The Lloyd's Blog

Stats 2012: The final countdown

Mon, 14 May 2012 17:54:00 +0100

Interested in indicative rate changes for Aviation in 2002? Property Treaty in 2009? Or an index that shows risk adjusted rate changes for the whole market from 1994 until 2010? The Premium Rating Index (PRI) section is for you.

As part of the ‘Stats’ subscription, the PRI is also available as an in-depth download and is a high-level class look at premium renewal rate movements in the Lloyd’s market. The two sections - incremental risk adjusted rate change and indexed risk adjusted rate change - highlight different ways of looking at these rates between 1994 and 2010.

If you’ve ever been asked how the Lloyd’s market works and stalled on a few of the specifics, A Guide to Lloyd’s might be just the backup you need. From an Introduction to Lloyd’s, to Who is Who?, Performance Management at Lloyd’s to Accounting and Reinsurance to Close this new section answers questions you might have been asking or been asked while working in the market. There are also some key events listed such as when Hurricane Betsy hit and why Cuthbert Heath was so important to Lloyd’s.

An additional download available from launch day on 17 May covers all syndicates’ historical capacity from 1993 to 2011. Previously, only active syndicates were included but for 2012 we’ve pulled together all those that have been reinsured to close and included them on a separate report.

There are 375 syndicates listed in the new section, from 0002 to 6107, which alongside the syndicate map will provide a useful history of capacity for those active syndicates today.

The Statistics Relating to Lloyd’s is published on Thursday 17 May so ensure your subscription is ready. If you’re not a market participant please also remember there is a substantial discount if order by the end of this month.

Find out more & order your copy

Vision 2025: Maintaining our great commercial position

Fri, 11 May 2012 10:30:00 +0100

It’s hard to forecast the future even though we’re in the business of predicting emerging risk. But one thing’s for sure: in an increasingly globalised world, business is getting tougher and we need to maintain our great commercial position.

Above all, there will be, of course, new opportunities, especially in new and emerging markets – and there will be an emphasis on ensuring we are well positioned to take advantage of these. We need to build and enhance the strengths of Lloyd’s. It’s not about a radical reinvention, but it’s crucial that we’re clear on where our focus should be and play to our strengths.

The Lloyd’s business model and brand are widely admired. Our underwriting and broking expertise, the innovative spirit that sees us first into new markets and the global reach of our licences are just some of the reasons that the world comes to us.

Importantly, Lloyd’s is and will remain a broker market. Firmly international, we want to attract business into London – and not away from it – through varied broker networks. Where markets demand, we will have a small number of overseas, locally focused centres, but the overall emphasis will be on bringing business through EC3. It’s all about London, we’re specialised and plan to stay that way.

And what about diversity? Of capital, talent and businesses? New entrants will be encouraged where they bring new opportunities. Lloyd’s is a traditional market in what is now arguably the world’s most cosmopolitan city. We need to be more representative of London and our customers around the world, encouraging diversity in all its forms and ensuring we attract the best and the brightest. It’s crucial we move with the times.

Vision 2025 challenges us to raise our game. It positions us to compete in a world of new markets, capital and talent and aims to ensure we continue to be the global centre for specialist insurance and reinsurance.

Yes, Lloyd’s has a successful business model. But as time goes on, we need to do it that little bit better. The vision builds on who and what we are and makes us stronger.

UK & Ireland – a stronger relationship than ever before

Thu, 03 May 2012 08:56:00 +0100

With similar legal systems, attitudes to investment, higher education systems and workforces comfortable operating in either environment, many British/Irish companies have a genuine intra-island feel. Mutual trade between the UK and Ireland is conservatively estimated at €35bn per annum and directly supports hundreds of thousands of jobs.

That said, trade does not grow in a vacuum. The conditions within which it prospers need constant monitoring and renewal, which is why the establishment of bodies such as the British Irish Chamber of Commerce are so important. Last month, I attended the UK launch of the Chamber at the Irish Embassy in London in the company of senior Irish and British business leaders from major multinationals, local companies, supporting bodies and SMEs.

Guest speaker was the Irish Taoiseach (Prime Minister), Enda Kenny, who commended the success of the Chamber in meeting the collective challenge to build business opportunities in Ireland and Britain that will stimulate growth and create employment.

In a recent joint statement with David Cameron, Enda Kenny made it clear that Britain and Ireland now look to each other as equal partners. Indeed, where the UK is Ireland’s third largest export market, Ireland is the UK’s fifth largest export market. The ties that bind are undoubtedly stronger than ever.

Northern Ireland has not been immune for the emerging optimism prevalent at such events. Earlier this month, my colleagues Eamonn Egan and Matthew Chandler joined the table hosted by the Board of the British Irish Chamber of Commerce at the gala dinner to celebrate the 230th anniversary of the Northern Ireland Chamber of Commerce at the Titanic Belfast centre in East Belfast.

Over 800 people gathered for the first such business event in Belfast’s newest landmark building, which coincided with the 100 year anniversary of the sinking of the Titanic. Guests were able to view the 1912 Lloyd’s loss book (under the watchful eye of our Lloyd’s Head Waiter, Bob Dee) which records the loss of the RMS Titanic - insured at Lloyd’s for £1m.

Next month we look forward to Dublin ‘Meet the Market’ event, where a large London representation are planning to traverse the Irish Sea - including over 17 managing agents and 14 Lloyd’s brokers who plan to host a Lloyd’s box. Dublin ‘Meet the Market’ is a unique networking platform for underwriters, brokers, coverholders and other industry representatives, from the Irish and UK markets to discuss face-to-face their existing insurance arrangements and explore opportunities for the future.

Lloyd’s has never been more international and outward facing than it is today. The way global business operates makes this a necessity. That said, sometimes it is doing business with our closest neighbours and friends that can be most straight-forward and profitable.

Statistics: a look at the what, where and how

Thu, 26 Apr 2012 15:06:00 +0100

This week, I’ll give you some insights into what data is used to produce Statistics Relating to Lloyd's, where it comes from and introduce the various technologies used to collate the content.

Most of the ‘stats’ data comes from returns submitted to Lloyd’s by syndicates. The returns are imported into a data warehouse at Lloyd’s where they are accessed securely via reporting tools (see below). We also source data from Xchanging and have a couple of spread sheets with some data painstakingly ‘lifted’ from a copy of the Statistics Relating to Lloyd’s 2001.

The main reporting tool used to produce the charts and tables is Business Objects XI. ‘BO’ is software that sits on top of a data source to enable the end user to query and analyse the data without having to think too much about where it came from.

Within the software, reports can be produced and exported in a variety of formats. They can also be scheduled but if doing more than 15-20 we use APOS InfoScheduler - an Excel-based tool that can automate batches of reports and enable us to change report parameters by simply filling in the correct value on an Excel sheet. This is a definite time saver.

If you’ve seen the Statistics Relating to Lloyd’s you may have spotted the syndicate map near the back (and possibly had to book an eye test afterwards). The syndicate map (also available as a separate download) is a graphical representation of Lloyd’s RITC Matrix, detailing all syndicate reinsurance to close (RITC) transactions from 1993 to date. The open source software used for this is Graphviz - graph visualisation software that can create diagrams using simple text language – there is a learning curve involved but the results are excellent.

Finally, to put all the tables, charts and text together, we have LaTeX, a document preparation system that uses a mark-up language to separate layout and content and makes it easy to produce professional results. It’s similar to html so easy-ish to get the hang of even for non-programmers, and due to its simple text interface it also allows the creation of content and documents to be automated.

As the release date for Statistics Relating to Lloyd’s 2012 gets ever closer (I should really get on and do some work for it now) a quick reminder that the deadline for ordering extra hard copies is the end of April. Also if you’re a third party subscriber there is a discount if ordered by the end of May…bargain!

Statistics Relating to Lloyd's: What's new for 2012?

Tue, 17 Apr 2012 12:42:00 +0100

I’ve been asked to write a little about what exactly is in ‘the stats’ (if you’ve not had the good fortune to get yourself a copy) and between now and then, will give you a bit more information on how we put the whole thing together.

Statistics Relating to Lloyd’s is a statistical guide to Lloyd’s that was brought out of retirement in 2009 (after an eight year break). It was reintroduced to provide data and analysis to Lloyd’s managing agents to help them better benchmark, measure and manage their businesses. During the last few years the guide has developed into an all important source of all things Lloyd’s - and includes facts and figures dating as far back as 1771!

Putting the guide together is no easy task and is something Lloyd’s Analysis team began to look at late last year. New sections have since been developed and previous ones retested to ensure that once the underlying data sources are approved the guide is ready to go.

What’s new for 2012?
New sections in the 2012 edition include an updated Lloyd’s Premium Rate Index (previously a separate download) along with historical syndicate and agent capacity. After receiving feedback from the market on how the information is used, we have also cut the number of the case studies on lloyds.com so only the most useful remain.

As in 2011, the guide contains summary financial statements for all syndicates that underwrote business at Lloyd’s in the last year. For each syndicate there is an analysis page (cue colourful charts) giving a short history of syndicate net and gross premium income, combined ratios, Lloyd’s market share and key performance ratios. Stats are also included on Lloyd’s capacity, premium income, loss ratios, membership, claims, agents, syndicates, brokers… but let me know if we’ve missed something!

Accompanying the guide is a suite of spread sheets that contain all the source data, case studies and an Excel tool to help you bring ‘the stats’ data (and your own data) to life. The guide is free for market participants (someone working for a managing agent, members’ agent, Lloyd’s broker, coverholder, or member of Lloyd’s). It is also available to buy for third parties who can order it via lloyds.com.

Next week, I’ll highlight some of the technologies used to fuse the guide together, which may give you (or your geeky colleagues) some ideas about how to manage and present your own data.

Curtain up on RIMS 2012

Fri, 13 Apr 2012 13:09:00 +0100

The Woodstock of risk management, RIMS annual conference and exhibition, runs from April 15-18 this year.

Launched in 1963, the convention now attracts around 10,000 risk professionals to what has become the biggest (and sometimes brashest) networking and educational event on the corporate risk management calendar.

The mindblowing four day event, which this year takes place in Philadelphia’s Pennsylvania Convention Center, promises more than 120 seminars, star-studded keynote presentations and a monster exhibit hall with over 400 vendors.

RIMS itself – The Risk and Insurance Management Society, Inc. – represents more than 3,500 mostly North American industrial and service companies. So it’s not surprising that there are seminars dedicated to businesses ranging from casino operators to oil companies.

The 2012 conference sessions range from the prosaic to the downright philosophical. This year risk managers can choose between, say, discussing certificates of insurance – or they can muse on the deep question: “Am I Still Relevant?”

They can explore employment class actions and risks in cyber space. They can even find out the risk implications of near field communications technology, whereby mobile phones will replace payment cards.

In the main hall, keynote speakers include Billy Beane, senior manager of the Oakland A baseball team and author of Moneyball (The Art of Winning An Unfair Game).

The Lloyd’s market will be well represented in Philadelphia, as usual, with a contingent of around 40 underwriters and brokers ready to meet with delegates on the market’s exhibit. Find out more about Lloyd's at RIMS 2012.

Risk historians, marine professionals and “Titanoraks” especially will find plenty of interest on the Lloyd’s stand. A copy of the original placement slip for the doomed cruise liner and her sister ship Olympic will be on display, along with other memorabilia held at Lloyd’s, including dining menus. You can find out more at www.lloyds.com/titanic

For more information on the RIMS convention, visit www.RIMS.org/RIMS12

Ensuring sustainable development in the Arctic

Thu, 12 Apr 2012 12:51:00 +0100

The report, Arctic opening: opportunity and risk in the High North, produced in co-operation with Chatham House, argues that rising temperatures are causing sea ice to retreat and weather patterns to change. This in turn is opening up the region to economic development.

The rapid melting of sea ice is very likely a result of anthropogenic climate change and, given that global efforts to reduce carbon emissions have, arguably, not been very successful to date, it is likely that this melting will continue apace. Some experts estimate that the Arctic could largely be ice free for the summer months within the next 25-40 years.

As the Arctic becomes ice free for longer periods of the year, this allows increased economic activity to take place in the region. In particular, energy companies have intensified their exploration activity and there are, potentially, opportunities for shipping companies as “new” routes across the Arctic, most notably the Northern Sea Route and North West Passage, offer reduced transit times.

Over the last few years, the Northern Sea Route, in particular, is already seeing more voyages in the summer months, largely by Russian-owned vessels. Other economic activities – from tourism to scientific research – also present the potential to increase in the coming decades.

However, this increasing economic activity does not come without risks. Despite rapidly melting ice, the Arctic remains one of the most remote, inhospitable and risky environments on Earth.

As the new Lloyd’s Arctic report emphasises, there is very limited support infrastructure throughout the region, and if an accident was to occur in the Arctic, such as the blowout of an oil well or a stricken tour ship, the consequences could be more profound than in other regions.

The Arctic remains, largely, a pristine and unspoilt environment with a complex and delicate ecosystem. Not only could the environmental impact of any disasters be worse than in other areas (and subsequent recovery and rescues take longer to complete than in other areas), but the public reaction is also likely to be greater and this could potentially be very damaging to corporate reputations.

If the Arctic is to be developed safely, sustainably and successfully, risk management will play a fundamental role and the new Lloyd’s report underlines the need for companies operating in the Arctic to have robust risk management frameworks and processes in place, including risk transfer solutions.

The report also highlights the need for transparent and strong governance frameworks to enable sustainable future development in the Arctic.

Download Arctic opening: opportunity and risk in the High North

International Women's Day...still a long way to go

Thu, 08 Mar 2012 09:30:00 Z

Huge changes have taken place since IWD was first observed in the 1900s. In a world where women have reached the top in so many areas of life it is right that today we should focus on what has been achieved rather than on the negatives. However, I make no apology for returning to a favourite topic of mine – women in the Lloyd’s market, or rather the dearth of women in board positions.

The Davies Report into women on boards was published in February 2011 and its key recommendations included:

All Chairmen of FTSE 350 companies should set out the percentage of women they aim to have on their boards in 2013 and 2015;
FTSE 100 boards should aim for a minimum of 25% female representation by 2015;
Chairmen should announce their aspirational goals by September 2011;
All Chief Executives to review the percentage of women they aim to have on their Executive Committees in 2013 and 2015.

Progress has been made in the last year with the percentage of FTSE 100 board seats held by women now at 14.2% (up from 12.5%). On FTSE 250 boards 18% of all appointments made between March and October 2011 were women – and for the first time in history it is now the minority of FTSE 250 companies that have all male boards.

However, I have been unofficially tracking the performance of the market in this regard for a couple of years now and I think it’s fair to say that overall we’re not performing well.

In 2010 the percentage of Lloyd’s market board positions held by women was 6.48%. In 2011 this reduced to 6% and this year the figure is 5.96%. So, for some reason we seem to be going backwards. In 2011, 26 out of 54 managing agents had no female board members – and this year the total number of women-free boards has increased to 29.

There are a couple of standout managing agents where female board membership stands at more than 20% but, as the figures above show, overall women only account for 6% of board members in the Lloyd’s market. If the 29 managing agents that currently have all male boards were each to appoint one woman this figure wouldn’t be high, but would be a more respectable 10%.

I know many in the market recognise we could do better and, while keen to appoint women to their boards, often cite the difficulties in finding suitable candidates. There are many talented and capable women working in the market today in senior positions.

I have to ask if we do enough as a market to mentor and encourage these women into executive and board positions. And do we recognise the talent that is there? I talked in a previous blog about cultural challenges – what is it about this market that makes it difficult for women to break through the glass ceiling?

We all want to operate in a diverse and vibrant market. After all, it makes good business sense. Let’s use International Women’s Day as an opportunity to reflect on how we can improve the diversity of the market and, who knows, by next year’s event we may have something to celebrate.

Showing support for the MGAA

Thu, 16 Feb 2012 17:00:00 Z

It will evolve from having an unelected board of like-minded individuals to a newly constituted board elected by its fast-growing membership. With this process underway it's worth revisiting the special significance of the coverholder/MGA model to the Lloyd's market.

The term 'coverholder' originates from within the Lloyd’s market and describes a company or partnership authorised to write contracts of insurance on behalf of a syndicate. Outside the Lloyd’s market, coverholders may be known under different names. In the UK and US they are known as MGAs, while in some parts of Europe and in Australia they are described as 'underwriting agents'. Increasingly though, the term 'coverholder' is being adopted outside the Lloyd’s market.

Coverholders are a vital part of the Lloyd's distribution network. They enable Lloyd’s managing agents to operate in a certain region or country, compete with local insurers and, in particular, access SME business efficiently. Globally, around 30% of Lloyd's premium income is derived from coverholders so their importance cannot be underestimated.

Today almost a third of Lloyd's UK portfolio is derived from a network of around 600 coverholders, comprising both broking firms with binding authorities and dedicated MGAs who are 'pure' underwriting agencies and don't undertake any broking.

The approval of coverholders at Lloyd’s sits with the Delegated Authorities Team - with whom I work very closely. In the past 18 months I've visited around 40 prospective UK coverholders from Gateshead to Glasgow, Birmingham to Bristol, assisting in the application process by making recommendations as to each applicant's ability to meet the qualification criteria.

So why do we need the MGAA? The coverholder model is not unique to Lloyd’s and there are believed to be in excess of 200 'pure' MGAs in the UK. They are a long-standing and highly profitable part of the insurance market but historically the UK MGA sector has had no independent representative or voice.

The transition of the MGAA to an elected board is a great opportunity for Lloyd's to support this fledgling association as it grows in representation and strength. Insurance carriers, intermediaries and policyholders all stand to benefit from its existence. The MGAA will ensure that the role its members play in the insurance industry isn't under-valued and will help MGAs receive the recognition they richly deserve.

The objectives of the MGAA can be found at www.mgaa.co.uk/objectives. If you are an MGA, an insurance carrier/managing agent or Lloyd’s broker/service provider and you would like more information about joining the MGAA then get in touch.

Talent crunch fears also apply to London Market

Wed, 18 Jan 2012 15:52:00 Z

I read with interest the recent publication of the Lloyd’s Risk Index and noted in particular the number two risk as perceived by business leaders. The aptly titled move in risk perception from “credit crunch to talent crunch” as the second highest priority resonates within our market.

I have blogged before about capacity and the scarce resource of brokers and underwriters. If market speculation turns out to be true, we could see the market grow next year as it has been doing steadily over the last few years (although currency fluctuation has had a part to play in this growth).

The scarcity of brokers and underwriters at the level necessary to place complex risk may make real growth more difficult to achieve in future years.

A question to ask is, can the same brokers and underwriters handle a greater volume of risk placements by making the process more efficient whilst retaining the market’s unique selling point: face-to-face trading? Given the early feedback from the e-endorsements initiative – it looks like we can.

A new year, a new Electronic Distribution website…

Tue, 10 Jan 2012 12:46:00 Z

The Electronic Distribution team runs several projects to help the market realise these opportunities and perform R&D around areas that may offer new opportunities going forward, including the iPad pilot and ‘MRC SmartForms’ project in 2012.

The new Electronic Distribution Team website is now live providing an overview of the planned activity for the team in 2012 and tools currently available for the market.

A key part of the website is the Technology Library which was developed in response to feedback from the market and contains profiles of all the key e-trading vendors and solution providers that offer products to the Lloyd’s market.

This should be a useful resource for Managing Agents and Brokers wishing to make the most of opportunities arising through technology in electronic trading and binder management.

Access the new pages via this link and let us know if you’ve any questions or feedback, we will be looking to constantly update and enhance the content through 2012:

Electronic Distribution website

Looking ahead to 2012

Fri, 23 Dec 2011 09:13:00 Z

It was very gratifying to see so many market practitioners in attendance, especially given that our primary aim is to assist underwriters and brokers in enhancing the quality and quantity of their UK portfolios.

You can access the presentation here but below are some key bullet points from the slides:

- The UK commercial P&C market is worth £46bn across personal and commercial lines, with three-quarters of this business transacted outside of the London market.

- The Lloyd's market is already the fourth largest UK commercial lines writer, but with just 7% of market share there is considerable potential for growth, in profitable classes naturally!

- With 80% of UK commercial insurance passing through the hands of brokers, according to estimates from the Association of British Insurers, Lloyd's reliance on brokers needn't be an impediment to growth in the sector.

- The regional small and medium enterprise (SME) sector, which has a 50% share of the UK commercial lines market, represents a particular opportunity for Lloyd's, and our footprint among the UK SME market appears to be light.

- The presentation cited the views of various insurance intermediaries in the UK market to demonstrate how Lloyd's is commonly perceived. The overall conclusions suggest that Lloyd's can do more to attract business from MGAs and non-Lloyd's brokers from regional UK.

- With MGAs in mind Lloyd's has been instrumental in the launch of the Managing General Agents' Association (MGAA) in September 2011 and we will continue to take a proactive role in its development. Working with the MGAA we will continue to explore opportunities to improve links with coverholders and next year both Lloyd’s and the MGAA will be hosting a range of events which will provide networking opportunities for the Lloyd’s market and the MGA communities to come together.

- The MGAA has 42 full founding members with combined gross written premium of £1.25bn. It has already secured an official contact at the Financial Services Authority to ensure that the managing general agency sector has a voice.

- Lloyd’s UK development activities also include a number of regional broker events and road-show events. We are also seeking to make Lloyd's more attractive for scheme/affinity/SME business via the coverholder/service company channels. Of course our overall aim is to attract more profitable UK regional business into the Lloyd's market via coverholders, service companies, Lloyd's brokers and non-Lloyd's brokers.

The events programme for next year is as follows:

28 February: UK Regional Broker Programme (1):London

Late April: Regional Event / Road Show: Midlands (TBC)

16 May: BIBA Conference: Manchester - Lloyd’s Stand / Workshop

12 June: Airmic Conference: Liverpool - Lloyd’s Stand / Workshop

13 September: Broker Expo South: Ascot - Lloyd’s Stand

19 September:UK regional broker programme (2): London

08 November: Broker Expo North: Coventry - Lloyd’s Stand

If you would like to learn more about these events, drop me an email at keith.stern@lloyds.com and I'd be happy to advise how you can participate and what you can expect from these opportunities.

We've adopted a more strategic approach to organising events, using interview-based research we conducted earlier this year, the idea being that we bring the right people into Lloyd’s and invite the right people to our events/stands/presentations when we are 'on the road'. UK events information can be found here.

I’d like to take this opportunity of thanking the market (Lloyd’s brokers, coverholders and underwriters alike) for your enthusiastic response to breathing new life into our UK book of business (in a particularly challenging environment) and here’s hoping that we continue to strive forward in 2012 in our own back yard as well as internationally of course.

Getting women on board

Tue, 13 Dec 2011 16:08:00 Z

Following publication of Lord Davies’ report earlier this year, there's been a lot in the press about women on boards. Davies recommended a minimum of 25% of women Executive Directors, arguing that a higher number of female directors would strengthen organizations, improve results and enhance corporate governance.

He called on Chairmen of the FTSE 350 companies to publish their aspirational targets within six months. Whilst two thirds of Chairmen have still not done so, recent press shows that since the report the number of female directors has jumped.

The Davies’ proposals generate significant strength of feeling and emotion, both positive and negative. The report recommended targets, widely interpreted as female quotas. For them and you're accused of backing "tokenism" and demeaning women; against them, you're berated for burying your head in the sand and not recognising that it remains a male dominated world.

The truth is for many women this is a sterile debate, wanting only to be able to accomplish their goals and fulfil their potential. However as an observation, I have to say that the senior equality balance hasn't shown much sign of changing of its own volition over the recent years and since the report 27% of Board appointments across the ftse 250 have been female, taking the overall percentage of women directors to 15%.

So is it a question of demand or supply? I'm always told there are not enough senior women out there and that they drop out due to the "work life balance". Well we all, men and women, want one of those. Personally I think we are not creative enough about where we look for talent. Yes, of course more women than men drop out from the workplace, but we're not yet looking for a 50:50 balance on Boards, just achieving 25% of women would be good!

And do women disappear just because of work life balance? Frequently women are motivated by different things, and in order to advance through the ranks in some organisations, can often mean working with a particular culture or style that doesn’t suit everybody.

In my experience the business world is more risk adverse when employing a woman from say a different background or another industry, whilst they may be more prepared to take a chance with a male. That's not a criticism - merely an observation as there will always be a tendency for like to hire like, that's life. Head-hunters have a role to play too. I believe some of the language they use sets the tone for an entirely unconscious gender bias.

For example, job descriptions often require a Director to have "gravitas" - a roman virtue defined as "weight or seriousness." Not necessarily a quality associated with women, perhaps the word "impact" is more apt. Then there's the age old "grey hair," not many women's colour of choice.

Well let’s be honest - a balanced Board can be a great thing for a business. Diversity takes many forms of which gender is just one. It doesn't mean one type of person is better than another, but different is good, it avoids groupthink and can better represent your customer base. Both difference and independence of thought are critical to effective board performance and governance.

Is it a flexible working, childcare issue, the work life balance? Actually I think in Insurance we're on a par with most other sectors. But like any industry, to get to a senior position (and it might not be fashionable to say this), you've got to be able to be around and available when issues arise - and that's exactly the same for all of us, male or female. Talent is a pre requisite, but being there counts too. We can make it easier in the workplace but to make it to a senior level requires compromise. On both sides.

I passionately believe to be truly effective at a senior level you have to be true to who you are, and so the worst thing you can do in these situations is to conform or play a role and try and mirror the personalities around you. So we need more women.
So what should we do in our Market? To be completely honest I think women have to take a lead and be more assertive (in their own way). Sitting back and waiting for something to happen isn’t going to change things.

Women need to go for the jobs they want and to have the belief that they can do it. Start by finding a mentor, any mentor, male or female - the market is a networking business. If the Davies report makes Nominations committees more receptive to women candidates than they were, then that's a good thing. It might get you into the interview - but it’s up to you to get the job.

Lloyd's Risk Index: Are businesses really better prepared?

Wed, 07 Dec 2011 10:49:00 Z

In a world still firmly gripped by recessionary pressures and still in the long shadow of the global financial crisis, business and economic risks top the list for global executives.

Two years on from the height of the credit crunch, business leaders across all regions and sectors now perceive the world as a fundamentally riskier place than they did in 2009 when we asked the Economist Intelligence Unit to run our first survey.

The Risk Index is based on a global survey of over 500 top business leaders’ risk priorities and corresponding preparedness. For those of us in the business of identifying, tracking and analysing risks it makes very interesting reading. In a year of unprecedented multiple huge natural catastrophes – from the earthquake and tsunami in Japan to the tornadoes across the US and floods in Australia – it is surprising to see all the natural hazard risks appear in the Index’s bottom ten.

Even more eyebrow raising is the fact that executives around the world say they actually feel better prepared to respond to risks, both natural and man-made, than they did in 2009. Is this really the case and are businesses genuinely better prepared?

Clearly business leaders will have heightened awareness of the different risks facing their companies, but given the way events, both in terms of natural hazards and political and economic developments, have unfolded in 2011, are we confident that we are really better prepared to meet today’s fast-changing, complex and globally-linked risk landscape?

Lloyd's Risk Index

COP17: what's all the fuss about?

Tue, 29 Nov 2011 16:22:00 Z

The United Nations Framework Convention on Climate Change (known as the UNFCCC) is the key UN treaty on climate change. Each year, the countries that have signed up to the treaty (known as ‘the parties’) gather to discuss international climate policy (at what are known as “COP” meetings).

The COP3 meeting in1997 led to the Kyoto Protocol, which essentially committed countries to reducing their emissions levels to 5.2% below 1990 levels. COP17 at Durban opened yesterday and despite being a critical meeting for the future of climate change, media expectations seem to be much lower than previous year’s meetings.

Unfortunately, if agreement is not made at Durban, the Kyoto Protocol will lapse at the end of 2012, leaving either a gap between commitment periods or a permanent void. A simple repeat of the Kyoto Protocol would also be unwise – as the US is not involved and signed up nations only account for 15% of global emissions.

However, the political differences that need to be overcome can appear huge. Some countries feel that any commitment should be non-binding and be little more than the pledges made two years ago at COP15 in Copenhagen. Other countries feel that reduction targets should vary by country and specifically that it is unfair to impose reduction targets on countries that are still developing.

Emissions reduction would be the main goal for the negotiations. However, at the moment the outlook is more promising for firm agreement on the shape of the new green climate fund. Created at COP16 Cancun, this aims at channelling $100billion of finance into developing countries for adaptation.

So why do we as insurers care? Greenhouse gas emissions need to peak and begin to fall by 2020 to reach the emissions target of 5.2% below 1990 levels. Without this achievement, the societal and economic impact will be devastating.

Extreme weather in the form of heat waves, tropical storms and increased flooding have all been linked to climate change. According to Munich Re, of the 950 natural catastrophes recorded in 2010, 90% can be related to the weather. The potential cost of future climate risks could overwhelm many insurers, businesses and society as a whole.

All eyes should be on Durban over the next week to see if past promises can be fulfilled…

Find out more about COP17

New tools launched for Lloyd's coverholders

Thu, 03 Nov 2011 17:42:00 Z

My previous blog highlighted the upcoming Coverholder Technology Forum which formed part of a very successful ‘coverholder week’ in late September. Over 200 delegates attended the Forum to learn more about the ways in which technology is helping make the coverholder distribution channel work smarter for all involved.

20 technology vendors showcased their solutions in a 'Vendor Carousel' in the Old Library before hosting stands in the Captain's Room to discuss their solutions with Managing Agents, Brokers and Coverholders from the all over the world (information is available on each of the vendors from paivi.autio@lloyds.com)

Other highlights included a Bluffer's Guide hosted by Peter Montanaro where the premier of the low-budget Oscar contender 'iPad Lad' was shown; and the 'Presenting the Vision' slot where Miller and Bell & Clements were joined by two of their coverholders, TAPCO and JimCor to show how they are already employing the 'vision' of sharing real time XML data on risks underwritten.

A great week, thanks to all those that attended!

Following the Coverholder Week, Lloyd’s has launched two initiatives in October to help our coverholders. The first is a new brand for Lloyd's coverholder that enables our 2100 coverholders to identify themselves as such and helps them promote their specific relationship with Lloyd's to clients through the use of a bespoke logo and title.

This is something that we've been putting in place over the summer in response to consistent feedback from coverholders that they found the previous guidelines confusing and that they would benefit from a coverholder specific logo and brand.

The other big deliverable in October was the Coverholder Toolkit. Through consultation with coverholders globally it has become clear that many find the Lloyd’s market confusing and were not working as effectively as they could through misunderstandings.

Many had questions that would be answered easily with simple online guidance. Through the summer we worked with brokers, managing agents and Xchanging to bring together all the information relevant to coverholders and create a toolkit of chapters that explain the key points and provide links to help navigate through the comprehensive information available to coverholders online.

Have a look via the link below and let us know what you think, we want make sure it is doing the job we set out to do so are keen to hear feedback, initial comments have been very encouraging.

Coverholder Toolkit

Leap of Faith: what a difference a year makes

Wed, 02 Nov 2011 15:40:00 Z

It’s now 12 months since e-Endorsements was launched and I'm still fascinated at how perceptions within the market have changed during that time. Whilst participating underwriters and brokers were supportive at its inception, it was still very much a 'leap of faith'. Would it work? Would counter-parties respond electronically? Would it provide benefits? And of course, would it be sustainable?

A year on and this leap of faith has been rewarded with over 500,000 ACORD messages being sent as part of e-Endorsements (which translates to about 2,500 risk endorsements per month). More importantly, as a collective, the market is now seeing the real benefits of this initiative.

I have blogged before on what these benefits are. Brokers and clients are benefiting from same-day endorsement turnaround and an increase in capacity. Where the carrier is a non- agreement party, they are benefiting from the ability to update exposure at point of bind, to start credit control process at point of bind and to keep claim files up to date.

As the months have rolled by, I've been particularly pleased to see the shift in perception of the project within the market as these benefits have emerged. One managing agent I saw at the beginning of the pilot was supportive but perhaps a little sceptical having borne the scars of previous similar initiatives. When I met with them recently, they were positively enthused about the benefits they are now enjoying.

The lesson is, perhaps, that with a market consisting of 250 or so firms that are so inter-connected, the benefits case for a single firm doesn’t always stack up. Instead, a 'leap of faith' approach is sometimes necessary to reap the collective market-wide benefits. For me, it is not just coincidence that this leap of faith has been necessary for ECF, A&S repository and The Exchange - all of which have yielded their ascribed benefits.

I have to hold my hands up here. In 2004 I didn’t think there would be sufficient value in the A&S Repository beyond removing the van and its cargo of paper. But this initiative (and that leap of faith!) enabled Xchanging about five years later to reduce their service levels on premium processing by two days (another of those unseen benefits). The Premium Payment Working Party estimated this was worth many £100,000s to the collective bottom line for carriers.

Collaboration – The Hidden Strength

Thu, 06 Oct 2011 11:01:00 +0100

Many articles refer to the clustering effect as a key success factor particularly when applied to the London Market. Most commentators will refer to the number and proximity of brokers, underwriters and lawyers but not to the myriad of other service providers that contribute to the DNA of the London Market.

This clustering effect has driven success in recent modernisation initiatives. For example, the electronic Endorsements Pilot, where collaboration between underwriters, brokers, trade associations, gateway suppliers, message management tool suppliers, hub providers, back office system providers and front office system providers has been essential to success through defining standards and common process.

All of these firms being clustered in the square mile is clearly a hidden strength of the market.

The next phase of collaboration could be around back-office message integration for underwriters through common application providers. The 50 or so managing agents probably use less than ten common back-office providers.

The opportunity for underwriters to collaborate on standards, common process, EDI replacement by XML messaging etc. through their common supplier is high, enabling costs to be shared, delivery times to be reduced through a single core software version and earlier delivery of benefits.

All in all this makes the benefits case much more compelling. We have already started to see collaboration in this area but, in my view, it is the one to watch as a significant driver of modernisation.

Operational parallels with the FX Markets

Wed, 14 Sep 2011 10:54:00 +0100

Every so often I come across some interesting insights into other sectors that could provide some pointers to the “art of the possible” for our own industry. One such instance I came across was the success story of the Foreign Exchange markets.

Forty years ago this was a highly regulated sector, providing exchange services to commerce for the purchase of goods and services, but now it has grown phenomenally to the point where most trades are purely financial.

It is a global 24/5 de-centralised financial market, with London by far trading the largest proportion of business - at over 30% of the total market - with its nearest competitor at around 18%.

So what has driven this growth and dominance? It is perhaps explained through six factors:

1. People – Availability of a skilled, flexible workforce
2. Business environment – Levels of regulation and tax
3. Infrastructure – Primarily the price and availability of office accommodation
4. Market access – Volume of trading and the clustering effect of a number of companies operating at a location
5. Competitiveness – Price level
6. Technology – 24/5 real-time capability, which lowered transaction costs and increased capacity.

It is here we see parallels with the London Insurance market, where we score highly on the first four factors but less so on the final two. Operationally these translate into making it easy to do business from a process perspective and increasing capacity. In my view it is the increase in capacity that is the most interesting.

We have seen that in the endorsements pilot over 90% of the endorsements sent electronically have been dealt with screen to screen. The lack of box visits has increased capacity amongst the scarce resource of brokers and underwriters.

In other words, their time has been released to concentrate on value adding activities such as sourcing new business and secondly because more volume (risks) can go through the same resources it reduces the operational unit cost which improves competitiveness.

An often cited tale is that smaller more attritional risks, as opposed to CAT risks, do not come to London because the frictional costs are too high. It seems that technology can reduce these frictional costs without harming one of London’s unique selling points – face to face trading of complex risks.

The subscription market has benefited from the greater appreciation of concentration of risk generated by the banking crisis which has translated into greater premium volumes. If this newly acquired business can be “locked-in” through reducing the frictional cost, the competitive threat from other jurisdictions reduces.

PS: The IUA’s recently published market statistics report suggests that the market is growing and the ability to do so relatively painlessly (service standards are improved) may be indicative of technology increasing capacity – something to keep an eye on.

September Events

Thu, 01 Sep 2011 17:29:00 +0100

As the Northern Hemisphere 'Summer' draws to a close and we move out of the holiday season and into Autumn and renewals, there are a number of events taking place in September which may be of interest.

The recurrent theme to this year's blog, as you would no doubt have gathered by now, emphasises how important UK MGAs and regional brokers are to the Lloyd's market. Consequently, our September calendar has three significant opportunities for the market to build on those relationships.

On September 7 we are running the first inwards programme for UK regional brokers. We have nearly 60 brokers from around the UK who will be attending this one-day event at Lloyd's. The day will include presentations from key Corporation departments, tours of the Underwriting Room and the highlight of the day will be a networking lunch to meet the market. We already have over 60 Lloyd's brokers, coverholders and underwriters registered to attend the lunch. If you'd like to attend we can put you on the waiting list - please send an email to events@lloyds.com with your request.

We hope that this inaugural programme will be a precedent for similar programmes in 2012 and beyond and we will be working with the likes of BIBA and other broker networks and cluster groups to attract more inwards broker 'traffic' into Lloyd's.

On September 8 the Managing General Agents' Association (MGAA) launch takes place in the Old Library in Lloyd's at 3pm, with drinks and canapes from 4.50pm. The journey begins for this fledgling association which already represents over 50 members. I sit on the Steering Committee for the MGAA because we at Lloyd's want to show our support as an Associate Member and also to formally recognise this important development for 'The Third Force' within the UK insurance industry.

Of course the importance of binder business to Lloyd's cannot be under-emphasised. The MGAA has already received some support from managing agents and non-Lloyd's insurance carriers but if you are a supporter of binder business and haven't yet considered joining the MGAA in an associate capacity, then I urge you to attend the launch to find out more. If you want to register to attend please contact enquiries@mgaa.co.uk

Lloyd's will also be hosting its first stand at a Broker Expo on September 15 which is an ideal opportunity for our market practitioners to showcase their products to UK brokers. We already have a full complement of underwriters supporting the stand at Broker Expo South in Weybridge but if you are interested in participating in the Expos next year in Coventry and Weybridge then please email me.

Other noteworthy anniversaries taking place on the same dates in September which also came to my attention are as follows...

September 7th is National Threatened Species Day
September 8th is International Literacy Day
September 15th is International Day of Democracy

I hope that my comparisons to dates which highlight the extinction of endangered animals, literacy and democracy, are not seen as ironic in any way but it is just as well we're not hosting an event on September 19 as on that day we apparently celebrate 'International Talk-Like-a-Pirate Day!

Electronic Claims File – Continuous Improvement

Mon, 22 Aug 2011 14:14:00 +0100

I’ve written before about the Electronic Claims File (ECF) and its impact on the time it takes to settle claims. It's clear that its influence in improving the processing of claims continues.

David Lang’s article on lloyds.com illustrates the success of the Claims Transformation Programme with standard claims taking half the time that they did before Claims Transformation and probably around a quarter of the time that they did before ECF.

But why is this reduction so significant? These standard claims represent the majority of claims. The drop therefore brings the Lloyd’s market within touching distance of world-class settlement times.

Achieving this improvement without ECF would not have been impossible but it's difficult to comprehend the resources that would have had to be deployed to achieve a similar result, particularly considering the challenge of measuring a manual process across 250 firms. With ECF it is simply at the touch of a button.

Proof again that the market modernisation efforts are driving out benefits and in this case, client focused benefits.

Forum aims to help the market work smarter

Fri, 12 Aug 2011 10:38:00 +0100

The Forum will give brokers, managing agents and coverholders a chance to discuss how we can work smarter and see a variety of software solutions that can help make delegated business cheaper and easier to run.

Coverholder reporting was generally not in a good state 18 months ago.

Coverholders were being asked to report information to London in a variety of different formats to each syndicate, at different levels of detail and using different templates – and information was being re-keyed several times and took many weeks or months to be processed. This was onerous for the coverholder and often resulted in delayed and incomplete data for stakeholders in London.

It was recognised that to make coverholder’s lives easier and to make use of technology to share this information more effectively we needed to agree a standard set of reporting data across the Lloyd’s market. As I reported in my last blog this has now been done and the full suite of standards has now been live for almost six months.

Now that these standards are in place we are working with the market to help them choose the technology solutions that best suit their needs. To this end we are running the second Coverholder Technology Forum at Lloyd’s on 29 and 30 September.

We hosted the first such event in November 2010 and the feedback was so positive we decided soon afterwards to run a second, larger event this year.

At this year’s event we have 20 solution providers with stands in the Captain’s Room and a series of panel discussions, presentations and networking events planned across the two days.

Visit www.lloyds.com/coverholdertechnologyforum to find out more about the agenda and register.

If you’ve any questions, please email CoverholderTechForum2011@lloyds.com

Forecasting Risk

Thu, 30 Jun 2011 15:35:00 +0100

We are at the beginning of another hurricane season and everyone is waiting with bated breath to see if it will be “third time lucky” for the insurance industry with no major hurricanes making US landfall for the third year in a row.

As always we have seen the usual round of seasonal forecasts and all are predicting another active season. It therefore seems a good time to consider how the insurance industry uses forecasts to inform decision-making and whether it is time to investigate new methods and techniques given the recent advances in technology and climate research.

Forecasting scientists are now developing models to predict weather events and patterns over timeframes from the seasonal to several years. Increasingly sophisticated forecasting models take into account ocean and atmosphere conditions, as well as seasonal and regional climate trends, such as El Nino. Forecasters are also refining the skill of these models which should make them more relevant to the premium setting and capital decisions insurers make.

As the impacts of climate change are increasingly felt, and in particular the growing evidence that climate change is resulting in more frequent severe weather events including hurricanes, such longer-range forecasting approaches should play an increasingly important role in the insurance industry.

Lloyd’s recently held a series of expert workshops to explore the potential of long-range forecasting for the insurance industry and used the outputs from these sessions to prepare a Forcasting Report. This report, jointly produced with the Met Office, highlights both the challenges and potential benefits of introducing long-term forecasting into the insurance industry.

Access all areas (of the Lloyd's Market)

Tue, 14 Jun 2011 17:01:00 +0100

And with BIBA in Manchester in May and AIRMIC in Bournemouth earlier this month, there were plenty of opportunities for Lloyd's market practitioners to mingle with delegates. We were delighted that so many underwriters and brokers from the market joined us on the Lloyd's exhibition stands at both of these events.

At the BIBA conference we also conducted a workshop on 'Accessing the Lloyd's Market' presented via a panel discussion format comprising a Lloyd's broker, a service company, a managing agent and a coverholder - emphasising that there are a number of different entry points into the Lloyd's market. The theme of the workshop was to demystify Lloyd's, particularly for those regional brokers who may have thought it's too complicated for them to deal with. We provided the attendees with a 'Roadmap' to accessing the market which will hopefully be of use to the 60 or so attendees in their future dealings with Lloyd's.

We continued with the theme of accessing the Lloyd's market at the Lloyd's Northern Ireland inaugural event on 26 May. The event took place at the Culloden Hotel in Belfast and it was well attended by 40 market players from the Lloyd's market combined with a great response from the local insurance community with nearly 100 local attendees.

Being part of Lloyd's regional market development strategy, the event presented an opportunity for the Northern Ireland insurance broking community to gain a first-hand understanding of how access to the Lloyd's market works and equally to garner market appetite among Lloyd's underwriters, Lloyd's brokers and coverholders in attendance.

In addition to the panel discussion in Belfast, a combination of Lloyd's managing agents, Lloyd's brokers and coverholders hosted 15 individual company networking tables to showcase their insurance products. Local market participants were invited to meet and explore mutual interests and business opportunities in an informal breakout session. The day ended with a networking lunch.

The Lloyd's event in Belfast was a great opportunity to reach out to regional brokers and we will be undertaking similar regional events around the UK in the future. Accessing Lloyd's isn't just about accessing the distribution network and the insurance products underwritten by Lloyd's underwriters, but it is also about accessing the talent, knowledge and wealth of expertise that we have within the Market and Corporation.

At the AIRMIC conference, Neil Smith and Alexandra Vincenti (Emerging Risks & Research) hosted a workshop for over 40 attendees on 'Emerging Risks' focussing on managing emerging risks from nanotechnology to digital risks, space weather and pandemics. This workshop provided delegates with a useful forum to discuss and share information about these topics and to learn about the 360 reports.

We will be participating in more third party conferences and continuing to host our own in-house and regional events in the future and as always if you are interested in any of these networking and promotional opportunities then please get in touch.

The side effects of fracking

Mon, 06 Jun 2011 14:53:00 +0100

While only being 1.5 in magnitude and not causing any structural damage, what it did do was throw light on a controversial method of gas extraction known as hydraulic fracturing, or “fracking”.

Fracking involves injecting millions of gallons of water mixed with rock-dissolving chemicals, into shale rock to unlock the natural gas inside.

Drilling for shale gas is huge business in the US and seen as vitally important in securing future energy sources with oil supplies coming under increasing pressure. But shale gas drilling isn't restricted to the US – it is becoming increasingly common in Europe, in countries such as Poland and Germany, and most recently in the UK.

While small earthquakes are a worrying side-effect of shale gas drilling – and sufficiently so for Cuadrilla Resources to suspend its current shale operations in Lancashire - they are relatively common. What is of much greater concern to many is the environmental impact of fracking and, in particular, the potential contamination of water supplies.

Some environmentalists and community groups, particularly in the US, say the fluids used to break-up shale deposits are polluting water supplies and releasing harmful substances into the drinking water of people living near gas wells. The drilling companies counter that fracking happens too far below the water table for this to be possible.

Currently the UK Government does not seem overly worried about drilling for shale gas with the Energy and Climate Change Committee finding no evidence that the technique of fracking is unsafe. Such an approach is directly at odds with Government views in France and the US states of New York and Pennsylvania, where fracking is banned.

It'll be interesting to see if the recent seismic activity in North West England will be enough to trigger a UK Government review of its current approach to shale gas drilling.

You only get out what you put in

Tue, 31 May 2011 11:14:00 +0100

I return yet again to my favourite subject: benefits. Put another way, advantages, gains or promotion following the publication of the Endorsements Pilot review by Ernst & Young (available on the LMA’s website).

What never ceases to amaze me is the array of benefits that occur after a major process change programme has been implemented. Many of these are often never even considered in the original cost-benefit and it seems that using ACORD messages to support the placing of endorsements has followed this pattern. I have referred to a couple of these in previous blogs but now an independent report has validated these early assessments.

Whilst operational efficiency, reduced error rates and improved turnaround were all expected, real gains have also been seen in improved use of skills, transparent tracking, improved credit control, capital allocation and improved management information.

None of these were originally predicted, but I think some of this is down to the creativity of individuals - having been given a basic set of tools, they seek to optimise the usefulness of these.

A key thing that struck me was that volume and integration are the key to optimising these benefits (as I've discussed before). As soon as significant volumes are coming in electronically, underwriters and brokers can justify re-focusing their teams and optimising their business process.

This in turn leads to increased benefits, which ultimately drives investment in technology to simplify the process further and, you guessed it, more benefits.

There are of course flavours of integration, which are individual to particular market firms, a further example of choice, these include:

Integrating message based endorsements into existing workflow systems alongside other methods of receiving endorsements.
Integration with workflow as above and the creation of back office record for the endorsement.
Full integration into workflow as above, creation of a back office record and automatic population of many fields of information.

Whilst not nirvana, (many would argue for a ‘fatter’ message, so more of the back-office record could be populated), it does move firms along the road to straight-through processing at their own pace and allowing their own choice of integration. However, it is clear the more firms put in the more they will get out in terms of benefits.

Hurricanes and errors of reasoning? Again...

Wed, 04 May 2011 10:51:00 +0100

This time they relate to Karen Clark's presentation.

First she makes the comment:

"Models Can't…Predict Near Term Catastrophe Losses".

In my previous blog post Dice seriously underestimating risk, I noted that cat models do not attempt to "predict" actual losses. They simulate a range of possible losses around an estimated mean level. If there is plausible evidence that the mean loss is higher, for some reason, then it is right to reflect this in the model. The actual outcome may be higher or lower - that's what random means.

To give evidence for her claims Karen then shows the following graphic:

I believe this graphic is really evidence for the opposite point of view i.e. that catastrophe models should take account of the medium term forecast.

From a quick look you might think that the graphic makes Karen’s point well - and it does show that actual outcomes are more variable than the forecast. To be honest I'm not sure what NOAA's ranges are in the graphic. If they are inter-quartile ranges then the actual data might even be within the full range of variance.

In any case, if you look at the average, over the 9 years, of number of storms NOAA predicted would arise in excess of the long term average you get around 2 (17/9 if I’m reading the graph right). Now look at the actual number of storms in excess of the long term average, you again get 2 (well 15/9 so pretty close).

In other words NOAA predicted an average of 2 storms in excess of long term averages over the period and that's what we got.

This suggests that, whilst their annual hit rate might not be perfect, over the long term they do add value compared to background climate averages.

Another way to look at this is to consider how many times NOAA got the difference from long term average directionally correct. Use the letter “S” when they get the direction correct, this is a “success” and “F” (for failure) when they get it wrong. Then in the 9 years shown NOAA’s success pattern is: F,S,S,S,F,S,S,S,S

So they got the direction right 7 years out of 9. If they were just guessing this success rate would be pretty unlikely - they'd have around a 9% chance of guessing that well or better. To my mind this suggests their forecast has some skill and that is the reason for their success rate.

So it looks like climate models aren't bad at telling us the average frequency over the medium term. Fortunately it is the medium term view that insurers currently want to reflect in their catastrophe models.

Our forthcoming paper discusses the use of forecasting in the insurance industry and considers these issues in more detail.

Hurricanes and errors of reasoning?

Tue, 03 May 2011 17:04:00 +0100

One of the topics discussed related to the "medium term" view of hurricane risk. The crux of this debate is whether hurricane activity is elevated above long term average rates for some reason.

The reason might be climate change, natural cycles or (as I suspect) a bit of both.

AIR provides two hurricane event catalogues, to quote from their presentation at the meeting:

– "The Standard Catalog is a long-term view of risk conditioned on the characteristics of all Atlantic hurricane seasons since 1900"

– "The Warm SST (WSST) Catalog is also a long-term view of risk, but conditioned on only those seasons since 1900 in which the Atlantic Ocean has been warmer than average (observed ~50% of the time)"

They also, quite correctly (and usefully) point out "Neither of the stochastic catalogs was designed to “forecast” losses" a subject that our forthcoming emerging risks paper on forecasting and insurance will discuss in more detail.

Their presentation then makes an error of reasoning as far I can see (though I don’t know what they said verbally and powerpoint slides can be misleading). They say...

"Both views of risk are credible and scientifically valid, though the WSST catalog is based on less data, and is thus subject to elevated levels of uncertainty"

Firstly, the "uncertainty" they are speaking of (I believe) is the uncertainty in the distribution of hurricane losses in their catalogue - this would include the average loss. Their model provides an estimate of the average loss and they argue that this estimate is more uncertain when the WSST catalogue is used because it has less data.

But, this is only true if the underlying process is, to use a technical term, stationary. A stationary process is one which has a constant (unknown) underlying mean. It’s obvious that the more observations you make of a stationary process, the more you learn about it.

If the underlying process is not stationary, say it has a cycle, or a upwards trend - then a long term average will be highly uncertain. At almost all points in the cycle it will be a biased (i.e. not very good) estimator.

If sea surface temperature is a good predictor of mean hurricane activity then conditioning on this variable would give a better - and more certain estimator.

At Lloyd's we've made it clear in our ICA guidance that we believe the hurricane time series is not stationary:

"Models are based on past experience and it is likely that over time this experience will become out of date due to all manner of trends.... there is strong evidence that hurricane risk in the North Atlantic is raised above long term averages.... "

Theory turning into practice?

Wed, 20 Apr 2011 16:30:00 +0100

He was musing that if he didn’t need to secure the five straightforward lines that day he could maximise his chances of securing lines on the more complex risks that attracted higher premiums.

It seemed to me that this was a clear and tangible example of what electronic placing support in the market was designed to do – release time so brokers and underwriters could focus their precious resource on the complex and challenging risks.

There is evidence that brokers and underwriters are using the electronic endorsement initiative to test this theory in practice, indeed some firms have redesigned their business process to take advantage of this.

By using a triage process to allocate the simple risks to more junior staff, the highly skilled underwriters and placing brokers can focus on the more complex risks. And the potential for all firms to take up this opportunity is significant, with the endorsement pilot showing month on month that about 90% of Marine endorsements do not involve a visit by the broker!

The benefits of this approach are that less complex endorsements are being handled outside of underwriting hours meaning that brokers are able to give same day service to clients (see my previous blog on this subject).

I have heard of many instances where the broker has sent the endorsement out at 08:30 and gained agreement by 09:30 meaning same day service is achievable, such service is appreciated by brokers and clients alike which only enhances the market’s reputation alongside its strength of underwriting expertise.

The use of electronic placing support is never going to replace face to face negotiation for complex risks. This is a fundamental part of the market’s proposition; but it begs the question when it comes down to say, a simple name change are highly skilled underwriters and brokers really adding value to the process or whether their time is better spent focusing on underwriting, value add services to the client and business development?

2011 Hurricane forecasts begin

Tue, 12 Apr 2011 16:58:00 +0100

This year there seems to be broad consensus that we’re in for another active season, although not as busy as last year.

The benchmark for seasonal Atlantic hurricane outlooks remains Colorado State University now under the leadership of Dr. Klotzbach, who took over the reins from Dr Bill Gray. The team at Colorado is predicting an active season of 16 named storms with nine hurricanes and five major hurricanes.

Other forecasts are not diverging far from this view. Tropical Storm Risk is expecting 14 named storms with between seven and eight hurricanes. And AccuWeather.com’s forecast of 15 named storms falls right in the middle of the Colorado and TSR forecasts, although it is predicting slightly fewer hurricanes (six with three major hurricanes).

The million (or billion) dollar question for the insurance industry is how many, if any, of these storms and hurricanes will make landfall in the US.

TSR offers a US landfall forecast of 1.9 (+/- 1.5), while CSU said there is a 72% probability that a major hurricane will make landfall in the United States and a 48% probability that a storm will strike the East Coast. Therefore, it remains to be seen whether we will be as fortunate as last year in avoiding any major hurricanes hitting the US coast.

The UK Insurance Sector: less people, more engagement!

Wed, 06 Apr 2011 16:21:00 +0100

I had always thought of Bristol as a relatively high employer of insurance staff but it was interesting to hear from the Regional Manager of the coverholder, who advised me that with a team of eighteen they are now the third largest employer of insurance staff in the Bristol City Centre!

That was certainly a surprise to me but I suspect this development may be indicative of a trend across the UK.

The ABI's statistics which are produced from the Office of National Statistics (Ecomonic and Labour Market Reviews) appear to confirm that there might be such a downward trend. In 2008 and 2009 the employment figures for the UK insurance sector were fairly static with an average of 311,000, but 2010's figures shows a marked decline of approximately 11% with 275,000 now employed in the sector.

This may of course be a temporary blip but perhaps with the increasing use of IT technology and platforms, we maybe witnessing a more permanent decline in the number of insurance staff across the UK.

Since the Second World War the insurance sector has grown and flourished to make the UK insurance industry the largest in Europe and the third largest in the world and according to the ABI the UK's insurance industry accounts for 8% of total worldwide premium income.

The financial services industry has historically been a people business and the importance of relationship-building has traditionally been one of the strengths of the Lloyd's market.

That said, we have had to move with the times and in recent years Lloyd's has made a quantum leap forward in embracing the very latest in IT initiatives. As a market the way in which we distribute our products, record premiums and claims, and monitor our aggregations of exposure, has changed beyond recognition to the market that I first encountered over twenty years ago.

However, integral to our financial successes, especially over the past five years, is that whilst we have made tremendous progress in implementing cutting-edge IT sytems and processes into the market, at its heart the Lloyd's market is still a people business, whose success is founded upon productive relationships with brokers, coverholders, intermediaries, loss adjusters, risk managers and clients.

Perhaps with fewer people in the industry and more IT initiatives responsible for driving the selection of the insurer and the issuance of the product, it is all the more imperative not to lose sight of the importance of nurturing those people-relationships that underpin the IT infrastructures.

There may be less people in the industry but Lloyd's brokers and underwriters should continue to strive to reach out to the community of insurance folk around the country to raise the Lloyd's profile and to ensure that we are not just another faceless insurer on an aggregator's panel.

Conferences are a great opportunity to meet many people in one location and with BIBA (Manchester, May) and AIRMIC (Bournemouth, June) approaching we are delighted to have Lloyd's stands at both events where Lloyd's market practitioners can meet with brokers and risk managers alike.

We have also launched a UK programme to encourage more dialogue between Lloyd's market practitioners and regional brokers and with the support of the IIB (Institute of Insurance Brokers) we are hosting an inwards visit to Lloyd's on 7th September.

If you are interested in any of the UK events and activities, particularly if you want to participate in networking and promotional opportunities to meet with people from across the industry, please contact me.

And in the meantime we await the 2011 UK insurance sector employment figures with interest...

Keeping things simple for Coverholders

Mon, 07 Mar 2011 13:05:00 Z

For those of you who read my previous blog you’ll be aware of the good work that the market is doing in standardising the reports we request of our coverholders across the world.

Last week we made another big step towards a more efficient trading model with our coverholders by launching a standard claims ‘bordereau’, paving the way for fully electronic submissions to London, reducing rekeying and simplifying reporting for the coverholder.

Gemma Reed has been leading this work from a Corporation perspective working closely with LIIBA, the LMA and Coverholders globally to get consensus on the data needed.

This is the final ‘standard’ to be launched as part of current plans to standardise reporting from coverholders globally. We now have a standard report (or bordereau) live for premiums, claims and property risk information. We are now consulting with market on the need for further ‘risk bordereau’ standards beyond property but the main focus for 2011 will be supporting roll out of the standards with brokers and coverholders.

As part of the roll out we are working closely with key Agency Management System suppliers who provide software for coverholders in key territories to ensure they can easily produce the reports without the coverholder having to rekey data. Two of the key providers in the US are in the final stages of designing reports in line with our new standards.

Making the delegated authority model easier to use for our coverholders and more operationally efficient is a key objective within the 3 year plan and these standards are an important step to that goal.

More information on the reporting standards

Solar Storm Surge

Thu, 24 Feb 2011 12:33:00 Z

These flares can disrupt technology and communications on Earth. However, far from being a one off, such occurrences may be a sign of things to come as we head towards a period of increased solar activity.

Solar flares and other forms of “space weather” are not new phenomena. However, what has changed is the potential impact of space weather on earth – we live in an increasingly interconnected and digitised world and it is this dependency on technology that makes us most susceptible to space weather. Solar flares, or more accurately coronal mass ejections, unleash waves of charged particles, which cause geomagnetic storms when they hit the earth’s magnetic field. These storms can seriously disrupt power grids and communications systems.

This is particularly timely as the sun moves through periodical cycles of activity and we’re currently moving towards a period of high activity with the “solar max” predicted around 2013/14. Although solar activity in this cycle may not be as high as in some cycles in the past, we have never before been so dependent on interconnected technologies and systems across the world. It is no surprise that Governments are looking seriously at the issue of space weather. Yesterday the Government’s chief scientific adviser, Professor Sir John Beddington, warned that a perfect solar storm could cause more than £1.2 trillion of damage to the Earth’s communication systems.

Last week’s solar flares may not have caused widespread disruption, but did affect communications in parts of Asia. Now is not the time for complacency.

For more information on potential impact of space weather, please refer to http://www.lloyds.com/News-and-Insight/360-Risk-Insight/Space

Upgrade Paths

Tue, 22 Feb 2011 10:30:00 Z

Inevitably the conversations ventured into “what’s next” for message handling to support the endorsements pilot as it moves to cover all endorsements during 2011.

Many managing agents originally opted for a “suck it and see” approach by purchasing a hosted gateway and message management tool which allowed them to participate in the endorsements pilot.

However, many are already starting to see the benefits which arise when integrating messages into systems such as underwriting back-office, workflow and exposure management. See my previous blog for more information http://www.lloyds.com/News-and-Insight/Lloyds-Blog/Market-Operations/Carl-Phillips/2010/10/Endorsements-Pilot-is-Go

What I find most encouraging is how many managing agents are exploring this 'upgrade path'. A few have gone even further by fully integrating the messages into their workflow and back-office underwriting system, complete with comprehensive management information.

Atrium are even offering a solution that links the messages, their document management system and their underwriting system to other managing agents as the first step towards a shared repository of process applications. They believe, rightly, that integration across the market will maximise the benefits and help overcome the cultural caution of underwriters and brokers.

So what’s in it for Atrium? Well, it feels there is no competitive advantage to be gained from their integrated solution and want to see more collaboration between practitioners in solving technological challenges of this nature. Hence its willingness to help others… not reinvent the wheel.

Time for a Cat Risk USP in Solvency II standard formula?

Wed, 16 Feb 2011 16:39:00 Z

The withdrawal of personalised scenarios doesn’t leave global reinsurers with any choice but to plug global premiums into a factor based calculation method; silly numbers result => GIGO.

This drives the industry’s commitment to Internal Models (=good) but fear remains that non-approval would become an existential risk to add to the ORSA. While it makes identifying a Reverse Stress Test easy, how much better it would be if we could find a way to use the standard industry tools (= cat models) to generate a risk sensitive, undertaking specific parameter (USP)?

Showing support for the MGAA

Mon, 31 Jan 2011 10:45:00 Z

The Committee published its Proposal in October 2010 and held a meeting with some 70 or so prospective members in November. The response was very positive. Since then we have held two further meetings in January, one with insurers and one with service providers to the MGA community (including Lloyd's brokers).

Those meetings were also very productive and so it is our intention to offer both insurers and service providers, Associate Member status.

We are now aiming to launch the Association by the end of this quarter. Membership invitation requests will be despatched to MGAs, Insurance Carriers, Managing Agents, Lloyd's brokers and service providers during February.

The MGAA's objectives include the following:

• To be a central representative body to put the views of members to government departments and agencies including the FSA, Parliament, the European Commision and European Union Parliament and other relevant organisations.

• To set best practice guidelines to assist members in ensuring the stability, security and reputation of their individual businesses, while recognising that ultimate responsibility for those issues rests with individual carriers

• To work actively to improve the underwriting agency sector's professionalism, stability and competitiveness.

• To be a technical centre providing commentary, information and guidance on regulatory developments of relevance to underwriting agencies.

• To promote the UK underwriting agency sector through good public relations and appropriate communications to the trade and general media.

• To promote market opportunities and through its relationship with the CII and any other appropriate establishments to promote training and education as well as standards and product and service quality.

• To listen to the membership, and develop beneficial services for MGA's.

The full list of objectives is located on the MGAA's website: www.mgaa.co.uk

For those Coverholders, Managing Agents, Lloyd's Brokers and Service Providers, who haven't attended any of the aforementioned presentations and would like to know more about joining the MGAA either as a full member or as an associate member please email via enquiries@mgaa.co.uk

The increasingly important MGA sector is not defined by either the insurer or broker model but it shares important elements of both underwriting and intermediation. As regulation increases, as it inevitably will, it is clear that the case must also be made to differentiate properly between brokers and underwriting agents in order to create a transparent view for customers as to the proper activies and merits of both.

The formation of the MGAA is an exciting development for a significant sector of the UK insurance community, and Lloyd's is delighted to be able to lend its support to this initiative.

Dice seriously underestimating risk

Fri, 21 Jan 2011 16:25:00 Z

That’s an average of two.

Frankly I can't believe it.

I expected an average of 3.5.

My die is seriously underestimating risk.

I'm off to buy another one that works...

With the above in mind, consider this article which contains this phrase:

"These percentages translate into cumulative insured losses from 2006 to 2010 of between $60bn and $70bn, for the AIR, EQECAT and RMS models. But the actual cumulative losses were only $15.2bn, said Karen Clark…..A short time horizon is not sufficient for credibly estimating insured losses from hurricanes”

Unless I'm missing something, the quotes above are using the same argument as my dice example. She seems to be saying: because the actual losses are less than the expected losses that means the models are "wrong" in some sense.

This confuses what the models are with what they aren't. The models are not attempting to forecast losses; as Paul Nunn said in a Tweet last week. They are simulation tools (just sophisticated dice) which produce a range of possible losses.

It is possible to calculate average losses from a model (like my dice example above) - but we'd expect actual losses to be different to expected losses most of the time - even averaged over quite a long period.

Catastrophic loss simulations are drawn from a very heavy tailed distribution (i.e. there is a reasonable probability of some very high losses from time to time) - a classic feature of heavy tailed distributions is that they take a very long time to converge to their average (indeed some don’t ever converge). This is why the average loss is only one of many factors that are used in pricing.

Reinsurance renewals - how was it for you?

Thu, 06 Jan 2011 14:26:00 Z

The only sectors with a clear upward bias were marine and energy, credit, bond and political risk, brokers say.

As Guy Carpenter points out in its report, Points of Inflection - Positioning for Change in a Challenging Market, early predictions that reinsurance renewal rates were likely to fall were correct.

The Guy Carpenter Global Property Catastrophe Rate on Line (ROL) Index lost 7.5% – the second consecutive annual decline - due in large part to moderate loss activity and abundant levels of industry surplus.

Although the year began with significant cat activity (windstorm Xynthia in Europe, the Deepwater Horizon oil rig loss and the Chile earthquake, plus the New Zealand earthquake in the second half) the year finished with relatively low insured cat losses after an unexpectedly low-loss US hurricane season.

These subdued losses, combined with unrealised investment gains, led to record levels of capital, which in turn drove reinsurance pricing lower at the renewal, Guy Carpenter notes.

Willis Re’s report, titled Keep Calm and Carry On, says that despite the continued softening and the worst ever first quarter for nat cat losses on record, the global reinsurance market emerged from 2010 relatively unscathed, aided by recovering investment positions and continuing strong reserve releases.

It said price reductions at the January 1 2011 reinsurance renewals averaged between 5% and 10%.

According to Willis Re, reinsurers’ 2010 underwriting results are lower than the exceptional ones achieved in comparatively loss-free 2009, but they are much better than initially feared after the disastrous first quarter.

With the industry overcapitalised, Willis Re reckons that reinsurers may implement more aggressive capital management strategies through share repurchases, dividend payments and other similar measures.

Aon Benfield’s analysis of the reinsurance renewals highlights that for the first nine months of 2010 total global reinsurance capacity increased by 17%, reaching a record high of $470bn by Q3 2010. Its report, Partnership Renewed, says that reinsurers are virtually in lockstep with their clients and both parties are now lowering prices at the same rate.

That’s because although both reinsurers and insurers are enjoying fully recovered balance sheets there is quite limited growth in demand for their products.

The report points out that the major developed markets in the US and Europe are facing their second or third year-on-year of non-life market-wide premium declines, even as gross domestic product figures return to sequential growth.

Aon Benfield advises insurers and reinsurers to work together to create demand by generating new products and/or innovations on existing products.

Looking at the prospects for 2011 and what would turn the market, Guy Carpenter says a sufficiently big cat could reverse the direction of rates. It believes a $50bn loss event could stem the decline for a year while a $100bn loss could lead to “outlier” reinsurance failures. But it will take a $150bn insured loss event to produce a sustained turn in the market, the broker says.

Guy Carp is also monitoring reserve releases, looking for signals that the sector has entered the “cheating phase” and asking how much longer favourable development can be expected to prop up calendar year results.

Willis Re agrees. Commenting on the conclusions of his company’s report, Peter Hearn, CEO at Willis Re, warns that the global reinsurance industry faces a tough time in 2011: “Thin investment returns and declining back year releases provide little cover for declining underwriting returns. In such an environment, any shock to reinsurers’ capital base, either through underwriting losses or other capital events, is likely to result in a sharper reaction from reinsurers than primary companies will find easy to bear.”

Emerging technology, emerging risks

Tue, 21 Dec 2010 16:21:00 Z

However, are they as quick in protecting their companies from potential risks posed by these emerging technologies? One thing is for sure is that criminals are certainly moving quickly to exploit any potential corporate vulnerabilities around new technologies.

Two of the most recent technology trends that companies are increasingly utilising are social networking and cloud computing. The former is becoming an increasingly important marketing tool and channel to market for companies, while the latter is perceived as providing significant potential cost saving. Both trends are explained in detail in our latest 360 Risk Insight report on digital risks. The report also highlights the new potential risks to business arising from these trends.

Social networking provides new ways for people to communicate, but it also means new ways for information to leak. The popularity of Facebook and other popular social networking sites has given cyber criminals new ways to steal both money and information. It seems more and more companies are being hit by spam, phishing or malware attacks via social networking sites.

There is likely to be a huge growth in cloud computing over the next few years as companies seek to streamline costs by outsourcing applications and services to the cloud. However, this is likely to raise a number of security concerns, particularly relating to reliance on third-party cloud service providers. How much do companies know about these providers and their security and governance processes? One fundamental question is when data is held in the cloud, what is the legal jurisdiction?

Businesses appear to slow in responding to the new risks posed by these new technology trends, unlike their criminal counterparts. In a recent Ernst & Young Survey, only ten per cent of companies felt that security teams should examine these trends as a priority, although two-thirds did think the adoption of emerging technologies would pose increased risks to business.

As businesses consider adopting new technologies, they should look at the same time at the security implications and possible associated risks. This shouldn’t stop companies from benefitting from the latest technologies, but mean rather than playing catch-up with cyber criminals they can deter and thwart them at the outset.

www.lloyds.com/digitalrisksreport
www.ey.com/informationsecurity

STP - what does it mean?

Mon, 13 Dec 2010 00:00:00 Z

My own definition of STP would be a world where basic information is not re-keyed. There will always be additional keying as individual firms add richness to the data for their own analysis to improve their results. But there is no sense in re-keying information such as insured name, period of cover, renewal date etc.

This kind of 'core' information is currently duplicated (and thus re-keyed) by each carrier on the risk and, where applicable, at the bureau. But it could just as well be sent by a structured message following its original creation. There are still considerable productivity benefits to be had in this area by not having to re-key this ‘core’ information.

The debate, then, revolves around how much of the data is core as opposed to 'read once then file'. The latter is best suited to an electronic document rather than structured messaging (trying to structure this type of data would involve about 14,000 separate items!). Electronic documents can be sent very easily as part of the ACORD message (a la the Endorsements Pilot).

So maybe STP is core information sent around the market in a structured message and then taken into back-office systems. These can then be supplemented by documents sent electronically as part of the message that are read and then reside on 'document repositories' for use in the event of a claim.

A milestone...

Mon, 06 Dec 2010 17:51:00 Z

I remember when we reached 10 and 100 and of course 1000... The pilot is focused on Marine - although, of course, any class can be sent over the Exchange and not just endorsement messages, Signed Line Advice and Firm Order messages can be sent too. We've seen a sharp uptake in volumes since 1st October, as you can see below.

This is great news. To be clear, the 100,000 isn't just endorsements, it includes placing and signed lines as well. I don't want to mislead, so for transparency's sake these figures represent total messages crossing the Exchange and include all supporting messages/responses such as, for example, document requests and acknowledgements. Patterns of messages are difficult to predict as this is new for us, but on average one unique "risk" type message has around three supporting messages.

So all in all, very encouraging and down in no small part to the efforts of the Endorsement Management Group and all of the teams across the market who have worked so incredibly hard to achieve this. In terms of endorsements, the first class was always going to be the hardest as this changes the way we work. The challenges encountered can be unique to every participating managing agent, company and broker organisation, all of whom have had to ensure that this new way of working is clear within their own organisation before going live.

The aspiration is that the majority of endorsements for all classes will be carried electronically by the end of next year. So this is just a gentle start and we need to gather feedback and review the lessons learned at the end of the pilot. What has been achieved so far is down to the dedication and effort of hundreds of people across the Market and so I'd just like to say a big thank you. It's fantastic to see the results of so much work start to come together, so let's hope it's onwards and upwards...

ECF - Scope Increases

Mon, 06 Dec 2010 00:00:00 Z

Thanks to enhancements made earlier this year, Aviation Claims can now be handled by ECF in about a third of the time than on paper. This faster-paced claims handling is of major benefit to aviation clients.

Binders is an area where take up has been slower and a number of enhancements were needed to optimise the process. It was good, therefore, to see that Canadian Above Authority Claims can now be handled by ECF as a result.

This continuous improvement should see the proportion of claims handled on ECF steadily increase. Next step? The final frontier…tackling co-lead binders.

Same Day Service, Please

Mon, 29 Nov 2010 09:31:00 Z

The cost benefit of any new project will always be identified first (as part of good project governance). But on many occasions not all of the benefits are identified at this stage. Instead, they often manifest themselves after the project has been delivered.

The Endorsement Pilot is no different. I’ve talked before about the advantages for carriers but now (despite it being very early days) we are also starting to see the benefit for clients.

As part of the pilot, brokers issue an endorsement to the market and all agreement parties should respond to it within 24 hours. This means the broker is able to send evidence of cover to the client within 24-hours or same day in many cases.

This marks a transformation in client service. The same endorsement in a “paper world” might take a week to be issued to the client. As markets across the globe seek to differentiate themselves, this 'same-day service' is yet another arrow in London’s quiver. As you can tell, benefits arising from change projects are particular hobby-horse of mine. As the months go by, I am sure other hidden benefits will start to emerge. I’ll keep you posted!

Promoting Lloyd's service companies and coverholders in the Midlands

Tue, 23 Nov 2010 13:25:00 Z

When I was based in Sydney, one of our Australian coverholders (who bizarrely was a fanatical Birmingham City supporter) regularly took great delight in contacting me to discuss the fortunes of our respective football clubs. He particularly relished these chats when Birmingham celebrated a victory and my team, West Ham, had endured yet another disappointing result.

I, of course, reciprocated at every opportunity whenever the Hammers enjoyed a rare win at the expense of the Blues. Today, with Birmingham third from bottom and West Ham propping up the entire Premier League, suffice it to say that the correspondence between me and the coverholder has dried up … at least for the time being!

Travelling up to Birmingham a few weeks ago (and casting my football prejudices aside) I contemplated whether Lloyd's is indeed at the top of the Champions League of insurance carriers in the Midlands or languishing at the bottom? Is the Lloyd's platform the team of choice amongst regional brokers in Birmingham and other towns and cities in the Midlands?

After meeting with a number of Birmingham-based prospective coverholders and existing service companies it seems to me that these alternative and complementary models help to place our underwriters in a strong strategic position to do more business not only in the Midlands but throughout the UK. Service companies and coverholders co-exist side by side and by providing different access routes into Lloyd's, offer the regional broker - and ultimately the customer - more product choice than that offered by the local companies market.

With tailor-made products on offer, service companies and coverholders provide Lloyd's with a great opportunity to write more SME business and move out of the Champions League and into the Premier League where Lloyd's can become first choice for local markets outside London.

The Ricoh Arena (apart from being home to another currently unsuccessful Midlands football team) recently hosted the Insurance Age Broker Expo. Now running for six years, the 2010 event saw a record number of exhibitors and delegates.

My colleague Alan Taylor, Manager, Broker Relationship Management, attended and mingled with a wide range of exhibitors and delegates. In all there were eight underwriting exhibitors promoting their Lloyd’s facilities and a number of Lloyd’s Registered Brokers were also present.

A new innovation for the 2010 Expo were broker clinics. Four ran throughout the day on a one-to-one basis and appointments had been pre-booked (and were heavily subscribed). This was also true of the workshops – fully booked, running morning and afternoon and covering a wide range of topics from brand to selling.

It is important that Lloyd's underwriters and brokers are visible at these regional events and such a presence would assist in convincing regional brokers that we're serious about providing solutions for their clients' insurance needs.

Lloyd's is a renowned academy of talent in the insurance world and local coverholders and service companies help our underwriters to show off their skills. However, it is important for underwriters to attend insurance fixtures outside of London and play a few away-matches during the (renewals) season.

Science of Risk

Wed, 17 Nov 2010 16:48:00 Z

To this end, along with partners, we created the Lighthill Risk Network which has promoted debate on topics ranging from nanotechnology to cyber crime.

This year Lloyd's has launched its first annual competition "the Science of Risk" which offers cash prizes for research in the fields of: Climate Change, Natural Hazards, Biological risk, Technological risk and Behavioural risk.

Each of these topics have been covered by the Lloyd's 360 project and Lloyd's Emerging Risks team in one shape of form; but we were sure there was much more to discover - over 85 competition entries later we were proved right!

The entries were of a high standard and we had a tough job narrowing them down to 25 shortlisted papers (five per risk category). These are now being scrutinised by judges picked from the insurance industry and also leading figures in academia.

The winners will be announced on 24 November at a conference at Lloyd's. The winners will present their work to an audience of academics and key industry stakeholders including rating agencies, underwriters, brokers and regulators. All shortlisted candidates will be able to showcase their work over a poster session in the (deliberately long!) coffee break. Then the winners will go on for a celebration dinner in the Adam Room hosted by Lloyd's CEO Dr Richard Ward.

I hope the Prize will encourage a broader range of academics to realise that the insurance industry is a key consumer of their research. A global market place like Lloyd's is interested in safety technology, materials science, the natural world, risk taking behaviour, financial mathematics, political risk, emerging digital technologies… the list just goes on and on.

We'll publish the shortlisted entries on lloyds.com after November 24th...watch this space!

Washing up after Badens Oktober risk fest

Tue, 16 Nov 2010 16:28:00 Z

Baden-Baden is probably still clearing up after hosting the insurance and reinsurance industry’s very own Oktober riskfest. All week the lobbies and salons of the grand hotels lining the banks of the River Oos were stuffed with suited and booted executives from eight in the morning until the first cocktail parties start at 6pm. Then the action switches to the city’s many posh restaurants and later, for the diehards, the late night, early morning bars of the casino and Leo’s bar.

The annual convention, during which the ground is laid for the 1/1 renewals, allows the European markets to take stock and recalibrate. It is an animated scene compared to the Rendez-vous in September. In Monte Carlo it is noticeable that people are in casual outfits; they sit back in their chairs to chat amiably about how market conditions might pan out. In Baden everyone is wearing a dark suit and tie; they lean forward during their meetings at numbered tables, listening attentively.

In some years at Baden – when there has been an active hurricane season, for example – the convention can generate a lot of heat especially around the potential for a pricing correction. But in the absence of a major event, this year’s Baden meeting was a calmer affair with more nuanced discussions about where rating is headed and how reinsurance buyers can optimise their programmes.

The broad brush picture seems to be that reinsurance sellers have abundant capacity and though willing to be flexible enough to keep business, they have drawn a line in the sand. Reinsurance buyers, for their part, are quietly pleased to see prices still going sideways despite a series of costly – if not apocalyptic – cat events that included windstorm Xynthia and the Chile ‘quake.

There are pockets of problems for both sides obviously, including motor business (they still can’t find the handbrake) and credit (still in the red).

Uncertainty continues to surround Solvency II: some people believe it will be the saviour of a slow growing reinsurance market and force insurers to buy more cover. Others fear it will create consolidation among primary companies and strangle competition. A few genuinely believe that the European Commission will never get it past the post. But that’s another story and one that will still be running next October in Baden-Baden.

Space weather is not just science fiction

Sat, 06 Nov 2010 10:00:00 Z

My team has just launched our latest report on “Space Weather: Its impact on Earth and implications for business”. Working on this report has made me realise just how vulnerable our planet is. The Sun moves through 11 year solar cycles when its activity levels rise and fall, and while it is our life source providing us with energy but it can equally become a threat to our way of life. 2012 is often adopted by apocalyptic theorists as the date when our world ends and while I don’t think that’s the case this date denotes the start of the next solar maximum

If anyone has been lucky enough to visit one of the Scandinavian counties to witness the Northern Lights, you will have seen first hand the effect of this solar activity on our Earth. The spectacular light displays are the result of magnetic storms in our atmosphere caused by enormous explosions on the surface of the sun which throws solar plasma into space and towards our planet. At peak times in the solar cycle, there are simply more of these solar events.

However, the sun has been experiencing these solar cycles for centuries and the Earth has always been bombarded by space weather. So what is everyone worrying about?

Well, since the last solar maximum we have become more reliant on the very technologies that are most at risk from space weather. Nearly everything we do relies on electricity. Most companies now rely on computers to communicate with each other and their customers; our food requires refrigeration; petrol stations need electricity to pump the fuel to the surface; trains need overhead power lines and the London Stock Exchange would quickly grind to a halt if the power went off. However, power grids can be easily taken down by surges of electrical current induced by the same storms that cause the Northern Lights. And unlike localised power cuts, space weather can cause disruption simultaneously across whole countries or continents.

The largest storm ever witnessed was in 1859 and is known as the Carrington Event. At the time, it took out the entire US Telegraph system. If a similar sized event occurred during the next solar maximum, it would cause 130 million people to lose power in the US! There is no guarantee when such an event will happen again, but this does not mean we should dismiss this risk as nothing but science fiction.

Making life easier for our coverholders

Thu, 28 Oct 2010 17:03:00 +0100

Allowing brokers and agents to underwrite insurance on behalf of syndicates has been a very effective and long standing model at Lloyd’s. These ‘coverholders’ (of which there are around 2,600 globally) bring in around 30% of Lloyd’s premium and were highlighted as strategically critical to the market in the strategic review last year.

As mentioned on Carl Phillips' blog, there is a programme of activity underway this year across the market to enhance and promote the coverholder channel for the future. This week sees the deliverable of one of the most important initiatives and an important milestone in the history of coverholders at Lloyd’s. On Friday 29th October we will launch a standard ‘bordereau’ (set of data) for coverholders to use to report premium, tax and regulatory information to Lloyd’s.

For those close to coverholders you will know we already have an exposure management standard for property risk information live with ACORD (the insurance standard's body) which has been developed with Paul Nunn’s team, ACORD and the market. This new standard will sit alongside the risk standard and be used by coverholders to report to London.

This may sound like a small and rather bureaucratic step but it is in fact a giant leap towards the plan to use technology in the coverholder distribution channel. The agreement by the market to a standard set of reporting data for premiums allows brokers, managing agents and crucially coverholders to better plan use of technology that allows data to move between all parties electronically.

Sarah Thacker has led this work at Lloyd’s so a huge thanks to her for pushing forward on what, at times, seemed like an impossible challenge!

Find out more about the new standards

Face-to-Face with Electronic Support... an advantage?

Fri, 15 Oct 2010 00:00:00 +0100

A number of studies published recently compare and contrast the contribution of the social aspects of our business with electronic communications and how these might differ between, say, London and Bermuda. What caught my eye was the conclusion of these studies suggested that selective use of face-to-face and electronic interaction can reduce inefficiencies and improve decision quality.

Successful businesses survive and prosper by adapting to change. Charles Darwin’s quote “It is not the strongest of the species, nor the most intelligent, it is the one that is the most adaptable to change” is as true today in a business environment as it was in formulating the theories of evolution 150 years ago.

It would appear that the London Market has the greater opportunity to adapt to and to create competitive advantage from the selective use of face-to-face and electronic interaction than its Atlantic cousin.

I have written before on the Gracechurch Study that found brokers remain solid on the need to have close physical proximity to the people they deal with - this is something much more difficult for the Bermudian Market to adopt than it is for the London Market to adapt to electronic support using ACORD messaging.

Evidence of this is the consensus of the London Brokers, London companies and Lloyd’s carriers to start the marine endorsements pilot. From 1st October 2010 all direct marine endorsements from the participating brokers (representing over 80% of the total premium volume) will have the face-to-face trade supported by ACORD electronic messaging reinforcing another of the conclusions of the studies that the box is used to ratify an underwriting decision.

Rediscovering Sussex ... and the Lloyd's brand

Mon, 11 Oct 2010 09:00:00 +0100

As I journeyed through some very picturesque parts of West Sussex to visit two potential new coverholders it occurred to me that my "reverse-commute" seemed a little out of step with the routine for so many in our market who undertake the daily commute into town.

Every day brokers and underwriters from Sussex commute into London Victoria en route to the City. As they depart from places like East Grinstead and Horsham, I wonder how many of these insurance industry commuters are aware that some of our business partners are very close to home and, in some cases, are located almost on their doorsteps. Indeed many of these intermediaries are situated in the high streets, business parks and even in shopping centres right in the heart of their local commuter communities.

After my meetings in East Grinstead and Horsham my confidence in these types of intermediaries was again re-affirmed. These coverholders are potentially a great source of business, particularly those specialising in scheme/affinity/association-type risks.

However, the lack of awareness of Lloyd's, amongst intermediaries and their clients appears to be a real issue and this isn't the first time that I have encountered this problem. The Lloyd's brand is highly prized and valued and in many ways it is our single most important asset, so it is disappointing to learn that it isn't always used to its fullest extent.

In a nutshell it seems that some clients are simply unaware that they were insured with Lloyd's underwriters! Lloyd's brand is something to be proud of and there are easy guidelines which show you how to use it in a way that compliments managing agents' brand assets. The brand is so important to Lloyd's and it should be equally important to our clients and the intermediaries selling the products to them.

It seems that to our colonial cousins in USA, Australia and Canada the Lloyd's brand is held in the highest esteem and intermediaries are very keen to make their clients aware that they have purchased a Lloyd's policy.

Much closer to home, in the home counties of South East England, it appears that at times the brand (and ultimately the security of the policy) hardly gets a mention. I'd never really thought that much about the brand not being used (usually it is misuse that is more troubling) but there's plenty of time to think about such matters when your car is stuck behind a tractor.

As the trains from these commuter towns speed (or trundle) into town, it is worth reflecting not only on the potential business partners that we leave behind us each day but also on the extent that the Lloyd's brand is utilised and understood outside the City of London.

Next stop - the Midlands.

Endorsements Pilot is Go! Benefits start to flow?

Wed, 06 Oct 2010 13:41:00 +0100

Friday proved to be a momentous day, certainly in the Market Operations team when the endorsements pilot went live, as we saw a flurry of live endorsements passing between brokers and underwriters using ACORD messages.

Are we seeing benefits already? Colin Smith of Mitsui Sumitomo Insurance Underwriting at Lloyd’s certainly thinks so. Mitsui were a notification party on a risk where the endorsement was received by the agreement parties at 15:20, agreed by the leader at 15:31, and received by the notification parties at 15:36. This allowed the Mitsui underwriter to review and action the endorsement by 15:50.

So what’s the significance? In the paper world a notification only endorsement would have taken months to be received and posted to the underwriter’s ledger through the underwriter signing message (USM).

Now it is received at about the same time that agreement is reached and could be posted to the underwriter’s ledger and aggregation systems the same day. This means an underwriter’s credit control process can be put into place immediately, improving cash flow and eradicating the “trapping” of small additional premiums. Additionally the underwriter can manage their exposures more effectively through the receipt of more timely information.

Natural climate variability

Tue, 05 Oct 2010 00:30:00 +0100

Climate change sceptics often point to anomalies in the patterns of climate change. For instance, Arctic sea ice in 2007 was at an all time low, but it has since recovered to some extent. Does this mean that climate change is being reversed or does not exist at all?

Certainly not. I attended a conference on climate change, risk, adaptation and resilience this week at which it was made clear how important natural variability in our climate is to the issue of climate change and it is this variability that can explain the above phenomenon.

Looking at the graph above, the mean temperature rises and falls each year with the hottest year on record being 1998. The fact that we have not had a year that hot since then does not mean we can discount climate change. It simply means that our climate is varied. To put it simply, the wiggles along this graph are natural and to be expected. Patterns in our climate could change every 70 years or perhaps be decadal shifts as with the Atlantic multi-decadal oscillation or even more frequent as with El Niño and its counterpart La Niña. These shifts will naturally change the extremes of our climate and should be factored into any models of our climate. However, if you plotted an average line across the graph above, it would show overall an average warming in our land surface temperatures. Similar graphs can be drawn for sea ice cover, sea levels, sea temperatures, glaciers, snow cover and climate humidity.

Similarly, sceptics often use the wide variations in possible scenarios provided by climate science as proof that the scientific community does not really understand climate change.
However, the conference made another interesting point, which was that science has to provide margins of error – not do so would not be science. Of course a 5 metre rise will make more of a difference than a 1 metre rise to someone who lives 4 metres above sea level, but the important point is that climate science shows that sea levels are rising per se and that action should be taken.

In terms of gaining investment for adaptation measures, these variations present a further problem. As Professor Pavel Kabat explained at the conference, climate models provide high accuracy but low precision predictions – i.e. mean temperatures will rise by between 1.4 and 5.8 degrees by the end of the century. However, an investor deciding whether or not to partner with a company that is researching ways to maintain crop yields during higher average temperatures is looking for much more precise information. Science simply can not deliver this. Businesses therefore need to work with science and consider adaptation strategies that allow a degree of flexibility to reflect the uncertainty in models.

Billions potentially facing water scarcity

Thu, 30 Sep 2010 14:46:00 +0100

According to a new US study, water scarcity may pose an even bigger and more immediate threat to people and businesses than previously assumed. Writing in the journal, Nature, the study authors report that nearly 80% of the world's population lives in areas with an "insecure" supply of fresh water due to scarcity and pollution.

The study also suggests that the problem is only likely to get worse in the coming decades as water supplies come under increasing stress due to climate change and increasing population growth.

The researchers also illustrate that while developed countries have taken an infrastructure-led approach to water scarcity, for instance building reservoirs and dams, this strategy has had a detrimental impact on local biodiversity and they advocate an integrated approach combining infrastructure with natural options, such as safeguarding watersheds and wetlands.

Lloyd’s identified water scarcity as an increasingly important issue for business in our 360 Risk Insight report published in April this year. Like the US study, our report highlights the global scale of water scarcity and the need for immediate action given population growth trends and the increasingly severe impacts of climate change. It similarly calls for integrated approaches to water management, but also highlights the key role of businesses in helping tackle this issue.

As well as managing a range of water risks across their own operations and supply chains, companies, particularly those in water-stressed areas, have a key role in raising awareness of this issue and working with local governments and communities to develop plans to tackle it.

Download Lloyd's 360 Risk Insight Global Water Scarcity Report

BBC News: Water map shows billions at risk of water 'insecurity'

Guardian: Human impact on world's rivers 'threatens water security of 5 billion'

The Market of First Choice?

Mon, 27 Sep 2010 17:41:00 +0100

The Gracechurch London Market 2010 Study’s main headline was that Brokers were “very positive” about doing business at Lloyd’s over the next three years but digging down into the details some interesting trends are emerging.

An emerging market trend that caught my eye was the prediction that the percentage of risks placed electronically would almost double by 2012. Brokers anticipate more business being placed screen to screen over the next two years, maybe as much as 5% of the total. However brokers remain solid on the need to have close physical proximity with the people they deal with; face to face trading being one of the unique selling points of the London Market.

As we approach the formal launch of the Endorsements Pilot on 1 October 2010 that will see all endorsements for direct marine hull, cargo and liability sent electronically using electronic messaging to support the face to face trade it seems that this forecast may prove to be correct.

Lloyd’s is currently undertaking a piece of research using the iPad. This work proposes replacing the broker’s slip case with a device that enables documents used in the face to face negotiation to be stored and read electronically. Brokers have responded to this proposal with great enthusiasm.

The combination of a ‘sexy’ gadget to support the trade and ACORD messaging to evidence contract certainty could help maintain the uniqueness of the London Market and may well mean that 2011 is the year when electronic support for the face to face placing process comes of age.

Discovering Formby and Warrington

Thu, 23 Sep 2010 09:34:00 +0100

My challenge is to ensure that Lloyd's maintains the same standards (and also enjoys the same benefits!) in the UK as it does overseas, especially with regard to our relationships with the intermediaries that we rely upon for business. For instance with coverholders, there is a clear benefit to knowing them better and thus attracting more good business into Lloyd's. Well-managed coverholders are a great source of business revenue and supporting this community should foster the development of new opportunities.

A visit to two prospective new coverholders recently took me to Formby and Warrington. Clearly there is more to Formby than the lend of its name to the famous musical hall actor George Formby - who adopted it when he spotted a goods train heading in that direction! By the same token Warrington isn't just the place of the famous 1981 by-election that saw former Labour cabinet member Roy Jenkins narrowly defeated as the first Social Democratic fielded candidate. As a school boy I remember giggling at the media reference to him as 'Warrington Woy' taking a swipe at his rather obvious and famous speech impediment but my own rather more recent impediment, was equally concerning - where are Warrington and Formby?

Putting my limited 'South of Watford' knowledge to one side, I discovered Formby to be one of the more affluent towns in Merseyside with huge SME potential and Warrington also enjoying similar pockets of development and light-industry whilst also benefitting from being strategically positioned between Manchester and Liverpool.

The Lloyd's community in London remains at the heart of the London insurance market which in turn is at the centre of the global insurance industry. Yet with increasing reliance on the internet and online selling, isn't it also necessary to understand how insurance intermediaries operate in towns like Formby and Warrington? I believe that the answer to that is an unequivocal 'yes' because while it is important for Lloyd's to understand how to exploit electronic media to its fullest extent, we mustn't lose sight of the fact that insurance will always be a people business.

Managing agents with service company operations have long since recognised that to do business in regional UK it is important to be there. For managing agents who don’t have their own infrastructures around the UK, it is vital we ensure that relationships with intermediaries continue to be forged in places like Formby and Warrington if we are to compete for SME accounts.

And so my geographical naivety of the UK will continue to be tested with a trip to Sussex – mustn't forget my green wellies!

Monte Carlo and the paradise syndrome

Mon, 20 Sep 2010 12:41:00 +0100

In my experience there are two types of Monte Carlo Rendez-vous. There’s the type that coincides with a big loss event, such as 9/11 or Katrina, or a financial crisis like the fall of Lehman.

In those years, the atmosphere around the hotel lobbies and cocktail parties is charged by the possible implications of the cataclysm that just took place.

Then there is the other kind of Monte Carlo: the one where people are suffering from paradise syndrome. That’s where very wealthy people become anxious believing things are so good that something must come along soon and change it all.

For reinsurers it means they should be basking in the glow of good results but they’re actually fretting about what form the next cathartic event will take - and when it will happen.

The 2010 Rendez-vous falls into the latter category, with insurers, reinsurers and brokers engaged in a low level phoney war over pricing while they wait for the big event to decide it for them.

But it’s possible that a lot of people are looking around for the big market moving event when really it is already happening around them.

Lloyd’s CEO Richard Ward told me that he isn’t convinced that a big cat can change market sentiment. He said that the earthquakes in Chile and New Zealand had not registered highly on the market’s Richter Scale and nor had the Transocean/Deepwater accident moved the wider insurance market.

“The last time the US market turned was when the industry’s combined ratio was 113% - last year it was 101% so we have a long way to go yet,” he said.

Dr Ward is more concerned about other pressures on the market such as the continuing poor state of the economy, claims inflation and depressed investment returns. He said, “Pricing in this environment is very difficult and suggests a bleak outlook.”

Alterra CEO Marty Becker agrees that the investments markets pose a threat that is not getting sufficient airtime. He worries that falling investment yields will cause some companies to “stretch for yield”. He warned that reinsurers should remember they’re in the liability risk business – not the investment risk business.

Reinsurance capital and investor relations was a big talking point at the Rendez-vous, however. Specifically, people were discussing how much capital is being returned to shareholders and asking if it is a good thing. During the first six months of 2010, reinsurers repurchased $4.9bn in shares compared to $2.3bn for the whole of 2009.

Reinsurance broker Guy Carpenter based its press call on the subject with the head of global reinsurance markets, Chris Klein, saying that reinsurers should be looking for “value accretive” opportunities to deploy capital rather than sending it back to achieve return on equity targets.

Habib Kattan, head of ceded reinsurance at Lloyd’s company Kiln, told me he is worried by the pressure placed on reinsurers to buy back shares to enhance ROE: “What is wrong with excess capital for when the Big Event impacts the balance sheet and the debt markets are either illiquid or unwilling to lend?”

But David Brown CEO of Flagstone Re said that a conservative approach to share buybacks created shareholder value at no risk. He also believes the trend could be instrumental in causing the market correction that people are looking for. He believes returning capital directly addresses the supply/demand equation that drives pricing.

Clearly, it doesn’t take a big cat event to get the Rendez-vous worried – the absence of a big cat event will do just as well.

Surveying for a solution to water problems

Tue, 14 Sep 2010 15:54:00 +0100

The launch of the survey coincided with World Water Week and reflects a growing recognition in Government and the wider economy that securing future supplies of affordable, clean water in a climate-stressed world, is becoming an increasingly important issue.

This online survey will cover a wide range of water-related issues, including securing water resources, improving customer services, enhancing water regulations and incentivising water conservation and will inform a Water White Paper due to be published by Defra in summer next year.

The fact that the Government is keen to gauge the views of the public on this issue illustrates that securing future supplies of water is something that will affect us all. No longer is water scarcity seen solely as problem that affects developing countries in the more arid regions of the world. As climate change takes hold, water scarcity will increasingly become a concern for all countries not just developing ones, as shown by recent water scarcity problems in parts of Australia, Spain and California. And water is not just a public concern, businesses also needs to be aware of potential risks to operations created by water shortages.

The risks for business relating to water scarcity are examined in Lloyd’s recent 360 Risk Insight report, “Global water scarcity: risks and challenges for business” published earlier this year. The report highlights that all companies face water risks, either directly to their operations or indirectly through their supply chains. Some of the risks identified include operational, regulatory, reputational and geo-political risks.

We will wait to see what suggestions the public make on how to improve water supply in the UK, but this is certainly something businesses should be thinking about as well – both in terms of future implications to their operations and supply chains but also in terms of how they can work with Government and other organisations to raise awareness of this issue and look for solutions.

Defra future water policy and online survey

Statement of Intent

Thu, 09 Sep 2010 09:59:00 +0100

There is increasing evidence that climate change is leading to more extreme weather events and it is frequently the individuals and communities that are least able to cope with such events that are the most vulnerable. Many developing countries are particularly vulnerable to the increasingly severe and long-lasting impacts of climate change.

One of the main reasons for this vulnerability is the lack of loss reduction measures and risk management structures in place in developing countries. This is where insurance can play a fundamental role in helping protect people and communities in developing countries from the impacts of climate extremes. Equally it can also assist climate-stressed areas to recover more quickly when disasters inevitably strike in the future.

This week four insurance climate change initiatives, representing over 100 insurance companies, launched a statement calling on governments to support and enable the knowledge and expertise of the insurance industry to play a key role in risk management in developing countries.

The statement on adapting to climate change initiatives in developing countries was launched jointly at Lloyd’s by Climatewise, The Geneva Association, the Munich Climate Insurance Initiative and insurers in the United Nations Environment Programme’s Finance Initiative. Lloyd’s is an active member of three of these initiatives and we wholeheartedly support this statement.

The statement highlights how the insurance industry can support adaptation by applying our risk management expertise and by developing insurance solutions that meet the needs of local populations. However, to enable insurance to play an effective role we need government support to develop the necessary risk management frameworks and structures in developing countries.

Insurance has a fundamental role to play in helping businesses and communities recover from climate-related disasters. However, with government support, we can arguably play an even more important role in developing countries in encouraging people to develop appropriate and robust risk management solutions to address climate-related risks – and most importantly to develop adaptation measures to limit the potential impact of climate change.

Developing risk management and insurance solutions in developing countries is an area Lloyd’s is already focusing on and we published a paper on this topic at the end of 2009. As part of our support for this statement and the intent behind it, we will be continuing to push forward our work in this area.

See also:

Lloyd's ClimateWise activities

360 Risk Insight MicroInsurance Report

ClimateWise ( external site)

The Geneva Association

Munich Climate Insurance Initiative

United Nations Environment Programme's Finance Initiative

No surprises please…

Tue, 31 Aug 2010 15:06:00 +0100

The aftermath of an expensive hurricane is not a good time to find out that the basis risk wrapped up in the protection you’ve bought means zero recovery or painful shortfall.

Any (re)insurer who took a large hit from Ike and stumped up for $20bn ILW protection for the 2008 season will empathise with this – watching Ike industry loss estimates breach the $10bn mark and then fall short of the $20bn trigger must have been unpleasant to say the least.

Therefore, the announcement that Property Claim Services (“PCS”) industry loss estimates will now be available at County resolution through the Verisk Catastrophe Index will be of interest to market participants concerned about basis risk.

The full details can be found on the Verisk site, but in essence, the US State level PCS losses are split by County based on modelled representations of the hurricane footprint and the distribution of industry exposures across the State provided by catastrophe modeling firm AIR.

PCS loss estimates have long been the staple trigger for industry loss-linked risk transfer in both the reinsurance and capital market arenas. But cedants looking for industry loss-linked cover have had to swallow basis risk where their slice of state losses has not been well distributed within classes and states. If Verisk’s modelled disaggregated state losses prove an effective proxy for loss at the county level, there is potential there to dramatically reduce basis risk.

So, why County resolution? The trick, when thinking about basis risk, is to consider the size of the event relative to the scale of loss reporting. At the return period level at which industry loss-linked protection is typically sought, we’d expect hurricanes to be pretty big. However, even hurricanes at this level do not cause equal devastation across an entire state, and storm tracks certainly do not follow State lines. Even an exceptionally large storm such as Katrina – which cast hurricane-force winds 100 miles out from its centre (source: NOAA) – did not cause severe damage across all counties in those States worst affected.

Source: NASA Goddard
So the ‘one size fits all counties’ approach of a State-level index inevitably yields basis risk for hurricanes, and would yield an indigestible amount of basis risk if applied to a highly localized peril such as tornado.

There are of course, many other considerations beyond reporting resolution when assessing the reinsurance effectiveness of industry-loss linked cover: the effectiveness of the industry loss collation methodology, reliance on modeling techniques and tools such as industry exposure databases to split reported losses for custom triggers, counterparty credit risk and speed of payout to name but a few. These are, however, topics of conversation for another time.

The threat of pandemics is here to stay...

Thu, 26 Aug 2010 09:51:00 +0100

The WHO may have declared the official end to swine flu, but the risk of deadly disease has not gone away. This month, the UK Health Protection Agency reported 50 cases of the NDM-1 “superbug” in UK hospitals. The virus has now been reported in the US, Australia Sweden, and the Netherlands with the first case reported in Canada yesterday. A superbug is essentially a bacterium that carries several resistance genes making it difficult to treat with normal antibiotics. NDM-1 is a concern as it is resistant to the group of antibiotics known as carbapenema which tend to be used when more standard drugs have been tried and failed.

NDM -1 started in India and Pakistan and most of those who have shown symptoms of NDM-1 here in the UK had recently travelled to this region. More specifically, many of these people had gone to the area to seek cheaper medical care – often called medical tourism. Although, the growth in global travel and global trade brings benefits to both people and businesses – not least greater choice of service such as medical care - it also provides a useful launching platform for the spread of disease.

However, despite many sensationalist reports that bird flu and swine flu were going to be the next 1918 Spanish flu pandemic which killed around 25-40 million people, the reality is never quite as bad. Should this give us comfort? Without getting into the medical science (and I do not profess to be a medical expert), the only reason that we have been spared a truly deadly and global pandemic is the nature of the viruses we have seen.The reason that Spanish flu killed so many in a world of limited global travel was that it mutated into a far deadlier strain. Most people who caught swine flu only experienced mild flu symptoms so the death toll - though high - only reached around 18,000 people. A repeat of a viral strain similar to the 1918 flu in today’s globally interdependent world would be truly deadly. Globalisation and the risks to business was the topic of a 360 Risk Insight report that my team produced last month, which amongst other risks, also discussed the ease at which disease can now spread across borders. A few weeks later, NDM-1 has given us all a wake-up call by showing the reality of this in action.

Food security risk will hit Africa hardest

Wed, 25 Aug 2010 16:52:00 +0100

A new food security index published by the risk analysis firm Maplecroft suggests that countries in sub-Saharan Africa will be hardest hit in terms of future food security.

The index evaluates the risks to the supply of basic food items across a number of criteria, including health and nutrition, cereal production and imports, conflict and government effectiveness. Afghanistan is ranked first and then African countries make up the rest of the top ten and account for 36 of the 50 nations classified as most at risk.

On average basic staples such as maize, rice and wheat account for 20 percent of the food consumed in Sub-Saharan Africa. With 85% of wheat consumed in the region imported, higher global food prices have led to higher local food prices and increasing supply problems.

Poor infrastructure, widespread poverty and frequent extreme weather events render Sub-Saharan Africa particularly susceptible to food insecurity. Conflict in countries such as Congo is also a key factor in ongoing food insecurity.

As extreme weather events in Africa are likely to become more frequent and of higher intensity due to ongoing climate change, this situation may only get worse. It would appear that African countries are likely to continue to dominate the food security risk index for some time and businesses with operations and supply chains in Africa should plan for ongoing uncertainty around food and all its related problems, not least geo-political risks.

Relevant Links

360 Risk Insight Globalisation Report

Tackling Global food Security

Maplecroft Food Security Index

From here to eternity... at least that's how it feels sometimes!

Mon, 23 Aug 2010 15:45:00 +0100

Changing the way a 320-year-old market works with almost two hundred organisations involved isn’t the easiest thing. With the LMG driving progress and all of the market associations supporting the initiative we’ve made absolutely stellar progress on the Exchange and we must remember that the first managing agents only started to connect in June last year.

Now we have 100% of managing agents, 80% of brokers by capacity and 13 IUA companies connected. This is no mean feat and the market should absolutely be proud of itself.

It’s difficult when times are tough to focus on investing in the future. So with Solvency II fast approaching and a range of other challenges it's great to see how far we've come. There is of course some scepticism still skulking around, largely because of previous initiatives but this is different (yes really!).

The Exchange does not seek to impose any way of working on anyone; it merely takes the common denominator in the market (the information) and enforces one standard. In a mature market, managing agents and brokers have a myriad of operating models and it is entirely down to each organisation how it wishes to implement and what technology it wishes to employ.

Keeping it simple is the absolute key. In spite of a few scurrilous rumours there are no hidden tactics beyond that; the Exchange has no plans to suddenly morph into a complex trading platform or back office system. It's also not meant to replace the face to face trading that makes Lloyd's so special, it just aims to support it and make it easier for information to flow into systems.

The set up of the Cross Market governance is well underway with a new company established owned jointly by the LMA, LIIBA, the IUA and Lloyd’s. Immediate focus is on the endorsement pilot and we are currently testing with the market. This is challenging as it is very much trying out how endorsements will be handled by each organisation in the course of day to day business, not technical testing that can be more accurately planned.

This means in many ways it's different for everyone and coupled with the fact that this is the first time we are trying this out, it makes it even harder. I’m sure the pilot won’t be perfect but lessons will be learned. Once we’re through this phase and have assessed how it went, it should become easier as we roll out to other areas and timescales for future phases are under discussion.

I am not going to pretend there won’t be more challenges ahead, of course there will. We saw a similar approach when we implemented Electronic Claims and just like claims I’m also sure it won’t be to everyone's liking. However, we have to remember why we are doing this; it's to ensure that we make it as easy as possible for brokers to bring business into this market, and that our customers are offered a first class service that competes in an increasingly global marketplace.

It's difficult to paint a black and white picture of savings as that will depend on each organisation's individual set up. But benefits it will bring, just as we’ve seen faster settlement to clients through electronic claims. The next stage will be challenging as it's used for real, but watch this space...we will get there.

Are we facing a food crisis?

Mon, 09 Aug 2010 13:30:00 +0100

Russia’s recent ban on grain exports has prompted fears among some that we may be facing a food crisis similar to that of 2007-8.

Wheat prices soared to a 23-month high last week as Russia announced a temporary ban on grain exports to protect supplies for domestic consumers. The most severe droughts in Russia in the last 50 years combined with the ensuing wildfires that are still burning now have devastated Russian crops and significantly reduced stocks.

Dry weather in other grain producing countries and regions, such as the Ukraine, Kazakhstan and the European Union, and heavy rainfall in Canada and Pakistan have impacted on global grain supplies and resulted in a 50% rise in wheat prices since late June. There are growing concerns that this rise will lead to a worldwide increase in the price of other crops and flour-related products, such as bread.

However, we are probably not facing a crisis of the proportion of 2007-8 yet. The crisis in those years saw the prices of crops, such as rice, wheat and corn, reach record highs and food shortages led to riots in hard-hit parts of Africa and Asia. At present there are large global stockpiles of grains following a couple of bumper harvests. Furthermore lower energy prices mean there is less demand for biofuels, which consume large amounts of crops, such as corn - a significant factor in the 2007-8 food crisis.

What we are seeing with both the current situation with wheat prices and the 2007-8 crisis is evidence of increasing global food insecurity. Lloyd’s recent 360 Risk Insight report, Globalisation and the risks for business, highlighted the fact that increasing incomes and continuing population growth will mean that global annual food demand will increase for at least another 40 years. In addition to increasing demand, factors such as climate change, water scarcity and rising energy prices are likely to further exacerbate global food insecurity.

Businesses must plan and prepare for an increasingly uncertain future in terms of food security – that applies both to businesses directly impacted, such as the agricultural sector and food and beverages industries, but also those less directly involved, which will be affected through their supply chains and operations located in severely food-distressed areas.

Whether the current rise in wheat prices will result in a full-blown food crisis will depend on how the weather affects global crop production in the next few months and on the response of national governments to rising grain prices. Unfortunately neither the weather nor the response of national governments, as shown with Russia, can be confidently predicted.

2010: A Game of Two Halves

Tue, 03 Aug 2010 17:08:00 +0100

The first half of 2010 has kicked up insured natural catastrophe losses totalling US$22bn, more than double the first half average since 2000 and even higher when compared to 2008, when the previous record for half losses was set.

These first 6 months this year have seen exceptional large number of cats, 440 (four-four-zero) events to be exact, with overall economic losses totalling US$70bn, according to Munich Re’s recent press release. Morgan Stanley’s Fat Tail Friday report (30 June) provides a graphic charting these first half global cat losses by Insured Loss:

The most significant first half event affecting the insurance industry is the Chile earthquake that occurred off the coast of the Maule Region on February 27, 2010. It rated a magnitude 8.8 on the moment magnitude scale, lasting 90 seconds.

While releasing 500 times the energy of the Haiti earthquake tragedy, the Chilean earthquake claimed only ~0.5% of the casualties (500 vs 220,000) largely thanks to good seismic building code standards. Munich Re estimates the economic loss to be US$30bn with insured loss of US$8bn (Swiss Re’s estimates US$4 to 7bn). The Insurance Insider (July edition) highlights the uncertainty around the eventual ultimate claims from the Chile earthquake, citing underwriter views that the industry loss could eventually reach $15bn.

In a recent press release, Lloyd’s announced current estimates for net claims before tax in the order of US$1.4billion to the devastating Chilean earthquake. Lloyd’s CEO Richard Ward points out “These figures are our estimates of the market’s total exposure. The claims relating to the Chilean Earthquake will evolve for some time.’

Notable atmospheric events include severe flooding (Madeira, several US states, central Europe and China), and of course Winter Storm Xynthia in Europe. And with the 2010 hurricane season only just kicked off, the second half of 2010 will be challenging year for the insurance industry.

As for England and their attempt to win the World Cup, I blame it on two catastrophes - a lack of home grown talent and the wrong formation

…I make that four-four-two.

Climate change with a twist

Mon, 02 Aug 2010 16:50:00 +0100

At the start of this month I attended the second assembly for CREW – the Community Resilience to Extreme Weather project. CREW comes under the broad banner of climate change initiatives but as I discovered throughout the course of the day, the project’s angle of approach is somewhat unique: climate change, but through a new lens.

In the (re)insurance industry, climate change has been drawing our attention to the Atlantic basin frequency of late. However, here in the UK, we would be remiss as a sector to ignore what is happening closer to home. There are questions around the frequency and severity of extreme events in the UK that need to be both asked and answered, and the aim of the EPSRC-funded CREW project is to do just that.

Scale and integration were two themes that particularly impressed themselves upon me during the assembly. CREW aims to examine and tackle the impact of climate change at a local level – hence the ‘C’ for community – a departure from the larger scale investigations we’re used to in this area. The targeted output of the project is a set of tools to enable communities to adapt to climate change – the approach is one of vertical integration, covering quantification of the impact all the way through to cost-benefit analysis of options for mitigation. In short, the CREW team is building a package to support climate change-related decision-making.

So what is the ‘so what?’ for (re)insurance? With an arsenal of pricing and risk management tools already at the industry’s disposal, where might the CREW tools fit in?

Well, the climate change scenario modelling is certainly exciting – the ability to project risk forwards beyond the existing baseline and to consider what the industry may be faced with in 10, 20 or 50 years time in the UK. This information would no doubt be valuable for any medium to long-term planning be it growth, investment management or rate adequacy.

The results of the team’s investigations so far have raised red flags for increased weather risk. In addition, one interesting “all-clear” has also been thrown out by the analyses: increased tidal flood risk in South-East London. The full details can be found here but as a summary, the team concluded that we are unlikely to see a meaningful increase in flood depths as a result of sea-level rise. (Don’t throw the sandbags away just yet, however. The all-clear was specifically for increased tidal flooding only, and there are several other drivers of flood risk in South-East London).

Although the principal users of the toolkit seem likely to be those in the public sector involved in local planning, widespread use of the end product could have significant implications for the (re)insurance sector. If the tools are a success, one possible outcome could be increased “climate-change proofing” of buildings and infrastructure. And this would change the vulnerability of exposures subject to insurable perils in the UK.

But I am getting ahead of myself, and the project, here.

At the July meeting - fifteen months on from the first general assembly - it was clear that the team was several steps closer to delivering the toolkit. But there are many hurdles to overcome before the project is completed. Coordinating research across multi-disciplinary and geographically dispersed teams is no mean feat, and keeping the work and final output relevant to the broad range of end-users (households, SMEs, planners) is an enormous challenge.

I look forward to the next update...

It never rains but it pours

Wed, 28 Jul 2010 09:15:00 +0100

Working with CCRM, and analysing detailed daily rainfall data from the UK Met Office archives, Lloyd’s has looked at the changing patterns of extreme rainfall events in London. Comparing two 46 year periods, pre and post 1960, for one of the most complete meteorological station data set has shown a significant increase in number of extreme (>25mm in a day) rainfall events, as well as highlighting some interesting shifts on a monthly and seasonal basis.

Figure: Number of days exceeding 25mm daily rainfall threshold

Met stations going down the drain.

One worrying issue the report highlights is the closure of meteorological stations across the country will increasingly make regional analysis of weather trends harder in a future that will need big decisions and clear thinking to address climate change challenges.

Download report

Record Global Temperatures...

Mon, 19 Jul 2010 10:12:00 +0100

NOAA today released figures confirming what the overworked barbeques and increased sales in sunblock have been telling us for the past month – that this June has officially had the warmest global land surface temperatures since records began in 1880. In fact, the statistics show that the global June land surface temperature for 2010 had risen 1.93°F (1.07°C) above the 20th century average of 55.9 °F (13.3°C).

Whilst the balmy summer days this entails may brighten up the summer for many, the UK Government has been keen to remind us that these rising temperatures naturally have wider implications. On the 14th July, the Department of Energy and Climate Climate Change (DECC) launched a Google Earth Map to demonstrates the potential impact of temperatures continuing their current trend and increasing by 4°C.

The effects on rising sea levels, water scarcity and crops that are conveyed through the application in pictures, videos and scientific explanations, are pretty effective in producing the desired reaction – a realisation that the year-to-date temperatures being the second warmest on record may not all be ice-lollies and sun hats. And it’s not just the land that is heating up.

The worldwide ocean surface temperature was 0.97°F (0.54°C) above the 20th century average of 61.5°F (16.4°C) for June, which according to the NOAA is the fourth warmest on record. Given that this was most pronounced in the Atlantic Ocean, the devastating effects of rising temperatures may be experienced by some sooner, rather than later. High sea-surface temperatures are a key factor in determining the activity of the Atlantic Hurricane season.

To read about record number of storms that are forecast for this season, read recent blogs here and here. However, it is important to bear in mind that these statistics are based on average temperatures across the globe, and as NOAA's map demonstrates below, there remain areas of the world that are not heating up:

Source: http://www.noaanews.noaa.gov/stories2010/images/map-blended-mntp-201006.gif

This serves as a reminder to why we should talk about Climate Change, rather than Global Warming.

Hurricane forecasting: No longer a Gray area

Tue, 13 Jul 2010 14:27:00 +0100

It wasn’t so many years ago that pioneering Dr Bill Gray of Colorado State University had a monopoly when it came to capturing underwriters’ attention as he announced his forecast for hurricane activity in the upcoming Atlantic season (June – November).

Fast forward to today and things have changed considerably. Dr Gray has passed on the baton to Phil Klotzbach (who continues to refine theCSU approach), while a host of other organisations have entered the fray with their own techniques. As is often the way, competition drives innovation, both in forecasting methods (typically statistically-based but increasingly dynamic computational models, or a blend) but also in measures of forecasting “skill” – as each team attempts to demonstrate more reliable forecasts than the others.

A relative “new-kid-on-the-block” is Matt Huddleston at the UK Met Office who is throwing the phenomenal computing power of their GloSea model at the problem (click here for good explanation of what they do and why it has such promise from Dr Jeff Masters at Weather Underground). If the approach is promising, the 2010 forecast is horrible – calling for 20 named tropical storms (70% chance of 13 – 27 storms) and an ACE Index (Accumulated Cyclone Energy) of 204, both measures around double the climatological averages.

NB: While it is nice to have some organisations like the Met Office that make me proud to be British, I kinda hope they’re wrong!

Trouble on oily water

Fri, 09 Jul 2010 11:51:00 +0100

We are all in new territory. US government officials reckon that oil has been gushing at a rate of between 1.47 and 2.52 million gallons per day since April 20. At that rate, the disaster dwarves the Exxon Valdez disaster of 1989, when 11 million gallons were spilled from the stricken tanker.

More worrying, we don’t know how a hurricane will add to the spill’s loss potential – or vice versa. Experts at the Insurance Information Institute are worried that if a major storm hits the northern Gulf of Mexico and makes landfall the oil could travel further.

If oil enters the loop current and the storm conditions are right, it could even be pushed up into the Florida Keys and beyond onto the US Atlantic Coast.

These concerns are against the background of recent forecasts calling for greatly increased hurricane activity this year, feeding fears that the spill impacted Gulf coast could be in for a major landfalling windstorm.

What might happen when a windstorm passes over the Deepwater Horizon spill? Here’s a range of possible scenarios from III’s analysis, some predicated on what happened after the (relatively minor) Ixtoc blow-out of June 1979 when Hurricane Henri passed just North of the main portion of that spill:

• A NOAA/AOML report on the Ixtoc spill found that the winds did not blow long enough or strongly enough to control the direction of the oil flow.
• However, the combination of swells from Hurricane Henri and wind driven waves from a non-tropical low pressure system scoured beaches of over 90% of their oil.
• Ixtoc blowout experience showed that if a sandy beach is already fouled by oil, a hurricane can help clean up the mess. However, along shores with marshlands, the majority of oil will probably remain stuck.
• Shores that are already fouled by oil may benefit from a hurricane, but the oil cleaned off those shores then becomes someone else’s problem.
• A hurricane moving through the Gulf of Mexico spill will very likely result in much higher damage to the coast, spreading the oil over a larger region and bringing oil to shore, even if diluted.
• Oil moving south due to a hurricane’s winds may get trapped in the 250-mile wide loop current eddy, resulting in broad spinning oil slick stuck in Gulf of Mexico for days or weeks after a hurricane, leading to a warming effect on the Gulf waters.
• Loop current eddies often act as high-octane fuel for hurricanes. Warming of the eddy by oil pulled into it by a passing hurricane could lead to explosive intensification of the next hurricane that passes over the eddy.
• Rapid intensification of Hurricanes Katrina and Rita were both aided by the passage of those storms over loop current eddies.

Other unknowns suggested by III include the potential impact on residential areas of an oil/dispersant mixture driven in by storm surge. Equally, winds from a hurricane often hurl ocean sea spray miles inland, causing major defoliation and tree damage far beyond where the storm surge penetrates.

The ball park figure for estimated industry insured losses is currently around $3.5 billion.

But looking at the III’s analysis of potential linked losses, the fact that the oil is still flowing strongly and the hurricanes have yet to arrive, the only certainty is that the situation will worsen for the environment, for the local economy… and for insurers.

Take a look at Hartwig's presentation here.

Water wars

Tue, 29 Jun 2010 16:18:00 +0100

This week five East African countries refused to back down on a deal to share Nile Waters that excludes the two biggest users, Egypt and Sudan.

For a decade now the countries in the Nile Basin have been involved in discussions (under the intergovernmental Nile Basin Initiative) on how the waters should be shared and protected to the benefit of all. A solution is becoming increasingly urgent due to changing climates, environmental pressures and rapidly increasing local populations.

Last month Eithopia, Kenya, Rwanda, Tanzania and Uganda signed an agreement on “equitable and reasonable” use of the Nile. Egypt and Sudan, whose arid climates in the north of Africa make the Nile their lifeblood, refused as it did not guarantee their ancient rights under treaties signed under British rule in 1929 and 1959, which granted the two states “full utilisation of the Nile Waters”.

The new agreement suggests each country’s share of the waters be based on a number of variables such as population, climate, contribution to river’s flow, current and future water use, and social and economic needs.

This potential tension around access to local water resources is an issue highlighted in our recent 360 Risk Insight report on water scarcity. The report, produced in co-operation with the WWF, reveals that securing future supplies of freshwater will become an increasingly important issue for business and society generally. This is especially true for communities and businesses living and operating in water-stressed river basins, such as the Nile, which are only likely to get worse as climate change takes hold and populations expand.

The report suggests that companies operating or with supply chains in areas of water scarcity, and particularly where there is competition and tensions over water access, should consider supply, operational and even reputational risks to their business. The report emphasises that businesses potentially exposed to such water risks should begin to manage these risks both at a local level by working with local communities and water users and at a river basin level by engaging with national governments and regional bodies, such as the Nile Basin Initiative.

To read the full 360 Risk Insight Report on water scarcity, please visit www.lloyds.com/360

Micro’s getting macro attention

Thu, 17 Jun 2010 09:39:00 +0100

If conference themes and new publications are a measure of growing interest in a sector, then microinsurance - the provision of insurance in developing countries - is definitely on the up.

The Global Microinsurance Summit is being held in Paris at the end of this month, and that is quickly followed by the 4th Asian Conference on Microinsurance in Ho Chi Minh, Vietnam, in July. This in turn is quickly followed by another conference in Asia - the Microinsurance Summit 2010 taking place in August in Singapore.

And this growing focus on microinsurance is not restricted to seminars and conferences, with the launch in February of the first publication in the UK dedicated to microinsurance, the aptly named ‘Microrisk’. Published quarterly, it covers the entire microinsurance sector and provides ideas for new ventures, as well as reports on existing projects.

There is no doubt that as existing markets mature, insurers are increasingly turning their attention to new opportunities and new markets of which microinsurance is certainly one.

Lloyd’s too has recognised the potential of the microinsurance market and we decided to explore this emerging sector in one of our recent 360 Risk Insight reports. Published in November last year, the report estimated the potential market for insurance in developing countries at some 1.5 to 3 billion policies. The challenge though, as laid out in our report – and the focus of many of the conferences mentioned above – will be to make profits in these high volume but low margin markets.

There are a range of challenges facing insurers from a basic lack of understanding of the concept of insurance in many of these cultures and communities through to practical considerations around distribution and logistics.

However, microfinance has shown that financial services products can be sold successfully, and profitably, in developing countries. Given time, there is no reason why microinsurance, should not be able to replicate this success.

And the fact that insurers, such as Munich Re and AIG, are taking up this challenge shows that while the pay-offs may not be immediate, the potential long term returns should make the initial hard work and investment worthwhile – a message that will undoubtedly come out loud and clear from the upcoming microinsurance conferences and publications.

Feelings running high in Madrid

Thu, 10 Jun 2010 09:31:00 +0100

In session after session, speakers outlined how difficult macro-economic conditions combined with increasing attention from regulators was going to put severe pressure on margins.

As if to ram home the point, just outside the Westin Palace conference venue, noisy demonstrations were taking place over the Spanish government’s planned austerity measures.

But regulation - and especially Solvency 2 - was at the top of the agenda. At the star studded CEO panel Jose Manuel Martinez, chairman of Spanish insurer Mapfre, said lawmakers should take into account the role of insurance in the economy before it burdens it with unnecessary and excessive capital requirements. “Without the industry economic development would not take place,” he said, “In my opinion we clearly have enough capital… there have been [just] two failures of insurers in the last 50 years… the only big company having big trouble was AIG.”

Stefan Lippe, chief executive of Swiss Re joined the chorus saying that if insurers and reinsurers have to hold more capital it will push up the price of nat cat protection. Lippe said that the insurance industry was not doing a good job of communicating such real issues to regulators and politicians. It needs to form a unified front: “If we can’t speak with one voice, how can we get the understanding to our regulators,” he said.

But tougher capital requirements are inevitable, according to Geoffrey Bell, whose firm Geoffrey Bell and Associates advises governments and central banks. He said everyone is going to have to pay. “One of the features of the new system for banks is the use of buffer capital in the form of a preference share type structure… I suspect this type of buffer capital will be a feature of your industry in a few years.”

Not everyone is enamoured of the advice dished out by banking experts. Patrick Liedtke, secretary general of the Geneva Association, believes that regulators looking to manage systemic risk in the financial system are barking up the wrong tree. He told me on the sidelines of the conference that the various bodies proposing a levy on financial institutions are only interested in maximising contributions to a fire fighting fund and are in thrall to the banking sector.

Like Lippe, Liedtke believes that insurers are being ignored in any debate. “If governments are serious about fire prevention in the global financial markets they should bring in the firefighters as well as the potential arsonists.”

Strong words indeed from the normally mild mannered Geneva Association.

2010 Atlantic Hurricane Season Forecast:The year of the “Perfect Storm”?

Fri, 04 Jun 2010 09:16:00 +0100

http://www.cpc.noaa.gov/products/expert_assessment/hurrsummary_2009.pdf

At the Insurance Day London Summit, CEO Richard Ward cautioned that the insurance industry may this year be facing a “perfect storm”, due to softening rates and low investment returns. Coupled with the number of Cats already stacked up in the first half of 2010, it is increasingly important to consider the potential impact of a hurricane season which, according to respected forecasters, may bring with it a high number of real-life, tangible, “perfect storms”.

Since the predictions made at the beginning of the year, forecasters have continued to increase their expectations for an above-average Atlantic hurricane season. Key forecasters cite a weakening El Niño event coupled with record eastern and central tropical Atlantic sea surface temperatures as driving factors.

El Niño events are characterised by a warming oceanic phase of the tropical eastern Pacific Ocean (the NOAA provides up-to-date monitoring and explanations of the El Niño and its global consequences for weather and climate). The latest publication from the WSI suggests that the El Niño has now vanished completely. Together with their prediction of Atlantic sea surface temperatures ‘even warmer than the freakishly active season of 2005’, the scene appears set for an eventful season.

To put this into perspective, the following forecasts have been made for 2010, set against a 60 year average and the relatively benign 2009 season:

	2010 Forecasts
Forecaster	Tropical Storms	Hurricanes	Major Hurricanes	Date of Forecast
Colorado State University	18	10	5	02/06/10
NOAA	14 to 23	8 to 14	3 to 7	27/05/2010
WSI Corporation	18	10	5	26/05/2010
Tropical Storm Risk	16.3 (± 4.1)	8.5 (± 2.8)	4 (± 1.7)	09/04/10
2009 Summary (source NOAA)	9	3	2	-
1950 - 2009 Average	10.4	6.1	2.7	09/04/10

GC ForeCat predicts that the Northeast region is the most vulnerable, with an anticipated mean number of landfalling tropical cyclones of 0.62, significantly above the 0.29 1951-2007 average. This is in comparison to the decrease in mean number of landfalls to 0.22 for the Southeast region and a below average 0.59 rate for the Gulf. The Florida coastline retains an above average forecast of 0.60.

Despite the Gulf’s lower expected landfall rate, the risk associated with any storm could be exacerbated by the oil spill resulting from the Deepwater Horizon rig explosion on 20th April. Dr. Jeff Masters considers the potential impact of an active hurricane season on the oil spill in his Wunderblog.

So, whilst Professor Saunders and Dr. Lea, writing for Tropical Storm Risk, predict a 77% probability that this season will bring activity in the top one third of years historically, it may be helpful to remember the words of William Arthur Ward,

“The pessimist complains about the wind, the optimist expects it to change, the realist adjusts the sails”

It's life Jim but not as we know it

Tue, 25 May 2010 10:54:00 +0100

Late last week Craig Ventner, founder of company Synthetic Genomics announced the stunning news that his research group have created life starting from basic ingredients. He sums it up perfectly when the new results were announced at a TED, where he said they had created "the first self replicating species who's parent is a computer".

He appears to be well aware of the potential controvesy around his research; in particular the need to distinguish artificial created life from its natural counterparts. To achieve this they have embedded a "code within the code" - taking the building blocks of DNA and using them to create a way of representing the full English alphabet including numbers and punctuation within the news species itself. This is much akin to the way zeros and ones represent language within computers. With this new alphabet they have "watermarked" the new life form - including a website that anyone the cracks the code can visit. They've included the names of key researchers within the code and also some quotes including "See things not as they are but as they might be."

Ventner explains that accuracy is vital in some DNA regions - just one mistake out of ten thousand base pairs led to faulty experiments. So clearly care is essential.

He noted that Synthetic Genomics were working with Novartis to make a flu vaccine. Apparently the new vaccine could be produced in as little as 24 hours compared to the weeks or months it usually takes. The recent Pandemic highlights how valuable this could be; he also wondered whether such agility might make a vaccine against AIDS and other such quickly adapting viruses a possibility. Biofuels (fuel from living sources) is another areas ripe for new techniques and again they are considering ways of using their groundbreaking technology in these fields.

All this highlights the speed of development in this field. The possibilities are truly staggering and extremely exciting - but care, responsible development, is definately called for. New life in the laboratory is one thing. Releasing this to the wider environment is another, surely requiring very stringent tests? Whether a full blown environmental disaster is insurable remains to be seen. Insurers should take note of the pace of development however - depite the Star Trek quote in the title of this blog, this is not science fiction, it is happening now.

This and other related issues are debated in the Emerging Risks Team report "Synthetic Biology: Influence The Debate", available from lloyds.com.

Future Processing in the London Market

Wed, 28 Apr 2010 15:37:00 +0100

You may remember that back in November of last year, I blogged about the Future of Central Services processing work that Market Operations had presented to the London Market Group. Since then, the LMG have appointed Tim Carroll, Underwriting Director at Canopius, as the Project Sponsor to provide direction and report to them on the project’s progress. Tim comes with a wealth of experience in both the Companies and Lloyd’s markets, so is ideally suited to spearhead a cross-market initiative.

To quickly recap, the Future of Central Services project will define an optimum processing model for the London market beyond the “Finish What We’ve Started” workstreams. Throughout 2010, various working groups will design and review new ways of processing business that uses modern technology and data standards (ACORD). One of the key goals of the project; to provide insurers with choice in the central services that they utilise, will be at the front of everybody’s minds when designing these processes.

The project team will be liaising significantly with the market to seek insurers’ views on whether the provision of services should be lightweight or heavyweight; in other words: to what extent should market infrastructure (e.g. document repositories) and business services (e.g. policy checking) be provided ‘on a one size fits all’ basis? Heavier provision of central services obviously runs contrary to enabling a choice of services and of service providers; therefore we expect the project to strike a balance between maintaining the economies of scale and efficiencies that we currently enjoy for subscription risks and enabling insurers to perform some processing in-house or with a third-party outsourcer. Additionally, we would be keen to hear the extent to which insurers would like to invest in internal infrastructure. If you would like to share your views on this particular topic, please do not hesitate to contact me. Alternatively, please contact the Project Manager, Simon.Collins@lloyds.com.

I will be updating my blogs with the progress of this project, and the others that Market Operations are involved with, throughout the year, so please check back regularly to be kept informed.

Are reinsurers sleepwalking through April renewals

Mon, 05 Apr 2010 10:35:00 +0100

Unprecedented cat losses in the first quarter of this year bode ill for the rest of the year. Reinsurers are facing a bill of US$16bn from nat cats that include the Chilean earthquake and the European windstorm Xynthia.

A report from Willis Re, “Calm Amid Calamity”, which tracks reinsurance rate movements across different markets and product classes, says the difficult first quarter is a bad start for reinsurers busy tying up their important April 1 renewals for three reasons.

First, because their largest losses are from smaller markets, where they are less able to generate significant premium volumes to accelerate post-loss payback.

Secondly, losses in the first three months of the year leave reinsurers exposed to the historically more active third and fourth quarters.

Thirdly, and adding to the potential for future market volatility, some forecasters are predicting a more-active-than-usual North Atlantic hurricane season.

There are other clouds on reinsurers’ horizon: evidence of reserving stress, with fourth quarter 2009 releases not as plentiful as in earlier quarters, and; investment portfolios carrying a lot of government debt at a time when many governments are under fiscal strain, Willis Re said.

Yet despite growing uncertainty and loss activity, Willis Re says reinsurers have yet to react in terms of pricing, conditions and capacity. The April 1, 2010 renewals showed only modest risk-adjusted reductions and hardening only in specific business with consistently poor results.

Could reinsurers, their senses dulled by overcapacity, really be sleepwalking into trouble? Or is it too early to call the market? I’m with Willis when they say that all this activity will stir reinsurers and that it that will stiffen their resolve on renewals later in the year.

Click here to read Willis's full report

It’s official – ECF is quicker

Tue, 30 Mar 2010 14:19:00 +0100

If you’re a regular reader of this blog you’ll know that market modernisation is a theme I return to again and again. A lot has been achieved but there is always more to do so it’s great to get some real evidence that all the effort the market has put in is yielding significant benefits.

The Electronic Claims File (ECF) Best Practice Group has recently concluded a ‘time and motion’ study on ECF claims. They wanted to find out what impact the introduction of ECF has had on the time taken to handle claims transactions.

The study compared the time taken to process claims on ECF with that for equivalent paper claims files and found that for the London market overall ECF claims take on average less than half the time of paper claims (47.3%).

Looking at the figures for Lloyd’s alone the average ECF claim takes just over a third of the time of an equivalent paper claim (36.5%), whilst claims handled by IUA companies take on average 60.5% of the time taken for transactions on the equivalent paper file within the company market.

If you’ll forgive the pun ‘claims’ as to the benefits of ECF have been around for a while – it’s great to have these finally backed up by some real figures!

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Another Step Closer…

Wed, 17 Mar 2010 14:33:00 Z

I spoke back in November 2009 on the ‘Finish What We’ve Started’ (FWWS) initiatives which aim to complete the work started with the development of the ECF and A&S systems and processes. You may recall the initiatives comprise a new version of ECF (ECF2) with improved usability and functionality, a new method for processing accounting transactions via ACORD messages (eAccounts) and, last but by no means least, a new IMR Security Model which improves the access rights that users have to documents held within the Insurer’s Market Repository.

The market has taken another step forward in market modernisation with the successful implementation of the IMR Security Model in December 2009 (with further enhancements to come at the end of March). As a result the market is already starting to see the benefits of these enhancements.

The Security Model enhancements have allowed certain types of claims and associated expert fees to come into the scope of the ECF and A&S systems and equally importantly have stopped the need for certain types of claims to have to revert back to paper processing. For example, contracts that had been processed electronically but then were subject to Mid Term Broker Changes or Mid Term Carrier Changes, may have had to revert back to paper to preserve the appropriate access rights to the documents for those contracts. However, the enhancements of the Access Control Lists that sit behind each document now allow these types of claims to continue to be handled electronically.

Improvements to the way that documents relating to confidential terms, or to claims that may be subject to conflicts of interest, has meant that brokers and carriers handling certain types of business (for example, aviation) have increased confidence that the IMR is the appropriate way for them to service the business. We have started to see the resultant increase in the volumes handled electronically.

Finally, the IMR Security Model enhancements have, for the first time, provided the ability for Third Parties to access the system. Experts such as lawyers and adjusters can now view documents, subject to permission, and fee collectors can now process fee bills that are linked to the claims they relate to.

The net result of all of this is that more types of claims can now be handled more effectively and efficiently which can only be good news for the London Market and our customers. I’ll keep you posted on the further developments of the FWWS programme.

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Let the shock absorbers do their job

Wed, 03 Mar 2010 16:39:00 Z

The Geneva Association has confirmed what most of us already knew: insurance is not like banking and it does not pose a systemic risk to the financial world. In a nutshell, insurers are more stable than banks because they are funded by upfront premiums, giving them strong operating cash flow. Insurance policies are long-term with controlled outflows, which aids stability: you won’t have “a run” on an insurer.

During the credit crunch, the Geneva Association observes, insurers maintained relatively steady capacity, business volumes and prices, unlike investment banks. Some insurers did get into bother but that was through their quasi-banking activities, namely derivatives trading on non-insurance balance sheets and their mismanagement of short-term funding from securities lending.

Recognising that, the industry association has put forward five recommendations to address those activities and further strengthen stability. As well as suggesting ways of strengthening risk management it suggests implementing a principle-based supervision framework that captures any non-insurance activitities, such as excessive derivative trading. It adds that it would agree to “macro-prudential monitoring with appropriate insurance representation”.

But Nikolaus von Bomhard, Munich Re CEO and chairman of the Geneva Association, adds something that will resonate with his peers in the industry. “In the public debate, the business model of insurance is not always sufficiently demarcated from the business models of other financial services providers, such as banks,” he said.

That’s why many believe that any reform of insurance regulation prompted by the financial crisis must be proportionate and fit for purpose. Insurers are the shock absorbers of the global economy and through their longterm investments they actually contribute to stability.

They have proved that and regulators should be careful not to undermine them with unnecessary rules that could even cause instability in the sector.

Hindsight’s a wonderful thing…

Mon, 01 Mar 2010 12:38:00 Z

…or is it?

The Emerging Risks Team at Lloyd’s has just published a new report on Behavioural Risks. The report looks at a whole variety of typical biases in human thought processes – and suggests that knowledge of them can help us manage risk better.

Biases with hindsight is discussed in the classic book “Judgment under uncertainty: Heuristics and Biases”, written in 1982 by Daniel Kahneman, Paul Slovic and Amos Tversky.

They suggest that rather than learning from our past behaviour, instead we will tend to view things through rose tinted spectacles – overstating our own abilities. Summarising the work of a 1975 experiment by Freschoff and Beyth, they say of people reviewing the past:

“They not only tend to view what has happened as being inevitable but also to view it as having appeared ‘relatively inevitable’ before it happened. People believe others should have been able to anticipate events much better than was actually the case. They even misremember their own predictions so as to exaggerate in hindsight what they knew in foresight”

This does not suggest we cannot learn from the past – far from it! But knowing about this bias along with all the others described in our report can help insurance professional be more objective about “facts”.

The report includes a case study on emerging risks management, which I believe is particularly susceptible to these biases (due to the great uncertainty around probability and impact in this field). We hope it will provoke some debate and also provide a useful background to Paula Jarzabkowski’s ethnographic study of the Lloyd’s market.

All systems go...

Wed, 17 Feb 2010 15:04:00 Z

A lot can happen in a month and the Endorsements Initiative is certainly testament to this. To date the initiative has received an overwhelmingly positive response and as a result received unanimous sign off by the Endorsements Management Group to move to ‘live’ status.

Broker involvement was spearheaded by Aon, Marsh and Willis and the LMA and IUA sought a mirror commitment from the insurer community. To date we have ’signed up’:
• 48 managing agents which represents 100% of the relevant Lloyd’s market
• 18 IUA members, together accounting for 61% of the premium endorsements on business processed through the bureau by IUA member companies
• 10 major brokers representing some 53% of the total business placed in Lloyd’s.

So what’s it all about?

The ultimate aim of this initiative is for all endorsements in the London Market, irrespective of complexity, to be submitted and agreed electronically using electronic messaging – specifically via ACORD XML. This will initially focus on direct Marine Cargo and Hull classes of business – but to ensure we get maximum participation, a limited number of other classes will be included where there is a sufficient level of interest.
Not only will this help prove that electronic processes can by used effectively, it will enable the front line brokers and underwriters to get real experience of the benefits offered by the use of electronic messaging to support the process.
Support is an important word when talking about electronic messaging and it really is important to emphasise that while the submission and agreement must be done electronically, face to face negotiation between broker and underwriter is not precluded. This is true across the placement process.
This initiative really is important in kick-starting the wider adoption and use of electronic messaging, particularly from a practitioner perspective. It is encouraging to see the level of interest around the London Market, now we just need to ensure that we are both technically and operationally ready for the 01 June. A tall order? Not at this rate…
More information on the endorsements initiative can be found on the LMA website.
And the newly relaunched Exchange site.

A way to save time in keeping up to date

I’m sure you all like to keep up to date with the latest blogs and news on lloyds.com but do you find it takes a long time to find the relevant website or page, or you’ve missed something as it has moved off the front page before you got to it? Have you thought about using an RSS feed? Once setup you will be able to have all the websites and pages you are interested in, in one place and at a click of a button. The websites and pages are then automatically updated with the latest information without you doing a thing! Never miss an important event again!

RSS stands for Really Simple Syndication and it’s really easy to setup.

Click the link below to find out more about what an RSS link is, how it works and how to set one up:http://www.lloyds.com/News_Centre/RSS_feeds.htm

Marine insurers get that sinking feeling

Thu, 28 Jan 2010 16:49:00 Z

Marine insurers whose premium income has been hit by the devastating fall in volumes and values in global trade and by the dramatic drop in ship values, must be on watch for more risks on the horizon, according to the executive committee of the International Union of Marine Insurance (IUMI).

At the group’s annual winter meeting at Lloyd’s, IUMI president Deirdre Littlefield of Starr Marine outlined a catalogue of problems facing the industry, which could feed through to insurers.

She said: “Newbuild cancellations and deferments are increasing, but a huge amount of tonnage still is due to be delivered this year and next. Regrettably, we have not seen a significant leap in the scrapping rate of old ships, which is almost beyond belief in the present crisis.”

Owners and charterers are doing all they can to reduce costs possibly leading to skimped maintenance and deferred repairs, Ms Littlefield warned. “It’s bad news for insurers who cover hull, cargo and liability risks. The situation is compounded by the emergence of new problems.”

These are mainly technical but could lead to big headaches for underwriters, she suggested. Fuel management is becoming an urgent issue as more stringent MARPOL rules for reducing emissions mean that the type and quality of bunker fuels are of vital concern. If onboard fuel management goes wrong, there can be potential catastrophic consequences.

Of equal concern is the impact on machinery from the growing trend of slow steaming, now being implemented by a number of operators to cut fuel costs. Large, high-speed diesel engines are designed to operate only at sustained high service speeds.

In another area, underwriters, through surveyors, need to monitor the standard of repairs carried out at yards which have been equipped for new construction only but which are now desperate for work, Ms Littlefield said.

Laid-up ships are another worry and underwriters need to pay close attention to the conditions of cover for vessels which have been idle without being deactivated, or just lying at anchor or drifting awaiting firm orders, often with minimum maintenance and prone to collisions or typhoon damage.

More than ever, the IUMI president concluded, there is an acute need for underwriters to focus clearly and selectively on the risks presented to them, and aim for a price that is realistic yet fair

And now an early storm warning

Fri, 08 Jan 2010 16:51:00 Z

Did you see the weather forecast? I mean the long range forecast for Atlantic hurricane activity.

In the US, highly respected wind watchers Philip Klotzbach and William M Grey of the University of Colorado department of atmospheric science have put their money on the 2010 hurricane season being “somewhat more active” than the average 1950-2000 season.

After the lull of 2009, Klotzbach and Gray predict that activity will return to levels more typical of recent times. They expect to see between one and 16 named storms, six to eight hurricanes and three to five major hurricanes.

Over in London, fellow scientists Adam Lea and Mark Saunders of the Aon Benfield UCL Hazard Research Centre also predict an active hurricane season. They reckon there will be 13.9 (+/- 4.9) tropical storms, 7.4 (+/- 3.1) hurricanes, 3.4 (+/- 1.8) intense hurricanes. Or put another way, the University College London team thinks there is a 62% probability that the hurricane season will be above average and only a 14% chance that it will be below normal.

The thinking behind Klotzbach and Gray’s early prediction is that 2010 is unlikely to be an El Nino year. (El Nino refers to the warming of the sea in the Eastern Pacific.) The absence of big windstorms in 2009 was attributed to the moderate to strong El Nino event.

According to the latest research from the US Climate Prediction Center, the current El Nino will persist into the Spring – but peak before June 1, the official start of the US hurricane season.

The odds on there being a consecutive 2010 El Nino are very low based on previous experience, Klotzbach and Gray say, so conditions are ripe for a return to hurricanes.

Lea and Saunders take a similar tack citing weaker than normal trade wind speed over the Caribbean and North Atlantic and higher than normal sea surface temperatures in the North Atlantic as key predictors.

Both sets of forecasters admit that the precision of such an extended outlook is low. But some insurers need reminding how lucky we were in 2009. A big insured event would have shaken the industry to its capital foundations in 2009, at a time when the financial markets were in recovery mode.

How will the markets respond if the wind blows a hole in insurers’ balance sheets in 2010? Has the insurance industry really reloaded sufficient capital?

http://www.tropicalstormrisk.com/

http://www.cpc.noaa.gov/products/analysis_monitoring/enso_advisory/

Liability prices: a case of arrested development?

Tue, 29 Dec 2009 11:29:00 Z

In 2008, businesses spent around USD142bn on liability insurance worldwide, around half of which originated in the US.

Importantly, emerging countries’ share is expanding. China generated USD1.2bn in 2008 with its market growing at an annual average rate of 22% per annum since 2000. Other emerging markets grew at an average annual rate of 10% over the same period. Central and Eastern European markets generated an additional USD2bn and have grown at an annual average rate of 19% since 2000.

These numbers come from a Swiss Re sigma study, which warns that there are challenges as well as opportunities in commercial liability insurance. Swiss Re’s researchers are worried that insurers are underpricing and under reserving the business. “Commercial liability rates are declining in all markets especially in the US, since 2004” according to Swiss Re’s Thomas Holzheu. “Because interest rates are low, business cannot be cross subsidized with investment results… prices should instead be increasing.”

Liability business, whether it relates to products, pollution or professional services, is a longtail business. Unlike property insurance it provides broad coverage often with high limits. It is affected by inflation which can send losses soaring.

Also, emerging risks to do with technological and social developments are a constant challenge and insurers have to closely monitor changing standards around food safety, employment practices and financial loss compensation, for example – compensation culture is another growing problem.

The big challenge for insurers (and governments and businesses) is keeping liability risks insurable in this complex environment. It means insurers monitoring drivers of liability claims and building them into actuarial models. But most important, Swiss Re stresses, is maintaining prices that reflect claims trends.

2009 Bumper year for Market modernisation

Tue, 22 Dec 2009 10:06:00 Z

As we approach the end of 2009 it seems an ideal time to reflect on the year – and what a bumper year we as a market have had! It has certainly been challenging and one that has been packed full of major developments helping to modernise the market, so let me begin….

The Lloyd’s Exchange

We have delivered the Lloyd’s Exchange which is essentially a messaging hub - it supports the face to face process of doing business in the room with information and documents being exchanged electronically using ACORD standards.

By the end of the year we expect over 50 organisations to have connected and we are currently working with the LMA to promote the completion of endorsements via the Lloyd’s Exchange – this is primarily being driven by the market with significant involvement from Aon, Marsh and Willis in addition to Beazley, Brit and Catlin amongst others.

-What’s in store for 2010? Initially we are focusing on exchanging placement messages; however the Exchange has the potential to support the complete end to end business process electronically. As such, we will explore with the Market how other message types could benefit from being passed over the Exchange. The technology has been proven and now the emphasis is on helping the Market realise the benefits of exchanging information electronically.

Lloyd’s Information Project

Part of this project aims to offer choice in how information is provided to Lloyd’s and I’m pleased to say that we have successfully delivered a solution that will allow a pilot group of Managing Agents to report their Service Company business directly.

Work has also been carried out behind the scenes to ensure standardisation in the information that we store and use for tax and regulatory reporting purposes, to prevent, on an ongoing basis, any duplication or inconsistency in the data captured. This will also facilitate the reduction in the number of reports needing to be produced and in time, reduce the reporting burden.

The Future of Central Services
We are working with the market to define a future model for the provision of central services, which reduces risk & costs, or increases processing efficiencies. We have been working closely with the London Market Group (LMG) & a cross market group which is made up of Managing Agents, IUA companies, brokers, IUA, LMA & LIIBA. They have reviewed the proposed model and agreed the next steps, which are to conduct detailed design work to support the Future London Market Process Model which we will complete throughout 2010 through the Future Processes Steering Group.

ACORD Standards

The progress in the market uptake of ACORD standards in 2009 has been encouraging. One of the highlights is the agreement on implementing one version of the standard for placing (2009.1) for the first time without customisations to suit individual’s processing needs.

Development of e-Accounting is well underway too – with some brokers hoping to send premium information to the bureau using ACORD accounting messages early in 2010.

There is more to look forward to in 2010. One of the ECF2’s (Electronic Claims File) project’s remits is to agree how the ACORD claims standard is to be used for the advice and management of multi-party claims using ACORD messages. For placing, apart from meeting the 2009.1 implementation deadline in February, the New Year will also be kick-starting with applying the standard in the Endorsement Pilot (via the Lloyd’s Exchange). We really are moving to an electronic world and a more efficient market place – let’s keep up the momentum!

London Market Group (LMG) (formerly Market Reform Group)
The change of name and extension of remit for this group is truly significant; it is a reflection that the market has been reformed through the implementation of Contract Certainty, ECF, A&S and Electronic Policies and now it is about wider collaboration and continuously improving the market through modernisation. This will ensure that London remains at the forefront of the global insurance industry, enhancing the competitiveness of the London market.

So, to everyone out there in the London market please pause for a moment to reflect on these achievements – congratulations are truly deserved for the progress that we have made together – this really is a time to celebrate! Particular thanks to the 100 or so individuals from over 30 firms that have been instrumental in delivering these achievements.
This is my last blog of 2009 but I look forward to blogging again soon in 2010 – if you would like further information on any of these subjects or would like to suggest a future topic for me to blog about please do get in touch. In the mean time, may I take this opportunity to wish Season’s Greetings to you all.

A way to save time in keeping up to date
I’m sure you all like to keep up to date with the latest blogs and news on lloyds.com but do you find it takes a long time to find the relevant website or page, or you’ve missed something as it has moved off the front page before you got to it? Have you thought about using an RSS feed? Once setup you will be able to have all the websites and pages you are interested in, in one place and at a click of a button. The websites and pages are then automatically updated with the latest information without you doing a thing! Never miss an important event again!

RSS stands for Really Simple Syndication and it’s really easy to setup.

Click the link below to find out more about what an RSS link is, how it works and how to set one up:
http://www.lloyds.com/News_Centre/RSS_feeds.htm

Shaping climate-resilient development – the case for utility theory

Mon, 21 Dec 2009 13:02:00 Z

The Economics of Climate Adaptation (ECA) Working Group has published a report titled “shaping climate resilient development“. It is an excellent report and focussed around a series of case studies. It proposes that decisions on which of the many adaptation options to adopt should be taken using detailed cost benefit calculations. A sensible suggestion at face value; but there are problems which I’ll describe below.

Before I do, I wanted to note that the report itself considers some of these issues though not quite the way Im describing it below.

Lets consider why people buy insurance. From a cost benefit point of view its an odd product. How many other products do you pay money for something you expect to be less valuable than the price?

It comes down to the word “expect”. In the context of cost benefit analysis, you compare the expected cost with expected benefits. The argument is that you chose the option where expected benefits outweigh costs. So that means you should not choose insurance, right?

We’ll no, probably not. People buy insurance to protect against extremes. They are willing to pay more than their expected benefits because, just occaisionally they’ll receive much more back than they put in.

Mathematically, the way round this is to introduce the concept of “utility“, this is just a obscure way of saying “happiness”. We shouldn’t be trying to maximise expected benefits but to maximise utility. To aim to be “happier”.

This is why insurance works. An insurer is happier selling you an insurance policy, because, by the law of averages (and providing premiums are based on the level of risk), we expect to make a profit; but simultaneously the policyholder is happier buying it, because they prefer a small guaranteed loss (the premium) against an uncertain very large loss that may lead to financial ruin.

Its a classic, win-win.

So I like the ECA’s new report; and it does indeed discuss the case for insurance – but I’d have preferred a more direct discussion of utility. Cost benefit may not be the best way to consider adaptation; concepts such as “resilience”, “no regrets” and “utility maximising” may be far more relevent. A robust policy in the face of great uncertainty may be far better than an “optimal” one. Because to truly optimise things you need to be really sure of your facts – and with climate risk we just aren’t.

Nevertheless I commend the report to you – it’s case studies are very interesting.

Climate change does not equal global warming

Fri, 18 Dec 2009 13:34:00 Z

I was recently asked why there was a conference taking place in Denmark about Global Warming. This is a question that pains me every time that I hear it – and emphasises the requirement to communicate the message about climatic change!

Climate change does not = global warming.

The headlines of newspapers relating to temperature changes – often quote the range of 1.1.to 6.4degC temperature increases by 2100 sourced from the IPCC. The Press rarely delve to the level of detail below the headlines to explain how this average change is manifest across different geographical regions. This point was further highlighted yesterday during a talk with Pen Hadow who, as part of ClimateWise week, was addressing a Lloyd’s audience about his recent findings with the Catlin Arctic Survey.

Surface air temperatures here in the northern hemisphere are distinctly higher than the reference 1961-90 period. Indeed, the annual mean Arctic temperature for the year 2008 was the fourth warmest year for land areas since 1990. These changing temperature regimes are resulting in a marked decrease in the level of sea-ice thickness in this area.

In the early part of this decade, there were suggestions that the summer sea-ice extent in the Arctic may disappear by the end of the 21st century – it now appears that there may be no summer sea-ice within a decade. The rate of warming here is alarming.

Whilst we are witnessing decreasing sea-ice in the northern hemisphere, we are observing some distinct differences in Antarctica. The British Antarctic Survey recently published the first comprehensive review of the state of Antarctica’s climate. Since 1980 there has been a 10% increase in Antarctic sea-ice extent, particularly in the Ross Sea region, as a result of the stronger winds around the continent (due to the ozone hole). In contrast, regional sea-ice has decreased west of the Antarctic Peninsula due to changes in local atmospheric circulation and this has also been linked with the very rapid warming seen over land on the west coast of the Peninsula.

The picture is confused? Or is it? Regional climate change impacts will be varied – we know this – but does the wider public? On a relatively local scale, the UK Climate Impacts Programme (UKCIP) published a set of probabilistic scenarios for changes in projected UK climate – with distinct regional differences.

On a global scale all of these changes will be further magnified. BUT, this is not what is reported in the press – and does not help to inform the public debate. The impacts of climate change will not necessarily result in uniform warming across the entire planet. This has to be recognised as part of the outcome from COP15. Today is the last day of negotiations in Copenhagen. We await with baited breath as to what the outcome(s) will be. Fingers crossed for a number of positive steps forward.

My other pleas:

1. Better communication around the regional dimension of climate changes, and that the planet will experience different changes as we go forward

2. Improved information around the rate of some of these changes - notably in the Arctic

Strong medicine for longterm cure?

Wed, 16 Dec 2009 17:01:00 Z

Broadly, there was a growing concern that the insurance industry was going to suffer under tighter regulation prompted by the financial crisis.

Despite having stood firm while the rest of the financial services industry wobbled, insurers were going to be tarred by the same brush as banks, it seemed – and they didn’t like it. But all is not as it seems, according to a KPMG survey that says many insurance executives actually believe that increased regulation will be positive for the insurance industry in the longterm.

“As the dust settles following the financial crisis, the reality of the long road to recovery has become clear to the insurance industry,” Frank Ellenbürger, global sector leader of KPMG’s insurance practice told Reactionsnet.com in a commentary to the findings. “Many executives have come to the conclusion that new regulation may not be a pleasant medicine in terms of short-term growth but ultimately it’s good for the industry,” he said.

In conjunction with the Economist Intelligence Unit (EIU), KPMG asked about the possible effect of expected increased regulation for the industry over the next three years: 62% of respondents felt that it would help improve risk management, 56% felt it would create better financial stability, while 55% felt it would encourage a longer-term view of business.

The majority of respondents did cite increasing regulatory intervention as the biggest barrier to growth, however, the main impact being increased capital requirements.

COP15: Week 1 Roundup

Wed, 16 Dec 2009 14:39:00 Z

After week one of the Copenhagen climate summit disagreement still remained as to the overarching objective of limiting global warming to 1.5° or 2°C? While G8 and major developing nations endorsed 2°C as a target in July this year, Tuvalu, a small island in the Pacific with very real existential concerns, led the charge for members of the Alliance of Small Island States (AOSIS) calling for a legally binding agreement along with a target of 350 ppm of CO2 and 1.5° of warming with the backing of over 100 delegations.

Neither target is going to be easy according to the UK Met Office which released analysis showing that 1.5°C would be “almost impossible” to meet without implementing measures to take carbon dioxide out of the air, and that even if emissions peaked by 2020 there was only a 50:50 chance of holding temperatures to 2°C.

On a positive note, some progress has been made on short-term funding commitments to help developing countries adapt, with the EU making up a large part of a $10bn annual global package. On longer term finance a consensus is emerging among developed countries around $100bn per annum, although developing countries say it needs to be more.

So the stage is set for Week 2 of the Conference of the Parties, with heads of state descending on Copenhagen for the final stages of negotiations. Optimists still hope for historic agreement. With President Obama set to join the fray later this week let’s hope that negotiators can “put their hands on the arc of history and bend it once more toward the hope of a better day.”

Climate data galore

Wed, 16 Dec 2009 13:57:00 Z

With all of the statistics being thrown about during the COP15 Climate talks you may find yourself wanting to get to the bottom of some of the numbers yourself. Well, if you are one of those people you’re in luck as www.realclimate.org are tackling the question of “where’s the data?” with their own collection of data sources. Not only that, but for the really adventurous they have links to code that allow you to run your own models.

My personal favourite is the www.WoodForTrees.org website that includes an interactive graph that allows you to view the various data that scientists have used to understand climate change including information on temperature, solar activity, ice and the atmosphere and ocean.

COP15 Summit – Day 5

Tue, 15 Dec 2009 14:47:00 Z

Notwithstanding the ambiguities surrounding Climategate, which is put nicely in context by George Monbiot here, the majority in the insurance industry are inclined to believe the climate is indeed changing. Under a warming world clearly weather patterns are likely to change, but for the reinsurance sector, key questions revolve around the impact on catastrophe events and losses:

• Will we see more (and more intense) hurricanes in the future than in the past?
• Will rising sea-levels mean worse coastal surges?
• Can we expect more flooding due to extreme precipitation events?
• Will heatwaves increase wildfire events and exacerbate crop insurance losses?

The IPCC report in 2007 says Likely, Likely, Very Likely, Very Likely in answer to the above questions, and the large majority of subsequent research supports this view. Given that (re)insurers will pick up much of the cost of additional losses, it’s no surprise that a substantial amount of effort is going in to translating the emerging science of climate change into insurance loss impacts.

A useful recent addition to this work was published by the ABI (pdf here) supported by AIR and the UK Met Office, and includes impact analysis of 2, 4 and 6 degrees of warming on UK Flood risk.

Two flavours of El Niño

Recent research about El Niño (widely credited with helping suppress Atlantic hurricane activity in 2009) under warming conditions, suggests that in future we may experience more central Pacific El Ninos, rather than the typical eastern Pacific ones. Bad news is that the central Pacific ones may not suppress Atlantic hurricanes to the same degree. [link]

While there is still uncertainty and disagreement in the scientific community around how global warming will influence hurricane formation, it’s worth remembering that we have already seen anomalous Atlantic hurricane activity this decade in terms of geographical extent (north east and south Atlantic) and duration of the ’season’ which saw the official close (30th Nov) of the 2005 season extend into the following January.

Clearly much uncertainty remains as to how exactly climate change will \ is already influencing catastrophe risk, and it is vitally important that the insurance industry continues to follow the academic research and reflect emerging trends into our risk frameworks.

We’re getting the message

Mon, 14 Dec 2009 10:19:00 Z

It’s hard to believe that this time last year we were still in the midst of a tender process to find a vendor for the Lloyd’s Exchange. Since then, we’ve achieved a lot. Having picked IBM in early 2009, the Exchange is now up and running with over 40 organisations connected. We are on target to connect 80% of Managing Agents (by capacity) and over 60% of the top 30 brokers (by premium) by April 2010. Thanks to the pilot participants, and a number of IT suppliers in the Market, we have the ‘tick in the box’ in terms of technology and the concept of electronic messaging has been proven. Pretty good going, but we’re not finished yet.

Gaining momentum

Over the last few weeks we’ve really gained momentum.

It was great to see that we were the talk of the Insurance Day Technology forum. There was a real buzz around the Exchange and the potential it has not just for placing and endorsements but across the whole risk lifecycle (we are exploring how other message types such as Accounting & Settlement and Claims could benefit from being passed over the Exchange next year). The range of connection options available now is also very encouraging; there really is something to cater for everyone – electronic messaging is firmly on the modernisation roadmap.

You may have seen the recent press release announcing that Aon, Marsh and Willis will pilot the Exchange for endorsements using version 2009.1 of the ACORD standard. The endorsements pilot, supported by the LMG and the associations, is due to start in 2010 and will essentially require all brokers and underwriters taking part to submit endorsements electronically. So far, the response to this has been overwhelmingly positive and this marks a real step forward in terms of kick starting the wider adoption and use of electronic messaging to support the face to face negotiation process. With the technology proven we now need to switch from ‘pilot mode’ to production volumes and I think the commitment we achieve around this pilot will be key a key enabler in delivering this.

On to 2010

So we have the capability to exchange data electronically. The challenge for 2010 will be to embed electronic messaging as business as usual. But this will be no easy job – breaking traditions that have become integral to the market for over 300 years is certainly a challenge. In conjunction with the LMG we will be setting some ambitious targets, but I’m confident that with the current level of interest and support in the Market, particularly around the endorsement pilot, we are on track to achieve this.

And if you aren’t connected yet – don’t get left behind.

Lloyd’s Exchange – Get the message

RSS stands for Really Simple Syndication and it’s really easy to setup.

Click the link below to find out more about what an RSS link is, how it works and how to set one up:
http://www.lloyds.com/News_Centre/RSS_feeds.htm

A gift from realclimate.org

Thu, 10 Dec 2009 14:46:00 Z

Realclimate.org is my favorite global warming blog. They describe themselves as a “commentary site on climate science by working climate scientists”. They provide an invaluable service by providing free expert views on: the latest research, media articles and sceptic driven psuedo science.

Recently a posting with the title “an offering “ caught my eye. This post was simply a link through to a series of climate change lectures by Professor David Archer. He works at the University of Chicago and he recorded the lectures he gave this Autumn on climate change. I’ve started watching these and am really enjoying them; although the content is not new to me it is fantastic to see the facts presented so clearly.

Note the post was called “an offering” – this seems typical of climate scientists. Not presumptious at all; he didnt call it “a gift”. But as far as Im concerned that is what it is.

I havent watched them all yet; but from what I have seen anyone with remaining doubts about climate change should watch these lectures. In the face of this much evidence how can people continue denying?

Four degrees of separation

Wed, 09 Dec 2009 14:56:00 Z

The spotlight at the COP 15 summit recently shone on the World Meteorological Organisation and the UK MET Office as they presented their most recent findings. They gave a striking message that this decade will be the warmest since records began back in the mid-1800’s and that they have no doubt we are in a warming trend. The results presented also coincides with the production of two maps that outline the effect on the Earth of a 2 and 4 degree temperature rise, with the aim of explaining why we must avoid a 2 degree rise at all costs.

I think their point is well made.

What struck me was sheer scale of the range of local temperatures when comparing a 2 and 4 degree global rise. While I knew that a global rise in temperature would result in local varience, plus 1 degree here, minus half a degree there, the 4 degree global rise is much more substantial. Predictions show temperatures in New York and Moscow rising by 6 degrees, while Delhi and Tokyo rise by a modest 5 degress. However, the big hitters occur as we move away from the equator where an 11 degree rise is predicted for northern Russia, while parts of Canada and Iceland will increase by a toasty 14 to 15 degrees. Given that this is where many glaciers call home this will in turn have a serious impact on global sea-levels as the glaciers melt more quickly under their hotter conditions. The maps also give a flavour of other impacts such as subsidence caused by the melting of permafrost, the aforementioned sea-level rise combined with storm surges could pose a serious threat to costal assets, greater risks for forest fire, and the list goes on. When comparing with the 2 degree map we see that the local temperatures and secondary impacts are far more preferable.

Of course ideally we’d like to suffer none of these impacts and have our climate stay just how it is, however given the choice, a global temperature rise of 2 degrees is far more prefereable than one that is 4 degrees or more. Let us hope that the COP15 summit takes this message to heart and take the steps needed to sustain our environment.

Climategate

Tue, 08 Dec 2009 15:04:00 Z

One of Nixon’s greatest legacies (in popular culture) was the suffix of “gate” – associated with anything that had an air of suspicion around it. This holds remarkably true for the recent episode of intrigue around Climategate. The similarities with Watergate really end there – because the furore raised by those who hacked into the Climate Research Unit’s servers at UEA and published SELECTED EXTRACTS from a series of emails from leading climate scientists will not bring about the downfall of one of the largest issues facing humanity today – and tomorrow.

The contents of the extracts that have been variously published at face value appear damming, and unsurprisingly have been held up high and wide by climate sceptics who argue that this is the end of the Global Warming “charade”. Senator Inhofe, who sits on the US Senate Committee on Environment and Public Works has really gone to town. The message from the Senator’s blog is unequivocal, and I quote ”Most important, however, these revelations of fudged science should have a cooling effect on global-warming hysteria and the panicked policies that are being pushed forward to address the unproven theory”. Although this is hardly surprising when one looks at Inhofe’s previous postings including the ‘Fact of the Day’ ”Skeptic’s guide to debunking global warming”.

Leaving aside the issue of the illegal access to the emails – the extracts are what they are, and they are now in the public conscious. What does this mean for climate science and advising governmental policy to drive forward and effect change? Personally, I think the sceptics will have a blip of a louder voice for a short while – and this will have a marginal impact on public sentiment. But thankfully this will pass. I am hopeful that the COP15 proceedings will further demonstrate the imperative to take decisive action to begin to mitigate the potential impacts of climatic change (not just global warming). And we need the scientists to help us to understand what this could mean.

Most climate scientists are reasonable and will agree that there remains a degree of uncertainty (if you’ll excuse the pun) as to the relative levels of natural variability and anthropogenic contribution to climate change, both regionally and globally. The one fact that doesn’t change is that change is happening – and its not all for the good. The scientific community needs robust challenge and needs the opportunity to share what it has found. Much of what we see published is based upon models – views of a potential future. The recent claims that have had a higher voice claiming these are all a sham fail to note that there are a number of independent academic institutions, running thousands upon thousands of simulations – and yes there are some years that point to globally averaged high increases in temperature, some lower (yes some will point to cooling!). However, the average of these multiple views all point to a dramatically changing global climate.

Now, we have a choice. Do we do nothing and let the world continue to pump inordinate quantities of CO2 into the atmosphere and see what happens? Or do we use the information that we have had from the climate science community and DO something.

Are we really going to play Climate Roulette? The bullet is loaded….

Climate scientists publish latest view of risk

Mon, 07 Dec 2009 15:55:00 Z

The Intergovernmental Panel on Climate Change (IPCC) was set up in 1990 and its first report arguably led to the creation of the United Nations Framework Convention on Climate Change (UNFCC). From this a series of annual meetings has emerged, the “Conference of the Parties (COP)”. COP3 led to the Kyoto protocol in 1997; in 2010 we all earnestly hope that COP15 will lead to another set of international agreements.

The IPCC is a respected body, it does not carry out science, it reviews the work of others and publishes a summary. Its summaries represent a global scientific consensus. In order to manage the vast volume of papers they have to review the IPCC have to impose a cut off date. This means that the latest IPCC report is based on science that is now three years old.

In many respects this is not a big deal. The science back then was already very clear; climate negotiators already know what they have to do. To reduce the risk of the worst predictions political leaders must agree to rapid cuts in greenhouse gas emissions; starting in the developed world and quickly involving everyone.

But to ignore the science of the last three years would be unwise. Sadly, as has so often been the case over the past 20 years the emerging science is “worse than they expected”. One reason for this in my view is that the IPCC consensus process leads to excessively cautious pronouncements – the scientists are so scared of making statements that turn out to be overly pessimistic that they will only opine when they are really sure of their work. Whats wrong with that? You might ask. Well, I suggest it means that the IPCC reports are not a “best estimate” but are really an optimistic statement – and this is bourne out because each new report contains even worse predictions.

However, climate negotiators dont need to wait until the next IPCC report (2013) for the latest science. A large group of world famous scientists have produced a new report “The Copenhagen Diagnosis” which contains their latest views on risk.

The news isn’t good.

Greenhouse gas emissions are now 40% higher than 1990, higher than all the scenarios considered to date. Greenland and West Antarctic Ice sheets are loosing ice at an accelerating rate (see our 360 report on this), the Arctic Sea Ice is dissapearing much more rapidly than thought. Sea levels are rising much quicker than expected, upper limits are now set at 200cm by 2100 compared to 59cm as previously thought!

Is there hope?

Yes. We can change and accept lower energy allowances.

Operations – Completing the missing link

Sun, 22 Nov 2009 10:40:00 Z

Feedback from brokers, managing agents and insured’s is consistent at praising Lloyd’s for its capital advantages, security and ratings, performance management expertise and market access. But one area of regular criticism is its operating environment. Market modernisation seeks to address this anomaly.

Earlier this year the Market Reform Group, now called the Market Group (see my previous blog), approved the Finish What We Started (FWWS) initiative.

The FWWS work includes projects such as ECF 2 release 1 (Electronic Claims File), IMR (Insurer’s Market Repository) Security Model Upgrade and E-accounting all of which will bring significant process benefits to the market. Whilst a huge step forward operationally, the lifespan of FWWS is only considered to be 5 years beyond its completion date.

In order to maintain the momentum for market modernisation, the London Market Group has been considering how to advance things further. Their goal was to consider how business should be serviced to preserve the advantages of the London market, and in particular of subscription, in a world where more and more information will be exchanged via structured data messages.

Coincidently Lloyd’s Market Operations had already been working on this very point through the Future of Central Services project.

The LMG examined a number of operational models and selected the one that met the following criteria:

Supports choice in terms of service provision
Removes negative Londonisms
Removes process burdens from brokers
Uses full ACORD messages to provide richer information throughout the risk lifecycle. This enables risk information to be re-used throughout the end to end business process, with business validation at the point of creation.

The LMG commissioned a cross market group to review the proposed model, with a view to recommending whether further detailed analysis should continue. The group was made up of representatives and practitioners from Managing Agents, IUA companies, brokers, IUA, LMA and LIIBA and was facilitated by Lloyd’s Market Operations.

The group met regularly to review the proposals and recommended that a project be initiated to progress detailed design work.

The LMG agreed and as result most of 2010 will be spent analysing lower level detail to produce the detailed designs that support the Future London Market Process Model. The chosen model and its designs will be published at the end of 2010 by the cross-market group.

What’s the significance of a name?

Thu, 29 Oct 2009 11:11:00 Z

It was recently announced that the London Market Group (LMG) has succeeded the Market Reform Group, is this just another renaming exercise or something more significant?

The change of name and extension of remit is truly significant; it is a reflection that the market has been reformed through the implementation of Contract Certainty, ECF, A&S and Electronic Policies and now it is about wider collaboration and continuously improving the market through modernisation.

As fundamental reform draws to a close and we move through to modernisation the LMG can address wider subjects that affect our market building the appropriate consensus around any issue that affects the competitiveness of our market. This will ensure that London remains at the forefront of the global insurance industry, enhancing the competitiveness of the London market. And maintaining London’s recently enhanced position in the global marketplace with the confidence to address future challenges as they arise.

Update from Baden-Baden

Wed, 28 Oct 2009 17:04:00 Z

It’s a great big talking shop, much like the Monte Carlo Rendez-vous in September – but the temperature is cooler and mood is more business like.

The usual Baden scene is of executives with collars turned up against driving rain, criss crossing between the posh hotels where they meet to earnestly discuss the cathartic effect of the latest natural or financial disaster.

But this year it is different in lots of ways. The sun is shining for a start. Also, while the financial crisis hasn’t actually gone away, the markets are more settled than this time last year. Just as important, it has been a benign year so far in terms of catastrophe losses.

It is Autumn and there is still plenty of time for a windstorm in Europe – but for a lot of the reinsurers here it feels a little like Spring.

There are a number of reasons for that. One is that, having come out of the credit crunch relatively unscathed reinsurers have proved the resilience of their product to their clients, according to underwriter Sharon Gallagher of Kiln Reinsurance 510. “Reinsurance capacity is stable and that’s valued by clients. It is incredible in the circumstances just how stable reinsurance pricing is,” she said.

Richard Chattock, active underwriter with Montpelier Syndicate 5151 agrees that there is increasing recognition of the value of secure reinsurance. “Everyone is aware that the capital markets could go bad again,” he said.

Reinsurers are even optimistic about the possible effects on their business of Solvency II, the regulatory regime that will take effect in 2012. In his traditional breakfast press call in Baden-Baden, Munich Re director Ludger Arnoldussen said that Solvency II would lead to a renaissance for reinsurers.

Under the new Solvency II rules, recognition of reinsurance and its capital relief effect is no longer limited to 50% (as under Solvency 1) with unlimited cessions possible. “The value proposition of reinsurance companies is greatly improved as a result,” Arnoldussen said.

Reinsurance brokers in Baden-Baden have an extra spring in their step too. They point to a growing trend for cedants to spread their reinsurance shares a little more widely in order to reduce counterparty credit risk. Nick Frankland, chief executive for Guy Carpenter Europe said it makes sense for insurers to achieve a spread of reinsurance within a band of acceptable security: “It is better than having a concentration in that same band,” he said.

Lloyd’s franchise performance director Rolf Tolle, holding court from a comfy chair in the Brenners hotel, said he discerns a willingness among cedants to diversify their reinsurance panels. He believes that Lloyd’s will be a beneficiary of the trend: “We see the amount of business being offered to Lloyd’s is increasing,” he said. “We’re in a good position in terms of being able to offer syndication with good security.”

Of course, Baden-Baden is not completely changed in character and arguments about the necessary direction of the market still fill the air. Mr Tolle, who has been attending the meeting since the late Seventies, has witnessed the market’s ups and downs over the years.

This year is his last as a representative of Lloyd’s because he steps down at the end of the year, handing over to a new director of underwriting, Tom Bolt. “It is clear that an improvement in pricing, terms and conditions is needed in both the reinsurance and underlying insurance business. But I suspect the market will stay flat,” he predicts. “In a sense the market is a victim of its own success because capital has not been destroyed – it has been replenished.”

Are risk managers high on depressed rates

Fri, 23 Oct 2009 17:08:00 +0100

Insurers are still renewing North American commercial property and casualty insurance programs at deeply depressed rates, according to a new Benchmark Survey from RIMS, the risk manager’s association.

The survey, which tracks changes in insurance policy renewal prices as reported by North American corporate risk managers, finds that commercial insurance buyers are getting good deals because the global economic recession has suppressed demand for insurance capacity, making underwriters fight for diminishing premium dollars.

The survey cites average general liability premiums, which fell 3.7 percent, and average workers’ compensation premium, which was down 4.5 percent as evidence. Declining sales and payrolls, which are used to calculate premiums, were behind the falls, it explains.

Advisen’s Dave Bradford, editor-in-chief of the survey, said carriers are posting underwriting losses, “but in this recession, they have found it nearly impossible to push through rate increases except in a few especially distressed areas.”

Property insurance policies renewed in the third quarter with essentially no change in average premium. Directors and officers liability (D&O) policies also renewed with no change in average premium.

RIMS spokesman Daniel H. Kugler, a risk manager at tool maker Snap-on, Inc. commented that many companies are buying less insurance, and underwriters feel pressured to keep prices low to hold on to the remaining premium dollars. “It’s still a buyer’s market, and it looks as if it may stay that way for a while,” he said.

Another new report, this time from broker Willis, echoes RIMS findings, saying that “marketplace forces that have led to sometimes frenzied competition among insurers may remain in place into 2010”. The detailed report goes on to explain exactly how benign weather and different marketforces have combined to keep prices down, right across the P&C board.

But Willis’s chairman Joe Plumeri says in his intro to the study that buyers should curb their enthusiasm: “While undoubtedly appreciating the windfall of softening rates, risk managers must also consider the issues of market security and counterparty risk as never before.”

Sage advice: chasing reductions is fine but quality cover does come at a price – and this is the worst possible time to find that your insurer isn’t there when you most need him.

ACORD 2009.1 – Placing: standardise to this version please

Fri, 16 Oct 2009 11:19:00 +0100

ACORD standards develop over time by taking account of members’ feedback, based on their experience of implementing the standard’s specifications.

ACORD may publish up to two new releases of their existing standards a year, depending on members’ demand.

However, there has been latency—especially by early adopters—in moving on to a newer version of the standard. Up to this point, most are operating on hybrids of an ACORD Placing standard published in 2005. The market’s inherent multi-trading relationships mean that updating an existing implementation without a coordinated approach can be a resource intensive activity, with little perceived benefits for individuals.

Market participants have put in a huge effort working with ACORD in specifying the 2009.1 version of the Placing standard, especially in aligning London market specialities with international practices. The decision to standardise on this version signifies:

The market’s recognition of synergy—in order to reap the maximum benefits, we must work together and move in sync

The market’s commitment in taking full advantage of the standard’s evolution through physical implementation, not stopping short at agreeing the specifications on paper only

This latest 2009 version of the standard focuses on complex business scenarios including:

Multi section risks

Declarations

Subjectivities

Management of endorsements

Capturing a richer set of structured information

The market has agreed to implement the ACORD 2009.1 structure for Placing on 19 February 2010 and to incorporate incrementally the above business capabilities throughout 2010.
Along with this decision, the market would deter operations on any other versions of the Placing standard. This means current implementers would need to complete their own preparations for upgrade by the market agreed deadlines, or risk missing out on their business.
The Lloyd’s Exchange will have the 2009.1 structure in place by Q4 2009. This means current and future participants on the Exchange can have a head start on the upgrade to the 2009.1 standard should they choose to.

A way to save time in keeping up to date

http://www.lloyds.com/News_Centre/RSS_feeds.htm

Boardroom risk rates bottoming out?

Fri, 09 Oct 2009 17:16:00 +0100

In its recent quarterly market overview for US business, Aon found that D&O rates for financial institutions are increasing significantly: capacity is shrinking and coverage terms are tightening.

On the other hand, the market for all other sectors continued to be extremely competitive with rates trending down, ample capacity and the broadest terms and conditions seen in years, Aon says.

Most insureds should expect to see stable rates in the short term, brokers agree, while rates for financial institutions are expected to continue to increase.

Willis in London also says that the commercial sector continues to resist the sharp rate increases for D&O insurance seen in the financial institutions sector, with the average premium for commercial business falling 5% in the second quarter. In contrast, some financial institutions have seen “double digit” premium increases, in percentage terms.

Willis stresses that the 5% reduction is for commercial clients with strong risk profiles.

But even these buyers could soon be seeing prices trend up, both brokers warn. “The delicate balance between the forces holding D&O prices down and the need for rate increases could soon shift in the favour of underwriters,” said Michael D. Rice, national practice leader of Aon’s financial services group.

Commenting on the findings of the Willis survey, Julian Martin, executive director of Willis FINEX Global, warned, “Owing to the economic downturn, we are experiencing an increased level of scrutiny and underwriting analysis, meaning that is essential for renewal negotiations to begin early in order to deliver timely renewals.”

You have been warned.

What will risk management look like in the future?

Thu, 08 Oct 2009 10:32:00 +0100

In a release timed to coincide with the Ferma conference taking place in Prague this week, Lloyd’s broker Aon outlines a utopian vision of risk management in the future.

Aon predicts that corporate CFOs will have more say in structuring risk transfer solutions and at the same time, more [non-financial] companies will appoint chief risk officers to complement their risk managers.

Aon also envisages greater use of technology to accurately capture business risk information in order to satisfy the growing demands of insurers fed up with spreadsheets. Better still, the systems will utilize risk data standards so everyone talks the same risk language.

That in turn will lead to greater risk differentiation and clients not being tarred with the same brush by insurer.

Growth in enterprise risk management will be accompanied by insurers innovating around new risk transfer products that hedge commodities prices, for example, and weather related risks. Very big industrial companies will tap the capital markets for facultative capacity.

Compelling as it is, something is missing from this picture and that’s the new risks that are lurking over the horizon and will challenge risk managers and their insurers in the future.

Effective risk management with a systematic approach to structures and risk transfer is to be welcomed. But knowing about the potential risks around the corner so that systems can be adapted to the real world is crucial as well.

That’s why forward looking projects like Lloyd’s 360 Risk Insight and the Lighthill Risk Network are so important.

‘Data, but not as we know it…’

Thu, 01 Oct 2009 11:58:00 +0100

You’ll notice ACORD is a recurring theme in my blogs and this is not just a coincidence. We are moving to an electronic world and the ACORD standard, which supports the use of structured data, is at the heart of this.

Structured data, so what?

Well the ’so what’ is actually quite big and while ACORD standards may seem rather unexciting, and to some may even seem intangible – the benefits of using structured data are many.

Think:

Validation of data before submission – recipients receive accurate and reliable data directly into their back office systems, no more re-keying!
Support for regulatory compliance – better quality and more accurate data is available faster and more securely (great for complying Solvency II, data protection and transparency rules)
Better management information available = better business decisions
The data becomes international and portable – businesses can easily hook into lower value but profitable global business

Exchange of information quietly running in the background leaving brokers and underwriters to focus on trading

And whilst in some individual cases it is difficult to define ‘how much bang for your buck’ it is important to realise what these changes are really about – and that’s modernising the Market.

The standards are already being implemented to support key business processes in the Market, I’ve highlighted some examples below:

Technical /financial accounts messages are being used in the eAccounting project. And these message types have been enhanced to support both bureau and non-bureau transactions
Placements and endorsements are supported. The 2009.1 standard, which will support multisection risks and declarations, is likely to be implemented within the next 6 months and tools such as the Lloyd’s Exchange will validate against this standard. First steps on the way to ensure single interpretation and use across the Market.

The ACORD standard for document repository interoperability (DRI) allows brokers and insurers to exchange documents, already in use for the Accounting and Settlement repository and the Electronic Claims File

And the technology is there to support this change – the Market have already laid the foundations with the Electronic Claims File, Accounting and Settlement and now the Lloyd’s Exchange – demonstrating the commitment there is to using technology to fulfil the vision of an efficient, modern market place.

The decision by underwriters and brokers to start this modernisation journey with the Electronic Claims File was bold, a step into the unknown. But here we are, five years on, the benefits of that decision are now real with quarter by quarter reduction in claims settlement time probably now halving the average time for claims handled on paper.

Any dilemma around an electronic world is less about the technology, the standards to support this, or even the pounds and pence business case (remember this is about modernisation) and more about the cultural change this brings.

A way to save time in keeping up to date

I’m sure you all like to keep up to date with the latest blogs and news on lloyds.com but do you find it takes a long time to find the relevant website or page, or you’ve missed something as it has moved off the front page before you got to it? Have you thought about using an RSS feed? Once setup you will be able to have all the websites and pages you are interested in one place and at a click of a button. The websites and pages are then automatically updated with the latest information without you doing a thing! Never miss an important event again!

RSS stands for Really Simple Syndication and it’s really easy to setup.

Click the link below to find out more about what an RSS link is, how it works and how to set one up.

http://www.lloyds.com/News_Centre/RSS_feeds.htm

Marine business - steady as she goes in London?

Wed, 16 Sep 2009 10:40:00 +0100

OK, pirates are making the headlines but the sector’s main worry, according to IUMI president Deirdre Littlefield, is the global economy and how conditions in their clients’ business will affect marine insurers.

Littlefield says that trading conditions for the shipping industry are dire and the short-term prospects are bleak. “Every sector is in trouble despite one or two bright spots. A lot of companies have already folded or filed for bankruptcy, and more will follow,” she said in a press call on Sunday.

This is putting a lot of pressure on marine insurers who are trying to cope with greatly reduced ship and commodity values, and far fewer ships trading as more go into lay-up or lie idle.

The number of total losses has stabilised, but the future claims picture is very worrying Ms Littlefield says, because owners are deferring essential repairs and maintenance.

Yet marine insurance market capacity continues to be plentiful. The danger now is that many underwriters will be tempted to cut rates and make other concessions in order to maintain market share as the amount of new business available continues to dwindle.

“We have seen this cut-throat situation before, of course, but never at a time like this when the shipping industry is literally on its knees,” she told IUMI delegates.

While it is true that there is a downturn in the global economy, some regions are suffering more than others. Those differences are feeding through to insurers and, as one broker recently pointed out, marine insurance is becoming more regional in character.

In its recent outlook paper for the marine insurance sector, Aon points out that regional centres have a different take on pricing. US insurers are pressing for rate increases and seem to be losing business to London as a result. In mainland Europe, different countries such as the Netherlands have their own dynamics.

Norwegian underwriters likewise are said to be defending their business against ‘outside’ interests. Meanwhile, Singapore is growing as the marine insurance hub for Asia, albeit on the back of London companies moving in.

Lloyd’s Exchange sends first message

Wed, 15 Jul 2009 15:51:00 +0100

The significance of this event is that it validates the statements made about the Exchange and satisfies the market's expectations that it is:

• Simple technology
• Quick to install
• Easy to use
• Follows the small steps approach
• Proves the value of a messaging hub

When the market is ready the Exchange will validate the messages to the ACORD 2009-1 placement standard [http://www.acord.org/]. This is the version that the market has decided to standardise on (more on this topic in an upcoming post).

The challenge now is to involve the ‘grassroots’— the guys with the slip cases and the guys with the rubber stamps. That’s now viewed as a priority for the market associations.

Electronic Claims File and Accounting & Settlement

Mon, 15 Jun 2009 15:42:00 +0100

In 2006 the Electronic Claims File (ECF) and Accounting & Settlement (A&S) systems were implemented, with the aim of enabling brokers to transmit documents to insurers and Xchanging instantly from their desktops.

Part of our role as Market Operations is to check the perceived benefits at the outset of a project against the actual performance/benefits that are realised from a Lloyd’s perspective.

The delivery of the ECF and A&S systems is one of the market initiatives we’ve been supporting: the aim is to enhance systems and remove any remaining obstacles to e-processing all transactions.

When the projects began, it was anticipated that the benefits of ECF and A&S systems would be:

• 20% reduction in claims settlement time
• Faster settlement of premium transactions
• Reduced administration costs for brokers
• Simultaneous access to the claims file for all parties
• Ability to present claims outside of normal UK office hours
• Ability to present claims from any global location

We’ve recently begun work that will try to identify whether these benefits are being realised. Early indications are that the market is experiencing genuine benefits in terms of cycle time reduction and a faster, more efficient end–to-end process.

These efficiencies have in turn led to tangible financial benefits in areas ranging from increased opportunity from investment income (on premium received faster) through to reduced transport costs of paper from broker offices to London and then on to Chatham (and of course back again!).

As said, we’ve just begun this benefits assessment and we’ll keep you updated …

Lloyd’s Exchange: painless upgrades

Mon, 15 Jun 2009 15:05:00 +0100

That’s not the case with the Lloyd’s Exchange. To borrow a line from a popular TV ad: Lloyd’s Exchange: ‘Does what it says on the tin’.

Many of you in Operations will have already been notified that as a result of the upgrade to the Insurer’s Market Repository, which provides Electronic Claims File (ECF) and Account and Settlement (A&S) in the market, that some changes to your systems will be necessary. These changes are mainly to do with alterations to IP addresses and subsequent testing.

Individually, these changes are relatively small. But when the changes are applied across the market (which currently stands at more than 50 companies but potentially as many as 250) the effort could be considerable.

One of the benefits of the Lloyd’s Exchange is that it’s a gateway based on a single connection. Companies connect to it and that’s all they need to do.

Changes to the access (or IP) address happen at the gateway not in the companies’ systems. In other words, the principal change (to the access address to the Insurer’s Market Repository) happened once and only at the Lloyd’s Exchange—not 50 (or 250) times at the various companies.

Any firms connected to the IMR (or e-Accounting when implemented) through the Lloyd’s Exchange therefore wouldn’t be affected by these changes—they won’t have to do a thing.

Like I said…‘Does what it says on the tin.’

Reasons to be cheerful insurance execs forecast growth

Wed, 10 Jun 2009 09:43:00 +0100

KPMG’s survey (‘A Glimmer of Hope: Growth prospects in the global insurance industry and the escalation of risk and capital management’) of 315 industry executives from 49 countries in March and April 2009 shows that more than half the respondents expect an improvement in organic growth (55%) and expect an improvement in growth by acquisition or take-over (53%) during the next 12 months.

Respondents are also positive about their business prospects as they relate to premium volume (53%), expense ratio (53%) and capital reserves (47%). They are least positive about their share price, with only 40% of respondents expecting to see an improvement in this area.

Concern over the impact of the weakened economy, and particularly the capital markets, has increased insurance companies’ focus on risk management, the survey found.

Both regulators and government showed double-digit growth in terms of influence on company risk management policy and execution; ratings agencies decreased the most, with their influence falling by half to 14%.

http://www.kpmg.com/Global/IssuesAndInsights/ArticlesAndPublications/Pages/A-glimmer-of-hope.aspx

Insurers prepare for a class action pandemic

Tue, 09 Jun 2009 13:55:00 +0100

Research published recently by Lloyd’s and the RAND Institute for Civil Justice Europe has already raised the prospect that class actions are on their way to Europe from the United States, increasing anxieties of a further litigation boom. Europe is seeing a rise in consumer and investor activism, and a growing willingness by legislators to allow people to pursue mass grievances through the courts.
Swiss Re points out in its new report that the European Union is interested in using collective redress both to enable compensation for infringement of competition rules and to improve consumer rights within and across member states. About half of EU member states have already introduced instruments for collective redress and the European Commission is moving towards the introduction of collective redress mechanisms right across the 27 member states.

Swiss Re says insurers need to get involved: “We are convinced that the insurance industry has an interest in actively participating in the ongoing legislative dialogue in order to explain the potentially adverse consequences of unbalanced collective redress systems.”
Swiss Re suggests lawmakers should bear in mind the unintended consequences of the US class action system, which has contributed to a massive increase in the cost of the US tort system to USD 250 billion annually.

On the other hand, as Swiss Re points out, the broad trend towards the spread of collective action also presents some business opportunities for insurers, such as an increased demand for different liability coverages, including product liability and Directors & Officers.
But whatever systems are adopted in Europe and elsewhere, the imperative must be to look at what is wrong with the US system, where costs are out of control and claims too often made without merit, and prevent it happening here.

As Swiss Re says, “Access for all should make litigation more efficient, not more expensive—for either plaintiff or defendant.”

Terrorists mapping the next generation

Mon, 08 Jun 2009 14:43:00 +0100

The Aon 2009 Terrorism Threat Map from Aon Crisis Management shows a trend towards fewer terrorist attacks in the Middle East but increased activity in Pakistan, India and Afghanistan, with Thailand and Nepal also showing more incidents.

Produced in coordination with security consultancy firm Janusian, the map represents a snapshot of terrorist groups’ intent and capability and provides a graded indication of the current threat of attack in each country.

Terrorist groups with more traditional ideological leanings seem to be experiencing a resurgence, said Craig Preston, executive director at Aon, citing the communist Shining Path movement in Peru and a revolutionary anarchist movement in Greece as examples.

The global recession could produce a new generation of terrorists from disaffected communities and usher the return of class-based politics, he said: “This raises the prospect of new terrorist groups forming in the developed world on the far right and far left of the ideological spectrum.”

Although another major terrorist attack in a Western country by Islamists is possible, and there are signs of more sophisticated plots, the threat has subsided Aon believes as a result of improved intelligence and security. “In general, operating conditions for terrorists have become more difficult in Western countries as well as in some Middle Eastern countries, such as Saudi Arabia,” Preston said. “Also there’s a shift of focus among terrorist groups towards establishing new fronts in places like Pakistan and Somalia.”

A copy of the 2009 Terrorism Threat Map can be requested from
http://www.aon.com/

Download the map at
http://img.en25.com/Web/AON/2009_Aon_Terrorism_Threat_Map.pdf

Janusian
http://www.janusian.com/

2009 Atlantic Hurricane Season Forecast

Fri, 22 May 2009 14:21:00 +0100

With less than two weeks to go we thought this an opportune time to give you an update on how some of the most respected forecasters see the 2009 season.

In recent years the first named storm of the season has actually begun outside of the ‘official’ season. Last year Tropical Storm Arthur formed in the Gulf of Mexico on the 31 May. In 2007, Subtropical Storm Andrea and Tropical Storm Barry both formed before 1 June.

It’s time to turn our attention to 2009 activity, and again, sooner than perhaps we had originally anticipated—Dr Jeff Masters’ Weather Underground blog ¹ flagged up one storm to keep an eye on from the morning of 19 May. The storm didn’t develop into a tropical storm, however, an interesting precursor to the season, as some areas in Florida are deluged by rainfall.

Historically, we’ve seen how forecasters have changed their forecasts over the season, and we’ll look to provide an update on this situation later this summer. However, as the season begins, here’s the latest from some of the more highly respected forecaster organisations:

Number of:	Tropical Storms	Hurricanes	Major Hurricanes
Colorardo State University ²	12	6	2
Tropical Storm Risk ³	15	7.8	3.6
WSI Corporation ⁴	11	6	2
Accu Weather ⁵	10	6	2
1950 - 2000 Average ⁶	9.6	5.9	2.3

The hurricane forecasters are predicting an average season, with an average/slightly above number of tropical storms and hurricanes forming when compared to the 1950-2000 baseline.

With reference to the heightened activity observed from 1995-2008, we may well be looking at an average season.

Just because the forecasts predict an average season, it doesn’t mean that the (re)insurance industry should sit back and relax: it’s not the number of storms that count, it’s the intensity and also if landfall is made.

So as ever, insurers and reinsurers need to keep a close eye as the season progresses. And let’s not forget that although we may have a focus on the Atlantic season, the Pacific Typhoon season ⁷ is also in progress—and from a nat cat perspective, every day is earthquake season…

Insurance information standards? Do we really need them?

Wed, 13 May 2009 15:39:00 +0100

The short answer is: yes.

The long answer? Like any global business, the London Market must continually enhance process efficiency to remain competitive. We do pride ourselves on our long traditions but we’re not likely to use a quill in a digital age.

Process change is necessary to ensure efficient and flexible working with multiple markets across the world. Potentially, multiple markets could also imply multiple communications techniques and that would be expensive, difficult to maintain, introduce ambiguities and so on. It’d be inefficient to say the least. So, we need a common communications framework.

We don’t need to invent the framework because it already exists. It’s provided by ACORD, the internationally recognised insurance standards body. Simply put, ACORD provides a global standards framework for the exchange of insurance information.
By adopting ACORD standards, the London Market will be able to exchange insurance information in a consistent way both within the Market and between markets, globally.

By collectively embracing industry standards, the Lloyd’s market will be able to clarify information requirements and therefore benefit from consistent and streamlined information flows. We’ll increase efficiency while reducing the costs inherent in matching differing local flows—we’re not saying no more information cleansing and manipulation, but a lot less of it.
We can then fully focus our energies on what Lloyd’s in renowned for—its expertise, products and service.

Record interest

Sun, 22 Feb 2009 14:52:00 Z

It’s been a busy few weeks, the first three of our quarterly test phases have been fully subscribed by Managing Agents and IUA companies (but some slots still available for brokers), and attendance at briefing sessions at record highs. In fact, I spoke at a Market Reform Office event a week ago and it received a record attendance…or it could just be me. (http://www.marketreform.co.uk/index.php?option=com_content&view=article&id=289:exchange-and-epolicies-enthrall-record-crowd&catid=46:latest-news)

The main questions being asked before the trails are how participants can get involved in one, and how will they connect to the Exchange.

Luckily, both are very easy top answer. To register for a test phase, please contact Sharmi Biswas (sharmi.biswas@lloyds.com) and for more on connecting to the Exchange, the website set up specifically to answer these sorts of questions is open to all:
http://www.loyds.com/exchange

A change of banana skins

Fri, 20 Feb 2009 14:14:00 Z

Investment performance is now the number one risk facing the insurance industry, according to the latest Centre for the Study of Financial Service (CSFI) Insurance Banana Skins survey, conducted in association with PriceWaterhouseCoopers.

The 2009 risk ranking, drawn from a survey of over 400 senior insurance executives, contrasts sharply with the previous survey published in 2008. Investment performance (1), equity markets (2), capital availability (3) and macro-economic trends (4) are now at the forefront of insurers’ concerns, above the previous year’s number one worry, ‘too much regulation’ (5).

Natural catastrophes, management quality and climate change now barely figure.

Of course insurers are operating in a different, more uncertain, environment: low investment returns, dried up capital sources and an economic slump all dominate.

It is a wonder non-life respondents sleep at night. The survey showed their top ten banana skins also include managing the pricing cycle, reinsurance security and risk management techniques.

‘Too much regulation’ slipped down the overall rankings to fifth place, but it remains a big issue. That’s because insurers fear a regulatory crackdown in the wake of the credit crunch. Insurance executives worry that their industry will be made to share the cost for what is essentially a banking crisis.

The survey doesn’t inspire confidence. Doubts over the quality of the insurance industry’s risk management and its exposure to complex risk instruments such as credit default swaps are sharply up on the previous survey. Only 4% of respondents thought that insurance companies are well prepared to handle such risks, compared with 21% last time.

But were they doubting their own or their competitors’ abilities?

www.pwc.com

www.csfi.org.uk

Satellite crash leaves liability issues lost in space

Thu, 12 Feb 2009 09:53:00 Z

Around 6,000 satellites have been sent into orbit since 1957 and although they are in different orbits, it’s getting busy up there.

Tuesday’s crash—the first ever between two large space objects—was between an operational Iridium satellite and a defunct Russian military ‘Cosmos’. The Iridium satellite is one of a constellation launched for mobile phone services.

Neither satellite is believed to be insured. But according to David Wade, Atrium Space Insurance Consortium, the accident raises some important questions over liability and the possible threat posed by debris to other satellites.

“For a time, this will pose an increased risk of debris strike for satellites in similar [low earth] orbits, which includes some of the earth observation satellites that are insured,” he says.

There could be a case for calling into action the UN's Convention on International Liability for Damage Caused by Space Objects. In practice, because the Cosmos satellite is not thought to have been operational, it's unlikely that there will be any liability.

Also it would be difficult to prove whether the Iridium satellite crashed into Cosmos or the other way around, Wade says.

Another complicating factor under the Liability convention is that the Launch State is ultimately held responsible (or in the case where the satellite operator and launch state are different, they are jointly and severally liable).

“In the case of the Iridium satellites it is a US based operator, but the satellites were launched on US Delta vehicles, Russian Proton’s and Chinese Long March’s. If the Liability Convention were to be triggered the particular Iridium satellite, and which launch vehicle it was launched on, also needs to be identified”, Wade says.

US Strategic Command has identified about 600 pieces of debris generated by the collision. The larger pieces of debris that pose a real threat will be tracked and monitored by the agency.

US Strategic Command tracks around 18,000 items of space junk that are 3.9 inches across or bigger.

Floogle—epidemic warnings from a search engine

Tue, 20 Jan 2009 13:37:00 Z

They have noticed that the number of people making queries like ‘flu symptoms’ is strongly correlated with the number of doctors visits due to the flu in that region.

Google explain their work [http://www.google.org/about/flutrends/how.html] and provide a link to this paper [http://www.nature.com/nature/journal/vaop/ncurrent/pdf/nature07634.pdf] from Ginsberg et al which gives more details (including a brief mention of other similar studies, some of which use Yahoo! data). At first look this result might seem quite obvious. If a region is in the depths of a flu epidemic it’s hardly surprising that more people than average will search for information about relevant symptoms. The real power of Google’s research is that the information contained in the queries appears to have predictive power. In other words they can spot an impending epidemic before it happens.

According to Ginsberg et al the new Google methods can give useful information some two weeks prior to the traditional monitoring methods by the Centre for Disease Control and Prevention (CDC) (http://www.cdc.gov). They stress that traditional methods still have their place and are not calling for their new methods to replace them. However, they hope that their approach could be very useful for medical authorities in planning for an epidemic before it occurs. I imagine this would enable the early ordering and deployment of antivirals, for example.

They consider how their approach might fair during a pandemic and stress that their method has not been tested in this scenario. It may be that heightened public awareness of the flu at such a time will invalidate their method (searches by the ‘concerned well’ may swamp those with early genuine symptoms). However, if their method is useful in such a scenario it could save many lives.
Lloyd’s Emerging Risks team have produced a [report on Pandemics http://www.lloyds.com/NR/rdonlyres/AFDA2B40-DAD7-4E15-8DAD-7838ED165A1E/0/ER_Pandemic_InsuranceImpacts_V2.pdf] and are continuing to monitor this subject for developments.
In any case, Ginsberg et al state that seasonal flu, which occurs annually, is still responsible for up to half a million deaths every year, so any reduction in mortality from this cause would be welcome.

The Exchange

Thu, 15 Jan 2009 14:41:00 Z

On Tuesday of this week we announced that IBM had been chosen to develop the pilot for the Lloyd’s Exchange.

The response to this news has been overwhelmingly positive and hopefully the ‘son of Kinnect’ labels are finally beginning to come loose.

After Kinnect, it was felt that a central solution would never be suitable again, but there is a clear gap in the market around setting central standards. Faced with the difficult decision of which supplier to select and how to operate (and more importantly not wanting to pick the wrong one), a central simple ring main that everyone can use to communicate was deemed the best solution. Think of it just as an electronic operating standard, it doesn’t impose any way of working on anyone, it just moves the information about.

And thus the Lloyd’s Exchange was born.

We are now working with IBM to develop a pilot with businesses around the market. We also have the support from the LMA, IUA and LIIBA. Using ACORD standard messages we could have the first messaging system for dealing with placing risks.

Watch this space!

Europe is keeping an eye on the benefits and risks of nanotechnology

Tue, 16 Dec 2008 15:55:00 Z

The European Union's Observatory-NANO (http://www.observatory-nano.eu) project has launched a new website to bring together work on the scientific, economic, societal, business, regulatory and risk issues surrounding nanotechnology.

The project is also currently writing 56 reports regarding the various scientific and technological developments covering a wide range of sectors.

At the time of this blog posting the scientific, economic, societal sections already contain some interesting information; however, the regulatory, business and HSE & risk sections are currently under construction. Interim annual reports from each section are expected in April 2009.

As insurers, the HSE & risk section is of particular interest and the following quote—taken from the project's first newsletter (which can be subscribed to by registering on their website) - describes their work:

"Nanotechnology-based products, as with those from other technologies, have the potential to cause harm to both human health and the environment. A number of activities have been initiated over the last few years to investigate such impacts; however their coverage is still incomplete in terms of materials, exposure routes and doses. This work package will highlight such new research and make extensive links to existing databases, organisations, networks and initiatives. In addition, it will review the ST analysis performed within the project to determine what (if any) EHS impacts they may have that are not already being investigated by other projects/organisations."

This will be headed up by the Institute of Occupational Medicine (http://www.iom-world.org/) (IOM) and includes the CEA, RIVM and Empa. The IOM is based in the UK and also runs the SAFENANO project (http://www.safenano.org/), an excellent resource for information on nanotechnology hazard and risk. The health and safety comments echo those made in the Lloyd's report on Nanotechnology (http://www.lloyds.com/emergingrisks), which was published at the end of 2007.

In addition, a questionnaire for stakeholders in nanotechnology will be launched in December 2008 and will cover environmental health and safety as well as economic and societal impacts of nanotechnology. Insurers may want to consider taking part in this to ensure the industry's voice is heard in this rapidly developing field.

Are industry CEOs resolved over Jan 1 rate increases

Wed, 10 Dec 2008 15:42:00 Z

They will probably go something like this:

• I will instruct my underwriters to increase premium rates
• I will make sure my company achieves a technical profit across the board
• I will try to invest risk free
• I will initiate a root-and-branch programme of enterprise risk management, investing in whatever systems and people are necessary to make it work.

OK, I made that last one up.

But the industry is certainly going to press for rate increases come the January 1 renewal. It doesn’t have an option.

The reasons for such resolve are clear. Insurers and reinsurers have so far proved resilient to the problems besetting other financial institutions. But they need to be very sure footed if they are going to stay resilient over the medium to long term.

They’re not in as bad shape as banks, but insurers and reinsurers are still looking at depleted capital bases and minimal investment yields in the future. Their financial flexibility is constrained and no-one is sure how long this three dimensional crisis will last. An increase in claims activity caused by recession, a credit crunch with legs and a stock market correction all happening simultaneously? Not even the most seasoned industry bosses have seen that before.

In a presentation in London earlier this month, Swiss Re’s chief US economist Kurt Karl said if there is one thing he is certain about it’s this: the uncertainty will continue.

At least let’s be grateful that we are not in the banking business was the message from Karl and his Swiss Re counterpart, Thomas Hess. Insurance is fundamentally different to banking: you can’t have a run on an insurance company because payouts are not triggered by policyholders’ will; insurance hazards are uncorrelated and there is no contagion between insurers; and insurers are not exposed to short term fluctuations in asset values because they usually hold them to maturity.

Mr Hess acknowledged that the industry’s double whammy of reduced investment yield and hurricane-related underwriting losses had eaten into the industry’s solvency ratio. But he pointed out that it is still 20% better than the low figure recorded in 2002. “Insurers and reinsurers coped with that [ratio] in 2002 so that cushion still exists,” he said, before adding. “But it all depends on what happens ahead.”

Rating agency Standard & Poor’s agrees that reinsurers have sufficient excess capital available to absorb the shocks of 2008 (including windstorm losses), but its credit analysts point out that the cushion has lost much of its stuffing. According to their analysis, the combination of hurricanes Gustav and Ike and the impact of investment losses for the first nine months of 2008, adds up to around $22bn of capital erosion for nine of the largest global reinsurers.

S&P says that this ‘AAA stress’ has effectively wiped out 85% of the excess capital held by that same group of reinsurers, on the basis that they had a total of $25.4bn at the beginning of the year.

If that doesn’t concentrate everybody’s minds on underwriting for a profit, I don’t know what will. How about the possibility of a major nat cat event blasting up the US east coast sometime next year? Enter Aon Benfield’s climate Cassandras.

The Aon Benfield UCL Hazard Research Centre boffins are predicting an active Atlantic hurricane season in 2009. In their news release they ask readers to note that their long range forecasts do not have a great record. But, based on current and projected climate signals, US landfalling hurricane activity will be 35% above the 1950-2008 norm they reckon.

So volatile weather and an inclement investment climate: uncertainties persist on either side of the balance sheet. That’s not good news for an industry sitting uncomfortably on a rather thin cushion. If the wind does blow, capital markets investors willing to help reload the industry will be in short supply, unlike previous years.

(Re)insurance industry CEOs are not well known for their resolve. This time it is different: they know they need to protect their capital position and they know how to do it.

Big Brother is watching you....sneeze

Fri, 05 Dec 2008 13:39:00 Z

http://www.ft.com/cms/s/0/b21a9dc2-bf48-11dd-ae63-0000779fd18c.html

They will infect a number of individuals and then expose them to a variety of social situations to see how the flu is transmitted. I found it particularly interesting to see they are focusing on the debate over whether the flu is transmitted via airborne particles or surfaces.

This is an interesting question, not least because if surfaces can act to transmit the flu it opens up other routes for legal liability challenge. Our pandemic report [http://www.lloyds.com/NR/rdonlyres/AFDA2B40-DAD7-4E15-8DAD-7838ED165A1E/0/ER_Pandemic_InsuranceImpacts_V2.pdf considers the following scenario:

"A catering company is responsible for the food for a particular global airline. It is discovered that the pandemic can be spread on packaging and after a review the global explosion of the pandemic is tracked back to a sick individual in the company whose health procedures were inadequate. Is the company responsible?"

The proposed Big Brother research may help to answer the question of whether packaging could spread the flu, and therefore help us to anticipate possible legal challenges in future.

Lloyd’s on “The ShakeOut”

Fri, 21 Nov 2008 16:07:00 Z

The US has faced the reality of dealing with large natural catastrophes in recent years – most of them windstorm related. But what about earthquakes?

At 10 am, 13 November 2008, millions of people in Southern California participated in ‘The ShakeOut’ drill, a practice drill to test the preparation and ability of the area to cope if such an event occurred.

The simulated earthquake was described as having of magnitude 7.8 that ruptured 300 km (200 miles) of the southern San Andreas Fault, between the Salton Sea and Lake Hughes, 80 km (50 miles) NNW of Los Angeles. This scenario earthquake was not selected as a worst-case scenario, but rather as a plausible event on the fault system considered the most likely to produce a major earthquake in southern California (Jones et. al., 2008, USGS Open-File Report). The southern San Andreas Fault is believed to have generated earthquakes of ShakeOut size on average every 150 years, and on the selected portion of the southern San Andreas - the last earthquake occurred more than 300 years ago indicating an earthquake is a possible future event. In contrast, there are many faults within the highly populated regions of southern California that could produce damaging earthquakes as well; however, their average repeat times (recurrence intervals) are thousands of years.

Creating scenarios and testing how the market copes with possible extreme earthquake events are a familiar process to Lloyd’s. The Exposure Management team have developed the RDS framework that outlines a number of well defined disaster scenarios, including earthquake events that cause an aggregation of risks that may have a material impact upon individual syndicates, and the market as a whole. The team analyse the financial impacts of such events to ensure the market is capable of surviving damaging events.

The Great Southern California Shakeout Drill aims to ensure businesses and the general public are aware of the social and economic ramifications of an earthquake occurring. The Shakeout scenario impacts were developed and described by the US Geological Survey, the California Geological Survey, and numerous other public and private organisations. The descriptive narrative of the event began at 10:00am local time with the two minutes needed for the rupture to travel the length of the fault and then proceeds through subsequent hours, days and weeks. The total impacts estimated for the ShakeOut scenario include over 1,800 deaths and economic losses on the order of $213 billion. Its primary physical effects would be felt in eight counties (Imperial, Kern, Los Angeles, Orange, Riverside, San Bernardino, San Diego, and Ventura) but indirect economic impacts on shipping and transportation would likely be felt throughout the country. Assuming a 12-14% take-up rate for earthquake insurance, the implied insurance loss is $25-30 billion. This does not include the potential insurance physical and liability associated with the loss of utility services and infrastructure.

Recent focus has been concentrated on the impacts of hurricanes, such as Ike and Gustav, but earthquakes have equally destructive capabilities and require careful preparation so as to reduce the impacts to society. It’s worth remembering that, unlike for hurricanes, every day is earthquake season!

Interesting Links:

What Would a Great Earthquake do to the Buildings in Downtown Los Angeles?

Media Advisory: USGS Animations Show Intense Ground Shaking From 7.8 Great ShakeOut Scenario Quake

East Asias got talent but can it hold on to it

Fri, 21 Nov 2008 08:55:00 Z

The East Asian Insurance Congress is the convivial talking shop that sees insurance bosses fly in from around the region to compare notes on their different colourful markets.

On the one hand, there are representatives from mature and sophisticated insurance markets such as Japan, Singapore and Taiwan. On the other, there are chief executives from important emerging markets such as the Philippines, Indonesia and Vietnam.

Reflecting the importance of the region to the market, Lloyd’s will be represented by many delegates.

Although the convention is to be hosted this time around by the Hong Kong Federation of Insurers, on the doorstep of what is potentially the world’s biggest market, China is unlikely to dominate discussions.

Instead, discussions will revolve around issues that are also central to insurers in the Northern hemisphere: climate change and terrorism. A lot can happen in two years.

Like Europe and North America, Asia Pacific has been hit by its share of nat cats and the strongest typhoons are getting stronger.
Cyclone Nargis, which hit Burma in May, left as many as 150,000 dead. Earthquakes are also an issue, especially after the devastating
Sichuan disaster in China.

Japan and Taiwan also have significant earthquake risk.

Terrorism is as pervasive in eastern Asia as anywhere else in the world and Lloyd’s 360 Risk event Terrorism in Asia in February pointed up the growing threat of local insurgencies in the region.

There is no mention in the conference programme of turmoil in the financial markets and the effect it might have on insurers in the region.

Though with local stock markets still suffering on the eve of the conference, it’s certain to be a topic of conversation.

Alex Faris, Lloyd's general representative for Hong Kong, told me that with global insurers so active in the region, the financial crisis and its wider fall-out is certain to be a talking point.

“Marine business is also affected in the region, with problems in ship financing and the decrease in value of fleets, as well as the associated drop in cargoes at present,” Alex said.

Insiders believe that the industry has sufficiently strong fundamentals to withstand the current turmoil in the financial markets, though it is likely to see its profits eroded.

In a report of five markets with rated insurers (‘Asia's Insurance Industry Can Shake Off The Negative Effects Of The Recent Market Turmoil’) Standard & Poor's Ratings Services credit analyst Connie Wong says the industry's operating performance is likely to deteriorate in 2008 and some companies may even report losses due to plummeting investment profits, slowing new-business sales, and falling confidence among policyholders.

“But we expect the rated insurers that have strengthened their balance sheets over the past five years to ride out the storm without major rating changes and believe that the sector's strong growth potential will remain intact over the medium term,” Ms Wong said.

“The capitalization of most rated insurers has been hit by declining profits or a reduction in investment evaluation reserves. However, we believe these setbacks are still manageable and will not affect most ratings due to adequate capital levels for the current ratings. But if market conditions deteriorate, insurers that have thin capital buffers will prove vulnerable,” said Ms. Wong.

Another subject not on the conference agenda this year is talent. The scarcity of talent available to fill executive positions in the insurance sector is a growing problem in the US, Europe and Bermuda. In competition for smart individuals with other parts of the financial services sector, Asia’s insurers could soon be facing its own intellectual capital crunch.

“Insurance is considered a poor cousin of the banking industry in Asia as well and we have been struggling to find good people to join the industry,” says Jon Song, Associate Director of Lloyd’s Asia in Singapore.

In tandem with the General Insurance Association (GIA) in Singapore, Lloyd’s is taking steps, however, Jon says. “These include a talent outreach project (to inform students and young professionals of the insurance industry), numerous career fairs and profiling talks; and lastly a global internship programme.”

This is important. As the financial markets stabilize and the tiger economies re-sharpen their claws, places like Singapore and Hong Kong are likely to become even bigger insurance hubs, catching up with London and Bermuda, Zurich and New York. And they will all be competing for the same people.

So the problem facing East Asia’s insurers in the future could be two fold: first attracting the best local people into the industry—and then keeping them close to home.

Cholera and climate change

Fri, 14 Nov 2008 13:24:00 Z

According to an article [http://news.bbc.co.uk/1/hi/sci/tech/7720163.stm] from the BBC scientists are now able to predict cholera outbreaks because they appear to follow seasonal increases in sea temperature.

Scientists – as ever – are being innovative in their use of the available data. Apparently they’ve taken satellite observations of sea surface temperature and also the amount of observed chlorophyll from plankton and noticed that they correlated with cholera outbreaks. Rita Colwell from the University of Maryland has been leading this research.

In an interview [http://www.thenakedscientists.com/HTML/content/interviews/interview/892/ ] on “the naked scientists” Professor Colwell noted that: “The areas that are affected mostly are the developing countries: India, Bangladesh, Malaysia, countries in the Middle East and Far East and countries where sanitation and safe drinking water are not available to all.”

Meera Senthilingam, one of the naked scientists’ team noted that: “We’ve all heard about climate change in the news […] But one factor we don’t hear about is the effect climate change can have on human health and pandemics. A bacterial disease now thought to be exacerbated by climate change is cholera.”

As is so often the case we see the interconnectedness of emerging risks. Climate Change is a subject the Lloyd’s 360 project www.lloyds.com/360 has devoted significant time to. Pandemics have been studied by the emerging risks team culminating in a report www.lloyds.com/emergingrisks published in October.

This story also shows that satellite data and other Earth Observation data is critical for risk management.

Only by ‘mashing up’ these data sets (sea surface temperature, plankton and cholera incidence in this case) can we see the connections between them; and then propose methods of modelling and predicting impacts.

I hope that a prediction tool is available soon; it is just one example of the adaptation we must carry out for climate change.

Postcard from Baden-Baden

Wed, 29 Oct 2008 09:25:00 Z

No-one seems that surprised or bothered. Everyone is preoccupied. Reinsurers, cedants and brokers trek through the park in the centre of town, collars turned up on their overcoats, oblivious to the heron stock still in the swollen river Oos.

Alternating between the grand hotels that stand along the riverbank—Badischerhof, Europaischerhof and the Brenners—delegates’ minds are filled with renewal rates, terms and conditions, solvency and profitability.

“I’ve been coming here for 15 years and I have never known a renewal like this one,” a veteran broker told me.

What’s different is that life has suddenly become very complicated. Like the weather, the business climate has become unpredictable and impossible to call. It has changed, but no-one is really sure what is going to happen next.

No doubt some people are missing the familiarity of the underwriting cycle: up or down, at least people knew where they stood. At Baden-Baden this year there is the unreal feeling that anything could happen.

In previous years, if there had been a storm like Hurricane Ike in the run up to renewals, everyone knew what to expect. Capital would be depleted, the market would harden and then later, new capital would come in to take advantage of it. This year, it’s not so simple. There are three elephants in the underwriting room: capital market meltdown, falling share prices and global economic recession.

Primary insurers who want to maintain their current business model (ie stay in business) are suddenly more dependent on reinsurance than they have been for a long time. It is virtually the only form of capital relief left open to them given the state of the markets. They want to retain less risk, they want to buy more reinsurance.

But reinsurers live in the same world. They are less exposed to the markets, but they just got smaller as well. As well as taking a hit on the asset side of their balance sheet, they’re finding (to their astonishment in some cases) that losses from Ike just keep on coming.

Surely that means that reinsurance prices can be jacked up, revealing to reinsurers at least a silver lining behind the clouds over Baden-Baden? Not so, apparently. While some reinsurers are predicting big rate increases (notably Munich Re which issued a press statement on Monday saying it expected a double-digit hike) others are less bullish.

Lloyd’s own Rolf Tolle, speaking at the Baden-Baden symposium, said he thought it was too early to call the bottom of the market. He said there is a justifiable fear among reinsurers that if they increase their prices they will lose the business.

At the same event, William Hawkins, the outspoken insurance research director at Keefe, Bruyette & Woods, pointed out that unlike previous post hurricane scenarios reinsurers have not actually lost a huge chunk of capital.

On the contrary, as other industry commentators pointed out, reinsurers were more or less prepared for Ike and Gustav having learned their lessons well. Now they are more likely to be hoarding capital because they don’t know what is going to happen next to them, nor how long the current turmoil in the financial markets will last. By keeping capital levels up, that may contribute to keeping the market soft going into next year.

It is all very confusing. But at least it is keeping everyone’s mind off the rotten weather.

So good they named it twice?

Wed, 22 Oct 2008 09:31:00 +0100

It must be a strange sight for any unsuspecting “civilian” arriving in the pretty German spa town during the last week of October. The sight of hundreds of men (and some women) in dark business suits crisscrossing the town, clutching their bulging briefcases, seems at odds with the otherwise sleepy autumnal scene.

But these people are on a mission. With the January 1 reinsurance renewal looming large on the horizon, buyers, brokers and reinsurance underwriters are starting to negotiate their deals.

It’s nice to imagine these discussions taking place in the relaxing, hot spa baths that the town is renowned for. The reality, however, is a scene of busy executives sweating contract details in overcrowded salons and hospitality suites around the town’s many plush hotels.

What are the big renewal related issues that will exercise people’s minds in Baden-Baden this year? Seymour Matthews, managing director of reinsurance at Lloyd’s broker Cooper Gay, expects some interesting discussions around reinsurance pricing this year, with reinsurers attempting to get into the driving seat.

“I believe reinsurers will be stressing the need for them to make underwriting profits in the current investment climate,” he says. “If reinsurers show a united front this could be a real turning point.”

Mr Matthews says that unexpectedly high losses from Hurricanes Ike and Gustav will also contribute to increases in reinsurance rates: “Cat losses for 2008 are considerably higher than the modeling agencies predicted.”

“The question European primary insurers will ask is whether they should be on the hook for US losses,” he says. “My personal feeling is that the days of the many paying for the few are over.”

Mr Matthews fears that the complex dynamics at play in the run up to this year’s renewals could slow things down.

“I worry that people will still be talking about all this in a month’s time and that the renewals will be very late again,” he told lloyds.com. “Cedants who are not prepared and leave decision making too late could be in for problems. Getting good advice early from their broker is key.”

Sharon Gallagher, underwriter at Lloyd’s insurer Kiln and a Baden-Baden veteran, agrees that reinsurance pricing will be the main topic on the agenda especially in light of recent events.

“Reinsurers are effectively loaning insurers their capital—in the current environment that is an expensive thing to do and with investment returns reducing, pricing cannot reduce, even for cedants without losses to their programmes,” she says.

“Although 2007 results were profitable, many of them were propped up by significant old year reserve releases and 2008 has seen its fair share of losses, whether large risk XL losses, Central European wind and hail losses, mid-West floods or the recent hurricanes [Ike and Gustav],” Ms Gallagher explains.

Ms Gallagher says that recent events emphasise the need for good risk management by reinsurers and insurers alike. “Whilst the reinsurance industry has made huge strides in recent years with cat modelling and, at Lloyd's, with the Realistic Disaster Scenario returns, we cannot be complacent,” she warns. “As recent events in the banking industry have shown, models are only a guide and are no substitute for understanding the underlying exposure of a portfolio.”

For their part, in the current climate, cedants need to factor in the possibility that their reinsurers might not be willing nor able to pay up when the large loss happens. “Regulators' security rating requirements can push cedants towards concentrations of cessions with a handful of reinsurers when the whole basis of our industry relies on spread of risk,” she says. “We must ensure that we do not simply become slaves to ratings but that the benefit of diversification is given its proper place.”

NOTE: Baden-Baden was officially given its double barreled name status in 1931 and derives from “Baden in the state of Baden” – as distinct from other Badens in other German states.

http://www.baden-baden.de/en/tourism/indexc.php?content=/content/00783/indexen.html

Adaptation Works

Fri, 17 Oct 2008 11:21:00 +0100

For this report we teamed up with Risk Management Solutions, the catastrophe modelling company. We looked at how much a 30cm sea level rise will increase flood risk for high risk coastal properties around the world and then considered how they can be strengthened (“adapted”) to keep the risk manageable. Without such adaptation the findings of our case studies are sobering, in some cases average losses will more than double from just 30cm of rise.
I recently came across a great example of how adaptation can help. The picture shows the results of Hurricane Ike’s storm surge. It starkly illustrates that well adapted properties fared very well; the fate of their neighbours was sadly different.

According to the Institute of Business and Home Safety the homes left standing had all been designed according to the standards they promote. The standards clearly worked. The IBHS is a non-profit organisation whose mission is to “…reduce the social and economic effects of natural disasters….”. Their standards are called “Fortified …for safer living”® and are a practical list of adaptations that can be made to improve the resilience of property to natural disasters.

They address their advice to both homeowners and also builders. This is good to see; I think it’s crucial that the building industry is engaged when discussing adaptation. If builders aren’t aware of adaptation options they won’t discuss them with their clients, and an opportunity will have been missed. The IBHS’s 77 page “builders’ guide” gives a detailed breakdown of suggested safety measures ranging from landscaping to roof design. They also consider all types of peril across the United States including hurricanes, wildfires and flooding, each of which may already have been adversely affected by climate change.

Our latest 360 report looks at various adaptation measures, some of which are broadly in common with those the IBHS recommend. Working with RMS, we have quantified the reduction in average losses that adaptation would be expected to bring. We found in all cases that an appropriate combination of adaptation measures can reduce future risk to below current levels. Such modifications are not free; but we hope that, by illustrating the financial benefit of adaptation, consideration of costs versus benefits can be made.

Some scientists are talking about far more extreme sea level rises than 30cm by the end of the century. Professor David Smith speaking in our latest video, which accompanies the 360 report, suggests that 2m of rise by 2100 is quite possible. So 30cm of rise could happen sooner than you think. We believe it is plausible that it could happen as early as 2030, which is well within business timeframes. Of course the pace of change could be slower than this. However, this just illustrates the uncertainties that climate change brings and the need to plan flexibly.

In the event of really extreme sea level rise the only option in some regions will be to move; they will quite literally be underwater. The IBHS state that in some areas, such as low lying barrier islands, some structures cannot be certified. They have clearly concluded that some areas are just too hard to protect; we can expect that the number of homes in this category will rise in future. However, for less exposed areas, and shorter timeframes, it is possible to adapt to changing risk.

Catch it Bin it Kill it

Thu, 16 Oct 2008 15:34:00 +0100

It gives simple, almost obvious, advice to help slow the spread of a flu pandemic. Many forms of pandemic spread via inhalation of water droplets created when we sneeze; if the droplets can be caught and disposed of the flu won’t spread as rapidly. It’s not rocket science.

The Emerging Risks Team at Lloyd’s have recently published a report on the [insurance impacts|LINK] of a pandemic which explores whether or not the world is better prepared to face the next major pandemic. The report references the 1918 ‘Spanish Flu’ pandemic, which was spread by the demobilisation of troops, and some estimates believe it led to 100 millions deaths, more than the First World War itself. The report considers whether this event is truly a worst case.

There are many reasons to believe the world would be better off: better drugs, better communications; models of disease spread; a healthier population and a co-ordinated response from the World Health Organisation backed up by International Health Regulations. But there are also reasons for doubt. Just-in-time supply chains used by many industries including hospitals may not be robust, particularly if they are spread across several countries; global travel far exceeds levels in 1918 and can rapidly spread disease; we have a much larger global population (nearly 3.5 times the level in 1918) and more people live in cities in which the pandemic can spread quickly.

I have a concern that most of the discussions around a pandemic relate to the flu (particularly H5N1) because, while this is the pathogen causing the most concern at present ,it is not the only possible pandemic. Others include: Hendra Virus, Cholera, Tuberculosis, Ebola, MRSA and SARS. It is important that pandemic preparedness plans do not over optimise to one scenario and are robust to many.

The report considers the scenario of a major pandemic which causes a recession (as many fear would happen) and then various experiments to consider how insurers may be affected.

In scenario planning it is useful to consider possibilities, even if they are felt to be unlikely. Directly affected insurance classes might include: General Liability, D&O, Employers’ Liability, Medical Malpractice, Event cancellation and Travel insurance. However, secondary effects might also occur. For example, at the height of a pandemic the number of available tradesmen may temporarily be lower than usual (they may be sick, or just not want to go into other peoples homes). In this case, traditional claims resulting from burst water pipes, storm damage to roofs, etc, may take longer to fix; and usually claims that last longer cost more.

While these secondary impacts are unlikely to damage the capital of insurers they will be an unwanted drain on profitability.

We hope the report is useful for professionals within insurers that are considering emerging risks. If the impacts considered in this report were not envisaged at the time of writing a policy then contract certainty is key. Inner limits for pandemic losses may help to contain exposure.

More on risk management of carbon nanotubes

Fri, 10 Oct 2008 11:05:00 +0100

These substances are on our emerging risks radar due to their similarity to asbestos fibres and potential health effects.
In a previous blog (“Carbon nanotechnology observed to cause asbestos-like injuries in mice”, July 11) I discussed this issue and commented on the risk frameworks that companies could follow to manage the environmental and health risks that may arise.
The Environment Agency’s advice (pdf, 1pg) is interesting because it targets certain groups: “those involved in synthesis or use of carbon nanotubes or in the management of the wastes produced”, and clarifies their duties to classify and correctly manage any waste produced involving the use of this technology.

Their statement notes that while our knowledge of health effects is incomplete there is enough cause for caution because “nanotubes may display hazardous properties either as irritant … toxic … or carcinogenic ….”. Therefore they advise that carbon nanotubes be classified as hazardous waste. They specifically note that the material “may display physiological properties similar in nature to asbestos”.

Their briefing sheet also gives advice on the concentration of these particles that can be disposed of safely and discusses various waste disposal options concluding that incineration above 850 degrees centigrade is the preferred option but other methods, such as chemical breakdown, may be appropriate.

The insurance industry’s losses relating to asbestos have been considerable, so it is good to see the Environment Agency taking these issues seriously. Underwriters would be well advised to track their exposure to nanotechnologies where concern has been raised, and carbon nanotubes in particular.