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Issue 113 - 5th August 2010
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IUA says US financial reform will benefit all
The International Underwriting Association has said the signing of the new US financial services will create new opportunities for international insurers and reinsurers. The Association’s CEO Dave Matcham said the changes will increase business opportunities for the London market and make it easier for companies to insure American risks. “These reforms represent the most sweeping change to financial regulation in the United States since the Great Depression. Much of the legislation is focussed on the banking industry rather than insurance, but there are a number of measures which could have very significant and lasting impacts for the London market,” he said. “In particular, there is excellent news for surplus lines business where the new legislation will make it possible for London companies to offer cover in areas that were simply not possible before. The compliance burden of conducting surplus lines business will also be reduced and a more competitive market should deliver a better service to US customers.” Part of the Act is designed to eliminate inefficient regulation of both surplus lines and reinsurance business, said the IUA. “It will open up new markets for IUA companies providing surplus lines cover and also paves the way for possible reductions in credit for reinsurance rules that require non-US reinsurers to post collateral of 100% for gross liabilities assumed for American cedents.” Currently individual states regulate the insurers to which surplus lines brokers may place risks and the levels of regulation vary significantly. The Act will establish uniform standards, barring any state from prohibiting a surplus lines broker placing business with an appropriate non-US insurer. Mr Matcham added: “The IUA has campaigned for many years for reforms to deliver a more modern and efficient US regulatory system. The Dodd-Frank Act is designed to restore responsibility and accountability in the US financial systems. It will also introduce some long-awaited improvements to surplus lines supervision.” Furthermore the legislation will limit rules which some states currently use to impose collateral requirements on reinsurance contracts involving ceding insurers licensed in their state – regardless of whether the insurer is actually domiciled there. Mr Matcham added: “While the Act does not in itself achieve the sweeping changes to US reinsurance collateral burdens that we have long sought to restrict, it does mean that London market firms will in future only need to worry about requirements in the state where a ceding insurer is domiciled. And in one state, Florida, the requirement for non-US reinsurers to post 100% collateral on gross liabilities for American risks has already been relaxed. The Act opens the door for other states to follow suit and I understand that several are now considering such reform.”
Overcapacity fuelling power woes
Insurance rates in the power sector are expected to soften further in 2010, despite the existence of many of the conditions that would normally presage a hardening market, broker Willis. The firm has issued its Power Market Review which found rates are still under pressure despite a poor underwriting performance in the past 18 months which has been beset by claims. Foremost among these conditions according to the report, is the steady stream of losses associated with generating equipment. “Insurers continue to be beset with attritional machinery breakdown claims, especially for combined cycle gas turbine failures, while “mega claims” (defined as a claim of more than $100 million) now seem to be an established feature of the power sector.” The report found that, over a ten-year period ending in 2008, such claims accounted for only three percent of the total number of losses, but 43 percent, or $4.2 billion, of total loss value. The “mega claim” trend continued in 2009, the report noted, with a catastrophic turbine failure at the Sayano–Shushenskaya hydroelectric power station in Russia, followed earlier this year by the explosion at the Kleen Energy combined cycle plant under construction in Connecticut. If 2010 follows the pattern of the last decade, Willis says that one more mega claim can be expected before the end of the year. In contrast with the widespread perception that property underwriters had a good year in 2009, mainly due to an abnormally low level of insured natural catastrophe losses, the continuing level of generator failure claims meant that some power insurers may have failed to turn an underwriting profit in 2009. Despite this loss trend, the Willis review said a hard market failed to materialise in 2009, as some predicted, and soft market conditions persisted through the first half of 2010. Surplus capacity and reduced customer demand, attributable to the global recession, have largely prevented underwriters from increasing rates to the level that many consider is merited. Willis predicts that absent any market-turning events, power sector insurance rates will continue to ease for the remainder of 2010. Commenting on the report’s findings, Graham Knight, Managing Director of the Willis Utilities Practice Group, said, “In the absence of major natural catastrophes, loss levels were significantly lower in 2009 than in prior years: however, insurers were presented with additional volumes of machinery breakdown losses, particularly involving gas turbine technology, plus a number of less predictable loss events. This may have caused some underwriters to incur an underwriting loss on their power book in 2009, notwithstanding the healthier position of much of the rest of the market.” Mr Knight said there is a growing “frustration” among underwriters that “the current surfeit of capacity in the market has militated against an increase in rates to levels they consider justified.”
Microinsurance on the agenda as nat cats continue to hit emerging markets
As 2010 continued to be badly affected by major natural catastrophes there is a growing belief that the international insurance community will be asked to step into to provide coverage in conjunction with national governments. Reinsurance intermediary Aon Benfield, has released the latest edition of its Monthly Cat Recap report, which provides an analysis of worldwide catastrophic events in July. The report highlights that the month witnessed some of the worst flood events in history, with Asia being particularly affected by the deluge. In Pakistan, more than 1,500 people died when monsoonal rains gave rise to flooding and landslides. At least an estimated 250,000 homes were damaged or destroyed and economic losses are expected to reach hundreds of millions of dollars. Meanwhile, China also suffered from severe rainfall and subsequent flooding around the Yangtze River, with more than 650,000 homes affected and economic losses estimated at CNY84.8bn ($12.5bn) solely in the month of July. It comes after a major earthquake hit the country earlier in the year. Steve Jakubowski, President of Aon Benfield’s Impact Forecasting, said: “The flooding across Asia has displaced millions of people and destroyed many millions of hectares of farmland. In some cases, farming companies were reporting that 80 percent of their crops had been destroyed, which is devastating to the livelihoods of those affected and will have a significant impact on local economies, some of which rely heavily on agrarian output.” Meanwhile, during July a severe heatwave hit Europe, causing at least 2,250 deaths, many from drowning as people took to the water to escape the high temperatures. Russia was particularly affected, where prolonged drought destroyed 10 million hectares of crops resulting in losses totaling EUR700m ($970m). However the ongoing impact of natural catastrophes particularly in Asia has fuelled the debate over the role of the international insurance community in driving the development of insurance and risk markets. At the Singapore International Reinsurance Congress last November the deputy head of the Singapore Monetary Authority highlighted the need for the international community to play a role in the insurance of natural catastrophes. There is a growing movement for insurers to play a role rather then simply compete for the major commercial risks leaving the government to shoulder the full costs of natural perils. One underwriter said: “While we have seen major floods and earthquakes in Asia this year but the insured cost is not high. Certainly locally there is a view that international insurers need to play a role. It lends itself to the use of microinsurance and we are expecting some major announcements in the coming months as firms look to strike microinsurance deals to be seen to be working with regional governments.”
Marsh complete Kroll Sale
The deal which has seen Marsh & McLennan sell its risk and security advisory firm to international screening and security corporation Altegrity has been completed. The agreement to acquire Kroll was announced on June 7 and the two firms announced that regulatory approvals had now been given to enable the deal to go through. Altegrity, which is principally owned by Providence Equity Partners, acquired Kroll from MMC in an all-cash transaction valued at $1.13 billion. Goldman, Sachs & Co. and Apollo Investment Corp. provided debt financing for the transaction. MMC was advised by Perella Weinberg Partners and Wachtell, Lipton, Rosen & Katz, LLP. Altegrity was advised by Goldman, Sachs & Co. and Bank of America Merrill Lynch. Debevoise & Plimpton LLP served as legal counsel to Altegrity and Providence. The statement said: “The acquisition brings together the highly complementary Altegrity and Kroll business lines and further diversifies the business offerings of Altegrity.”
Jon Guy
Editor
Global Broker & Underwriter
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