Major firms falling into short term risk trap warns broker
Europe’s largest companies were warned the growing trend to fire fight the risks which have emerged since the financial crisis are leaving them open to the vagaries of the economic outlook. Gilbert Van den Eynde, Global Leader of Marsh’s G5 said firms need to spend more time and resources over the next year on long-term strategic risk planning to avoid being vulnerable to changing market conditions. He made his comments as risk managers gathered in London for the Federation of European Risk Management Associations’ (FERMA) London seminar, Mr Van den Eynde, said: “As a result of the recession and ongoing cost pressures, Europe’s largest companies have tended to be more focussed on counterparty security and credit risk in the short-term, as well as taking advantage of any efficiency savings from their insurance transactions arising from the soft market. These immediate efficiency savings are highly attractive. However, by failing to pay enough attention to the interconnectivity of the risks their organisations face – and preparing for the possible hardening of insurance rates, many firms could be dangerously exposed to the vagaries of an uncertain economic outlook.” He added: “The past 10 years also bear witness to how unexpected events, such as terrorist attacks or severe hurricanes, can quickly trigger a swing between a soft and hard insurance market. Longer-term risk strategies, such as risk transfer optimisation and the use of captives, should be considered and used, where appropriate, to extract more value from firms’ risk and insurance programmes. This is true even when softer market conditions prevail.”
Expert says research funding misses gravity of climate change threat
A conference of leading academics and insurers were told this week that the research into climate change needs to attract a far higher level of funding then it currently enjoys. The Willis Research network held the day-long event at its Lime Street headquarters where a senior official from the UK’s Met Office warned that more money is being spent on scientific research to examine issues which unlike climate change would not result in the potential to lead to man’s extinction if nothing is done to halt its progress. Dr Matt Huddleston, Principal Consultant – impacts of climate change on business, at the Met Office warned: “We know more about climate change then we do about gravity. Gravity is fixed but we know little about how it functions. Therefore there is a considerable resources expended on research and I have been at the CERN facility in Switzerland where they are looking at the fundamentals. But such a level of resource is not being focused on climate change yet it is a far more fundamental threat to our survival. The world is heating up. There is no doubt it will continue but it is our future participation on this planet which is in doubt.” He added that all the climatic indicators pointed to an above active hurricane season and that the data gathered by the Met Office showed clearly the world was getting warmer. “This is constant pattern from multiple sources,” added Dr Huddleston. He said a four degree rise in the world temperature could well see a one in a 200 year typhoon loss which would deliver in excess of a billion dollars of insured damages should it hit China and in the United Kingdom such a temperature rise would have significant effect. It would see a 30% in one in 100 year flood events and a natural climate shift of the UK storm tracks south wards would result in average insured losses in the UK increasing by 25% as the storms moved south to target densely populated area such as the South East and London.
New scheme seeks to solve legal PI black hole
The Law Society which regulates the UK’s legal profession has stepped into to look to fill the void in the availability of solicitors’ professional indemnity coverage. The rising tide of litigation against law firms in the UK had seen a tightening of the level and capacity of coverage offered to law firms and the collapse of Quinn Direct which had aggressively targeted the market in the past had only exacerbated the situation. The industry had operated a joint risk pool for those firms which could not find coverage but those firms could only use the pool for a limited period and underwriters which were being asked to fund the pool had grown increasingly concerned with its viability and the burden of cost it created. Now the law Society has launched the SafetyNet scheme, a PII support initiative, will provide assistance to “distressed” firms, or firms seeking to avoid entering the Assigned Risks Pool (ARP) or attempting to exit the ARP, in obtaining professional indemnity cover from the insurance market. In a statement the law society said: “SafetyNet, is managed by Lloyd’s broker PYV Limited, will seek to provide such firms with access to insurers which specialise in distressed risks. Those firms which apply will undergo an assessment to determine their suitability for the scheme.” It added solicitors may also be required to undergo a Risk Assessment Survey which will be conducted by an approved risk assessor prior to their proposal being presented to the insurers.
Commenting on the scheme, Nick Pointon, Director of PYV Limited, said: “The primary aim of SafetyNet is to support those firms that have been unable to secure PI cover or are seeking to exit the ARP by enabling them to better present their risk profile to the insurance market. The scheme is designed to deliver a positive change to firms through effective risk management, and by so doing enable them to not only obtain cover now but also enhance their risk profile moving forward so they are in a much stronger position to secure cover at future renewals.” Law Society Chief Executive Desmond Hudson added: “We are committed to doing all we can to offer an opportunity to distressed legal practices to escape the ARP or avoid it. This is a positive development for those unable to obtain professional indemnity insurance cover. The scheme is geared towards improving a legal practice’s risk profile for the future. It acts as a long term solution to members of the profession unable to secure cover. This is, however, a difficult market for solicitors who will need to consider carefully all the implications.”
High catastrophe costs impact Lloyd’s returns
Given the level of major losses in the first half of the year there was little surprise this week that Lloyd’s reported a sharp fall in its interim profits. The market reported a pre-tax profit of £628 million lest then half the figure for the first six months of 2009 when the market delivered a figure of £1.32 billion. While saying its combined ratio was a “a solid performance compared to our peers,” the figure of 98.7% is 6.9% higher then the previous year representing the impact of the wave of catastrophe losses which have defined the first half of the year. Investment returns also fell from the 2009 figure of £708 million to£597 million. In a statement Lloyd’s said the result “reflects a period of significant claims and extremely challenging investment conditions”. It added; “A conservative investment mix has resulted in a positive return of £597 million during a period of continuing volatility in financial markets, and central assets are at a record high.” Lloyd’s Chief Executive, Richard Ward, added: “The first half of 2010 demonstrates that we are well placed to deal with challenging market conditions. Our resolute focus on underwriting discipline, close attention to our customers’ needs and a prudent approach to investment stands us in good stead for the second half of the year.” Lloyd’s Chairman, Lord Peter Levene, added: “The first six months of 2010 were the costliest on record since we began interim reporting, testing not only Lloyd’s but insurers around the globe. While events such as the Chilean earthquake and the Deepwater Horizon loss have proved challenging, paying these claims and supporting our policy holders is what we are here to do. “It is a true indication of the strength of the Lloyd’s market that despite challenging investment conditions, softening rates and exceptional catastrophic events, we have returned a first half profit of £628 million.”
Two year study launched to find key to Fraud detection
As the level of insurance fraud both personal and commercial continues to soar one insurance investigation firm has teamed up with leading academics to investigate just how to spot a fraudster. The market has spent millions on complex systems and technology which is designed to spot when people are lying but the professor behind new study says a lot of what is perceived to be current market practice is wide of the mark. Dr Sharon Leal, a research fellow at the University of Portsmouth, is an expert in detecting deception. She has recently embarked on a £112,000 study, funded by a leading insurance fraud investigation firm, to establish 'ground truth' about how liars behave when making claims. Her research and experiments will conclude at the end of 2012 and are expected to give insurance fraud investigators the first evidence-based techniques for spotting liars to replace the gadgets and gut instincts they have traditionally relied upon. Dr Leal said: 'Insurance fraud has been on the rise since the recession began and insurance companies are very keen to find a way of beating those who cheat. There is a saying, ‘needs must when the devil rides’, which basically means when times are tough, people, are more likely to break the rules. That is certainly true in the case of insurance fraud. People think if they are telling the truth it will shine out, but it doesn't. Insurance investigators waste time and money when they chase innocent people. Under these circumstances some innocent people withdraw their insurance claim because they can't cope with the stress of being investigated.” Traditionally insurance fraud investigators have always relied upon a range of tools and instinct to identify liars, including recording telephone conversations and then running them through a voice stress analysis machine to decide if the person is telling the truth. They have also looked for signs such as nervous fidgeting, not looking at the questioner directly, and blinking a lot. But the gadgets and interviewers' instincts are wholly unreliable, according to Dr Leal. She added: “'Contrary to popular belief, motivated liars do not fidget, avert their gaze or blink nervously. They are usually calm and have planned their lies down to the last detail. Also, many people do not see anything wrong with making a false claim and if they don't feel nervous or guilty, it follows that the techniques that rely on these factors will ultimately fail. Even the majority of experts overestimate their ability to spot a lie. They might as well toss a coin in the air - their record of finding the cheats would be the same at about 50:50.”
