London Marine Market within the global context

Marine intermediatePeter TownsendSwiss Re Academy

Slide 2

The boundaries of the London

Market are not clearly defined.

Lloyd’s of London.

– Syndicates operating under the Lloyd’s franchise.

– Lloyd’s capital is sourced World Wide.

– The majority of Lloyd’s premium income is from the U.S.A.

Companies.

– Members of the Insurance Underwriting Association of London (I.U.A.)

– Other companies with London underwriting offices.

– European Economic Area (EEA) licensed insurers and reinsurers.

– Contact offices of foreign companies not authorised to transact business in the United Kingdom.

Protection and Indemnity Clubs

Marine intermediatePeter TownsendSwiss Re Academy

Lloyd’s

3

London Gazette 1688

Slide 4

Lloyd’s for first 300+ years

“Names”

Members Agents

Underwriters Underwriters

Chain of security pre 1992

Syndicate results premiums exceeding claims

Call on “Names” (unlimited)

Lloyd’s Central Guarantee Fund

Historical Constitution of a Syndicate

No assets (Assets held by Managing Agency)

12 month business annually recapitalised

100% dividend policy

3 year accounting system

Reinsurance to Close (RITC)

What is a “Name”

High net worth individual

Asset rich (not necessarily cash rich – eg farmers)

Earn 3 times

– Premium > Claims

– Investment income

– Capital appreciation

Pledged money as a guarantee

Gearing

Unlimited liability

Role of the Members Agent

Administer the Names assets

Assess individual syndicates for profitable investment

Balance portfolio

Rot setting in.....

Members agents fees

Back year under reserved

– Asbestos

– Pollution

– Health hazard (occurrence liability)

Reinsurance (excess of loss)

Then………

The placement

Occidental

36.5%

Texaco

23.5%

Thompson N Sea

20%

Union Texas

20%

Before

R/I

London 60%

USA 10%

Scand. 10%

Bermuda 15%

Mid. East 5%

After

R/I

London 80%

USA 5%

Scand. 5%

ROW 10%

The Spiral

How

Winners and losers

Retentions at the bottom

Retentions at the top

Reinstatement premiums

Bad debt

Risk

Risk

Risk

Risk

Risk

Risk

Risk

Insurer

XL Direct XL on XL (1st Tier)

XL on XL (2nd Tier)

XL on XL (3rd Tier)

XL on XL (3rd Tier)

XL on XL (3rd Tier)

Change in the constitution of

Lloyd’s

Asbestos and pollution

87J

Exxon Valdez

Piper Alpha

Northridge quake

Hurricane Hugo

Cat 90a

Slide 17

Lloyd’s losses from 1988 to 1992.

Conversion factor £1 = US$ 1.55

Source : The Truth about Lloyd’s who sourced the figures from Lloyd's Global reports or press statements.

Change in the constitution of

Lloyd’s

Traditional “Names” badly hit

Equitas “ring fencing”

Unlimited liability replaced by limited liability

Corporate capital

Actuarial developments

– Risk based capital

– Realistic Disaster Scenarios

Back to the future

Demise of unlimited “Names”

Brief introduction of spread vehicles

Demise of spread vehicles

Evolution to a market of corporate capacity

Growth of dedicated capacity

A market of insurance companies

Now over 95% of capacity is corporate

Lloyd’s for the future

Underwriters Underwriters

Capital Providers

Corporate Members

Change in the constitution of

Lloyd’s

•1995 Reconstruction and Renewal (R & R) announced; settlement to names and creation of Equitas to reinsure 1992 and prior liabilities.

•1998 U.K. Government signals that future regulation of Lloyd’s will fall under the Financial Services authority (F.S.A.)

•2003 Lloyd's implemented a new franchise model in 2003, which changed Lloyd's status from that of regulating the market to that of commercially managing the market.

Slide 22

Lloyd’s Franchise.

The Franchise model started in 2003.

The FSA now regulates Lloyd’s

The Corporation of Lloyd’s changed from being a regulator to being a commercial manger.

It has three objectives

An environment that encourages a long term return to capital providers.

To make Lloyd’s the market of choice for its stakeholders (Capital, Brokers, Underwriters and policyholders).

To have well managed and disciplined businesses.

It has four main activities.

Performance management

Capital management.

Risk management

International Licences & Brand

The franchise board has sharp teeth. The Lloyd’s franchise has been withdrawn from some operators.

Benefits of Lloyd’s

Small capital input

Lloyd’s sovereign S&P rating currently A+

Market

Centre of expertise

Worldwide licences

Difference between Lloyd’s and any other market?

Central guarantee fund

Company market

25

Slide 26

The Company Market.

Marine intermediatePeter TownsendSwiss Re Academy

Slide 27

London Company Market

Insurers and Reinsurers operating within the City of London.

–Members of the IUA ( which was formed from the merger of LIRMA and the ILU)

–Other Company Offices.

–European Economic Area Companies.

–Contact offices ; not authorised to accept business within the UK.

These companies used to be based in the London Underwriting Centre or the ILU building, but are now more widely dispersed with the City. Swiss Re is a typical example of this.

The Association of British Insurers (ABI) represents UK insurers wider interests outside of the London Market.

Slide 28

Marine companies in London have

reduced but are now stable

The ILU used to have in excess of 100 active members.

At the of the merger with LIRMA there were 46 members.

Following withdrawals, mergers and takeovers the number of companies writing Marine business in London is now 15.

Major players are Royal and Sun Alliance (RSA), Swiss Re UK, Allianz, Zurich, Lancashire.

P&I Clubs

29

Constitution of P&I Club

Non profitmaking - Mutual organisation of shpowners

Cover for liabilities arising out of management and operation of the ship

Exposure:

– Crew liability

– Pollution liability

– Collision liability

– Cargo

– FFO

– ROW

History of P&I Clubs

Originally formed in 18th Century following 1720 Statutory monopoly – Lloyd’s and 2 companies

Monopoly repealed 1824

De Vaux v Salvador (1836) judgement that shipowners were liable to third parties following collision

Hull underwriters only offered 3/4ths RDC

Lord Campbell’s Fatal Accidents Act 1846 – Crew liabilities

Employers liability Act 1880

Shipowners' Mutual Protection Society set up in 1855 to provide the shipowners with a solution.

The International Group – 13 Clubs

The International Group

Insure 90-95% of World’s tonnage

Committee = shipowners

Managers – undewriting/claims handling/advice/investment

Cover

Loss of life/PI to Crew or 3rd Parties

Loss/damage to cargo

Hospital/Medical/Funeral/Repatriation expenses

Death /injury expenses. Deviation etc

Life salvage

1/4th RDC

Loss/damage to third party vessel without damage to vessel (ie wavewash or causing another vessel to swerve and then damage...)

Cover

Quarantine expenses

Cargo’s proportion to GA and Salvage not recoverable from cargo due to breach in contract of carriage

Renewal date – and limits

20th February and Group R/I on same date

Until 20th February 1996 cover unlimited (except oil pollution which limited to USD 500 million a.o.acc/occ)

Partially Protected by R/I

Now limited. Vertical limit poss “target” for claimants, so compromise.

Based on 1976 Limitation Convention

Individual Owner’s liability – Calculate limitation amount entire fleet under the 1976 convention and max liability = 2.5% of that figure Est USD 4.25 billion depending on ROE USD-SDR

Slide 36

P&I Clubs

Direct or Broker

Application form for membership

No policy issued, instead a certificate of entry

Club Rules

No reserves as non-profit making

Non – competition agreement

Pooled losses excess of USD 8 million

Slide 37

Premium

USD per GRT entered (Or Contributing tonnage)

= Estimated Total Cost

ETC + Investment income less expenses

– = Anticipated Cost of Risk

Apportioned (depending on loss record) over the membership

Slide 38

Premium

Total Cost

First two calls:

– Advance calls - paid in the year of account

Final instalment – supplementary call

– Payable approx 18-24 months (if at all)

Investment income accrued

Release calls

Slide 39

Premium

Renewal terms

– General increase

Slide 40

Reinsurance

Retention

Pool

Captive

Group XL

Pollution limited to USD 1 billion

Non poolable risks

Slide 41

International Group P&I

Slide 42Chartered EntriesOwned Entries

Protection and Indemnity

US$ 1,000m

Collective Overspill Protection

One Reinstatement

Fir

st G

en

era

l Exc

ess

Un

lim

ite

d R

ein

sta

tem

en

ts

Fir

st G

en

era

l Exc

ess

Un

lim

ite

d R

ein

sta

tem

en

ts

US$ 30m

US$ 22m

US$ 8m

Upper Pool – Reinsured by Hydra

Third General Excess

Unlimited

ReinstatementsOil Pollution

Second General

Excess

Unlimited

Reinstatements

Lower Pool

US$ 30mPool - Reinsured by Hydra

US$ 290m

Protection and Indemnity

and Oil Pollution

International Group of P and I Associations

General Excess of Loss Reinsurance Contract Structure

Owned and Chartered Entries

(including Overspill Protection, Hydra Participation, Pooling and Individual Club Retentions)

12 months at Noon GMT 20th February, 2011

Lower Pool

First General

Excess

Unlimited Reinstatements

First General

Excess

Unlimited Reinstatements

Co

insu

ran

ce

25

%

Re

insu

red

by

Hyd

ra

Co

insu

ran

ce

25

%

Re

insu

red

by

Hyd

raSecond General

Excess

Unlimited

Reinstatements

Co

insu

ran

ce 2

5%

Re

insu

red

by

Hyd

ra

Individual Club Retention

Lower Pool

Individual Club Retention

First General

Excess

Unlimited Reinstatements

Pool

Pool – Reinsured by Hydra

Pool

US$ 3,060m

US$ 2,060m

US$ 1,060m

US$ 560m

US$ 8m

US$ 30 m

US$ 60 m

US$ 1,000m

US$ 500m

US$ 500m

US$ 22m

US$ 8m

Club services

Qualified legal staff

Claims handling

Worldwide correspondents

Slide 43

Options

Non-poolable risks

– Eg Freight Demurrage and Defence (FD&D)

– Legal expense cover for Owners in their disputes with charterers and others

– Strikes cover

– Contractual liabilities

Fixed premium

Extensions of cover (eg navigating port risks)

EU commission

The European Commission has opened formal proceedings to investigate whether certain provisions accompanying claim-sharing and joint-reinsurance agreements in the marine insurance sector might infringe European Union antitrust rules.

The Commission fears that the provisions at stake in the agreements between the Protection & Indemnity Clubs (P&I Clubs) within the International Group of P&I Clubs (IG) may harm ship owners and the insurers that are not members of the IG.

Slide 45

The aim of the procedure is to examine whether certain provisions of the agreements may lessen competition between P&I Clubs as well as restrict, to a certain extent, the access of commercial insurers and/or other mutual P&I insurers to the relevant markets.

The opening of antitrust proceedings does not imply that the Commission has conclusive proof of an infringement, rather that the Commission will conduct an in-depth investigation of the case as a matter of priority. The Commission opened the investigation on its own initiative. The companies will have ample opportunity to give their views and comment on the Commission’s proceedings before a final conclusion is reached.

Slide 46

EU commission

Capital Challenges

47

Capital Challenges

Basel Capital Accord (Solvency 2)

Individual Capital Assessment

Capital adequacy

– Reflect business written

– More transparency

– Earlier regulatory intervention

– Closer alignment of capital with risks

Minimum Capital Requirement

Ultimate Loss Ratios

Net Premium Income for a policy year by the sum of the net claims paid out to policyholders plus the Minimum Reserve Requirements.

18% of premium written up to €50m plus 16% of premiums above €50m.

26% of claims up to €35m plus 23% of claims above €35m.

Slide 49

Enhanced Capital Requirement

Asset related values x Relevant asset values (%) = X

Insurance related values x Relevant tech. provision factors (%) = X

Net written premium x Relevant premium factors (%) = X

Total ECR (before equalization adjustment) = X

Slide 50

Individual Capital Assessment (ICA)

Calibrated to BBB+

0.5% probability of ruin

Stochastic analysis

Realistic Disaster Scenario

Slide 51

Realistic Disaster Scenarios

Los Angeles Earthquake

USA windstorm

European Storm/Flood

Japanese Earthquake

Marine Collision

North Sea - Loss of major complex

Aviation collision.

Stochastic analysis

Percentile Ranges for Net Underwriting Income

(150,000)

(100,000)

(50,000)

0

50,000

100,000

150,000

Gross Current Option 1 Option 2

Structure

Ne

t U

nd

erw

riti

ng

In

co

me

1%-5%

5%-25%

25%-50%

50%-75%

75%-95%

95%-99%

x

Slide 55

0

5,000,000

10,000,000

15,000,000

(5,000,000)

(10,000,000)

(15,000,000)

* Cost of Risk refers to the sum of premium paid and the expected claims experienced

through the retained risk. As the degree of protection (and premium) falls, the expected

cost of risk generally declines…

Distributions of Cost of Risk

0 5 10 15 20 25 30 35

Program 1

Program 2

Program 3

Program 4

Program 5

Program 6

Program 7

Program 8

Program 9

Program 10

Cost of Risk (£ Millions)

No CoverMean Cost of

Risk

Full Cover

Example of Presentation of Results as Cost of Risk

…but the Cost of Risk range (i.e. volatility) increases

Distributions of Cost of Risk

0 5 10 15 20 25 30 35

Program 1

Program 2

Program 3

Program 4

Program 5

Program 6

Program 7

Program 8

Program 9

Program 10

Cost of Risk (£ Millions)

No Cover

Full Cover

Mean Cost of Risk