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EC News (25th May 2017)

  • Publish Date: Posted almost 7 years ago
  • Author:by Alan Jarque

Round-up of the weekly news and developments from the global insurance market with stories from Lloyd's, AM Best, Ironshore and more. 

Lloyd’s makes voluntary redundancy approach

The Corporation of Lloyd’s has approached all of its 1,100 members of staff inviting them to register their interest in voluntary redundancies amid ongoing efforts to revamp its operating model, according to reports.

The news was first broken by The Insurance Insider, which said the number of potential job cuts is yet to be determined by the Corporation.

A Lloyd’s spokesperson said: “We have been looking at the future operating model for Lloyd’s including our proposed structure, our processes and technology, so it can ensure that we are easy and efficient to do business with.

"What we are announcing is the opportunity for people to register their interest in the programme, and this will help inform how we continue to develop our plans around the operating model.

Further details are due to be announced to the market by the end of the third quarter.

Last December, Lloyd's announced that it was restructuring and simplifying its operations following a review by niche consultancy One6.

"This new structure and various initiatives will allow us to become more effective and efficient, ensuring the market has clear routes into the Corporation, avoiding duplication, whilst freeing up teams to look at the issues and opportunities around ensuring Lloyd's remains at the heart of global insurance and reinsurance,” remarked Lloyd’s CEO Inga Beale at the time.

"These changes are about making it easier for us to play the role the market expects."

Meanwhile, Lloyd’s has also reduced the costs of market subscriptions by 10 percent for 2017 as part of efforts to remain competitive.

Amid an ongoing soft market environment, carriers have been under pressure to become more efficient and reduce their operating costs in a bid to improve margins and Lloyd’s is no exception.

The Corporation’s expense ratio has steadily increased over the years, climbing from 34.7 percent in 2010 to 40.6 percent in 2016, driven by rising acquisition costs.

AM Best affirms AIG ratings following review

AM Best has affirmed the ratings of AIG and its insurance subsidiaries and restored the ratings outlook to stable, following a review that began with negative implications earlier this year.

In January, AM Best placed AIG’s ratings under review with negative implications after the US insurance giant said that it was expecting a material prior year adverse development charge in the fourth quarter of 2016, which it later confirmed to be a greater-than-expected $5.6bn reserve deficiency.

This came as the carrier announced a mammoth adverse development reinsurance agreement with Berkshire Hathaway's National Indemnity Company.

However, after analysing the carrier’s most recent financials, the ratings agency said it had been “possible to make a satisfactory assessment" that AIG's consolidated risk-adjusted capitalisation remains supportive of the A financial strength rating given to its operating units.

AM Best also acknowledged the appointment of newly instated AIG CEO Brian Duperreault, citing his “significant operating experience as an industry leader”.

In March, then AIG CEO Peter Hancock announced his resignation following a lack of shareholder support for his continued role at the helm of the company, being replaced by Duperreault earlier this month.

"AM Best has analysed the most recent financial information of AIG and its rated subsidiaries, in particular: the impact of the reserve development, the benefit of the adverse development cover and related loss portfolio transfer and an assessment of the adequacy of the group's current reserve position," the ratings company said.

AM Best also has discussed with AIG management and reviewed the viability of the planned corrective actions, capital return goals and organisational changes, including the new management framework.

The analysis "lessens AM Best's immediate concerns regarding the execution risk of successfully implementing the corrective actions taken to improve overall operating performance, and susceptibility to reduced credibility of (AIG's) franchise value."

AIG maintains adequate liquidity and financial flexibility, while its financial leverage and coverage ratios are within AM Best’s guidelines for its current rating,” the ratings agency added.

Moulder to leave PRA

Chris Moulder, the Prudential Regulation Authority (PRA)’s general insurance director, will exit the UK watchdog at the end of June according to reports.

The Insurance Insider has said that Anna Sweeney, the PRA’s current director for life insurance, will assume Moulder’s responsibilities when he leaves next month.

According to a PRA biography, Moulder currently leads over 150 insurance supervisors and actuaries, overseeing the activities of more than 400 insurance firms.

Moulder joined the UK regulator in December 2011 after spending more than 25 years at KPMG and presently serves as the PRA’s most senior non-life insurance supervisor. Prior to joining KPMG, he served in the armed forces for nine years as a Royal Engineer.

Most recently, he oversaw work on a public stress test for the London market to find out how it would respond to a range of simulated events incurring cumulative insured losses of around $200bn.

The dry run exercise tested 28 London-based non-life insurers and brokers on their resilience to a highly destructive hurricane, an unprecedented cyber-attack, a large stock market decline, and major re-insurer default, occurring in quick succession.

Other highlights of Moulder's career at the UK regulator include a thematic review of pricing which was held last year and a "Dear CEO" letter to the market last July in which he expressed concern over the sustainability of reserve releases.

Ironshore appoints ex-Hiscox political risk underwriter

Russell Fisher has re-emerged as vice president of political risk and credit at Ironshore following his departure from Hiscox earlier this year.

In his new role, Fisher will be responsible for writing European business but will be based in London. He will report to Don Asadorian, senior vice president of political risks and trade credit within Ironshore’s global political risk platform.

Fisher was previously a senior trade credit analyst at Hiscox for nearly five years but was one of a number of people to have been let go when the London-listed carrier placed its political risk business into run-off earlier this year due to challenging market conditions and a limited appetite to expand its small book in what it described as a “volatile class”.

Since then, two of Fisher’s former colleagues, Claire Simpson and Victoria Padfield, have joined Willis Towers within its London political risk and trade credit team, as part of a broader expansion of the firm’s financial solutions division.

Commenting on the appointment, Asadorian said: "Russell's credit risk knowledge and international banking relationships will further strengthen Ironshore's international capabilities for underwriting complex political risk and trade credit lines of business."

Carlyle sues insurers over Moroccan oil loss

US private equity firm Carlyle Group is suing a group of insurers that includes a number of Lloyd’s carriers over $400mn worth of oil it claims it lost when Moroccan refinery Société Anonyme Marocaine de l'Industrie du Raffinage (Samir) collapsed in 2015, court documents show.

In a suit filed in the United States District Court for the Southern District of New York, Carlyle Commodity Management, a subsidiary of Carlyle Group formerly called Vermillion Asset Management, said it had about seven million barrels of crude and oil products stored at the Moroccan refinery in 2015 before the state halted its operations.

In the court filing, Carlyle claims that underwriters, led by Mitsui Sumitomo Insurance Underwriting (now MS Amlin), have gone back on their obligations by declining to cover the losses, according to a report by Reuters on the court documents.

However, insurers argue that Carlyle's position in relation to Samir was as a lender and not as an oil supplier since the group never actually owned the oil it claims was stolen.

As such, they argue the losses allegedly suffered by Carlyle fall under the definition of an uninsured credit loss due to the refinery's failure to repay the amounts advanced to the sellers of the oil.

The insurers also allege that Carlyle breached its contract by not notifying the underwriters of payment problems.

The refinery was shut down in August 2015 after the Moroccan government imposed a $1.35bn unpaid tax bill on Samir and froze its accounts. This came as oil prices crashed from mid-2014, significantly reducing the value of oil Samir bought and held in its tanks for refining purposes. Carlyle says that during 2015 Samir emptied the tanks without its consent.

Carlyle filed the first request for cover to its insurers in January 2016 concluding that the oil could not be recovered.

In late February this year, Carlyle's insurers denied any cover, leading Carlyle to launch a lawsuit against the underwriters in early March, according to the court documents.

The claim relates to both primary and excess layers of coverage, with respective maximum limits of $250mn and $350mn.

MS Amlin is the lead insurer on the primary layer of the marine cargo claim, while the excess policy is led by Ascot Underwriting Syndicate 1414.

The other Lloyd's insurers subscribed to the excess layer are Axis, XL Catlin, MS Amlin, Chaucer, Travelers, Atrium, Ark, Markel, Beazley and Cathedral.

The case continues.

IFRS 17 poses major challenge for insurance industry: experts

The adoption of the International Accounting Standards Board (IASB)’s IFRS 17 will pose a major challenge for insurers and investors, Willis Towers Watson has warned.

In a response to the publication of the new reporting standard, Willis Towers Watson said that it was more than 'just' an accounting change and will have a wide and significant impact on insurers' operations.

The current standard, IFRS 4, has allowed local GAAP approaches to be used in each country which has meant very little consistency across countries and multinationals. The big change under IFRS 17 will be more transparency, giving investors a clearer picture of the returns they realistically expect on their investment and the risks to those expected returns,” said Kamran Foroughi, director at Willis Towers Watson, adding that it will take some time for investors to understand the new information.

Insurers across the globe will be required to use IFRS 17 for accounting periods from 1 January 2021 in what is the first ever global accounting standard for insurance contracts.

Willis Towers Watson said that the standard will impact profit, equity and volatility, as well as reserving and financial reporting processes, actuarial models, IT systems, and potentially executive remuneration, warning that insurance companies should not underestimate the work required.

The new rules require companies to recognise profit when insurance services are delivered, rather than when premium payments are received, as well as to provide information about insurance contract profits that are expected to be recognised in the future.

Meanwhile, the IASB has warned that applying IFRS 17 will require many insurance companies to gather new information, employ or develop people with appropriate skills and make changes to their financial systems.

Companies are also expected to incur costs in educating staff, updating internal procedures and communicating changes in their reports to external parties. Such activities may involve significant time, effort and cost, the IASB said.

Insurance companies are also expected to continue incurring costs in applying IFRS 17 on an ongoing basis. These will mainly arise from gathering the necessary information to update assumptions for measuring insurance contracts on a current basis.

However, carriers with operations in multiple jurisdictions are expected to reduce costs by applying a globally consistent model for their contracts, which will replace the current country-by-country system.

In addition, the new standard will simplify the measurement of some short-term contracts, such as those with a coverage period of 12 months or less, while a carrier will be able to apply the new requirements to a group of contracts, rather than on a contract-by-contract basis.

And IFRS 17 does not apply to some common contracts issued by non-insurers, such as most product warranties.

Markel to establish EU subsidiary in Germany

US-listed carrier Markel has announced plans to establish a new European subsidiary in Germany in response to the UK's exit from the European Union.

In statement issued last week (18 May), the company said that it is planning to apply for regulatory approval to set up an insurance company in Germany to “ensure that, whatever the outcome of the Brexit negotiations, a Markel insurance company will be able to meet the insurance needs of clients in the EU-27 countries.

Subject to regulatory approval, the carrier intends to have the new insurance company – which would be based in Munich - incorporated and capitalised within the first half of 2018, but no later than the deadline for Brexit negotiations between the EU and the UK, which is currently pegged for 29 March 2019.

We are focused on building upon and extending the global reach of our businesses. That means that we are committed to a strategy of profitable growth of our continental European business. Establishing a new insurance company in Germany will enhance Markel’s ability to do just that,” remarked Markel co-CEO Richie Whitt.

Markel has been doing business in Germany through its wholly-owned subsidiary Markel International since 2012 when it established a branch office in Munich.

Commenting on the announcement, Markel International president William Stovin said: “This is an important, strategic development for us. While we’ll continue to write international business through our Lloyd’s syndicate, we also want to build on the strong foundations of our national market businesses in Europe”.

The insurer’s decision to establish a German subsidiary is in contrast to announcements from other carriers regarding post-Brexit plans, with Hiscox, FM Global and AIG all opting for Luxembourg as the location of their EU bases.

Meanwhile, Lloyd's has said that it will open a European insurance company in Brussels, to ensure access to the single market following Brexit.

Ex-FSA chief Turner appointed Chubb European chairman

Chubb has appointed former UK Financial Services Authority (FSA) executive chairman Adair Turner as non-executive chairman of the insurance giant’s European and Lloyd's operations, it was announced last week.

Subject to regulatory approval, Turner will become non-executive chairman of Chubb European Group and Chubb Underwriting Agencies and will work closely with Andrew Kendrick, the carrier’s regional president for Europe, who will continue to have executive responsibility for the two businesses.

He succeeds John Napier, who has recently relinquished both positions.

Turner took over at the FSA at the height of the global financial crisis in September 2008 and remained at the UK regulator until 2013.

He has also held a number of other senior positions, including vice chairman of Merrill Lynch Europe and director general of the Confederation of British Industry (CBI).

Commenting on the appointment, Kendrick said that Adair’s “extensive knowledge and unique insights will be greatly valued by our board members and will add real value to our customer and market proposition in Europe.”