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Issue 85 - 22nd Jan 2010
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Offshore energy chief says market needs to change to survive
The Head of Global Energy for Bermudan underwriter Ace has told the London market the offshore energy sector needs to look at the introduction of a pricing model if it is to have any hope of solving the challenges it faces over catastrophe losses. Speaking at the Lloyd’s Library yesterday Roger Giddings told underwriters and brokers that the facts over the past decade spoke for themselves and showed the offshore energy market trailing the two classes of business from which is was developed in the 1960s. He said the marine hull and general property market had out performed the offshore energy sector and the core reason for the poor performance wads the inability of the offshore energy market to tackle the property catastrophe coverage and the rates the market was charge to meet the exposure. It is clear that the offshore energy markets are adrift of those in the marine hull and the general property markets,” he added. “The reason is that the hull underwriters are working within their core competencies. However offshore energy underwriters are not working within their competencies and we are seeing that reflected in the rates charged.” He added: “The core areas where skills are found wanting is in cat pricing.” Mr Giddings explained there was no easy answer to the issue but added that the need for a pricing model was evident, pointing out that other areas of the business have industry wide pricing models which may vary by a percentage point depending on the vendor but on the while the model was uniform. “You have a situation where you have an underwriter who is pricing the risk with the assistance of a pricing model while across the box or in the next office you have an underwriter looking at similar risks and similar exposure to your capital without such a model.”
Global ranking reveals the most hazardous countries for business
Scandinavia is one of the safest regions on the planet for businesses according to a new hazard list issued by corporate risk intelligence firm Maplecroft. The firm examines and rates the 26 most significant non-financial risks faced by international business to create a ranking of 175 countries. The Global Risks Index (GRI) measures a combination of strategic risks that are having an increasing impact on the global operations, supply chains and distribution networks of corporations. These include: terrorism, conflict, macroeconomic risks, rule of law, resource security, vulnerability to climate change, natural disasters, human rights violations, poverty, and risks from pandemics and infectious diseases. According to the GRI, 24 countries are at extreme risk, 17 of which are from Africa. Somalia (1), DR Congo (2), Zimbabwe (3) and Sudan (4) top the ranking, whilst Afghanistan (6), Nigeria (10), Iraq (12), Bangladesh (14), Pakistan (15) and Yemen (24) all feature amongst the poorest performing nations and are characterised by weak governance, internal conflicts and regional instability. Several of these countries, including DR Congo, Nigeria, Iraq and Pakistan, are owners of huge oil, gas and mineral reserves, which form important links in the supply chains of western and BRIC companies alike. High risk countries also critical to corporate supply chains include the Philippines (32), Indonesia (41) and India (42). Each of these countries poses specific challenges to business that require monitoring. India’s rating, for instance, reflects its poor human rights record, an increased risk of terrorism, high vulnerability to climate change impacts, a low capacity to contain disease, plus high levels of poverty, water and food insecurity. Professor Alyson Warhurst, Chief Executive of Maplecroft, states: “The key to understanding and managing global risks is to view them as interdependent. Increasingly, conflict is triggered by issues relating to poverty and water security, whilst threats to government stability emerge from energy scarcity. The Global Risks Atlas 2010 enables organisations to understand relationships between different global risks in different geographies, allowing them to develop a global business strategy.” “The countries rated least at risk in the GRI are predominantly Scandinavian with Norway (175), Iceland (174), Finland (173), Sweden (171) and Denmark (169) setting the standard for the rest of Europe,” added the report.
Levene wins St John’s leader award
Lloyd’s Chairman, Lord Peter Levene, has been named the 2009 Insurance Leader of the Year by the St. John’s University School of Risk Management at its 15th annual award dinner in New York this week. Lord Levene was presented with the award by which honoured his “global perspective and willingness to speak publicly, and bravely, about industry issues and topics”. The award also recognised the re-emergence of Lloyd's to a position of strength after difficult times and the example the marketplace provides for the wider financial services industry. In accepting the award, Lord Levene described the challenges facing the industry today. “I have spent much of last year reminding regulators and the media that insurance did not create this crisis, and that a one size fits all approach to financial services regulation is neither relevant, nor fair,” he explained. “We must demonstrate to regulators that we are capable of the highest levels of risk management. The story of Lloyd’s should reassure governments and regulators that root and branch reform can come from within.” Lord Levene became Chairman of the Council of Lloyd’s in 2002. He was the first Chairman of Lloyd’s Franchise Board, as well as the first Lloyd’s Chairman from outside the market. During his time in office Lloyd’s has expanded, securing licences in China and Brazil, and recorded three of the highest profit years in its history.
RMS in index launch
As aftershocks caused further panic in Haiti a new parametric index for estimating insured industry losses from U.S. earthquakes has been launched modeling firm Risk Management Solutions (RMS). Paradex U.S. Earthquake combines ground shaking data from U.S. Geological Survey (USGS) ShakeMaps with industry exposure data to calculate insured loss estimates, which can be used to structure and monitor catastrophe bonds, industry loss warranties, and derivative contracts. RMS said: “Paradex provides insured loss estimates by postal code and line of business for all 50 U.S. states and includes damage from ground shaking, fire following earthquake, and sprinkler leakage. These granular insured loss estimates help issuers to minimize their basis risk -- the risk that a security would not sufficiently cover actual losses from an event -- by tailoring the index to match their exposures and lines of business.” The new index will said the firm enable catastrophe risk to be “transferred to the capital markets quickly and transparently, with contracts settling in 40 business days or less following an event -- compared to up to a year for indices that involve polling the industry -- giving insurers and reinsurers quicker access to the capital needed to pay claims”. “Paradex offers insurers and reinsurers a straightforward way to transfer earthquake risk based on location-specific ground motion. To date, this approach has only been available through complex parametric cat bonds; now Paradex makes it accessible to simpler structures such as Industry Loss Warranties,” said Peter Nakada, managing director of the RMS dedicated ILS team, RiskMarkets.
Cat bonds on the rise says Fitch
The rise in the numbers and size of catastrophe bond in the past year has continued to gather momentum according to ratings firm Fitch. It predicts that issuance volume of property catastrophe bonds will be at least as strong in 2010 as it was last year, according to the firm’s new report released yesterday. The report added: “The insurance-linked securities (ILS) market reopened in 2009 after nearly a six-month hiatus following the demise of Lehman Brothers. Fitch counts 19 new ILS transactions brought to market in 2009 for a total issuance volume of nearly $3.5 billion. All but one of these transactions were property catastrophe bonds ($3.4 billion), with the other transaction a catastrophic mortality bond of $75 million.” Issuance volume accelerated as the year progressed with approximately half of those bonds issued in the fourth quarter. ILS market participants report a robust pipeline of new transactions. However, 'there will be competition from the traditional market where a softening pricing environment currently exists,' said Senior Director Don Thorpe. “Increased competition will temper the volume of issuance to a certain extent.” Nonetheless, 2009 represented the third highest year for property catastrophe bond issuance following 2007 and 2006, respectively. “The introduction of new structural features in catastrophe bond transactions that reduce collateral and counterparty risk contributed to the turnaround in issuance,” added Mr Thorpe. There are also early indications that the market is shifting from the use of total return swaps (TRS) in favor of a pass-through approach using highly liquid securities, such as U.S. Treasury notes or money market funds, as collateral. However, the use of tri-party repurchase agreements has recently gained momentum. Fitch views the new mitigants as positive credit developments though these new approaches are unlikely to affect the credit ratings assigned to most catastrophe bonds.
Jon Guy
Editor
Global Broker & Underwriter
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