The Casualty Market A Broker's Perspective
advertisement
9th Sept 2009 The Casualty Market A Broker’s Perspective Andy Keefe Marsh RMP Casualty www.marsh.com Economic Backcloth Challenging Times www.marsh.com Sub-Prime & Credit Crunch – Impact on Insurance Inventory, cargo, logistics, travel, people, leisure all caught up in “ripple” effect Aircraft & Ships mothballed but Capital projects brought forward Orders shrunk, cancelled or deferred coupled with Short time working Replacement & Maintenance programmes deferred or delayed More Banking covenant & Supply chain defaults Sale or closure of clients non-core business activities More Regulatory oversight Solvency II + Securities Risk + FOREX volatility could = More conservative investment strategy, change in insurers risk appetite & capital allocation strategies. More Business to Business disputes. More Litigation and Large claims challenges. Credit Crunch plaintiffs go looking for deep pockets. Divergent insurer behaviour “Dash for Cash” versus “Dash for Profit”. Insured’s looking for more syndication of risk - Smaller layers, broader panels, reduced lines Arson, Cyber, Extortion, Fraud, Recall, Theft - incidents rise Rise of the Tort of Nuisance Marsh 2 What Does the “New Normal” Economy Look Like? High levels of unemployment/ underemployment Low levels of investment return Exchange rate volatility Low levels of new borrowing – Affects housing, autos, other consumer durables Low levels of consumer demand/business investment – Significant increase in the personal saving rate, but virtually all used to pay down outstanding debt Marsh 3 Year-to-Year Change in Net Written Premium, 2000-2009:Q1 15.3% First multi-year decline in NWP since 1930-33 10.0% 8.4% 5.0% 4.2% 3.9% 0.5% -1.0% -1.4% -3.6% 2000 2001 Sources: Marsh 2002 2003 2004 A.M. Best, but 2009:Q1 is from ISO. 2005 2006 2007 2008 2009:Q1 4 P/C Insurance Industry Combined Ratio, 2001-2009:Q1 120 115.8 As recently as 2001, insurers paid out nearly $1.16 for every $1 in earned premiums Relatively low CAT losses, reserve releases 2005 ratio benefited from heavy use of reinsurance which lowered net losses 110 107.5 Best combined ratio since 1949 (87.6) 100.1 100 Including Mortgage & Fin’l Guarantee line 105.1 102.2 101.2 100.8 98.4 95.5 92.6 Cyclical Deterioration 90 2001 2002 2003 2004 Marsh *Includes Mortgage & Financial Guarantee insurers. 2005 2006 2007 Sources: A.M. Best. 2008 2008* 2009:Q1 5 5 Casualty Trends Covers, Limits & Prices www.marsh.com Cover “this Financial Interest clause (for non-admitted cover for the parent subsidiaries overseas where non-admitted is illegal) is fine but how do we pay the plaintiff?” “we need to look at Excess Product Guarantee for end-products rather than just components” “we need full Contractual Liability cover because our end-customers have arbitrarily imposed and/or increased the liability caps” “but I need my PPL insurer to cover my joint & several liability risk for my partners activities within the unincorporated Joint Venture” “so the Toxic Mould exclusion takes out cover for Avian & Swine Flu?” “why are you selling me an ELD policy when my PPL policy already covers pollution risks?” “but I need evidence of PI cover to secure this contract” “but why do we have a Deliberate Act exclusion on our Corporate Manslaughter extension?” Marsh 7 The Global View Wide disparity of limits purchased and pricing Full population comparisons only Marsh 8 Total Survey Population Marsh 9 Global Results: 2008 vs. 2007 Marsh 10 Global Results: 2008 v 2007 Marsh 11 Liability: Average Yearly Cost* Small and Medium-Sized Businesses, 2002-2008 $4.00 2006 2007 2008 $0.65 $1.06 $0.95 $1.08 $1.27 $1.03 $0.72 $0.96 $1.24 $1.37 $1.07 $1.00 $1.30 $0.94 $1.50 $1.56 $2.33 $2.31 2005 Costs have generally declined since 2004 $1.89 $2.00 $1.96 $3.00 $2.50 2004 $2.49 $3.50 2003 $3.09 $3.21 2002 $0.50 $0.00 $0 - $200M $201M-$500M $501M-$1B *per $1,000 of revenue, across entire liability program (full population) Source: Marsh, 2008 Limits of Liability Report Marsh 12 Liability: Average Yearly Cost* Medium and Large Businesses, 2002-2008 2005 2006 2007 2008 $0.10 $0.14 $0.16 $0.13 $0.18 $0.17 $0.13 $0.27 $0.32 $0.23 Costs have generally declined since 2004. $0.44 $0.36 $0.42 $0.25 2004 $0.54 $0.63 $0.69 $0.24 $0.50 2003 $0.38 $0.75 2002 $0.77 $0.67 $0.86 $1.00 $0.00 $1B-$5B $5B-$10B $10B+ *per $1,000 of revenue, across entire liability program (full population) Source: Marsh, 2008 Limits of Liability Report Marsh 13 The $5 Million Loss: Learning From Experience Marsh 14 European Companies: With vs. Without Operations in North America Marsh 15 The Casualty Market Today www.marsh.com The Perfect Storm? (“no, not the George Clooney movie”) 2001 – Dot Com Crash, falling Investment yields – Heavy “Nat Cat” & Large P&C losses – 7 years of rate reductions – Consistently poor Combined Ratios – Insurer insolvencies 2008/9 – Sub-Prime Crisis, Credit Crunch & falling Investment yields – Above average “Nat Cat” & Large P&C losses – 5 years of rate reductions – Combined ratios at or close to 100% – AIG rescue “Can you spot the difference”? Marsh 17 Casualty – June 2009 Policy holder surplus down but remains healthy - scope for further reserve releases now impaired Products & people exposure reducing BUT Injury Cost inflation still at +8% per annum Capital re-allocation strategies may change insurers appetite by class Claims challenges and battle of Coverage Counsel now the norm Social aspects heightened – enhanced awareness, deep pocket philosophy, collapse of social security systems Legal costs at 40% of bodily injury settlements not a sustainable model Primary & Excess Rates “bottoming out” but still competition for selected risks Captive premium levels under pressure US law firms actively recruiting Europeans to join US class actions Legislation will continue to drive harmony via EU wide directives but speed of change is dependant upon whether legal systems are based on codified Napoleonic civil code and Roman law or Statute and Common law which are driven largely by case law Implementation of EU environmental legislation will drive higher recognition and responsibility for pollution. Stand alone pollution markets likely to compliment or replace CGL form. CGL policy coverage could change as a result Increased incidence of Product Recall and Product Counterfeiting activity as the manufacturing supply chain becomes increasingly focused on the Far East Contract Certainty/EOC now embedded with 21 day ABI “on-time” at 91% BUT “document accuracy” at under 10% for top-end commercial arena remains an ongoing challenge Marsh 18 Large London Market Casualty Loss Events Sector Event Year Cost Estimate Raw Materials USA US Auto 1997 USD29m Life Sciences USA US Prods 1998 GBP21m Chemicals Far East RoW Prods 2003 GBP28m Technology USA US Prods 2004 USD15m Leisure USA US PPL 2005 USD11m Premises UK “Buncefield” 2005 USD250m+ Food Mft UK Salmonella 2006 USD35m+ Construction UK Collapse 2007 GBP75m+ Utilities USA Explosion 2008 USD1bn+ Technology USA Open Source 2008 USD100m+ Utilities UK Water Act 2009 GBP35m Marsh Geography 19 Coinsurance (Subscription) Market Practices The 5 x BIPAR Principles For? Against? – Breaking Cartels is good – Hard Market challenge – Leader panels are dwindling – Wide variation of terms & – Reflects true technical pricing of – – – – Marsh each insurer Reflects different insurer RoC needs Treating Customers Fairly Aviators already do this Already common in EU – – – – – conditions emerge Non-concurrency issues emerge Claims challenges increase Broker fees increase Multiple releases on claims needed Already common in UK 20 Risk Management 2009 – “don’t forget the basics” Marsh 21 Casualty Hot Topics www.marsh.com Casualty 2009 Hot Topics Global programme regulatory and tax challenges Tax Liability for “non-admitted” excess of loss “DIC” challenges ie Faute Inexcusable – what is a good local standard? Use of Capital (Historic v Prospective liabilities) & Solvency II Collateral Alternatives House of Lords 17/10/07 rules Pleural Plaques are not compensatable BUT? Asbestos “trigger” litigation (Bolton v MMI etc) coming to a head “Bartoline v RSA & Others” – TP pollution clean-up costs Law Commission Review (2010) – Insurance contract law, non-disclosure, warranties (Qayyum ansari v New India Ins 2009) Ministry of Justice (MoJ) paper CP8/07 published 20/4/07 Ogden 6 (2007) – new rules for loss of future earnings and non-mortality contingencies Marsh 23 Landscape of Emerging Risks Ageing infrastructures Food contaminants Indoor pollution Spread of diseases Space weather Cloning Telemedicine Endocrine disruptors Media risks Dirty bombs Cyber risks RSI Deteriorating safety standards Implants Contingent Business Interruption Stress at work Alcohol Toxic mold Drinking Mega water quality Tsunami Resistance to Botox antibiotics Electrosmog CO2 trading Business Loss of ethics reputation Off-shore & Power Invasion internet system Organised Customised of privacy markets crime break drugs Privatisation Pervasive Caldera Nanotechnology Bogus parts computing erruption Intercontinental data transmission Source: Sean Russell, “Emerging Risks: Risk perception at Swiss Re,” Presentation delivered July 4, 2007, at Marsh www.casact.org 24 Perception of Emerging Risks Insurer v Insured High 3 Nanotechnology Resistance to antibiotics Endocrine disrupters 2 REACH EU Insured Plasticizers Pandemic Ubiquitos computing Cyber risks Welding fumes Ecological damage Food contaminants Alcohol Drinking water quality Diesel and gasoline Alcopops Obesity Harassment Workplace related stress Ageing of infrastructure 1 Low Marsh 1 2 3 Insurer 25 Environmental - Traditional Coverage Forms and Gaps “We have it covered” General Liability Property D&O Business Auto Site Pollution/ Env. Liability Underground Storage Tanks Likely excluded Likely excluded Likely excluded Likely excluded Scheduled primary or excess of UST policy Waste Disposal Likely excluded Likely excluded Likely excluded Likely excluded Add optional Non Owned Disposal cov. Material Transport Limited coverage possible Likely excluded Likely excluded Limited coverage Add optional 1st Party or Contingent Trans. Hostile Fire Limited coverage possible Likely excluded Likely excluded Likely excluded Pollution coverage is all peril risk policy Business Interruption Likely excluded Likely excluded Likely excluded Likely excluded Add optional loss of rents / extra expense Fuels/Chemical Storage Likely excluded Limited coverage possible – named peril Likely excluded Likely excluded Liability coverage is provided for releases On-Site Clean-Up/ Remediation Costs Likely excluded Limited coverage possible, sublimit $25k Likely excluded Likely excluded Covered unless specifically excluded due to known liability Waste Storage On-Site Likely excluded Likely excluded Likely excluded Likely excluded Liability coverage is provided for releases Prior Environmental Claim/Loss/Violations Likely excluded Likely excluded Limited coverage for shareholder suits Likely excluded Covered unless specifically excluded due to known liability Marsh 26 The Fallacy of Predictions (or why we should think before we speak!) “no more boom and bust” – Gordon Brown, 1997 “640k ought to be enough for anybody” – Bill Gates, 1981 “no matter what happens, the US Navy is not going to be caught napping” – US sec of Navy, Dec 4, 1941 “radio has no future, X Rays are clearly a hoax, the aeroplane is scientifically impossible” – President, Royal Society, William Thomson, 1897 “the atom bomb will never go off – and I speak as an expert in explosives” – US Admiral William Leahy, 1945 “I think there’s a world market for about 5 computers” – Thomas J Watson, Chairman IBM, 1961 Marsh 27 Casualty Hot Topics in 2020? Social security systems collapsed - Long term healthcare no longer affordable Weak casualty pricing predominates Computer underwriting models unable to cope with rapid change in world of risk Toxic Torts – Alcohol, Benzene, Endocrine Disrupters, Obesity Novel Toxic Torts – IPR (Open Source), Lifestyle Products, Nano-particles, Pervasive Computing Bio Mechanical Engineering & Robotics developments “Post-Carbon” technology solutions introduced in a rush Aging Infrastructures under stress or unable to cope Climate Change/Emissions lawsuits Regulation overload Contractual liability stresses within supply chains US style class-action litigations now the norm Can “Occurrence form” survive capital market angst or uncertainty factor Aging population still at work Hypersonic and Space travel for the general public Asbestos has “peaked” – Nano-particles & EMF cell damage just emerging Marsh 28 Contractual Risk Management Stress in supply chain www.marsh.com Contractual Flows Principal or Customer SubContractor Supplier SubContractor Marsh 30
