely monitor and report cases of Zika, they hope to continue to improve their understanding of the virus. It seems certain, however, Zika will continue to spread.
The Zika virus only recently emerged in the Americas and it is difficult for insurance companies to assess the financial risks of an outbreak because of the limited data. Thankfully, though, we can look to epidemiological models of similar diseases – such as dengue fever – to better understand the potential spread and financial impact of the disease. For out-breaks of infectious diseases these models are better at capturing variability and uncertainty than traditional statistical techniques.
Modelling an outbreakThere is no straightforward way for insurers to build tradition-al statistical models on Zika. In instances like this, the starting
point should be to use epidemio-logical models to model the poten-tial impact of the event. To build the necessary parts background for a epidemiological model one can look at historical records, or-ganisations like the Centers for Disease Control and Prevention (CDC), the World Health Organi-zation (WHO), epidemiological medical journals and news sourc-es that serve as aggregators of in-formation which can be used to understand the outbreaks.
This research enables them to get a good sense of the start location, transmission rate dis-tribution, fatality rates, hospital-isation rates and the morbidity impact. Before they start to mod-el the outbreak, insurers will also want to make sure they under-stand the correlation between these variables.
There are two main options insurers have when it comes to modelling an outbreak: scenario testing (AKA stress testing) and sto-chastic modelling. While scenario
testing will not give insurers the full picture, it is a relatively quick way to get an understanding of the financial impact of a pandem-ic and gives the insurer a starting point. One of the downfalls of this approach is it does not provide a probability of occurrence. It will not tell an insurer, for instance, whether the chance of a severe event occurring is 2% or 10%.
Stochastic modelling, in con-trast, is an ensemble of many sce-narios. Each scenario is derived from a set of random draws from a set of specific distributions from the aforementioned variables. This not only allows the modeller to estimate the severity, but also the likelihood of the event or one like it. Stochastic epidemiologi-cal models have been developed and are used by many people in the epidemiological community. They combine our present un-derstanding of disease spread and virulence within a stochastic modelling framework. They are used to help assess the status of an
outbreak and where it may be in a few weeks. Organisations like the WHO and CDC use them to plan how to best deploy their resourc-es to fight an outbreak to stop or limit the impact of the pathogen. Insurers can use stochastic model-ling to better gauge the severity of an event and determine the best action to take to limit the financial burden. These simulations can be applied to an insurer’s port-folio to determine a probabilistic financial loss.
Addressing extreme eventsInsurers are excellent at dealing with medical cost claims and the impact of mortalities. However, pandemics are rare events and therefore, are not dealt with on a regular basis.
That is where companies like AIR Worldwide come in. We have actuaries, epidemiologists, data scientists and other subject mat-ter experts who are familiar with severe events and understand the multitude of variable inter-
actions which can help insurers, financial institutions and others calculate the risk. Insurers want that knowledge to help assess sol-vency, determine pricing and esti-mate reserve needs in the event of a severe outbreak.
Making better decisionsThere is great interest in Zika among insurers, partially because there are still so many unknowns. Primary insurers and reinsurers are trying to grasp the short- and long-term effects of the virus. One of the factors coming into play for life and health insurers is where their book of business is located. If the United States experiences sub-stantive local-transmission of the Zika virus, insurers in southern to mid-Atlantic states are most like-ly to experience the first wave of cases because the mosquito that carries Zika is most prevalent in that region.
Long-term, the biggest direct in-surance cost stemming from Zika will probably be care for children born with birth defects. Chief among these is microcephaly, a birth defect that can occur when a baby’s head is smaller than ex-pected because the brain has not developed properly. Another se-vere outcome is Guillain-Barré syndrome, in which a person’s im-mune system damages the nerve cells, causing muscle weakness and sometimes paralysis.
The Zika outbreak reminds us how vulnerable humanity is to emerging infectious diseases and highlights the challenges of prepa-ration. Probabilistic modelling and analyses provide organisa-tions with the robust view neces-sary for sound risk management. AIR’s global pandemic model can help companies anticipate the drivers of mortality and morbid-ity risk to facilitate optimal risk management, risk transfer and risk mitigation decisions. n
Doug Fullam is senior manager, life and health modelling at AIR Worldwide
Building statistical models for viruses like Zika can be
challenging for insurance companies
Wind turbines: the risk profile for renewable energy projects worldwide is rapidly evolving and the market will need to evolve with it
SPECIAL REPORT/RISK MODELLING www.insuranceday.com | Monday 22 August 20166 www.insuranceday.com | Monday 22 August 2016 7
Locating the sources of cyber exposureMuch like terrorism, the risk of a cyber attack is based on sporadic and unpredictable human behaviour, making it difficult to model and analyse
Cyber insurance and how the industry responds to the threat posed by rap-idly changing technology
has become a key talking point across the industry, which will shape our collective reputation in this burgeoning class.
Ensuring its response is able to evolve in tandem with technology and also that clients receive com-prehensive solutions from across the market will require consen-sus, particularly when it comes to the information requested from insureds. By coming together and developing an industry standard for cyber – both how it is under-written and modelled – the Lloyd’s market can ensure it is well placed to mitigate this evolving risk both now and in the future.
Parallels can be drawn with the evolving nature of terrorism. The new style of terrorist attacks, per-petrated by lone wolves or small groups (with apparent loose affilia-tions to large terror networks), has been redirected towards soft tar-gets and aimed at killing as many civilians as possible. The Westgate shopping mall attack in Nairobi is a prime example and more recent attacks in Paris and Brussels have followed suit. This style of attack contrasts starkly with what we have seen in the past, centred on high profile targets and aimed for mass destruction.
Hard to understandTerrorism, with its numerous moving parts, is difficult to mod-el and analyse but getting to grips with and understanding cyber crime is proving even trickier, especially given the difficulties in identifying attack perpetrators.
This is particularly important in the context of the insurance
market. The take-up of cyber in-surance has rocketed in the past few years, as has the expectation for coverages wider than have previously been offered. These have included, among others, rep-utational damage, system failure and business interruption.
The consequences of a cyber at-tack are potentially very costly. A hypothetical scenario developed by Lloyd’s for syndicate reporting is a cyber attack on 50 electric gen-erators resulting in a blackout of 15 states in the US. In the best-case scenario, power is restored within four days and in the worst case, power returns within two weeks. The total impact to the US econo-my is estimated as $243bn, rising to more than $1trn in the most extreme scenario. The respective estimated costs to the insurance industry are $21.4bn and $71.1bn.
These new risks are forcing insurers’ risk management divi-sions to have to think deeper – so how can they be managed?
Aside from standalone cyber coverage and that specifically included in other policies, the market is being faced by poten-tial liability for cyber claims from policies where cyber coverage has not been explicitly excluded. Many of those “silent” policies go back years; the challenge lies in lo-cating these latent policies. It is im-portant insurers can identify these risks so their costs can be factored into premiums charged.
Once sources of exposure have been located, insurers can begin piecing this together to get a true picture of potential accumula-tions of risk and the related finan-cial impacts on any one firm and the market as a whole, should we suffer a large cyber attack loss.
Unlike most risks capable of
causing catastrophic losses across the market, the management of cyber risk is still in its infancy. We are still in the discovery stages. This is evidenced by the simplistic risk management models we have seen released to the market, based on aggregate exposure profiles. These must evolve and mature at least to the extent that terrorism modelling has over recent years.
Coding challengeEven with the help of these models and the minimum standards is-sued by Lloyd’s, insurers are strug-gling. When coding cyber policies for their records, two of the main challenges faced pertain to occu-pancy and a general lack of infor-mation about the underlying risks.
For example, an insurer that covers healthcare providers is most likely to suffer a loss tar-geted at the healthcare industry. Being an insurance company, one might code this risk as “offices”, despite the most likely loss being from the “healthcare” sector.
Models that deal with such lev-els of detail are needed if we are to record our exposures accurate-ly and in a manner that is easily understandable, perhaps allow-ing for primary and secondary occupancies: “office” and then “healthcare” in this example.
Reporting standards for cyber, from insured to insurer and in-surer to reinsurer, have not yet caught up with those for other classes. The details that would be
most useful for insurers manag-ing cyber risk such as details on cloud providers, firewall protec-tions and number of employees are not always provided as stan-dard. Developing these reporting standards will be a key part of any industry-wide strategy to tackle the threat. As yet agencies that rate the cyber security status of businesses have not even agreed a common framework for those ratings.
Despite the challenges, the road to mitigating cyber risk is being paved. An historical database of events is being built up and the insurance industry is becoming more knowledgeable. Much like the threat posed by terrorism, cyber attack risk is based on spo-radic human behaviour and is unsurprisingly difficult to fully understand. Often, the difficulty in identifying perpetrators for cy-ber attacks makes classifying and understanding the motive even more challenging. By coming to-gether to share expertise and de-velop an industry standard we can mitigate these challenges.
Only if the industry works to-gether within existing and new frameworks will we be able to ful-ly incorporate and professionalise our tackling of cyber threats. An industry-wide response is, to put it succinctly, in everyone’s interest. n
Doyinsola Afolayan is assistant catastrophe modeller and Jacob Sayer a terrorism exposure analyst at Antares
Cargo cat modelling and the Tianjin lossRe/insurers need to embrace more sophisticated cargo catastrophe modelling and loss management strategies
Chris FolkmanRMS
One year ago, a series of accidental chemical explosions rocked the port of Tianjin, result-
ing in the deaths of 170 people, hundreds of severe injuries and the largest insured loss of marine cargo ever.
Dozens of warehouses and storage lots, collectively holding billions of dollars of cargo, were reduced to a smoking crater. It took hundreds of claims adjust-ers several months to gain a clear picture of the loss. When the industry estimates were finally published, the numbers were staggering. The estimates varied but were as high as $6bn – more than one-third of global cargo premiums collected annually.
The Tianjin explosions uncov-ered a significant blind spot in marine risk management – at any given time, cargo underwriters have little knowledge of where their risk is accumulating. Unlike houses and industrial facilities, whose locations are fixed and physical characteristics known, cargo risk is more challenging to grasp: it is mobile, its values are
volatile and it may be stored in dozens of different configura-tions, from silos to warehouses to shipping containers. Marine cargo may be the world’s oldest line of insurance, but it has also been one of the most reluctant to embrace new underwriting and catastrophe management tech-nologies. Ironically, anyone can track a consumer product’s jour-ney from origin to destination with almost hourly precision but pinpointing the exact location of a shipping container full of con-sumer products is considerably more challenging.
For cargo insurers, the problem of accumulation risk will not be going away any time soon. In fact, it is projected to worsen. Since the invention of the shipping contain-er in the 1950s and its standardi-sation in the mid-1970s, seaborne trade has almost quadrupled. Such growth has proven tremen-dously beneficial to the global economy, but has also created a vexing problem of exposure ac-cumulation for the shipping and insurance industries. Bigger car-go vessels have necessitated the relocation of river ports to seaside locations, where they are exposed to severe windstorm and storm surge hazards. The ports them-selves have grown larger and their terminals more efficient,
resulting in higher values of car-go at risk from natural catastro-phe. And most shipping experts agree the volume of cargo – and its value – will continue to grow.
Soft marketAdding to these challenges is the condition of the cargo market (soft) and common policy cover-age (broad). Most standard cargo contracts carry an “accumulation clause”, which may double the policyholders’ limits in the event of an “unexpected or unintend-ed” accumulation of coverage. No other line of business carries such a generous coverage extension, making accumulation risk argu-ably more important to the cargo line than to property.
Limits aside, the coverage it-self is increasingly broad, with “stock throughput” policies com-prising an increasing proportion of total premiums. The scope of such coverage, which insures products from “cradle to grave” – anywhere in the world – makes underwriters justifiably uncom-fortable. But, given market condi-tions, they must often provide it to retain renewals.
The size of the Tianjin port loss was unprecedented, but a recent analysis by RMS has revealed many other global ports are at risk of very large cargo losses as a re-
sult of earthquake, hurricane and storm surge perils. Surprisingly, a port’s size and its catastrophe loss potential are not strongly cor-related. The port of Plaquemines, just outside New Orleans, is nei-ther well known nor particularly large. But the RMS analysis found the port is susceptible to extreme storm surges and its 500-year in-sured loss could be as large as $1.5bn. Other smaller ports are similarly exposed to huge loss-es: Pascagoula (Mississippi), Le Havre (France) and Bremerhaven (Germany) were all in the top 10.
Working aroundDespite such pervasive loss po-tential, the catastrophe modelling of cargo has historically involved a series of workarounds that produce rough approximations of cat loss, but do not take into account critical characteristics of the risk. For example, cargo has always been classified as the same “contents” exposure, regardless of whether the ex-posure happens to be sensitive pharmaceuticals in cold storage or gold bullion locked in a safe. Today’s modelling approaches also fail to take into account sal-vage values, packaging or pre- loss protection measures.
Distinguishing safe accumu-lations of cargo from dangerous
ones will require much more rig-orous modelling techniques.
If the cargo line has been slow to adopt new technologies and analytics, it is likely to be because the line has enjoyed long periods of adequate profitability where change was not perceived as nec-essary. From the “cashflow under-writing” days of the 1980s, where unprofitable business was more than subsidised by astronomical interest rates, to the insurance cap-ital shortage of the post-September 11, 2001 years, cargo insurers usu-ally posted good numbers.
Following significant losses from the Tōhoku earthquake, hurricane Sandy and the Tianjin explosions, the most recent five years of pure losses ratios released by the Inter-national Union of Marine Insur-ance do not paint a good picture: 68%, 74%, 77%, 71% and 68%. Add in underwriting and loss adjust-ment expenses and profitability is close to nil. Given the increasing severity of catastrophe losses and the ongoing capital surfeit, these profitability levels are likely the new norm. The guessing game of port accumulations must stop and re/insurers should embrace more sophisticated cargo catastrophe management strategies. n
Chris Folkman is director of product management at RMS
Doyinsola Afolayan and Jacob SayerAntares
Nagoya, Japan
Guangzhou, China
Plaquemines, LA, USA
Bremerhaven, Germany
New Orleans, LA, USA
Pascagoula, MS, USA
Beaumont, TX, USA
Baton Rouge, LA, USA
Houston, TX, USA
Le Havre, France
Ningbo, China
Texas City, TX, USA
Yokohama, Japan
NY/NJ, USA
Hamburg, Germany
Mobile, AL, USA
Antwerp, Belgium
Marseilles, France
Shanghai, China
Chiba, Japan
0 0.5 1.0 1.5 2.0 2.5 3.0
2.30
2.00
1.50
1.00
1.00
1.00
0.90
0.80
0.80
0.70
0.70
0.70
0.70
0.70
0.65
0.60
0.55
0.50
0.50
0.50
Graph: Top 20 port 500-year insured losses ($bn)
0 0.5 1.0 1.5 2.0 2.5 3.0
Source: RMS
Nagoya, Japan
Guangzhou, China
Plaquemines, Louisiana
Bremerhaven, Germany
New Orleans, Louisiana
Pascagoula, Mississippi
Beaumont, Texas
Baton Rouge, Louisiana
Houston, Texas
Le Havre, France
Ningbo, China
Texas City, Texas
Yokohama, JapanNew York/ New Jersey
Hamburg, Germany
Mobile, Alamaba
Antwerp, Belgium
Marseilles, France
Shanghai, China
Chiba, Japan
Measuring the dark matter of risk
Chief executives of global corpora-tions operating in 2016 have two primary motivations: maximising their enterprise’s profitability/
share value and managing corporate risk. However, these two motivations are under threat from connected risks and the way extreme connectivity affect corporations in todays joined-up risk landscape. As a re-sult, emerging and potentially systemic risk poses a real threat to the C-suite of global corporations and suppliers, corporate risk managers and, particularly, their insurers.
The failure of a single firm from a con-nected risk can have a disproportionate ef-fect on both the firms connected to it in that vertical sector – financial institutions, for
example – and the wider re/insurance indus-try. More and more carriers I speak to know there is a problem but are at a loss as to what to do about it and their concerns are backed up by a survey the Russell Group sent recent-ly to more than 400 casualty underwriters.
In the survey we asked: “What concerns you most about the soft market?” Falling premium, not surprisingly, came top of the list but it was also interesting to see “increasing exposures” (19%) and “clashing or connected risks” (17%) also featured highly in the poll’s responses.
Every firm with physical assets has many liabilities that end up in the re/insurance mar-ket. In addition to product and general liabili-ty, there are a number of different sub-classes such as directors’ and officers’, errors and omissions and employment practices liability.
In a recent World Economic Forum white
paper UBS referred to extreme connectivity as the growth in the number of companies which are increasingly integrating across industrial sectors and geographies, and cre-ating greater levels of risk. This exposes com-panies to a network of connected risk as each company becomes more related to the next.
One might speculate the so-called Fourth Industrial revolution we are passing through has the potential to reshape the nature of risk as we know it by concentrating peak casualty exposures in a kind of dark matter that can-not be seen by today’s analytics and risk mod-elling observatories.
At Russell Group we believe there is every reason to be optimistic that this unaccounted for dark risk matter which is expanding to-day’s universe of exposures, can be observed, measured and tracked.
GlobalisationOne of the effects of globalisation is to con-centrate risk into fewer companies. Last year the top 1,000 companies generated $35trn in revenue, roughly one-third of total global rev-enue from all companies (roughly 50 million) of $105trn. Half of the supply chain of the top 1,000 firms is within the top 20,000 firms by revenue, the total revenue of which was $75trn.
Connected risk can, however, be an oppor-tunity for re/insurers to provide a better ser-vice to their clients. If it is possible to analyse, measure and quantify the industry’s expo-sures to connected risk – cyber liability, for ex-ample – then it also becomes possible to price these exposures much more accurately. How is this possible? Russell Group’s research into ex-treme connectivity has identified that connect-ed risks operate in a multi-class ecosystem.
This ecosystem is composed of risk drivers and receivers. “Drivers” of risk are: political vio-lence, supply chain, natural perils, cyber and credit. The “receivers” of risk are the special-ty classes, notably the aviation, space, energy, marine, property and casualty lines.
As a result, these receiving classes, which are exposed to the usual attrition, large loss and class events, are also exposed to events from the risk drivers. Consequently, insurers may have underestimated, quite significantly, the amount of exposure to this connected risk.
Know you riskIn the context of connected risk, it is vital the boards of global enterprises and their under-writers know their risks and are able to name their risks. This seems obvious at first sight but the reality is this simple aim is not being achieved by nearly every underwriting entity in the re/insurance market. n
Suki Basi is chief executive of Russell Group
Suki BasiRussell Group
Voyage of the Crystal Serenity through north-west passage tests new Polar Code regulationsCommercial pressure must not be allowed to overrule safety concerns
Michael KingstonDWF
Seattle airport was an in-teresting place to be on August 11 on my return to London. I had been attend-
ing a workshop to discuss best practice in the Arctic and the im-pending Polar Code with some of the world’s leading environmen-tal organisations concerned with the Arctic, who were asking me to bring their concerns back to Lon-don to help incorporate them into the insurance industry’s agenda.
As I waited patiently in the Delta Airlines queue, in front of me there were tourists check-ing in for a flight to Anchorage in Alaska to join the American company Crystal Cruises’ vessel Crystal Serenity for its voyage from Anchorage to New York.
Having left on August 14 for the 28-day trip, Crystal Serenity is by far the largest cruiseship ever to sail the north-west passage, carry-ing almost 1,700 passengers and crew. Prices have been reported to range from $30,000 to $156,000 per passenger.
The transit is truly historic. The north-west passage was first transited in 1906 by Norwegian Roald Amundsen (who took three years to do so) in the 19th cen-tury. The search for the passage was the Holy Grail of the explora-tion world.
For years the British sought to conquer the route, most notably by the “Barrow boys”, who were a string of explorers commissioned by Sir John Barrow, permanent secretary of the British Admiralty at the time.
This famously culminated in di-saster in 1845 during the Franklin expedition with the loss of both expedition ships, which disap-peared and all on board perished. Only in 2014 was Sir John Frank-lin’s ship HMS Erebus discovered. The second ship, HMS Terror, which was captained by Irishman Francis Crozier, is still missing.
The missions failed because of the harsh environment and its extreme conditions. While ice has been melting at record levels and technology has advanced, that does not negate the difficul-ties in such a remote environ-ment. It is extremely important the excitement of creating history does not distract both the Crys-tal Serenity’s passengers and its operators from the magnitude of the risks involved.
Looking at the passengers in front of me at Seattle airport, my mind flashed back to the talk I gave in Lloyd’s Old Library for the British Insurance Law Associa-tion: The finalisation of the Polar Code: the concerns and contribu-tion of the insurance industry.
I chose April 10, 2015 to give the talk as that date was the 103rd anniversary of RMS Titanic leav-ing Southampton. Although the Titanic disaster occurred in the early hours of April 15, 1912, what was going on in the days and months before that are where we must learn lessons from history.
It has been well publicised by Crystal Cruises that it has been involved in intense pre-plan-ning, liaising with the US Coast Guard and the Canadian authori-ties. There is simply no room for error in such a transit with so many people on board and in such a remote area. Crystal Cruis-es will be supported by a Canadian
ice-breaker and is also in contract to be accompanied by British Ant-arctic survey vessel RRS Ernest Shackleton, which obviously is the back-up plan for the transfer of passengers in the event of a loss of the Crystal Serenity in the middle of the passage.
Anything less in planning would not comply with adequate pre-planning under the new Polar Code regulations and would, after January 1, 2017, result in the fail-ure to obtain a polar ship certifi-cate, in theory.
Applying the rules correctly is critical. Education about the Polar Code is now a priority so the rules are applied correctly by operators, flag states, insurers, financial institutions and port state control. However, the reality at the moment is there is a lack of understanding.
For insurers, which will have a big role to play in the implemen-tation of the Polar Code, hull and machinery underwriters at pres-ent exclude voyages above 70°N under the Lloyd’s Institute hull clauses because of the dangers and difficulties involved, and pro-
tection and indemnity club rules do not allow vessels to travel “out-side normal trading patterns”.
Therefore, owners have to con-sult all insurers involved for Arc-tic operations. Insurers will need to look in detail at the owners polar waters operation manual to see what it is the operator is intending to do, what crew are on board and what mitigating provi-sions have been put in place for emergency situations.
Enormous opportunityCrystal Cruises is reportedly tak-ing reservations for a 2017 transit. Before looking to the second trip, it is important for Crystal Cruises to first harness for itself and the cruiseline industry the enormous win-win situation it is in.
Its voyage is in effect a showcase for the hypothetical application of the Polar Code. Crystal Cruises needs to educate everyone about what responsible pre-planning is. If the conditions are in accor-dance with pre-planning, every-one will have a trip of a lifetime.
But if adverse conditions arise Crystal Cruises will also need to
show what a responsible operator it is and what a responsible sector the cruise industry is in allowing the experienced and trained crew who are on board to be able to say “no, this is not safe, we do not go through”. Commercial pressure must play no role in that on-board decision-making process.
Either way – going through or not – if this happens, the histor-ic application of the Polar Code in theory is the most important lesson to learn.
In doing so, Crystal Cruises and its passengers will play an enormous role in the protection of the Arctic marine environ-ment and safety of life at sea for future activity.
A clear understanding of the rules and adherence to best practice will help to keep out rogue operators and preserve the area the passengers have paid so highly to see.
It does seem Crystal Cruises has gone to great lengths, but the proof will be in the pudding. n
Michael Kingston is a partner at DWF
Arctic ice: the voyage of the Crystal Serenity through the north-west passage is
in effect a showcase for the application of the Polar Code