insurance-adviser-issue-5

Insurance adviserI s s u e 5 / m a r c h 2 0 1 3I n s I g h t , f o r e s I g h t a n d p r a c t I c a l s o l u t I o n s

InsideThe changing insurance industry

Uncertainty over UK flooding

CBI: catastrophic claims?

multinational coverThe roots ofcomplex regulations are becomingonerous as businesses branch out

2 www.dacbeachcroft.com DAC Beachcroft

Th ese are exciting times for dac Beachcroft – our insurance team was named Insurance team of the Year 2013 at the legal Business awards in london on 7 february.

In line with our strategy of following our insurance clients to key emerging markets, we have signed a new association agreement with specialist insurance fi rm de la torre y monroy in colombia, ranked no. 1 in chambers for insurance.

our global reach means we are ideally placed to assist with international issues such as the challenges associated with multinational insurance coverage (page 10) and contingent business interruption (page 20).

nevertheless, the foundation of our continuing success (page 4) is still our people: over half our uK partners are listed as leaders in their field in the chambers and partners uK 2013 edition. In this issue we off er a special four-page analysis of the emerging issues that are most aff ecting the insurance industry (page 6). our expertise also off ers clarity in areas where uncertainty reigns, such as changing regulations relating to fl ooding in the uK (page 14) and rapidly evolving cyber risks (page 24).

Th e fi rm’s unrivalled reputation in the insurance fi eld and our expansion means that, despite some uncertainty in the insurance industry, we are confi dent of a bright future.

Welcome

20

4

24

david Pollitthead of Insurance 10

Executive agendaappeal upholds 9/11 ‘two-events’ ruling; insurance team of the year; tax-avoidance claims – the posh ppI; court upholds standard life decision; political violence aff ects insurance.

Special featureMarket reviewas the insurance industry undergoes an almost unprecedented period of upheaval, we gather together a panel of experts to assess the implications.

Cover storyMultinational insurance careful consideration is needed to avoid falling foul of ever more onerous compliance requirements.

a watertight responsedespite a national rethink of the roles, responsibilities and liabilities around fl ooding, realising a coherent strategy may be challenging.

4

6

10

14

Stemming young road deathsJames dalton, assistant director and head of motor and liability at the association of British Insurers (aBI), explains a proposed overhaul of how youngsters learn to drive.

Business interruptednatural catastrophes in 2011 were a reminder of nature’s terrifying and disruptive power. many of the associated business interruption concerns have yet to be resolved.

Caught in the netcyber exposures are a bigger risk than ever before. as attacks increase and legislation tightens, the rapidly evolving cyber insurance market still has room to grow.

In practiceeff orts by industry bodies to raise professional standards in the uK insurance industry are essential in a post-banking-crisis world to avoid overregulation.

16

20

24

26

Contents

16

14

Insurance Adviser / March 2013 3DAC Beachcroft

Insurance Adviser is a dac Beachcroft publication.

publishing services provided by grist, 21 noel street, soho, london W1f 8gpPublisher mark Wellings; Editor sam campbell; Art director andrew Beswick; Proofreader alan friedler; Commercial director andrew rogerson. Telephone +44 (0)20 7434 1447 Website www.gristonline.com

Cover image Kerry lemon Printer Burleigh www.burleighpress.co.uk Brand consultancy 3 fi sh in a tree www.3fi shinatree.com

If you would like to discuss any of the issues raised in this magazine please contact david pollitt on+44 (0)117 918 2226 or your local dac Beachcroft offi ce.

for media inquiries please contact the press offi ce on +44 (0)20 7894 6655.

dac Beachcroft llp is a limited liability partnership registered in england and Wales (registered number oc317852) which is regulated by the solicitors regulation authority. We use the word ‘partner’ to refer to a member of the llp, or an employee or consultant with equivalent standing and qualifi cations. a list of the names of our members is available for inspection at our registered offi ce, 100 fetter lane london ec4a 1Bn. Th e information contained in this magazine is for general information only based on english law. Th e contents of this magazine do not constitute legal or other professional advice. readers should seek appropriate legal guidance before coming to any decision or either taking or refraining from taking any legal action. If you have a specifi c legal question, you should address it to one of our lawyers by contacting the relevant partner identifi ed in this magazine, or on our website www.dacbeachcroft.com. If you are not sure who the relevant partner is please use the ‘contact us’ form.

claims management companies are turning their attention to mis-selling claims against professionals who introduced, arranged or promoted tax-avoidance schemes.

“The schemes in question are usually based around an unregulated collective investment scheme (ucIs),” says hans allnutt, associate, dac Beachcroft. “during the last two years, many of these schemes have failed or reached settlement with hmrc such that the investors’ losses have crystallised.”

one claims management company believes that there could be 85,000 possible claimants, with a total value of claims of £20–40 billion.

Insurers need to investigate tax-avoidance scheme claims very carefully, allnutt adds, especially those brought against non-investment professionals including accountants and brokers. “Insurers should make sure that such activities fall within the nature of their insured’s business and fsa authorisations that have been disclosed to insurers. In light of the volume of potential claims, insurers should also be sure to preserve any aggregation rights.”

Tax avoidance: the posh PPI?

Executive agendaemerging issues for senior decision-makers in the uK insurance sector

Insurance Team of the Year awarddac Beachcroft’s insurance team, led by partner david pollitt, was named Insurance team of the Year 2013 at the legal Business awards in london on 7 february. senior partner, simon hodson, and managing partner, paul murray, received the management partners of the Year prize.

legal Business highlighted dac Beachcroft’s high-profile success in a crucial challenge to the court of appeals’ original announcement in the personal injury case of Simmons v Castle. The association of British Insurers (aBI) estimated that the revised decision has saved the insurance industry £300 million.

“We are delighted to win this award,” pollitt says. “having been shortlisted in 2012, we feel fully deserving of the title this year following our recent mergers and continued market-leading work.”

an english court has upheld an arbitration award that concluded losses from the 9/11 attack on the World trade center arose from two events, rather than one. This issue, which has broader significance for the london market, has not been the subject of any previous english court ruling

“following 9/11, a large number of actions were started against the airlines and their security operators,” explains Julian miller, partner, dac Beachcroft. “The claims were settled and paid by their insurers under various aviation liability policies. In turn, the insurers were indemnified by their reinsurers on the basis that the attacks on each of the twin towers were two separate events.”

reinsurers were entitled to be indemnified on an ‘each and every loss basis’ but a dispute arose concerning whether one event or two had taken place, resulting in an arbitration in london.

“disputes of this nature are ordinarily resolved by arbitration and it is rare for this issue to come before the courts,” says parminder Badhan, associate, dac Beachcroft. “The outcome should provide clarity for the london market.”

9/11 ruling upholds two-events award

From left to right: Michael Portillo, DAC Beachcroft’s Andrew Parker and David Pollitt, and Martin Ellis, Managing Director, Prime Risk Solutions, sponsor of the Insurance Team of the Year Award.

Allnutt: many of the schemes have failed


ExECUTIvE agEnda

Since its launch in May 2010, Insurance Adviser magazine has been a visible

expression of DAC Beachcroft’s expansion and success.

In his welcome, David has already alluded to the exciting growth our firm has undergone since the merger of Davies Arnold Cooper and Beachcroft in 2011. Between us we have over 100 years of experience in the sector and we now work with almost all of the world’s leading insurance companies. We hope that the Adviser magazines help demonstrate that expertise in an accessible format.

Indeed, we know that our readers are both time poor and inundated with case-related material. We use guest journalists from leading insurance publications, who combine their knowledge with contributions from clients and industry experts, to ensure Insurance Adviser offers insight into the issues that keep you awake at night.

To complement the editorial content, we strive for an intriguing yet thoughtful approach to aesthetics. With this fifth issue, the 12th from the DAC Beachcroft Adviser stable, we decided that the time was right to progress the visual feel of the magazine.

Our previous cover illustrator, Diana at Rooftop Illustrations, helped craft bespoke images for previous issues. Kerry Lemon, who has worked with UK and US broadsheets, high-quality magazines and other demanding clients, is now taking the aesthetics of the Adviser publications forward with her distinctive style – we hope you like it.

As ever, we welcome any comments or feedback about anything to do with Insurance Adviser.

Clouding the issue: unrest has insurance implications

Court of appeal upholds Standard Life decisionThe uK court of appeal on 18 december 2012 upheld a high court decision, allowing standard life assurance to recover in full a £100 million cash injection it had made into its suffering life pension fund, under a mitigation costs clause.

The court of appeal held that the whole payment was incurred for the insured purpose; it was irrelevant that the insureds’ reputation was also protected. The court rejected the insurers’ proposition that apportionment should apply where both the insured and the insurer benefited from the payment in question.

The case could encourage financial services institutions to take advantage of mitigation costs clauses when taking

action for the dual purpose of placating aggrieved investors and protecting their brand, prior to claims actually being made.

“Insurers should review and, if necessary, amend their wordings. It is important to consider whether the mitigation costs cover in question, is as extensive as the one in this case,” says richard highley, partner, dac Beachcroft.

Highley: insurers should review and amend their wordings

Political violence impacts insurance

The insurance industry now faces a spectrum of societal risks, from simple economic riots through to terrorism and war-related incidents. “The insurance issues will depend on the types of covers purchased but are likely to include property damage and business interruption (BI),” says hermes marangos, head of International disputes at dac Beachcroft. “property damage cover typically excludes losses arising from any act of terrorism but bespoke covers can be purchased. In relation to BI this could also

include contingent claims.”There are also likely to be a variety of

other covers impacted such as medical expenses, kidnap and ransom, and claims related to identification and repatriation.

“a detailed examination of the cause for the specific loss and whether it arises from an excluded peril will likely be at the heart of coverage disputes,” explains Iftikhar ali, senior associate, dac Beachcroft, “especially in inter-pleaders between insurers as to which insurance is more specific.”co

rBIs

Claire Wright, Head of Marketing and Communications, DAC Beachcroft

Platform


Insurers often say they face unprecedented levels of regulatory change. Is this true?David Pollitt (DP): There is a huge amount of regulatory and legislative change, but that is not an unusual situation for insurers to be in. However, the unusually high degree of uncertainty is different: delays and concerns over the direction of Europe’s Solvency II, the new regulatory framework in the UK and potential changes to the provision of insurance for flood risk present a real difficulty. Andrew Parker (AP): Compared with a decade ago, the industry and individual insurers are now much closer to and more involved with proposed regulatory and legislative change, and that leads to more uncertainty because politicians and governments change their positions.Mathew Rutter (MR): Many of the issues insurers face today are international, and not

just limited to Europe. The scale and impact of change for some multinational insurers is far more significant. For example, the debate about whether insurers are systemically important – and therefore subject to additional capital requirements – is part of a common theme that sees banking rules being increasingly applied to insurers. DP: The principles underpinning Solvency II are pretty unarguable. But timing and additional cost of getting ready for Solvency II and other major regulatory changes is frustrating for insurers at a time when their bottom lines are under pressure.

Is regulation also becoming more complex?MR: There have been incremental increases in complexity in some areas. Solvency II is designed to be more sophisticated, subjective and risk sensitive, as well as introducing new levels of risk governance and reporting – and so is more complex. And as the rule book

gets thicker and more complicated, firms are more likely to trip up or get caught by something coming out of left field, such as the implications of the ECJ Test-Achats ruling on the use of gender in risk selection and pricing.

What are the drivers of regulatory and legislative trends?MR: Different issues have different causes, but many of the changes are the result of the financial crisis and a more protectionist view on the part of the government in response to mis-selling scandals like Payment Protection Insurance. Changes can also be seen as a response to pressure from the media to take action and to prevent a repeat of previous regulatory failings. However, to respond with more regulation ignores the fact that the quality of regulation is not measured by volume, but by being in tune with the risks posed. Often, less regulation is more

uK and multinational insurers are working in a rapidly evolving environment, from incoming european solvency rules, to efforts to control escalating legal costs and a potential re-writing of Britain’s century-old insurance contract laws. as these potentially revolutionary changes take hold, dac Beachcroft’s influential Insurance Market Conditions Report finds that decisive, responsive insurers with robust governance may end up one step ahead of the competition. Insurance Adviser brought together experts to discuss how insurers are coping at a time when balance sheets are under pressure, and look at the possible implications.

David Pollitt Some regulatory and legislative changes are more favourable than others, and are often driven by insurers themselves.

landscape A changing


InSUranCE MarKET anaLYSIS

>

effective as it allows people to focus on the important issues. AP: Insurers are also at the mercy of the political ebb and flow. The last two years have been about unpicking the previous 13 years of a Labour government – for example the Jackson reforms of civil litigation and the Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) are dealing with the consequence of the previous

government’s mistake in introducing conditional fee agreements (CFAs) with recoverable success fees.DP: It is worth considering that some regulatory and legislative changes are more favourable than others, and are often driven by insurers themselves. For example, LASPO is designed to cure the malaise of Britain’s

growing compensation culture and fraudulent claims, while other moves could address insurers’ growing problem with flood claims.

Is the industry getting better at dealing with regulatory issues?AP: The insurance industry is more co-ordinated and better at coming together to formulate a collective view.

DP: But there is still a long way to go. You could say that insurers have yet to find a unified voice on the issue of flooding and that there is an opportunity for the industry to do better.AP: Trade bodies do a good job. But if you have six potential fights with the government you have to prioritise. This is one of the areas

of greatest difficulty for the industry and for individual insurers.

What advice do you have for insurers?DP: Keep calm and carry on. At the end of the day it comes down to cost, but the effort is doubled at a time when premiums are under pressure, investment income is down, natural catastrophes have been increasing and when insurers’ value chain is under threat. MR: Insurers need to ensure that they are well connected in terms of information, and that they have a person responsible in the organisation for identifying and responding to regulatory and legislative change, as well as having the authority to ensure that things get done. They also need to be able to sense the ‘mood music’ and read between the lines of what the regulator is saying. Before specific rules are proposed, indications of policy direction are often trailed in speeches from the regulator or shots across the bow. If an

Mathew Rutter Many of the issues insurers face today are international, and not just limited to Europe.

Andrew Parker The insurance industry is more co-ordinated and better at coming together to formulate a collective view.

Nick Young We don’t know what the Law Commission will run with but it could have a significant impact on commercial insurers.

Different issues have different causes, but many of the changes are the result of the financial crisis and a more protectionist view.


insurer can pick up on these signs early, it is more likely to respond and develop products and processes accordingly. Smarter thinking means not simply waiting for the rules to change, but seeing which way the wind is blowing and not getting caught out.

What issues are likely to have the most impact?DP: I would pick Solvency II, the Consumer Insurance Act, Financial Services Act, LASPO and the resolution of the flooding debate.AP: To that I would add pricing, as that underlies some of the other changes, like LASPO, compensation culture, whiplash claims and the Competition Commission’s inquiry, which is a significant issue for motor insurers.

does the political situation in Europe also create uncertainty? MR: We have US clients that are looking to set up in Europe and use the passporting regime to underwrite across borders. Clearly, uncertainty over the UK’s future role in Europe could tip the balance in favour of choosing another jurisdiction. I would be surprised if any future changes would mean the UK could not take advantage of passporting into the financial services markets in Europe, but the current situation could create uncertainty, despite any change being some years away.

What about efforts to harmonise regulation? DP: The harmonisation model is flawed as there are limitations of what can be achieved once you get beyond Europe. One of problems with the harmonisation of insurance regulation is when

you come across regions that have very different legal and regulatory systems, such as the USA. MR: The USA is a big hurdle for harmonisation and will first require more harmonisation of rules between US states – but this will be a long process.

Many changes are due to be implemented in the next year or so. does this suggest that the pace of change may slow? DP: It might suggest that the underlying pace of change may slow down, but every model you look at over the past ten years shows the pace of change increasing.MR: The sense in Europe is of continual review – each time legislation is passed there is now a working assumption that there will be a drive for further amendments even before the ink is dry. For example there are moves for new versions of the Insurance Mediation Directive, Markets in Financial Instruments Directive, and there is even some talk of Solvency III. AP: There are areas where insurers agitate for change – for example the insurance industry has pushed for LASPO to help control the rising cost of personal injury claims. And if there is a lull in regulatory reform, the industry could look hard at its own agenda, and push for more action and delivery on flooding, civil reform and so on.Nick Young (NY): A good example of legislation that should have changed, but hasn’t, is the Riot (Damages) Act 1886. Eighteen months on from the riots of August 2011, and with on going protests in Northern Ireland, the government has yet to decide on who will review that particular statute – the impression

James reader, chief executive officer of covéa Insurance, explains how his company manages regulatory risk and highlights the importance of clear and properly implemented rules.

Q How do you respond to regulatory and legislative changes?We constantly monitor external information

sources, such as regulator and trade body publications and trade press, to identify important developments. We also have connections with a number of legal and professional organisations and, as part of an international group, benefit from central support on matters such as eu legislation and other international issues.

once we have identified an impending change, our response will depend on its nature. We will always ensure that an individual within our business has primary responsibility for managing our response, and that appropriate people are involved from across our business, including the specialist professionals in our risk and compliance teams.

Q How do you prioritise which changes to act on?prioritisation can be a difficult concept in this aspect of business. The critical thing for us is that we remain compliant with the current regulations and legislation, whatever they are at a particular point in time. That means it is important that we understand the impact of changes at an early stage so that we can plan our response and take the necessary actions in good time.

Q Which issues are occupying you most at present?We’ve recently had to deal with the implementation of the new rules on gender rating, and are continuing to assess their impact. looking forward, we are focused on a number of important developments, including the consumer Insurance act, solvency II and, of course, the replacement of the fsa as our lead regulator.

Q How is senior management involved in the process?our governance structure incorporates a range of committees and groups with responsibilities for ensuring we comply with particular regulatory requirements. a designated executive director will have overall responsibility for compliance with each specific piece of regulation. The executive committee regularly discusses regulatory issues, with a particular focus on changes which will most significantly impact on our business.

our risk and compliance function also has a critical role to play, in helping the business to understand regulatory issues and ensuring that we are responding appropriately.

Q Is there a competitive advantage in staying ahead of the game?In my view, there definitely should be long-term competitive advantage in being compliant and avoiding the costs and distractions that being found to be non-compliant inevitably brings. What is less clear to me is the situation in the short term.

There are definitely examples of organisations that have gained a competitive advantage from a more ‘aggressive’ interpretation of regulations – and of others feeling it necessary to follow that lead to remain competitive. In my view, regulators have a critical role to play in ensuring that new regulations are clear and taking actions at a very early stage to ensure that they are being applied as they expect.

an in

sure

r’s p

ersp

ectiv

e

>


InSUranCE MarKET anaLYSIS

is that it is not a high priority for the government or that it is on the ‘too difficult’ pile.

What is worth watching out for in 2013?AP: Many of these issues will run and run, partly because of their complexity and because they are interlinked. And this is what causes the timing issues and delay – none of these things happen as quickly as you would expect. Many of the proposed regulatory and legislative changes covered by the Market Conditions Report are unlikely to be resolved quickly, creating uncertainty and delays.

NY: One good example of this is the Third Parties (Rights Against Insurers) Act 2010 which we have been trailing for many years. The Ministry of Justice said in December that it is coming, but we still don’t know exactly when. That could drop below the radar of some insurers, but it is on its way. MR: It will be interesting to see how the new UK regulatory authorities conduct themselves under the new Financial Services Act. The Act gives the FSA’s two successor bodies new powers, particularly on the conduct side, that would allow them to act first and legislate later. They will be under pressure to prove themselves early on and will be looking for some easy wins.NY: The Law Commission’s ongoing reform of insurance contract law is also a topic to continue to watch. The

Consumer Insurance (Disclosure and Representations) Act 2012 is due to come into effect on April 6, 2013. This has been a long time coming but heralds significant changes in the law and the systems of insurers will have to change if they are to comply. For example the abolition of certain contract clauses and the introduction of compensatory remedies will require insurers to rewrite their proposal forms and review their underwriting guidelines, as well as put more specific warranties into their policies

There could also be a draft

bill dealing with fraud and damages for late payment and potentially warranties and business non-disclosure by the end of the year.

We don’t know what the Law Commission will run with – and the business side is a lot more difficult – but it could have a significant impact on commercial insurers.MR: Regulators are increasingly focusing on governance. Insurers need to demonstrate good governance because a lot of the regulatory issues discussed can be dealt with through good governance. It’s about getting the right people in place at the top and having the right processes and being able to evidence decisions. And governance needs to be kept under constant review.

Stuart Collins freelances for several insurance titles.

Insurers should be proactive and engage with policy discussions as they have much to offer, says Stephen Lewis, chief executive officer for general Insurance in the uK at Zurich Insurance.

Q How do you respond to regulatory and legislative changes?regulatory and legislative developments affect every aspect of our business, from a capital management

perspective, to the way we interact with customers and the way we run operations. We invest considerable resource staying up to date with changes and analysing their impact through senior appointments on representative bodies (such as my role on the Board of the association of British Insurers), direct interaction with policymakers and through dedicated government and Industry affairs and legal and compliance functions.

Q Is it important to be proactive in talking regulatory risk?In today’s world we face a cocktail of risks and long-term trends, many of which are complex and interconnected, for example economic and environmental stress. This complexity means that industry takes a reactive approach to legislation and regulation at its peril. taking a proactive forward-looking approach is key – Zurich engages in policy discussions with industry bodies and policymakers and develops workable and collaborative solutions to insurance-related issues.

Q How do you prioritise which changes to act on?In a changing world, where regulatory and legislative change is constant, priorities are directly linked to our business strategy and core focus areas. We have a blend of both industry-led issues and issues where Zurich has direct involvement. I have no doubt that Zurich’s experience and perspective enriches the debate.

for example, all insurers have had to focus collectively on solvency II and the changing financial regulatory architecture. In these debates, the swiss solvency test and ‘twin peaks’ regulation that Zurich has already ‘road-tested’ adds real-life experience to the theoretical debate. similarly, our leading role in commercial and public sector insurance has enabled us to provide policymakers reforming the personal injury and health and safety landscape in the uK with concrete suggestions in terms of lessons from the past, changes required and the impact they are likely to have.

looking ahead, we face a number of long-term questions that will require the government and sectors such as the insurance industry to work together to deliver public/private solutions, particularly as the public purse remains squeezed.

Q How is senior management involved in the process? all businesses need good regulation. however, regulation should always be co-operative and not constrictive. as such, regulatory issues are a core and regular part of the agenda of the leadership teams throughout our business. We regularly review our priorities and take advice from experts in this field. We also take steps to ensure all our employees stay up to date with regulatory developments and current trends. In addition, Zurich Basics is a set of principles that articulate our basic values and the key behaviours by which we abide to help ensure that we act in accordance with the highest ethical, legal and professional standards. living and realising the code of conduct is essential and is an obligation of every employee.

Q Is there a competitive advantage of staying ahead of the game?staying ahead of the game is not necessarily about gaining competitive advantage; it’s about building a sound and orderly business. The changing risk, regulatory and legislative landscape means we need not only to stay ahead of the game; we need to help governments and others shape it.

Many of these issues will run and run, partly because of their complexity and because they are interlinked – this is what causes the timing issues and delay.


THE COMPLExITY ASSOCIATED WITH multinational insurance programmes has grown partly due to the globalisation of economies and companies, with more and more organisations having overseas entities and operating across borders. But a tightening of insurance laws and regulations also plays a role.

In the wake of the global economic crisis, regulatory and tax authorities around the world are taking a much tougher stance, making it more difficult for global programmes to be compliant, explains Chris Wilkes, Partner, DAC Beachcroft. “This is partly about protecting their markets and the consumers in their markets, as well as tax raising through insurance premium taxes,” he says.

The changes are also a consequence of governments trying to keep more money domestically, says Karen Gorman, Partner, Global Service Risk Practice, JLT

Specialty. “Argentina, for example, is trying to keep as much premium income within the country, which means that the regulators are all over every placement involving foreign

insurers – they are really cracking down on global programmes. So, in Argentina, if you have a global programme with a captive, it means less money coming back to that captive and more retained locally.”

But financial issues are not the only driver. Emerging economies increasing their economic output – especially BRIC countries – may regard their nascent insurance industries as entitled to protection, says Ken McKenzie, Partner, DAC Beachcroft. “The fact that economies are developing is actually encouraging people to take a more rigorous compliance approach from a protectionist point of view.”

The result is that rules are becoming stricter in many jurisdictions. Gorman says that many parts of Africa, where in the past regulation was quite loose, are becoming more regulated: Nigeria and Ghana will start

multinational insurance programmes have changed considerably in the last few years, finds tony dowding, becoming broader, more complex, and more challenging than ever before. careful consideration is needed to avoid falling foul of ever more onerous compliance requirements.

multinational insurance Getting to the root of

>



MULTInaTIonaL PrograMMES

multinational insurance

Branching out: the regulatory implications for expansion must be considered

The fact that economies are developing is actually encouraging people to take a more

rigorous compliance approach from a protectionist point of view.

to see more business being retained locally because regulators are now enforcing regulations, for example. Conditions are becoming tougher in Europe too: the Netherlands has just increased its insurance premium tax to 21%, for example. All of this has a knock-on effect on clients and their global programmes, she says.

Companies need to look at the local regulations before deciding whether to include a country in the global programme, she advises. If the regulations state that 100% has to be retained locally, there may be no point in bringing that territory into the programme –it should perhaps be treated as a stand-alone coverage instead. But this route is not without disadvantages – the company loses central control over claims and premiums.

Regulators’ tougher stance, therefore, means less flexibility in programmes.

ComplexitySuresh Krishnan, General Counsel, Multinational Client Group, ACE Group, a leading multinational and specialty insurer, says that the compliance landscape is increasingly complex. “In many ways it is not just the insurer that is regulated but increasingly the insured and broker too. In this increasingly proactive regulatory and compliance environment, risk managers are looking for transparency and no last minute surprises. Above all, they are looking for certainty – where may a claim be paid and to whom, and who is ultimately responsible for premium taxes and other taxes that may be assessed on a global insurance programme,” he says (see box).

Krishnan says that focusing solely on the question of whether the insurer is admitted or non-admitted in a given jurisdiction tends to

respond only to the insurance company’s obligations. “The corresponding analysis also needs to be done about how and under what terms the risk can be ‘exported’ to get the full picture on compliance. It is vitally important that the risk manager works together with their finance, tax and legal teams to ensure that there is a clear understanding about premium allocation and claims payments in different jurisdictions.”

The picture is further complicated by an expansion of multinational programmes beyond the traditional focus on property and casualty covers. Krishnan says ACE is seeing increasing demand across Europe, notably from the upper middle market, in terms of the usual lines, such as property and marine. There has also been increased demand from larger companies for lines of business that have not traditionally been insured on a multinational basis.

For example, directors’ and officers’ (D&O) liability is now being included in many programmes, on an admitted basis, together with financial lines such as errors and omissions (E&O) and crime, as well as environmental liability (EL) and business travel accident (BTA). Many in the market are predicting that employment practices liability will also be included in global programmes in the next few years.

We are seeing more control coming from the centre. Clients want sight of what is being issued at a local level, whether it is invoices, policies, certificates and so on. Transparency is the key.

a question of compliance The increasing importance of compliance has led to much debate as to who is ultimately responsible: the risk manager, the broker, or the insurer. chris Wilkes, partner, dac Beachcroft, says that each is partially responsible for compliance. “The risk manager’s role is to ensure that a policy complies with the company’s insurance obligations in each relevant jurisdiction, though the actual checking may be delegated to the broker. generally, the insurer takes the lead on compliance, predominantly because they want to be able to sell the service that goes with the policy.”

Karen gorman, partner, global service risk practice, Jlt specialty, believes that compliance should be a collaborative effort. “The insurers all have their licences to protect, and so they have their own rules and regulations about what they can do where. But sometimes they are overly compliant and will insist on issuing a local policy everywhere that non-admitted is not allowed. But it’s not just about whether non-admitted is permitted or not: there are other factors, such as whether you can buy the cover in that territory, what the policy will say, or whether there is a risk in that country.”

she highlights that there are always different opinions on what compliance means from all sides as there are so many grey areas. “as brokers, we have to take what the insurers say, take our own data and experience, and then present it to the client, so that they can make an informed decision on how far they want to go in terms of compliance.”

>

12 www.dacbeachcroft.com DAC Beachcroft12 www.dacbeachcroft.com

MULTInaTIonaL PrograMMES

Chris Wilkes There are all sorts of reasons as to why a financial interest clause might be appropriate

Suresh Krishnan It is not just the insurer that is regulated but increasingly the insured and broker too

“In the past companies may have had, for example, one single policy for D&O covering worldwide and they are realising that this may no longer work effectively,” says Krishnan, “and non-executive directors are asking more questions, and the need for local policies is increasing.”

The procurement process for big multinational companies is about rationalising, says McKenzie. The goals of a global programme are realising economies of scale, reducing costs, and producing as homogenous a result as possible “so the fewer divergent carriers and brokers the better.”

“Ideally, you want to get as many different classes of insurance into the programme as possible,” he adds. “Sometimes a degree of specialist cover may be required in certain areas, which means it remains outside of the self-retained element, or the captive structure, or the master policy. If you are trying to achieve a programme with as few carriers as possible, then the pool of truly multinational insurers is relatively small.”

There are many insurers that can play a part in a multinational programme put together by a broker using a panel of insurers, and others that rely on partners and correspondent insurers. Yet only a small number of insurers have a network of offices around the world capable of servicing a programme, rather than just contact offices. Such a network clearly has some advantages, for example providing consistent cover worldwide, with local expertise and local claims handlers.

SolutionsThe classic model for multinational insurance programmes is a combination of local covers and a master programme with a difference in conditions/difference in limits (DIC/DIL) infill. This helps to ensure that the programme is compliant and enables the parent company to have a level of control over the programme, with standard terms and conditions and limits in each territory.

Achieving this ‘gold standard’ can be very difficult (especially at a sensible cost), says Wilkes, not least because DIC/DIL may be considered as non-admitted insurance.

The financial interest clause is a possible solution to the quandary of non-admitted insurance created by the insurance industry. This allows for a payment route that goes back to the parent of the company rather than the local insured, because it is a policy that insures the parent company’s financial interest in the local entity. But this, of course, means that the payment is to the parent, and not to the local entity that suffered the loss, and raises the issue of how that local entity can be reimbursed without tax implications.

This is a popular solution, says Wilkes, “but whether it is a complete or just partial solution in some circumstances is a matter of heated debate amongst lawyers. In some cases, the company may find other ways to refinance the local operation affected by the loss, or they are not worried about insuring the local entity, they are only concerned with insuring their investment in the local entity. So there are all sorts of reasons as to why a financial interest clause might be appropriate.”

McKenzie adds that, while claims have been and are being paid without challenge, the financial interest clause has not been tested in

every jurisdiction. With local regulators tightening the screw on compliance, seeing it as a means to protect their home insurance industry, there might in the future be scrutiny of this mechanism if not correctly constructed. “As a result, there is a need for the insured that buys a policy including a financial interest clause to understand the legal implications fully themselves, and their treasury function must understand the tax implications and know how they can make their payment route work if they intend to refinance the local operation.”

He stresses that the treasury function must understand what the financial interest mechanism does and plan accordingly. Most importantly, McKenzie advises a clear transactional record so that, in the event of a challenge, there is evidence ready to show that the financial interest clause is an appropriate mechanism.

The whole process of setting up and managing global programmes is becoming more complex and time consuming. JLT’s Gorman underlines the importance of awareness of the local regulations, and ensuring that all the documentation is back-to-back and it is following form all the way through. “It used to be that everything was issued on a good local standard at a local level. Now we are seeing more control coming from the centre. Clients want sight of what is being issued at a local level, whether it is invoices, policies, certificates and so on. Transparency is the key.”

To discuss the issues raised in this article, please contact Ken McKenzie on +44 (0)20 7894 6480 or [email protected]

i


MORE FREqUENT AND INTENSE PERIODS OF HEAvY rainfall need ‘urgent and fundamental changes’, found Sir Michael Pitt’s Review of the national floods in the summer of 2007. The government’s response was The Flood and Water Management Act 2010 (FWMA).

The legislation seeks to drive a more localised and effective response to the ongoing threat of flooding, creating a number of new roles and responsibilities for local authorities, the Environment Agency and developers alike.

Change can often create unintended consequences, however, and foreseeing areas of friction and limiting their impact will be crucial in ensuring the overall effectiveness of the new legislation. But there remains significant uncertainty in key areas.

FrictionFor example, the duty on local authorities to maintain a register of structures that have a ‘significant impact on flood risk management’ (which ties in with the government’s localism agenda) is likely to have implications for private and commercial property owners trying to secure insurance.

As these flood-important structures are identified and their impact on water levels is detailed, it is very possible premiums and terms of cover for properties nearby will be affected. A clear understanding of what constitutes ‘a significant impact on flood risk management’ is, therefore, important.

It is as yet unknown what level of information will then be made public about these structures – consistency on who has access to what information is important.

There is also some vagueness about where responsibilities lie. Although local authorities have been empowered with new duties

under the FWMA, the Environment Agency maintains its existing legal obligations for the strategic management of national flood and coastal erosion risk contained in the Water Resources Act 1991 and Coastal Protection Act 1949.

“We have said that if local authorities are to be given more authority and responsibility to manage flood risks, then they must have the right tools and expertise to do the job. This means having the ability to assess and nominate the structures accurately that will have an impact,” says Malcolm Tarling, spokesperson for the Association of British Insurers (ABI).

Contradiction?The exact legal fit between the new FWMA and existing legislation will come out in the coming months and years. In the meantime there are more immediate issues for local authorities struggling to ensure they have the correct skill sets and resource levels required to carry out their new duties. This may be particularly challenging at a time when austerity measures are restricting budgets and stretching existing resources to their limits.

It is likely to take some time before real practical improvements are delivered by the FWMA – many of the changes enshrined in the legislation are still to be put in place.

A watertight

major floods have become frequent in the uK over the last 15 years, writes edward murray, forcing a national rethink of the roles, responsibilities and liabilities around flood protection and management. But realising a coherent strategy may be challenging.

Malcolm Tarling If no agreement is reached then we will just revert to a free market

response to flooding?


FLoodIng

reached then we will just revert to a free market. We are very aware that 30 June is not far away and we are doing everything we can. We want to ensure and work towards a situation where the affordability and availability of flood insurance is maintained. We remain in intensive discussions with the government over our proposal that would safeguard the future affordability of flood insurance, and while we cannot guarantee we will reach

agreement, we are doing all we can to ensure a satisfactory outcome.”

Should the government and the insurance industry fail to find common ground on how to move forward, the unpalatable outcome for the 200,000 homes in question would be denial of insurance

altogether, or cover at significantly increased and potentially unaffordable levels.

Whether it is around the responsibilities that local authorities and government agencies bear, the way legislation dovetails, or the availability of insurance for the most vulnerable, there are many complex issues to unravel.

Unfortunately, as recent flooding has shown, time is not on our side. A strategy that is both consistent and coherent at an individual, local and national level is needed to keep the flood waters at bay.

Isto

cKIm

ages

However, in the same way that the new Act must be made to gel effectively with existing water management laws, it must also work with other rules and regulations to be truly effective.

The new Act demands, for example, that property developers construct new sustainable drainage systems as part of future projects. This greater burden on developers comes as the government has announced its intention to streamline planning

regulations amid increasing pressure to build new houses. New planning rules should not be allowed to supersede the

need for developers to commit to building sustainable drainage systems or to increase potential flood problems by allowing more buildings to be constructed on flood plains.

CoherenceAmbiguity persists for those with properties already constructed on flood plains and guaranteed insurance under the Statements of Principle agreement between the government and insurance industry. This agreement only runs until 30 June 2013 and as 2012 came to a close, negotiations between the two parties had come to an impasse.

Commenting on the issue, Tarling says: “If no agreement is

To discuss the issues raised in this article, please contact Andrew Parker +44 (0)20 7894 6232 or [email protected]

i

We have said that if local authorities are to be given more authority and responsibility to manage flood risks, then they must have the right tools and expertise to do the job.

The Flood and Water Management act 2010

• Local authorities will have new responsibilities to provide strategic management and co-ordination of local flood risk from groundwater, surface water runoff and ordinary water courses. local authorities will also have to establish and maintain a register of structures that have an effect on flood risk management in their areas.

• The Environment Agency (EA) is required to draft a flood and coastal erosion risk management strategy for england to be approved at ministerial level. Welsh ministers will be responsible for drafting a Welsh strategy.

• Flood risk management authorities will have to co-operate and act consistently within the framework of local and national flood risk strategies.

• Property developers must construct new sustainable drainage systems (suds) as part of future projects.


CAR CRASHES ARE THE SINGLE BIGGEST CAUSE OF accidental deaths for young people. They are also much more likely to be involved in very serious crashes: in 2011, almost 15 people died or suffered life-changing injuries each day on Britain’s roads as a result of car accidents involving young drivers. The Association of British Insurers (ABI) has responded by calling for a complete overhaul of the system for learning to drive.

To cut the number of young people dying on our roads, the ABI wants the government to introduce a new learner-driver scheme, which would allow new drivers to gradually develop their skills and gain experience behind the wheel.

The ABI’s proposals include a one-year minimum learning period, a limit on the number of passengers allowed in the car with a young driver, a night-time curfew and a no-alcohol policy. Countries that already have similar ‘graduated driver licensing schemes’ in place, such as the US, Canada, Australia and New Zealand, have seen a marked decrease in the number of accidents involving young drivers.

Unhurried safetyUnder the ABI’s proposal, in addition to the one-year minimum learning period, a novice driver would be required to accumulate sufficient experience behind the wheel before

being eligible to take a driving test. Intensive driving courses would not be permitted.

The ABI has also advised that a curriculum be drawn up: every learner driver would need to take lessons in all seasons, weather

conditions and types of road. The learner driver’s experience would be detailed in a logbook, which could be produced for inspection by the examiner before taking their driving test.

The proposal will make those who pass their test safer and more competent drivers, says James Dalton, the ABI’s Assistant Director and Head of Motor and Liability. Evidence from a number of countries that already have minimum learning periods, ranging from six months up to two years, shows that people who take longer to learn to drive become safer drivers.

“Creating a minimum learning period means that you will be required to learn to drive in a range of different driving conditions,” Dalton explains. “Under the current system, if you began learning in early spring and passed your test in early autumn, for example, you probably won’t have driven in ice and snow. It’s also possible you may not have taken lessons at night, so you may have little experience of driving in the dark before getting your licence.”

To compensate for the longer time it would take to get a full licence, teenagers would be able to start to learn to drive at 16½.

Passenger restrictions New drivers under 25 should not be allowed to carry passengers under the age of 21 for the first six months after passing their test, the ABI recommends, unless there is a

Stemmingfaced with an epidemic of car crashes involving young drivers, James dalton, assistant director and head of motor and liability at the association of British Insurers (aBI), says the insurance trade body wants to completely overhaul how youngsters learn and drive immediately after they pass their test.

young road deaths


supervising driver in the car also: someone over the age of 21 who has held a full licence for at least three years.

The reason for this, Dalton says, is that evidence shows the more passengers a young driver has in the car the more likely they are to have an accident. “An American study on crashes involving teen drivers shows that a young driver is three times more likely to have a crash if they have more than three passengers in the car with them.”

Having friends in a car with a young driver can create a lethal cocktail combining showing off, high speed and irresponsibility that all too often can end in disaster, he says. “By taking passengers out of the equation, at least at the beginning, young drivers are likely to be safer.”

But the ABI is keen to point out that exemptions will apply for youngsters driving to work or to college.

Most young people abide by the law, and if the law is changed to say there are certain things they can’t do for a limited period of time after they get their full licences then most would accept that.

>

ForESIgHT InTErvIEW

Cv James dalton James dalton is an assistant director and head of motor and liability at the association of British Insurers (aBI). he leads the aBI’s efforts on improving the personal injury compensation system, tackling uninsured drivers and improving road safety, particularly for young drivers.

he was previously the aBI’s senior european adviser, responsible for analysing the impact of regulatory developments in Brussels on the insurance industry and for lobbying european institutions.

he has also been a senior adviser at the new Zealand ministry of economic development.


a breath test after a crash or in roadside checks than any other age group, according to results of the Association of Chief Police Officers’ Christmas 2012 drink-driving campaign. Also, nearly one in five young drivers polled by the RAC admitted they had got behind the wheel either knowing or suspecting they are over the limit.

a mixed receptionThe ABI’s proposals have had a mixed response: the police and some road safety groups, such as BRAKE, have welcomed them, whereas motoring groups have been more cautious.

In press reports, the Institute of Advanced Motoring called the ABI’s recommendations negative and said they would dissuade young people from learning to drive. The AA also criticised the proposals on restricting night-time driving and carrying young passengers, claiming they would be almost impossible to enforce and would penalise young drivers trying to get to and from work.

The ABI has argued that the proposed rules would boost safety and be no more difficult to police than the rest of the system. “Most of the driving laws in the UK are self-enforcing,” says Dalton. “You wear a seatbelt, you don’t talk on a mobile while driving or get behind the wheel having drunk too much alcohol because the law requires you to do so. Most young people abide by the law, and if the law is changed to say there are certain things they can’t do for a limited period of time after they get their full licences then

avoiding the risksThe ABI’s call for all young drivers to be prevented from driving between 11pm and 4am for the first six months after they have passed their test is based on government statistics showing that over half of all serious car crashes in the UK involving teenage male drivers occur at night. Just over 20% of serious crashes involving older male drivers (aged 60–79) take place after dusk. Male teenage drivers are 17 times more at risk of having a crash at night than all male drivers, according to research by the University of London’s Centre for Transport Studies.

“The evidence is clear: the risk of crashing is much higher at night for young drivers than during the day,” says Dalton. “Preventing them from being out on the roads very late at night straight after they have got their licence should help to reduce that risk.”

The adverse effects of drinking and driving are already well known: alcohol affects a motorist’s ability to judge speed and distance, may encourage them take more risks, and also slows their reaction time by up to 15%.

Yet, the ABI believes the existing limit of 80mg alcohol per 100ml of blood is too high, proposing a legal limit of 20mg. This means that drivers would not be able to drink even a small glass of wine or half-pint of beer and still drive: essentially ‘none for the road’.

This should help to reduce the number of crashes involving young drivers, who are known to be more likely to drive after having a few drinks. More drivers under 25 failed

>

recession hit – the downturn and road deathscar crashes involving young drivers have actually fallen, the latest government statistics show. Th e number of deaths in accidents involving young car drivers in 2011 fell by 6% from the previous year – compared with a rise of 6% in all car occupant deaths over the same period.

Th e number of killed or seriously injured young car drivers has dropped by 36% from the 2005–09 average, while passengers of young car drivers killed or seriously injured have dropped by 45%; other casualties (occupants of other vehicles and pedestrians involved in the accident) have decreased by 28%, department for transport data shows.

Th e recession and high fuel prices are also having an eff ect. data provided by the rac foundation shows that motoring patterns and habits are changing as fewer miles are driven at slower speeds to help save fuel as a cost-cutting measure. speed has a huge eff ect on both crash likelihood and crash consequences. further analysis of the data

shows that car/van usage has decreased since 2007 while train use has increased.

Th e downturn seems to have succeeded in what road safety campaigners have been trying to achieve for years: a cut in the number of crashes involving young drivers.

fewer male teenagers are learning to drive, while those that do have a car are using it less. Th e proportion of young men aged 17–20 holding a full driving licence fell from 41% in 2007 to 35% in 2010, while the distance driven by young drivers, particularly young men, has fallen more quickly over the same period than for drivers of all ages, according to data from the national travel survey (nts 0201).

But the news does not undermine the aBI’s campaign, dalton says: if the changes in young drivers’ habits are due to the tough economic climate, then it is quite possible that the improving crash statistics might reverse as the economy picks up and more young people can aff ord to get on the roads.

We are hopeful the government will look at the evidence behind these proposals carefully and will move towards implementing a proven system for young drivers that delivers better road safety.


most would accept that.”Dalton also points to the failure of Pass Plus as proof that

voluntary schemes to help young drivers sharpen their skills have not helped improve road safety. “It didn’t bring down the number of deaths. You can devise a new post-test training course, but my question is: ‘Why not just make sure a driver can drive properly before passing the conventional test?’”

The government has now said that ‘all options are on the table’ and that it would consider the ABI’s proposals, but it is also looking at a number of other measures such as pre- and post-test training.

“We are hopeful the government will look at the evidence behind these proposals carefully and will move towards implementing a proven system for young drivers that delivers better road safety,” Dalton says, adding that polling done by the ABI shows a large majority of people are in favour of imposing

restrictions on young drivers after passing their test.Introducing a graduated licensing scheme in the UK will also

bring down the cost of young drivers’ insurance premiums, which the government has said it is committed to bringing about, the ABI points out.

But the main thrust of its campaign is to help reduce the carnage being caused by young drivers. Dalton says: “If people were fully aware of the number of road traffic accidents involving young people, and understood the likely impact of our recommendations on reducing the number of accidents then they probably wouldn’t question what we’re proposing.”

Simon Challis is a writer and media consultant specialising in insurance.

ForESIgHT InTErvIEW

To discuss the issues raised in this article, please contact Andrew Parker on +44 (0)20 7894 6232 or [email protected] i

VerV

erId

Is Va

sIlIs

/ sh

utt

erst

ocK

.co

m

17–24-year-olds with two years or less driving experience are much more likely to make a catastrophic claim than 37–44-year-old drivers with the same driving experience.

Th is clearly demonstrates that it is the age of the driver – as opposed to their experience – that is the key factor impacting upon the likelihood of suff ering a catastrophic injury in a crash.

Th e fi gure of £500,000 is the benchmark for what is known as a ‘catastophic claim’. Th ese claims are not ‘bumps and shunts’ but major crashes that will have serious consequences for the driver, their passenger and other road users, often involving lifetime care requirements for those injured in the accident.

* In may 2012 the aBI undertook a widespread data collection on young driver claims, asking members to say how many individual motor claims they settled, or are expected to settle, between 2007 and 2011 for more than £500,000. more than 2,500 claims were analysed from data provided by all major motor insurers, providing the sample for this chart.

Proportion of catastrophic claims by years of driving experience and age

Proportion of catastrophicclaims by age

80%

70%

60%

50%

40%

30%

20%

10%

0%

Prop

ortio

n of

cla

ims

driving experience

2 years or less 3–5 years Fr

eque

ncy

of

cata

stro

phic

cla

ims *

0.30

0.25

0.20

0.15

0.10

0.05

0.00

17–2

4

25–2

9

30–3

4

35–3

9

40–4

4

45–4

9

50–5

4

55–5

9

60–6

4

65–6

9

70–7

4

75–7

9

80–8

4

85+

age

17–24-year-olds

37–44-year-olds


The international community regards what happened as something of a blip but residents of New Zealand experience earthquakes all the time.


BUSInESS InTErrUPTIon

DURING THE COURSE OF 2011, NATURAL DISASTERS – including the Japanese Tsunami, New Zealand earthquake and Thai floods – claimed the lives of over 30,000 people and cost the worldwide economy around $350 billion. After the tragic and shocking loss of life, perhaps of most concern is that events on this scale are no longer considered ‘black swans’ – large scale, devastating events are becoming increasingly regular.

The grim tallies above, although hugely significant, do not tell the full story. Lurking beneath is the impact of business interruption and, more particularly, contingent business interruption (CBI).

As business has globalised and production has followed suit, it has become increasingly difficult for manufacturers to get a clear understanding of their supply chain. The dependence upon and fragility of these supply chains was brutally laid bare by the events of 2011.

Paper chainThe lack of resilience was particularly striking. “The flooding disaster in Thailand showed that business interruption at a key supplier can cause a ripple effect felt across an entire industry,” explained Allianz Global Corporate Solutions property insurance expert volker Münch.

Outsourcing, ‘just-in-time’ stock management, centralised procurement and distribution, and the increasing complexity of business supply chains all increase the reliance a business has on

its suppliers. But insurance can provide only so much protection and, even when protection is in place, claiming on the policy is not always straightforward.

“A big discussion point early on was whether Thailand was one event or several events and how should 72-hour clauses (which were really designed primarily for North American windstorm risk) be applied in this pretty unique scenario,” says Ben Nicholson, Partner, DAC Beachcroft. “The question commonly asked is whether or not the 72-hour clause has the effect of resetting the ‘event’ after each 72-hour period so that ‘the floods’ are treated as several events. If so, then, given that the floods continued to progress over the space of a month, there were some who argued that they should be treated as 11 or 12 events.”

This difficulty around interpretation of clauses was mirrored in New Zealand following the series of earthquakes the ‘Shaky Isles’ experienced in 2010–11. Without the large manufacturers that were hit in Thailand, the brunt of the effect of the earthquakes was felt by the local SME community.

“By and large it was normal for SMEs to have an extension for CBI to standard commercial business BI cover as opposed to having specialised wordings,” says Antony Holden, Partner, DAC Beachcroft.n

Igel

spIe

rs /

shu

tter

sto

cK.c

om

Businessinterrupted

a series of natural catastrophes in 2011 were a reminder of nature’s terrifying and disruptive power. many of the associated business interruption concerns have yet to be resolved, martin friel finds.

>


As a result, in many respects, the CBI exposures of these types of businesses were not properly assessed or understood. In fact, as Holden explains, the cover was often provided for free or, at the most, a small fee. It appears this cover was not properly considered by those who held it, or indeed those who sold it, and, as such, there was little understanding around what it was there for. This in turn led to confusion when it came time to claim.

“Some of the issues that arose were around the inadequacy of the definitions of supplier and customer in the extensions,” says Holden. “There was confusion as to the extent of the ability of affected businesses to claim and the extent of the indemnity available. That has been one of the material issues. Another was that, in many cases, because CBI cover was an extension, it was limited to 10% of the sum insured.”

For businesses with CBI in place, the interpretation of clauses within policies may result in drawn out negotiations and even litigation to secure the claims payout.

Meanwhile, the affected business continues to suffer as it sits in limbo. For example, there is a still a cordon around parts of the Central Business District in Christchurch two-and-a-half years since the earthquakes struck.

Strong linksSimple steps, such as avoiding using a single source for a product or component and selecting providers based in different geographical area that are not at risk from the same peril, can help.

But it will take a lot more than a few tips to properly protect against a business’s exposures. A better defence lies in mitigation of the risk rather than reliance on financial protection. A combination of insurance cover and a robust risk management programme is the best approach.

Businesses must be much clearer not only about who supplies them but also who supplies their suppliers and their suppliers’ suppliers. Without having a proper understanding of the supply

chain, its complexities and its weaknesses, a business cannot have a true understanding of the risks it faces.

The shocks of Thailand and New Zealand appear to have woken both the business community and their insurers up to the fact that CBI is the great hidden risk that most puts the survival of businesses at risk in the face of a catastrophic event.

Businesses reliant upon supply chains that stretch across the globe need to wake up and understand that the threats are real and the impact they can have even more so, Nicholson argues. “It could absolutely happen again. Every indication is that the next Thailand-type event will be in Thailand. There are always going to be natural weather catastrophe hazards and we have seen changing weather patterns across the world – in general the weather

Antony HoldenChanges to the scope

of cover mean that businesses are more

aware of supply chain issues

Ben NicholsonIn general the weather patterns are less predictable

UndercurrentThe Thai floods were

predicted but more severe than expected

>


Inexact models not only businesses were impacted by the 2011 natural catastrophes – insurers also found that they didn’t fully appreciate the world’s dense interconnectivity and the impact that cBI claims would have.

for example, the first estimates of the cost of the Thai floods were around $3 billion, a drop in the ocean compared to the final $45 billion bill. how did they get it so wrong?

“These things get looked at with hindsight,” says Ben nicholson, partner, dac Beachcroft. “The pervading view that we hear seems to be that the effect of the transition to just-in-time production and supply chain models, the increased fragmentation of the supply chain and the specialisation in particular components, probably wasn’t sufficiently well understood by the insurance and reinsurance market in general.”

nicholson stresses that this does not mean that the cBI market as a whole was caught napping, but rather that some less specialist underwriters were perhaps not fully aware of the risks that they were taking on. “historically cBI was a specialist, standalone cover that was bought and underwritten in a very considered way but we have seen a number of examples of cBI being included as an extension to standard BI cover.”

It appears that the ‘less specialist’ underwriters who had moved into this market had, as is often the case with new capacity, softened rates in the market. a lack of understanding over the true scale of the interconnectivity of the global supply chain was compounded by the fact that the risks were not necessarily being written at the right price.

needless to say, rates have since hardened. some estimates say that Thai flood

premiums, for example, have more than tripled and reinsurance rates on line have increased. In new Zealand, rates for property–catastrophe reinsurance were up by more than 50%.

But have insurers merely hiked prices and hoped for the best? not necessarily but improvements to the cat modelling following each of these disasters may not be the panacea that many hope. In Thailand, for example, the floods were predicted although the scale of the event exceeded expectations. going forward, Thailand lacks the historical data to model effectively.

“I’m not sure that modelling is the answer,” says nicholson. “however, it may be possible to deal with more detailed business-specific modelling and business processes”.

The specialist cBI underwriters will not necessarily be doing anything different as a result of Thailand, nicholson adds, as they are more familiar and comfortable with the risks

they are underwriting. It is perhaps those that do not have that expertise and experience that are investing in modelling these risks or are pulling back altogether.

In new Zealand, however, awareness of the complexities of

supply chain management and the risks that are inherent in these chains has increased significantly and has affected the way insurers approach these risks.

underwriters have tightened up their definitions of supplier and customer and stipulated that the cover will only apply to direct or second-tier suppliers. some have removed earthquake cover entirely and where it is present, it is aggregated. “Those changes to the scope of cover have meant that many businesses have become more aware of supply chain issues,” says antony holden, partner, dac Beachcroft.

he adds that some insurers have started using supplier and customer questionnaires when putting businesses on cover in an attempt to better understand the risks that individual businesses face.

“They establish whether they have a supply chain policy, who their tier one customers and suppliers are, whether they are self suppliers, have contingency strategies, a particular reliance on a particular port or airport and whether they request the supply chain management from their own suppliers,” says holden.

These measures have had the effect of educating businesses and some are now able to get better cover now that they have taken a proactive approach to their risk, adds holden. “In the past, in the sme sector, there was not much detailed engagement in the risk.”

BUSInESS InTErrUPTIon

the quake ranging from about three to five on the Richter scale.”Nevertheless, protecting assets in the modern global economy

may prove to be a steep learning curve. A robust risk management plan that understands and attempts to

mitigate the weaknesses in the supply chain, coupled with CBI cover, is currently the best that a business can do to prepare for the next unexpected catastrophe.

Martin Friel is a former editor of Insurance Age.

shu

tter

sto

cK

patterns seem to be less predictable.”In New Zealand, local authorities are being pushed by the

government to prepare for the worst to happen again. There has been a nationwide assessment of buildings and their ability to withstand earthquakes of the magnitude seen two years ago and all local authorities must have a policy to deal with this need to strengthen buildings.

If the international community has been slow to wake up to this new reality, the people of New Zealand have not. “The international community regards what happened as something of a blip but residents of New Zealand experience earthquakes all the time,” says Holden. “There have been 3,000 aftershocks since

To discuss the issues raised in this article, please contact Ben Nicholson on +65 6213 5902 or [email protected]

Hard goingInsurers found 2011’s CBI claims unexpectedly high


“THERE ARE ONLY TWO TYPES OF BUSINESSES; THOSE WHO have been hacked and those who are going to be hacked,” says DAC Beachcroft Partner Patrick Hill. The depressing inevitability of cybercrime is underlined by the fact that it is one of the fastest-growing criminal areas, costing global consumers $110 billion in the past 12 months, according to a survey by internet security provider Norton. In the past year, 556 million people have become victims of cybercrime, which equates to 1.5 million victims per day or 18 victims per second.

The increasing number of cases comes as tighter regulation looms over the EU: the European Commission’s draft replacement data protection legislation, General Data Protection Regulation, is due for implementation in 2015 or 2016.

Complacency coupled with a lack of understanding about the consequences means businesses are exposed to both risks from data and irreparable brand reputation damage, Hill says. “I think there is an element of ‘it won’t happen to me’ because they believe their business is not important or high profile enough.”

a risk more ordinaryWhile the high-profile cases of data breach such as TJ Maxx, LinkedIn and Sony garner more attention, Hill says that cases involving “more ordinary” organisations are equally, if not more important. One such case occurred in March 2012, when Britain’s largest abortion provider, the British Pregnancy Advisory Service (BPAS), was hacked by 27-year-old James Jeffery, a self-identified member of the international hacking group Anonymous. Jeffery defaced the company’s website and stole 10,000 records of women who had registered with BPAS, which he threatened to make public. BPAS issued a statement at the time stressing no patient records had been stolen, only records of registration. BPAS promised to increase its online security measures.

Hill warns neglecting the risk could be a business’s downfall.

Lockton’s Cyber risks decoded report found the average data breach cost in the US cost $7.2 million, and in the UK £1.9 million. A recent study conducted by risk management members association, Airmic, found a typical business

interruption cyber event costs approximately £250,000. Other estimates have put the total cost of a significant cyber event in the region of £500,000.

However, in tough economic climates, insurance may be first on the block for businesses cutting costs. “I think there is an element of: ‘Why should I buy this insurance if I haven’t traditionally needed to?’” says Hill.

Into the breachBusinesses that want to arrange cover may encounter difficulties in financially quantifying potential losses from a data breach, DAC Beachcroft Associate Hans Allnutt says. “Nevertheless, the potential losses arising from a data breach have driven the appetite to purchase cyber risk insurance products,” although he says that it is important to note that cyber risk products are not limited to data breach insurance but offer a wide range of covers.

Allnutt advises insureds to educate themselves about the cost of

cyber exposures are a bigger risk to businesses than ever before. as attacks increase and legislation tightens, lauren gow finds that the rapidly evolving cyber insurance market still has room to grow.

in the net

an insurer’s perspective cyber data breach laws differ significantly in different countries so shaping product offerings is challenging. coverage needs to include a range of liabilities, not solely concerned with unauthorised disclosure or loss of personal information or data (as was the case with Bpas). There is also a much wider range of risks associated with cyber data breaches including business interruption (BI) and denial of service (dos). In some cases, coverage can be achieved through an existing first-party commercial property and BI policies or third-party general liability policies. But specialised cyber risk policies as an extension or supplement for existing policies may be the real boon for insurers.

Caught


Th e true cost of cybercrime

Up to $1 trillion Th e value of intellectual property stolen from businesses worldwide by cyber criminals.

£20 billion a year Total estimated cost of cybercrime in the UK. It has been estimated that intellectual property theft costs £8 billion, industrial espionage costs £7 billion, extortion costs of £2 billion and direct online theft costs in excess of £1 billion. In addition, an estimated £1 billion is lost through theft of customer data.

14 days Average time it takes an organisation to resolve a cyber attack.

$17,696 a day Th e average cost to the organisation while a cyber attack is resolved.

CYBEr rISKS

foreseeable cyber events and have a strategic plan in place. “It is also a matter of changing attitudes – seeing cyber risk insurance as an investment; protection for cash flow and business concerns.”

Airmic says the available capacity in this line has ‘increased substantially during the past two to five years’ with a typical premium in the US $100,000 for a limit of indemnity of $10 million, covering both first-party and third-party risks. Typically, a limit of indemnity of £1 million to £5 million is more common in the UK, although some organisations may buy up to £10 million. An indicative cost for a limit of indemnity of £1 million (with no US exposure) would be about £30,000 or a premium of £150,000 for a £10 million limit. Airmic says its US insurance partners are reporting they are now using up to eight years of claims data to set premiums levels but, overall, insurers are still finding pricing limits challenging.

Allnutt and Hill agree that the market is wide open for insurers. While the US market (currently estimated to be worth between $500 million and $800 million gross written premiums) is further ahead than the European market, there is still enormous potential.

“Our view is that that sum is a very small amount when one thinks of the exposures in North America. So there is potential in the US and even more potential in Europe as the demand increases with legislation. Insurers are poised to take advantage of the anticipated increase in demand. A number of insurers have launched products in the last 12 months alone.”

Lauren Gow is a freelance writer who has worked for publications such as Insurance Times and Global Reinsurance.

get

tYIm

ages

Patrick HillI think there is an

element of ‘it won’t happen to me’

Hans AllnuttThe potential losses arising from a data breach have driven appetite for cover

To discuss the issues raised in this article, please contact Patrick Hill on +44 (0)20 7894 6930 or [email protected]

i


GROWING SCRUTINY FROM the government and regulators means companies across all sectors are under pressure to improve their conduct. The pressure is greatest in financial services: regulators have promised to impose stricter rules on financial services since the banking crisis and the Libor scandal last year again saw banks pilloried.

While the insurance industry has been at pains to differentiate itself from the banking sector, it too faces overregulation unless it can clearly articulate the difference between insurance and banking and demonstrate its own house is in order.

An insurance industry drive to raise the bar for professional standards may appease regulatory bodies. The Chartered Insurance Institute (CII) is championing various initiatives intended to instil best practice, improve training, development and levels of professionalism within all areas of insurance, including broking, underwriting, claims and management.

The London market often sets the tone for Europe-wide initiatives, taking a lead on issues such as Solvency II. The UK could, therefore, set a benchmark in its approach to best practice for Europe and beyond.

People could be a key area of differentiation. Talent is one of the fastest-growing risks according to Insurance Banana

In practice

To discuss the issues raised in this article, please contact Bill Paton on +44 (0)20 7894 6256 or [email protected]

i

Skins 2011, a study conducted by the Centre for the Study of Financial Innovation (CSFI) in association with PwC. The industry has woken up to the need to nurture its talent and do a better job of promoting the industry to top graduates.

The insurance industry may become the beneficiary of talent that would have once been attracted to the banking sector. A recent surge in quality graduate applications at Lloyd’s suggests this could already be happening as old perceptions of insurance being the ‘poor cousin’ to banking begin to change.

That may be helped by the Aldermanbury

Declaration on 4 March 2010 published by the Insurance Profession Task Force. This endeavour aims at shaping a common framework for professional standards, which it argues will lead to a more sustainable and profitable industry.

The Declaration requires high entry standards; continuous professional development (CPD); and adherence to a code of ethics. It specifies that firms meet common professional standards covering: commitment to excellence; training and development; professionalism within insurers; professionalism within brokers, broking, underwriting, claims and management standards.

However, demonstrating better practices

and improvements to regulators and other stakeholders may be a challenge for the insurance industry. Demonstrating a link between improving standards and a better outcome for customers and society is even more difficult. The CII is attempting to do this by linking standards to better outcomes:• Customers should have access to better

quality products designed to meet their needs, better service, and higher standards of advice and information;

• Corporate clients should find their businesses more sustainable with positive effects on the economy;

• Society should benefit from higher levels of trust in the insurance sector and better levels of protection and provision for the future;

• The taxpayer should incur lower costs to support uninsured catastrophes;

• The need for regulatory oversight should reduce along with regulatory and compensation costs;

• Employees should improve their human capital and self-esteem through training and ethical behaviour; and

• Firms adopting higher standards should gain a competitive advantage, attract and retain a more competitive talent pool and achieve higher returns.

Efforts by industry bodies to raise professional standards in the UK insurance industry are essential in a post-banking crisis world to avoid overregulation, says Bill Paton, CEO of DAC Beachcroft Claims Solutions.

The London market often sets the tone for Europe-wide initiatives so the UK could set a benchmark in its approach to best practice.


Patrick Hillpartner, specialist & International risk groupSpecialist areas Insurance litigation, professional & financial risk, political risk, cyber risk

patrick has extensive experience defending a range of professionals and institutions. he handles claims concerning financial institutions and directors and officers, including domestic and international trust related claims. he has also advised insurers on the interpretation and adjustment of complex high value contentious global political risk claims .

+44 (0)20 7894 6930 / [email protected]

dac Beachcroft offers strategic counsel and transaction support on all aspects of financial products and services to financial institutions, and is a market leader in global insurance. It also provides litigation and claims handling services, commercial and corporate advice. It understands the challenges its clients face, and helps them exploit business opportunities in this tough environment. The following are some of the partners quoted in this issue. for details of our other financial sector specialists visit www.dacbeachcroft.com

david Pollitt partner, head of InsuranceSpecialist areas Insurance, banking litigation, commercial dispute resolution, professional risk, professional regulation

david has advised financial institutions for a number of years on contentious

and regulatory matters. as head of the sector he also speaks to clients about their requirements, to ensure service delivery is aligned. david also fulfils the role of advisory partner, ensuring service delivery is constantly improving to meet clients’ needs.

+44 (0)117 918 2226 / [email protected]

Ben NicholsonpartnerSpecialist areas Insurance, policy coverage, reinsurance

Ben is a specialist insurance and reinsurance lawyer who

advises on high-value, complex and specialist lines disputes. he has particular expertise in construction and engineering risks in the power generation and distribution sectors and infrastructure development projects, and also advises on other non-marine lines of business.Ben has advised on disputes globally and recently launched Beachcroft’s singapore office.

+65 6213 5902 / [email protected]

Andrew ParkerpartnerSpecialist areas strategic litigation, insurance, personal injury, market issues

andrew is at the forefront of strategic litigation, advising insurers on a range of emerging issues affecting injury claims. he has played a leading role in monitoring such issues as periodic payments and compensation system/costs reforms, and was one of lord Justice Jackson’s assessors. he has also worked closely with the government on legislation.

+44 (0)20 7894 6232 / [email protected]

Nick Youngpartner Specialist areas dispute resolution, insurance coverage disputes, property loss, construction, engineering and energy insurance

nick is described as ‘the man to have in your corner when the going gets tough’ by legal 500 uK 2012 edition, Insurance and reinsurance london. nick has been involved in a number of significant and high-profile matters over the years and specialises in advising insurers and their insureds on crisis management issues following major losses.

+44 (0)20 7894 6100 / [email protected]

Chris Wilkespartner, reinsurance group Specialist areas financial services, insurance, major incident management, commercial dispute resolution, policy coverage,

property and construction insurance, reinsurance

chris specialises in policy and reinsurance coverage – particularly product liability, construction/engineering and business interruption disputes. he also has considerable experience in d&o and fidelity matters. chris focuses on international and cross-border issues.

+44 (0)20 7894 6844 / [email protected]

Mathew Rutterpartner, financial InstitutionsSpecialist areas financial services, insurance

mathew has considerable experience of regulatory

issues as they affect financial institutions. his areas of expertise include corporate governance, capital requirements, financial promotions and conduct of business, including tcf and general handbook issues as well as consumer credit. mathew regularly advises on transactions in the regulated sector, new authorisations, perimeter issues and outsourcing.

+44(0)20 7894 6322 / [email protected]

Meet the experts

© DAC Beachcroft 2013Auckland Birmingham Bristol Dublin Edinburgh Glasgow Leeds London Madrid

Manchester Mexico City Newcastle Newport Singapore Santiago Wellington Winchesterwww.dacbeachcroft.com

Insurance adviser

insurance-adviser-issue-5

Documents