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Dorian keeps Florida on ‘razor’s edge’ as hurricane threat continues

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Category five Dorian hit brings unprecedented damage to Bahamas

Analysis: Insurers have options in dealing with pension deficit problems

Market news, data and insight all day, every dayInsurance Day is the world’s only daily newspaper for the international insurance and reinsurance and risk industries. Its primary focus is on the London market and what affects it, concentrating on the key areas of catastrophe, property and marine, aviation and transportation. It is available in print, PDF, mobile and online versions and is read by more than 10,000 people in more than 70 countries worldwide.

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NEWS www.insuranceday.com | Tuesday 3 September 20192

ID Comment: Scor has everything to prove after Covéa’s bid

Some justification for Denis Kessler’s pointed refusal to sell Scor will need to be found in its upcoming business plan

Lorenzo SpoerryDeputy editor

Scor’s upcoming business plan will need to impress sharehold-ers angered and frustrated at chief executive Denis Kessler’s

sharp rejection of a good takeover of-fer last year.

Scor’s share price stands at €36.76, well below the €43 per share on offer from Covéa in September 2018.

At the time, activist investors dismayed at Kessler’s aggressiveness towards a po-tential bidder with a good offer sought to remove him as Scor’s chairman (while allowing him to keep his chief executive role). The long-time head of the firm re-sisted, promising better times ahead.

Against this backdrop, Scor will on September 4 present its new business plan, which it calls Quantum Leap.

It will have to live up to the name and show a real ambition for greater things. An improvement in the targeted com-bined ratio from the present 95% to 96% would surely be welcome, as would an

improvement in Scor’s return on equity. Or Kessler could take a new direction

entirely, investing more heavily in the fields of insurtech or insurance-linked securities. An accelerated growth strat-egy could be welcomed by the market, as might a suggestion capital will be de-ployed to grow the business via intelli-gent mergers and acquisitions.

Whatever happens, Covéa’s bid price will hang on Kessler like an albatross.

If, even in the current positive rating environment, he fails to deliver a sig-nificant improvement in the valuation of the company, his shareholders might feel justified in demanding even more significant changes in the composition of the boardroom. n

ArgoGlobal’s syndicate 1200 to exit Asia and most of marine hull book

Syndicate 1200 is to exit Lloyd’s Asia and most of its hull un-derwriting business as part of a move by its parent company, ArgoGlobal, to improve the syndicate’s profitability, writes Scott Vincent.

Matt Harris, group head of international operations at Argo Global, said recent combined ratios recorded in the syn-dicate’s Asia business were unsustainable.

“While we still see growth opportunities in the region, we need to prioritise our efforts in profitable growth in other markets,” he said.

The Asia business accounted for less than 3% of syndicate 1200’s gross written premium in 2018.

The decision to exit hull underwriting, which also repre-sented less than 3% of the syndicate’s gross written premium last year, was also made on the basis of recent underwriting results being unsustainable.

ArgoGlobal said it will still consider writing certain hull risks on a limited basis through syndicate 1200 from Dubai.

“This is another step in our overall drive to increase prof-itability,” Harris said. “It is important to note we are fully committed to the remaining marine classes we insure and [to] insuring hull on non-Lloyd’s platforms.”

ArgoGlobal said the announcements would not have an impact on Argo Group’s Ariel Re syndicate 1910 business, which includes a growing Hong Kong-based renewable en-ergy business.

Swiss Re, Capsicum Re partner on cyber reinsurance productSwiss Re and specialist broker Capsicum Re have jointly launched a “holistic” cyber reinsurance product that prom-ises a complete solution to insurers’ cyber needs, writes Lorenzo Spoerry.

The founders claimed the product, called “Decrypt”, pro-vides a single, flexible, end-to-end solution to insurers’ cyber exposure challenges, including embedded, silent and affir-mative cyber risks.

It offers a lead line from Swiss Re of up to $50m per client.Anthony Cordonnier, head of cyber product manage-

ment at Swiss Re, said Decrypt gives insurance companies a “unique understanding” of their portfolios’ affirmative and silent exposures, and offers protection against the aggrega-tion of cyber losses across different lines of business.

The product uses a modular approach of risk identifica-tion, quantification and transfer.

Rupert Swallow, Capsicum Re’s chief executive, described Decrypt as “another market-leading first for Capsicum Re’s award-winning cyber team”.

“By leveraging their superior risk knowledge and data and teaming up with Swiss Re, we have created a unique new solution that will manage insurance companies’ genuine concerns and challenges over cyber exposure management, and set the standard for the industry,” he added.

Denis Kessler rejected a takeover offer for Scor last year

© Nathalie Oundjian

NEWSwww.insuranceday.com | Tuesday 3 September 2019 3

Dorian keeps Florida on ‘razor’s edge’ as hurricane threat continuesSmall deviation in Hurricane Dorian’s forecast track will bring major hurricane conditions to the US East Coast

Scott VincentEditor, news services

Florida’s Atlantic coastline remains at risk of major hurricane impacts over the next 48 hours, with

even a slight change in Hurricane Dorian’s forecast path likely to bring the storm onshore.

Dorian’s path is now reaching the critical period where even a small deviation in the storm’s track can result in a multi billion-dollar difference in insured and economic damage.

While the storm’s official Na-tional Hurricane Center (NHC) forecast track shifted over the weekend to indicate Dorian was less likely to make a direct land-fall in the state, forecast models continue to indicate the storm will track very close to the US coast-line as it travels northward.

This means a deviation of just a few miles could bring major hur-ricane winds onshore in Florida, as well as neighbouring Georgia and South and North Carolina.

Signs that Dorian appeared

to be undergoing an eyewall re-placement – a process that would broaden the storm’s windfield – also added to the potential risk to the US coastline.

Broker Guy Carpenter de-scribed the forecast as a “razor’s edge” for Florida, with the poten-tial for sustained major hurricane winds along the coast should the storm deviate by even a small amount from its forecast path.

Should the storm creep along the US coastline as a major hur-ricane the extent of damage to coastal exposures would be sig-nificant, although it remains too early to quantify the potential im-pacts of this scenario.

Dorian spent more than 24 hours as a category five hurricane as it wreaked devastation in the northern Bahamas and remained a highly dangerous category four storm at the time of writing.

Fears of a landfall in the south of Florida, particularly a hit on Miami, which S&P Global Ratings has suggested could have caused an insured loss in the $100bn range, have now diminished.

But mandatory evacuations are taking place in Jacksonville, which is the state’s most populous

Category five Dorian hit brings ‘unprecedented damage’ to BahamasLoss adjusters are aiming to reach hurricane-hit parts of the Bahamas “as soon as possible” amid major fears about the extent of damage from Dorian’s category five passage over the archipelago’s north-west-ern islands, writes Scott Vincent.

Grand Bahama, the island that is home to a large proportion of the country’s insured exposures, was subjected to sustained catego-ry five winds, heavy rainfall and storm surge after Dorian stalled following a direct hit on the island.

Steve Bowen, director of the Impact Forecasting unit at Aon, said the longevity of these con-ditions on Grand Bahama was “hard to imagine”.

“The level of damage is likely to require a multi-year recovery on a par with other recent major global catastrophes,” he said.

Grand Bahama is home to Freeport, the second-most pop-ulous city of the Bahamas and its industrial capital, as well as several hotels, resorts and other tourist attractions.

Much of the archipelago’s

population and economic activi-ty is concentrated on the island.

Category five winds also hit Ab-aco Islands, where prime minis-ter, Hubert Minnis, has described damage as “unprecedented”.

Marsh Harbour, a town in the Abaco Islands close to where the storm made landfall with winds of 185 mph, is reported to have suffered major damage.

Alongside the 1935 Labor Day hurricane, this represents the highest sustained windspeeds at landfall ever recorded in the At-lantic Basin.

The US National Hurricane Center (NHC) said “extreme de-struction” can be expected on the islands hit by Dorian.

With Dorian stalling over Grand Bahama, the longevity and ferocity of wind damage, alongside heavy rain and storm surge, mean the storm will al-most certainly represent the costliest insured event on record for the Bahamas.

The NHC warned Dorian’s storm surge may have reached

up to 23 ft in parts of the Baha-mas, with rainfall accumulations of up to 30 inches.

Kenneth Tolson, US president for claims solutions at Crawford & Company, told Insurance Day the loss adjuster was aiming to get its teams on to the islands in the coming days.

“We have a team of 20 sched-uled to travel there as soon after the storm is possible,” he said.

“The challenge in the Bahamas will now be the extent of infra-structure damage. The eyewall went right across Marsh Harbour and Abaco, and with winds of around 185 mph we know dam-age will be severe.”

Five-day forecast for Hurricane Dorian

city and situated on its north-east coastline, as well as other locations along Dorian’s potential path.

The storm has proved partic-ularly challenging for forecast-ers over the past week but each of its movements has remained

within the NHC’s projected “cone of uncertainty”.

Much of the focus at the end of last week was on a potential land-fall in the West Palm Beach area of Florida’s east coast, before a shift in Dorian’s forecast track that sug-

gested the storm would recurve and either remain offshore or make landfall further north.

Dorian was due to turn towards the north-west at time of writing and the timing of that turn will help determine if and where it hits.

‘The level of damage is likely to require a multi-year recovery on a par with other recent major global catastrophes’Steve BowenAon Impact Forecasting

Source: NOAA

ANALYSIS www.insuranceday.com | Tuesday 3 September 20194

Insurers have options in dealing with pension deficit problemsUnless they are properly managed, defined benefit pension scheme liabilities can significantly restrict UK insurers’ strategic options in an increasingly tough market environment

Kieron SnowThe Pensions Trust

The insurance industry is facing a difficult time. The life market is contracting as consumers no longer

see the value of traditional protec-tion policies.

It is not any easier for non-life, either. Although it might be on the up, profitability will be hard to achieve.

Both are global trends and are not helped in the UK by the uncer-tainty surrounding Brexit.

But there is another drag on in-surance businesses in the UK and that is caused by legacy. Not the product lines and business pro-cesses that are being disrupted by the innovation from global digi-talisation, but from insurance and reinsurance organisations’ pen-sion schemes.

Defined benefit (DB or final sala-ry) pension schemes have not been consigned to the dustbin of history. Indeed, the UK’s DB pen-sion landscape looks remark-ably vibrant.

There are still almost 5,500 DB schemes in the UK with esti-mated liabilities of £1.6trn ($1.9trn).

To put that into con-text, that is approx-imately 80% of the UK’s GDP and an aver-age liability of £160,000 a member. That is an eye-wa-tering amount of money for a historic artefact.

Outside the large public-sector pension schemes, financial services are still well represented in this cohort and many banks and insurers still have large DB pension schemes, a great many of them in deficit, running in the background.

Deficits drag down businessesDespite large recovery plan pay-ments over the past 10 years, a sig-nificant number of schemes remain in deficit and DB liabilities are hav-ing a negative impact on the busi-nesses that run them.

The Pension Protection Fund (PPF) – the safety net for DB schemes with insolvent sponsors – said in its annual report that recov-ery plans or funding schedules to

eliminate the deficit remain “stub-bornly high” at a duration of nearly eight years.

The PPF might like to see deficits reduced faster but significantly in-creasing contributions could de-prive a business of working capital, potentially limiting growth.

An unwieldy deficit is also an extremely unpalatable quality in a potential merger and acquisition (M&A) partner. Potential investors in an insurer or broker can easily decide to walk away from a deal that could secure the long-term fu-ture of the company – and therefore the DB scheme.

There are a number of ways to address the problem. The first op-tion is to reduce costs. This is diffi-cult, because belts were generally tightened when the financial crisis hit more than a decade ago.

This approach is complicated by trustees and sponsors having to agree on a funding and investment strategy that aims to meet all of a scheme’s liabilities. This must also balance business needs, because the company needs investment to

secure its future – and thereby protect mem-

ber benefits.Reducing the

deficit faster can allow a scheme to approach the end game with an insurer or

self-sufficiency that bit quicker.

Buy-outThe ultimate end game

is a buyout, where-by members’ ben-efits are secured through an insurance con-tract. The risk transfers to the

insurer and the employer can take

the liabilities off its balance sheet.

If the scheme has not got the money for those kinds of premi-ums, it may look to run the scheme in continuance and secure a por-tion of members’ benefits through a buy-in contract.

Buy-in is a group annuity that covers the future benefit payments, typically for some or all of the pen-sioners. The risk profile of pension-ers is easier to determine than for deferred members, some of whom may be very young.

This may still require a cash in-jection that is not likely to be easily available or it would already have been paid in to reduce the deficit, and while it addresses the risk from pensioner liabilities, it does not address the (typically) greater risk

posed by non-pensioner liabilities.Even if there is cash, you still need

to find a premium the employer is willing to pay. And longevity risk is not cheap, even if it has stalled in the past couple of years.

Silent partnerAnother option is for an insurer or broker under duress to convince the PPF the scheme is likely to drag it into the fund and it has a better chance of success without it.

In 2005 insurance broker Heath Lambert agreed a deal that saw the PPF take on its three pension schemes with deficits of £210m in exchange for a 10% equity of the new company.

Six years later, the PPF realised £32.6m when Heath Lambert was acquired by US insurer Arthur J Gallagher.

This may seem an appealing way to rid a business of its DB liabilities. Yet, in almost 15 years, the PPF has only made a few of these deals.

Meanwhile, the burden – and therefore the cost – keeps increas-ing. The collapse of a number of high-profile DB schemes, including BHS and Carillion, prompted politi-cians and the regulators to tighten up the corporate pensions world and make it a safer place.

One suggestion put forward by the Pensions Regulator in a 2018 green paper, was for DB schemes to consolidate. Almost three-quar-ters of existing DB schemes have fewer than 1,000 members and £100m in assets.

It is these schemes that came in for the greatest scrutiny. As far as the regulator is concerned, these schemes cannot achieve critical mass and therefore pose the great-est risk.

Superfund consolidatorsDB consolidators operate under two distinct models. Each offers a one-stop-shop for employers that are struggling to manage their scheme on their own. The key difference is that one – Master Trusts – continues the relationship with the scheme, while the so-called superfunds will take on the risk from the company’s balance sheet.

The superfund consolidators are a recent innovation and have been encouraged by the regula-tor. These companies will take on schemes and run them off over the long term. Their margin comes

from economies of scale and they will in time buy the scheme out with an insurer.

This is not a cheap solution. Even if the funds became available, trust-ees would have to be satisfied the superfund’s covenant is stronger than that of the employer’s. Until those benefits are finally secured through a buyout, the employer may be on the hook if the super-fund should fail.

It is still very early days for super funds, as they do not yet have a regulatory framework to operate within.

An alternative is the DB Master Trust. These are regulated by the Pensions Regulator and may have to pass an additional accreditation process in the near future.

They offer a comprehensive and flexible solution to all sizes of scheme. Although grouped togeth-er, each scheme retains its own strategy and investment objectives, which may differ from others.

Consolidation in this context is really outsourcing to a specialist a management process the em-ployer have struggled to optimise in-house. DB Master Trusts are efficient at managing pension schemes with professional trust-ees supported by in-house legal, actuarial, investment and admin-istrative staff.

They can limit risk for the bal-ance sheet, while greatly improving governance, investment and risk management, in addition to reduc-ing operational costs.

Consolidation of DB funds now appears to be inevitable. It is backed by political will, regulatory support and commercial momen-tum to make it happen.

Employers and trustees will have to grapple with the demands of an increasingly proactive regulator fo-cused on seeing scheme risks and costs managed tightly.

Digitalisation is changing the market from within. There is also an external growth of new disrup-tive technology, providers with new, flexible business models and the internet giants whose plat-forms are perfectly designed to distribute financial products. And they are all lining up for a piece of the action. n

Kieron Snow is business development manager at The Pensions Trust

£1.6trnIn estimated

liabilities

www.insuranceday.com | Tuesday 3 September 2019 5

Consolidation of DB funds now appears to be inevitable. It is backed by political will, regulatory support and commercial momentum to make it happen

5,500DB schemes still remaining in the

UK, with...

wavebreakmedia/Shutterstock.com

FOCUS/ RISK MODELLING www.insuranceday.com | Tuesday 3 September 20196

The ever-faster pace of technological transforma-tion and increasing number of interoperable products

and services present decision-mak-ers with new opportunities for in-vestment – and new challenges.

Businesses no longer survive or prosper only by their individu-al efforts and isolated knowledge and systems. Complex and collab-orative technology ecosystems are evolving, in which enterprises align themselves with others to make their marketplace more competitive and their offering more relevant.

As the insurance industry strug-gles to deal with its high cost base and challenges from new business-es, the focus is on efficiency, inter­operability and choice.

The danger for risk modelling companies is they fail to recognise the future is about accessibility and interoperability, not closed-box sys-tems with a high price tag.

Action is already being taken to address these existential issues for the sector. For instance, the Insur-ance Development Forum (IDF) risk modelling steering group has kicked off a project that refines work done by organisations like Modex Nasdaq, with an OED data schema that is fully open, derived conceptually from the Oasis Ca-nonical data format.

The project, which involves com-mitment and co-operation between 16 private sector re/insurers and modelling companies, has as its ultimate objective achieving inter­operability between risk models on open platforms for all sectors.

As part of this work, a proof of concept is being developed for an open exposure data standard to enable a standard mapping of oc-cupancy and construction codes between each model, providing users of the results with a clear-er understanding of modelling assumptions. This is a huge step towards inter operability across public and private sectors.

Other key projects being run by the IDF risk modelling steering group include an initiative to fill model and perils gaps around the world through the launch of the IDF global risk modelling alliance (GRMA), to drive a collaborative, networked programme of open risk models and data content available on the Oasis platform and, indeed, potentially other open platforms in the future.

StandardisationAt the same time, Oasis is leading an insurance industry initiative with a focus on standardisation of catastrophe model results. Lloyd’s has committed to expanding the scope of the Lloyd’s Lab as part of its new strategy for the future and 11 teams, including Oasis, will be-gin working in the Lab as part of a 10-week programme that begins in early September.

Working collaboratively, this project will focus on finding solu-tions with the potential to contrib-ute to the ecosystem of services as part of the “Future at Lloyd’s” vision. This includes ways to en-hance data sharing and provide new sources of risk insight; pric-ing and risk models to help Lloyd’s market participants better under-stand threat scenarios; and ways to reduce the cost of processing claims as well as the burden of compliance and regulation.

Another component from a tech-nology perspective is a focus on standardisation and automation regarding application programme

interfaces (APIs) and action is un-der way here too. The Oasis plat-form now has a full API built to the latest technology standards,

automating all steps in model exe-cution – uploading exposure, veri-fying exposure, running the model, retrieving results – and providing

inter operability with other systems.This completed a recommenda-

tion from a group of its members conducted last year. Oasis is now

joining other industry initiatives to help to find a broader focus on the need for standardisation of API’s more generally.

Future directionBarriers to entry and data sharing in risk modelling are being torn down and cost efficiency and relevance

are being improved as a result. As a result of working collaboratively, Oasis is making some of the first climate-conditioned catastrophe

models available to the market, with both the Potsdam Institute in Germany and Columbia University in the US.

In addition, Oasis is pushing new frontiers in transparency developed through an initiative with Bristol University called Safe. This brings a standardised approach to understanding the key assumptions in any model and the sensitivity around those key assumptions.

Recently cat modelling company JBA has taken the principles gov-erning Safe and made many of the components in its new global flood model available to end users using the Oasis Framework.

Oasis is also spearheading a global collaborative risk model-ling effort dubbed The Wave – an international project with the aim of creating more openness, inter-operability and lowering the costs of risk modelling and data.

Already consisting of 10 global businesses working together, the mission is to collaborate and pool our resources to offer the most cost­effective way of understanding risk.

The upshot of this activity and much more is there is a strong glob-al drive to move the risk modelling industry forward, working with academics, both public and private sectors and developed and develop-ing economies to improve access to the latest models and enhance the models themselves.

What the focus on interoperabili-ty does is enable choice by stimulat-ing innovation and collaboration. What that means in cat modelling terms is it becomes easier to pick a model that suits a specific peril or country, and benefits those want-ing to see increased competition in the sector. n

Dickie Whitaker is chief executive of Oasis Loss Modelling Framework

The costs of risk modelling can be slashedThe increasing demand across the insurance sector for technology systems that are interoperable and cost-effective will make risk modelling tools more accessible

Dickie WhitakerOasis Loss Modelling Framework

www.insuranceday.com | Tuesday 3 September 2019 7

The danger for risk modelling companies is they fail to recognise the future is about accessibility and interoperability, not closed-box systems with a high price tag

The future of cat models is to focus more on efficiency, interoperability and choiceElena11/Shutterstock.com

Political risk capacity ‘high despite tensions’Demand for coverage among traditional insurance buyers remains strong

Lorenzo SpoerryDeputy editor

Capacity in the credit and political risk commer-cial insurance market is “close to an all-time high”

despite rising geopolitical ten-sions, Gallagher said.

Despite losses suffered as a re-sult of the commodity downturn, the market remains open to com-mercial opportunities, the broker pointed out.

Between January and July this year, the market has been supported by a growth in the amount of insurance bought by traditional buyers, as the product becomes increasingly embedded in their own businesses. This

is particularly the case for banks. The market has also benefited

from further co-operation be-tween private and public sector institutions such as export credit agencies and multilateral institu-tions. Commercial insurers have been taking an “optimistic” view of the impact public sector insti-tutions can have, especially when transactions face challenges, Gal-lagher said.

Hunter George & Partners renamedRyan Specialty Group’s (RSG) transactional risk managing gen-eral underwriter, Hunter George & Partners, has been renamed RSG Transactional Risks Europe, writes Lorenzo Spoerry.

RSG said the renaming “signi-fies the expansive nature of RSG Transactional Risks Europe’s offer-ings and identifies the managing

general underwriter more closely to the strong platform of RSG”.

RSG bought Hunter George & Partners for an undisclosed sum in 2016.

The following year, an office was opened in Barcelona, Spain, to expand the company’s trans-actional risk product offerings and geographic footprint.

Aon Reinsurance Solutions brings in Gero MichelAon has appointed Gero Michel to lead UK and Europe, Middle East and Africa analytics for its Rein-surance Solutions business, writes Scott Vincent.

Michel has joined from Chau-cer, where he served as managing director of its European business.

He previously served as chief risk officer and head of risk an-alytics at Montpelier Re, the Ber-mudian reinsurer which was

acquired by Endurance (now part of Sompo International) in 2015.

Michel will report to Eric Paire, head of capital advisory for inter-national business at Aon Reinsur-ance Solutions.

Nick Frankland, UK chief ex-ecutive of Aon Reinsurance Solu-tions, said Michel will work with the group’s capital advisory team to support clients with capital- efficient and structured solutions.

Axa XL appoints global head of upstream energyAxa XL has promoted Steven Farr to global head of upstream ener-gy, writes Lorenzo Spoerry.

Farr will be responsible for developing the upstream energy book, expanding on and deliv-ering underwriting strategy and product profitability.

Huw Jones, chief underwrit-ing officer for global energy and Axa XL, described Farr as hav-ing “considerable experience of underwriting upstream energy risks” and a “stellar reputation in the market”, adding: “I have ev-ery confidence he will succeed in this new role and continue to be a strong partner to our clients and brokers across the world.”

Farr joined Catlin Underwrit-ing Agencies, now part of Axa XL, in 2007 as a claims adjuster with-in the global energy team. He was made energy class underwriter in 2012.

Perils hires Goda as senior adviser for Japan

Loss data aggregation special-ist Perils has appointed Takashi Goda as senior adviser for Japan, writes Scott Vincent.

Goda most recently worked for Swiss Re, where he served as head of Japan and a member of the Asia management team until his retirement in 2014.

He has since completed further studies at the London School of Economics and currently holds various advisory and teaching po-sitions in Japan.

In his new role, he will support the expansion of Perils’ services into the Japanese market. Goda is based in Tokyo for the role, which was effective as of September 1.

Steven Farr will develop Axa XL’s upstream energy book in his new rolepan demin/Shutterstock.com

Trade credit and political risk insurance demand remains high

Travel mania/Shutterstock.com

Capacity for political risk stands at $3.09bn at present, while the unsecured non-trade market is supported by $1.76bn of capacity.

Capacity in the “trade and se-cured non-trade with government counterparty” segment stands at $3.12bn, while in the “trade and secured non-trade with a private sector counterparty” segment it stands at $2.48bn.