UK: Soft markets lead to hard times....
By David Abbott and Julie Tripp
On 29 August 2005 Hurricane Katrina made landfall on the Louisiana coastline. Just shy of one month later, Hurricane Rita tore across southern Florida, hitting the Texas-Louisiana border after crossing the Gulf of Mexico. About one month after that Hurricane Wilma, the most intense tropical storm on record in the Atlantic basin, ripped across the Gulf in the opposite direction, devastating parts of the Caribbean, Mexico and Florida. This 3-storm combination resulted in one of the most widespread loss recovery situations the US property/casualty market had ever seen. Even with the collegiate spirit and robust wordings in the market there were issues, particularly with business interruption. Some companies are still dealing with claims a decade later.
Astonishingly there has been only one major hurricane landfall in the US in the last eight years, despite a number forecasts to the contrary during that period. This year, the US National Hurricane Centre has forecast a "below-average" hurricane season for 2015. This low in North American hurricane activity has been a key factor in the recent softening of market conditions. Indeed, general property market conditions are the softest they have been since before 2000. Unfortunately, with soft markets can come soft drafting.
Industry Loss Warranties – the simple choice?
One type of cover taking centre stage at the 1 January renewals was the Industry Loss Warranty (ILW). ILWs, developed in the 1980s, have been on the increase since Superstorm Sandy in 2012. These covers are designed to respond once a loss has hit a certain threshold on an industry-wide basis. They usually nominate a specific organisation's reported figure to be the benchmark – for example Property Claims Services (PCS), Swiss Re's sigma or Munich Re's NatCAT service.
It is essential to draft these types of wordings tightly, however, as pitfalls abound. The most common relate to the suitability of the nominated index. For example, where an ILW's trigger is phrased as "non-marine property losses arising in North America" in excess of GBP 5 billion following a named windstorm, it would be prudent to nominate a publication that provides its estimates based on non-marine property only (some publications do not differentiate between marine and non-marine property in compiling their indices). If the trigger specifies a geographical region, it is important to ensure the publication nominated also covers that region, and not just a subset.
Where the publication nominated does not suit the trigger a reinsurer may use this to challenge the claim, and may even be permitted to substitute alternative figures proving its case. Where the policy includes an arbitration clause, the situation may become more difficult still, as in many cases arbitration clauses provide that the arbitrators need not rely on the strict letter of the law in coming to their decision. Arbitrators are often keen to find a "middle way" where the legal (and commercial) situation is not clear cut. In addition, if successful, the reinsured will not be able to rely on the outcome of the arbitration in relation to any other disputes arising under the same (or same type of) policy with its other reinsurers. All of a sudden a simple cover has turned into a complicated one.
Hours clauses take their time
Another area to consider when dealing with natural catastrophe claims is the so-called "hours clause". This clause allows the reinsured to aggregate losses arising from the same originating cause within a set time frame. Traditionally this is 24-48 hours for a hurricane or 72 hours for flood, and 168 hours for other non-named perils.
Recently, however, hours clauses have emerged that go rather beyond tradition. Frequently hours clauses now have time periods in relation to flood or snow-related losses of 504 consecutive hours, or 21 days. In addition, some hours clauses now permit the reinsured, as "sole judge", to aggregate losses from other catastrophes into the same loss, so long as those catastrophes occur within the relevant time period. We expect these sorts of clauses, particularly where the reinsured has sole discretion to deal with the losses as it chooses, to be difficult to challenge.
Beware the unexpected threats of climate change
Hurricanes and typhoons are often considered the "paradigm" example when it comes to considering the effects of and losses arising from natural catastrophes. "Superstorm Sandy" started life as a hurricane, although it became "extratropical" on reaching New Jersey. It continued to produce wide-ranging damage, including severe flooding in New York City.
It is worth bearing in mind that not all of the effects of climate change result in hot-weather events. Rising temperatures result in moisture being trapped in the air for longer periods, which results in more intense storms – both rain and snow. Perhaps one of the starkest recent examples of this is the series of snowstorms affecting New England earlier this year, which produced record-breaking snowfalls coupled persistent cold temperatures (making it difficult for municipalities to clear the snow from the roads). This combination resulted in particularly heavy levels of claims, including complex business interruption claims.
Some policies now include a "climate change" exclusion, which is designed to exclude from the cover all losses arising as a result of "climate change" or "global warming". To date such an exclusion has not been upheld by the courts, who have cited a lack of evidence proving climate change as a proximate cause. Experts have commented, however, that within the next 10 years there is likely to be sufficient data available to support an argument that climate change has directly caused a particular weather phenomenon. Such data will likely thrust this sort of exclusion into the limelight in future.
Until then, however, reinsurers should bear in mind that catastrophe losses are likely to come from unexpected corners, and soft wordings may bite at the unlikeliest of times.
UAE: Trends in the reinsurance landscape
By Peter Hodgins and Tom Bicknell
The UAE Insurance Authority has recently released its Annual Statistical Report for the Insurance Sector in the United Arab Emirates for 2014. The Report provides a comprehensive overview of the (re)insurance landscape in the UAE.
The key points highlighted in the report are:
Continued growth in the insurance market – insurance premiums for the UAE grew by 13.5% to AED 33.5 billion (approximately USD9.12 billion) in 2014, a 1.3% increase on the 2012-2013 growth rate.
The dominance of compulsory lines – general insurance remained the major contributor to the total premiums in the UAE accounting for AED24.9 billion (approximately USD6.8 billion) or 74.3% of total written premiums in the market, albeit this represents a 2% reduction from 2013. However, health insurance accounted for approximately USD3.03 billion of this business.
The split between local companies and foreign branches – the share of the market between local and foreign companies remained in approximately the same proportions as 2013 with life and funds formation premium still being dominated by foreign issuers (81.4% of underwritten premium). This proportion is, in our view, consistent with the life sector still being in a particularly early stage of development in terms of local expertise. By comparison, local insurers maintained the larger market share in respect of property and liability coverage with 75.1% of underwritten premiums.
Fragmented insurance landscape – there are 60 insurers (34 locally incorporated insurance companies and 26 branches of foreign insurers) and 164 insurance brokers (159 locally incorporated and 5 branches of foreign brokers). 13 insurers continue to operate on a composite basis. 10 insurers are licensed only to conduct life insurance and fund accumulation business. There are 11 insurers operating in the takaful sector.
Reliance on reinsurance capacity – the local insurers continued to be heavily reliant on reinsurance, with overall retention rates for general insurance business remaining constant at around 55%. However, there are distinct variations in the level of retention across particular lines:
Losses ratios – the market has experienced deteriorating loss ratios:
Looking to the future, it is probably trite to observe that premium growth will continue in the UAE given the low level of penetration in the UAE by comparison to developed economies. However, whether the rate of growth (a CAGR of 17% over the last six years) can be maintained is questionable. There is speculation that the declining oil prices in the region could result in a decrease in investment in new commercial projects with the knock on effect of reducing demand for insurance coverage. Although to some degree this will potentially be offset by the attraction of the UAE as a stable environment whilst geo-political uncertainty remains in the wider Middle East region.
Underwriters continue to comment on the soft rates across many lines in the region (which is reflected in the deteriorating loss ratios). This will undoubtedly continue whilst excess capacity exists in the reinsurance market facilitating the continued levels of low retentions by the local insurers. We are nevertheless seeing an increase in reinsurers seeking to establish a local presence to provide on-the-ground expertise to manage underwriting and claims. Whilst other financial hubs continue to develop in the region (eg the Qatar Financial Centre and the Abu Dhabi Global Market), the DIFC remains the popular choice for reinsurers keen to set up a MENA reinsurance hub. In this regard, the lack of underwriting expertise in many specialist areas, particularly in commercial lines business, means that the local market will continue to be dependent on outside expertise in its coverage of large or complicated risks. In addition, the continuation of the moratorium on the issuance new insurer licenses by the Insurance Authority means that fronting arrangements will continue to develop as a mechanism for accessing the local market.
The UAE Insurance Authority has not directly sought to discourage the local industry's reliance on reinsurance. Instead it has introduced measures to strengthen the insurance industry, primarily through the enactment of the Financial Regulations in 2014. These regulations introduce for the first time a risk-based capital requirement for insurers. Whilst commentators have suggested that the regulations do not adequately discourage the current levels of reliance on reinsurance, the clear intention of the Insurance Authority is to encourage consolidation and to create industry players who have the necessary financial strength to retain a greater percentage of the risks that they underwrite.
In a similar vein, the Insurance Authority has recently reignited the discussion on composite insurers an indicated that it expects such entities to segregate the life and non-life business into separate entities. It remains to be seen if this will have the effect of leading to consolidation, particularly in the life insurance sector.
A similar drive has been experienced in the insurance broking sector. Increased capital standards introduced at the end of 2013 has led to the exit of many smaller brokers. The result being the overall number of brokers decreasing from in excess of 200 to 164.
Overall, the insurance market in the UAE looks set to continue its solid growth with local participants continuing to be heavily reliant on the international market.
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