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Issue 84 - 8th Jan 2010
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Underwriters set to come under pressure over dealing with Iran
A leading political risk analyst has warned that global underwriters could be dragged into the front line of the United States’ ongoing dispute with Iran over its nuclear ambitions. Zaineb al-Assam, Head of Middle East and North African Forecasting at intelligence specialists Exclusive Analysis told a briefing held by the International Underwriting Association this week that 2010 was very likely to see the US look to exert more pressure on the Iranian government to open up its nuclear facilities to international scrutiny. “Further sanctions be they imposed by the United Nations or unilaterally are highly likely as the dispute between Iran and the international community over its nuclear programme shows no signs of being resolved,” she said. “It is expected that there will a range of sanctions imposed with refined oil product exports to Iran to be targeted.” However Ms al-Assam continued; “There is a real possibility that pressure will be placed on the international insurance community and Lloyd’s to cease to offer coverage to certain Iranian risks particularly companies owned by the Revolutionary Guard.” There are also fears that international energy facilities and interests in Yemen may well be targeted by Al-Qaeda, which has established a significant presence in the country since January last year. The recent failed attempt to ignite an explosive device on an aircraft on Christmas Day was traced back to the Yemen where the would-be suicide bomber had received training. Ms Al-Assam said Al-Qaeda had built up significant ties with various tribes in Yemen and that international energy facilities in the south of the country would be targeted. “Internationally-owned firms in the country are attractive to Al-Qaeda with US targets and aviation assets particularly at risk,” she explained.
Discipline abounds at January 1 renewals
Brokers have been saying that renewals were as expected at January 1 with Guy Carpenter saying rates were on the whole slightly reduced. Chris Klein, Guy Carpenter’s Global Head of Business Intelligence, said: “A combination of factors – including the rally in global financial markets, relatively low catastrophe losses in 2009 and lingering recessionary effects on demand – has resulted in an excess of supply and heightened competition at this year’s January 1 renewal. As a result, what we saw was an unusually slow renewal, in which a number of contracts did not close until very late in the season, as buyers sought to gain maximum pricing advantage. “As we move into 2010, it’s safe to say that the property casualty reinsurance market has weathered the global financial crisis and emerged in a relatively strong position, with abundant capital and ample capacity for most lines of business. At the same time, the environment in which reinsurers operate will continue to be influenced by global economic conditions as much as underwriting decisions, and these macroeconomic factors will continue to warrant close attention.” The firm’s report, Rates Retreat as Capital Rebounds: Global Reinsurance Renewals at January 1, 2010 reported Guy Carpenter’s World Catastrophe Rate on Line (ROL) Index declining by six percent at the January 1, renewal. Mr Klein added the renewals had not produced any major surprises: “It was on the whole a disciplined renewal. If there was talk of underwriters being routed on price it would be wrong. There were no real surprises.” Asked what type of event would change the underwriting strategy for the market in the year ahead Mr Klein said the lessons learned from Hurricane Katrina in 2005 had made the market more robust to natural catastrophes. “Katrina cost the market in the region of $50 billion, but in some respects the market has changed,” he said. “There are now more sophisticated cat models and we have seen a change in the way capital is allocated. It is very probable in the current climate that it would take an event of $60 billion or more to change the market. While last year was a below average North Atlantic hurricane season, in Europe the year was above average with Windstorm Klaus an event which drove prices significantly but that again was localised. Hurricane Ike was not a Katrina but it was a severe event for the marine and offshore energy markets and produced some price spikes. I think the fact in our report we mention there is competition and capacity for non Gulf of Mexico risk says it all.”
Warning that Insurers are risking the “perfect storm”
Research released this week is warning of the creation of a new recession which will be driven by the insurance industry’s mis-calculation of the risks they have assumed from firms blighted by the economic collapse of the past 18 months. Mactavish issued the first round of its Sector Risk Research Programme and warned companies running increased risks in the wake of the financial crisis, and failures by company management and the insurance industry to address them effectively could create a ‘perfect storm’ in the commercial insurance market. The research, which has been reviewed by the insurance practice at PwC and by analysts at Citi, shows that risks faced by companies have risen sharply due to the recession, increasing existing risks such as supply chain vulnerability, and adding new ones as firms adapt to survive. It also reveals that neither company management nor insurers have fully recognised changes to risk profiles, meaning insurance companies may be carrying unrecognised risks while firms’ cover may be inadequate, leaving investors exposed. The report warns that: “Parallels can be drawn between large property & casualty insurance institutions today lacking the ability to fully understand changing risk exposures and more publicised past failures of financial institutions to understand risks assumed. While loss impacts naturally lag economic changes by several years, turmoil in commercial insurance is expected as a latter phase of the financial crisis.” The report added: “These findings clearly have potentially severe consequences for the insurance industry which underwrites the risks concerned. A significant focus of the study was therefore in testing insurer assessments of the changes observed, the level to which they are currently understood and their impact on insurer policy.” For the insurance industry the key findings include; Faced with sudden changes, the historic risk assessment models used by insurers become increasingly unreliable. Given the increase in risk, widespread under-pricing is inevitable through 2010 as underlying risk increases while rates suffer continued downward pressure. An increased and more uncertain risk environment will impact claims costs, even if it can take years to become clear. It also raises the importance of existing weaknesses in the system used to explain and underwrite individual risks, leaving company shareholders and insurers exposed. This introduces a new risk to earnings for Property & Casualty (P&C) insurers. Mactavish expects real variance in how exposed insurers are to this segment, and how well they are able to respond to the challenge of building closer customer relationships to better understand risks. “The insurance industry continues to fail to communicate its value to customers – with depressingly little buyer recognition of the value provided despite greater-than-ever dependence of companies on insurance capita,” it added. “This suggests that conditions are set for the type of extreme and localised volatility for which insurers have been harshly criticised in the past. The industry already works on very tight margins following fierce competition, and supported by an unusually benign claims environment recently. Recessionary risk impacts may break this cycle. Bruce Hepburn, Chief Executive of Mactavish said: “The sheer level of business risk impact suggested by this research will become a huge issue for the insurance industry at a time when margins continue to shrink. Long-standing weaknesses in the system of understanding risk are increasingly exposed and history suggests some will rise to this challenge a lot better than others.” Achim Bauer, partner, PricewaterhouseCoopers, added: “This is a wake-up call to the insurance industry. Both insurers and insurance intermediaries need to fundamentally rethink how risk is assessed, how companies are insured and how to keep pace with an increasingly complex, uncertain and fast changing risk landscape. Taking action now will reduce the immediate business impact and strengthen their market position”
Aspen in share buyback
Aspen Insurance Holdings has announced that it has entered into an accelerated share repurchase program with Goldman, Sachs to buy back $200 million of Aspen's ordinary shares. Once acquired a substantial majority of the shares will be received and cancelled within the current quarter it added. In a statement Aspen said it may also be entitled to receive additional ordinary shares from Goldman Sachs based generally on the average of the daily market prices of the company’s ordinary shares during the term of the agreement. The program is expected to be completed within approximately ten months. Based on Aspen's closing share price on January 4, 2010, the $200 million share repurchase represents approximately 9.3 percent of the Company's total market capitalisation. The repurchase will be made under the terms of Aspen's share repurchase program announced on February 6, 2008 and will complete the full amount of that program. The purchase will be funded with cash and the sale of investment assets. Aspen Chief Financial Officer Richard Houghton said: "The accelerated share repurchase program we have announced today reflects our continued commitment to active capital management including the return of capital to our shareholders where we believe it is in shareholders’ best interests for us to do so. We will continue to manage our capital throughout the year and evaluate options available to us to generate attractive risk adjusted returns for shareholders."
Cold snap set to cost says business leaders
As the UK struggled under a deluge of snow and freezing temperatures one business association has estimated the disruption caused will cost the UK economy millions as many staff decided to remain at home. The Forum of Private Business (FPB) is warning that the cost of a single day of employee absenteeism because of the freezing winter conditions could be at least £230 million. The figure is a set to soar with weather experts predicting that the cold snap will last for almost a week and has crippled major areas of the UK with London and the South East set to be hit for the final three days of the week The Met Office has warned that minimum temperatures have dropped to their lowest for 15 years. The FPB’s calculation was made using information including the daily GDP figure, anticipated vehicle breakdown levels from the AA, average salaries and official data reflecting an expected fall in retail sales. “Employees make businesses grow and losing key staff because of the weather, even for just a day, is very damaging, particularly in the current economic climate,” said the FPB’s Research Manager, Tom Parry. “It is important that employers put in place contingency plans for these occasions and that these plans comply with employment law. For example, home working might be seen as a solution – obviously not for manufacturers and retailers – but business owners should be aware that it is their responsibility to ensure that employees’ houses meet health and safety standards.”
Jon Guy
Editor
Global Broker & Underwriter
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