Insurance Jottings

Britannia plumps for Luxembourg post-Brexit subsidiary

Britannia P&I Club is to establish a subsidiary in Luxembourg to ensure it can continue to trade in Europe after the UK leaves the EU on the 29th March 2019.


The company has said that Europe accounted for more than 40% of its global business.


It said that “with the advice of third-party consultants and having engaged with various EU regulators, Britannia’s board has now instructed the managers, Tindall Riley (Britannia) Ltd, to focus on Luxembourg as the preferred option”.


Britannia said that it expected to make a formal application to establish the new Luxembourg domiciled subsidiary in early 2018 enabling it to be operational by the end of 2018.


Sompo International to create Luxembourg operation

Sompo International has announced plans to establish a new European insurance headquarters based in Luxembourg.


SI Insurance (Europe) has been established to ensure the company maintains EU passporting rights following the UK’s exit from the European Union.


The Bermuda-based firm, the subsidiary of Sompo Holdings formerly known as Endurance, said it had put the strategy in place due to the significant uncertainty over the terms of the agreement for the UK’s exit. Sompo International said the new Luxembourg operation will create a base for continued business expansion in Europe.


The company intends to maintain its presence in the Lloyd’s market, and current offices in London and continental Europe. Regulatory approval is expected in the second quarter of 2018.


Beazley unveils new US marine insurance platform

Beazley has established its new US marine platform with an initial focus on hull, protection & indemnity and liability coverage for the marine and marine construction sectors.


The products offered in the US, which will be available on both an admitted and non-admitted basis, are designed to complement the large risk coverages available through the company’s London underwriters. Beazley has been a prominent insurer of marine risks in the Lloyd’s market in London since 1999.


Stephen Vivian, head of Beazley’s US marine focus group, said: “We plan to offer the same high standard of underwriting and claims service as we do in London, but we will be targeting business which typically is placed in the US domestic market and is rarely seen by our colleagues in London.


“Brokers who know Beazley know us as a selective but decisive insurer who is able to commit swiftly to risks which we like, backing our underwriting judgement with first class service. We plan to bring the same philosophy and approach to the US market.”


In the US, it will be writing predominantly brown water hull risks, with limits of up to US$5 million, and marine liability risks, on both a primary and excess basis, with limits of up to US$25 million.


Beazley’s marine liability offering will comprise a broad spectrum of coverages, including protection and indemnity, terminal/port operators, ship repairers’ liability, charterers, ancillary, contractual and excess liabilities.


Beazley’s marine division underwrote US$247.4 million in premiums in 2016 through underwriters located in the UK, Norway and Singapore. Risks in the US will be written for the account of Beazley’s AM Best A rated admitted carrier, Beazley Insurance Company, and – in the case of non-admitted risks – for the account of the Beazley syndicates at Lloyd’s.


The company further stated that it plans to expand the US underwriting team in the course of 2018.


UK legislation publishing in 2018 to reduce drone risks

Proposed legislation to place new responsibilities on drones weighing more than 250g – such as mandatory registration of the individual and required safety awareness tests – is due to be published in spring 2018.


This was set in a statement on the 26th November by Aviation Minister, Baroness Sugg, and has since been welcomed by the Lloyd’s Market Association (LMA) Aviation Committee.


“The implementation of drone-specific legislation is aimed at ensuring common safety standards, thus reducing the risks associated with drones,” said Paul Maguire, chairman of the LMA aviation committee and head of aviation at Faraday Underwriting.


In March 2017, the LMA Aviation Committee submitted a detailed response to the Department for Transport’s (DfT) ‘Consultation on the Safe Use of Drones in the UK’, where it suggested that the introduction of primary legislation is necessary to align the regulation of drone operation with those of manned aircraft.


To reduce unsafe flying, the proposed legislation could involve drones being banned from flying near airports, or above 400 feet. Police will also be given authority to seize and ground drones which may have been used in criminal activity.


Mr Maguire continued: “Regulatory enhancements which trend towards improved safety standards in this market are welcomed by insurers. The LMA Aviation Committee is pleased to see the UK again leading the way with respect to the safe integration of drones into existing airspace and we look forward to working with other aviation authorities and regulators to help align international standards.”


Pool Re to Include Physical Damage from Cyber Terrorism, Effective April 2018

Pool Re, the UK’s terrorism reinsurance pool, announced it will extend its cover to include material damage and direct business interruption caused by acts of terrorism using a cyber trigger. The new cover will be available in April 2018.


The cover, which will exclude intangible assets, will be offered as standard to all policyholders that purchase terrorism insurance from Pool Re members.


This initiative is the culmination of more than two years of work, said Pool Re in a statement.

Pool Re explained the coverage extension is based upon a research study commissioned from the Centre for Risk Studies at University of Cambridge Judge Business School.


“We will continue to evolve our coverage and today’s announcement is an effort to future proof the scheme and to close a potential gap in coverage before it became apparent,” said Julian Enoizi, chief executive, Pool Re.


“The threat from a cyber attack is evident and businesses have become increasingly concerned about the extensive repercussions these types of attacks could have on them,” he added.


“This was a clear gap in our coverage which left businesses potentially exposed. After rigorous analysis, we determined that we can close this gap,” Mr Enoizi said, noting that this move “establishes a new standard for terrorism cover and places the UK at the forefront of nations reinforcing their economies against emerging risks.”


He said it also demonstrates “what can be achieved through cross-industry, academic and governmental collaboration.”


Simon Ruffle, director of Research and Innovation at the Cambridge Centre for Risk Studies, said the study for Pool Re was very timely given the evolving nature of cyber terrorism.


“The centre has applied an academic approach to modern business, enabling a deep analysis of current geopolitics and technology in order to illuminate the shape of an emerging threat to the UK economy,” he said. “The cyber terrorism scenarios we examined provide insight into what types of attacks might be possible in the next few years that could impact Pool Re’s portfolio.”


The Future of Insurance – Blockchain Captives

As technology becomes more and more important for the insurance industry, Matthew Queen, general counsel and chief compliance officer at Venture Captive Management takes a look at the road ahead for blockchain captives.


“Blockchain is a quantum leap for risk management. The mysterious newcomer to fintech revolutionises current insurance practices and opens the door to new types of insurance.


From commercial general liability policies to our social contract with the government, blockchain creates new possibilities. This article explores how blockchains work, applications of blockchain to insurance, and how the captive insurance industry stands to change the world.


What is Blockchain?

Blockchain is a distributed, peer-to-peer system resting on top of the Internet. There is no point of control. The system is a trust-based network of computers in competition with each other to mine for tokens.


Bitcoin is, by far, the most popular token in a blockchain, but there are others: Dogecoin, Potcoin, and Ether are very popular. These tokens are traded like any other currency but have no coins, bills, or physical artefacts. In any other era this would create an unworkable, chaotic system, but new technology creates new possibilities.


Since the technology is new, and very complex, few practitioners really understand how blockchains work. Think of blockchains as a stack of Legos. Each Lego has its own serial number, called a hash. These hashes are a long string of nonsense characters that look something like this (v987vnwef908wednd0-sdc09j). Each block links back to the previous block in the chain all the way to the first block, called the genesis block.


Now, further imagine that this stack is replicated in hundreds of other places. Every time a new block is added to one of the stacks, all of the stacks assess whether that new block is a genuine new block, or a fraud. If the majority of the stacks agree that the new block is valid, then all of the stacks add this new block. This synchronous engine is called a peer-to-peer (P2P) network.


In the real world, each of these Lego stacks are located in a computer. These computers which are creating new blocks are called nodes. This is the feature which makes the blockchain resilient – infinite redundancies. In a way, this reflects how the Internet started as it was created on a series of equal nodes on an IP network.


These nodes mine for new blocks by solving maths problems all day long. The algorithms solved by the nodes are very hard to solve, but are easily checked on the backend. The computer which solves the algorithm first has its answer checked by the other nodes. Once the nodes agree whether the answer is correct, then the miner is awarded a token.


Mining is a continuous process of solving problems and checking the other nodes’ solutions. The answer to the algorithm is not pre-determined. Rather, the programmes vote on the winner and the token is awarded to the miner who reaches consensus. This is why P2P blockchain networks are built on trust. The trust is not in the moral sense, but in the trust of mathematics.


Since the majority of the nodes have to agree on the answer solved by the winning node, it is extremely difficult to hack a blockchain. However, nothing is impossible. There have been some hackers who have launched “consensus attacks” on blockchains by achieving a significant stake of the mining power of the blockchain. While this is bad, this technique cannot alter the blockchain’s history. In other words, if you’ve got 30 Bitcoin in the blockchain, consensus attack cannot take those away from you.


The effect of a consensus attack is that the attackers can double spend new coins. This bad situation is relatively rare and there are armies of white hat professionals keeping the pirates at bay.


Effects of Blockchain

Value can be stored in a blockchain with complete anonymity. The absolute privacy of blockchain is a headache for anti-money laundering professionals in the FBI and other agencies as it is nearly impossible to prove the source of blockchain coins without an informant. The good news is that all of this financial data is secure. Consequently, we no longer need to rely on accountants, bankers, or dusty old documents.


More interestingly, blockchains remove the need for securities. While the definition of a security is very broad, most people think of stocks. Stocks are little more than a reflection of the amount of a corporation that you own.


There is no reason that a stock certificate is necessary. New companies are conducting Initial Coin Offerings (ICO) to fund new ventures. These ICOs skirt around some of the Blue Sky rules from the SEC and are another headache for regulators as the government tries to keep up with the rapidly changing technological environment.


In April 2017, Estonia announced that it was considering an ICO for Estcoins. The concept was floated to raise money for the nation. While the ICO is a long way off, there is no doubt that governments will start issuing ICOs. In the long run, things are looking bad for paper money. The dream of every treasury is to issue non-counterfeitable currency desired by the whole world. Estonia is opening the door to this new reality.


Insurance Applications

With a single invention, blockchain eliminates society’s need for banks, securities, and even currency. Insurance is not immune from the sweeping changes.


Given that blockchains are trust-based networks, there is no need for humans to move money from one account to another. Blockchains open up the possibility of programmable money. This means that there are events which will trigger the payment of funds into an account. So long as there is consensus in the network of the occurrence of the event, the funds flow without need for human interaction.


This streamlines insurance but raises questions: How do you programme insurance policies? For example, if half of a house burns down, how do you assess the claim without sending out an adjuster? You do not. Without sufficient sensors or other future technology, simple house fires, fender benders, and many other traditional insurance functions still require adjusters, claims handlers, and financial professionals dedicated to moving funds.


But what about binary situations? What if you know that the occurrence of an event triggers a pre-determined amount of money?


Now you’ve got a blockchain application. For example, if a Category Five hurricane passes over a neighbourhood, then it is very likely that the insured properties will suffer losses at the limits. Catastrophic events frequently pay the maximum a policy can pay. Thus, if sensors placed in strategic locations all indicate winds above a certain speed for an amount of time, then the blockchain may trigger the automatic payment of funds. This application can easily be moulded for fire, hail, earthquake, and other catastrophic events. These insurance policies are called Smart Contracts as the insurance policy is paid upon the occurrence of an event based on rules in the programme.


If you eliminate an insurance company’s claims department, then the insurance company is almost a decentralised autonomous organisation (DAO). A DAO is a robot company. Once set up, the company operates based off of a set of rules written by the creator. For insurance companies, this means that insureds will pay premiums into an organisation which, theoretically, could have no humans working in it at all.


Theoretically, DAOs incur very few expenses past the initial expenses of setting them up. In a DAO were to offer a pre-determined indemnification upon the occurrence of an event, the DAO could offer ultra-cheap insurance policies. For example, if sensors in your car record an accident occurring at less than ten mph, then it would automatically distribute US$XXX to your bank account, but an accident at 45 mph automatically releases US$X,XXX. These pre-determined claims payments keep the costs of insurance to a bare minimum, which opens the door to car insurance policies for a dollar or two per month.


While the insured likely waives the right to sue in the event of a disagreement (how do you sue an anonymous online insurance entity?), there is a huge market out there for ultra-cheap insurance.


Captive Insurance Applications

Autonomous captive insurance companies are an owners dream. A parent company decides it wants to self-insure an exposure, so it sets up a DAO which pays claims upon the occurrence of an event. The captive managers set up the company, walk away, and now the business owner pays premiums into a company which runs itself and never wants payment for its services. Dividends automatically remit from the DAO once the reserves are no longer encumbered. Further, if the captive qualifies for the 831(b) election, the dividends will be remitted tax free back to the captive stakeholders.


With current technology, captive insurance DAOs are too expensive for the vast majority of businesses. However, blockchain technologies applications are astounding. Since many reinsurance policies contain follow the fortune clauses, it is conceivable to set up a captive taking a layer of risk paying out upon the occurrence of an event.


Once the captive’s blockchain achieves consensus that the clause was activated, the payment would automatically occur. Or, captives could be used to pay the deductible automatically for any losses in catastrophic events in a deductible buyback policy.


Protected cell companies can use blockchain applications as well. The core can run its own blockchain and create individual cells operating as separate insurance companies. Each of these companies could insure separate risks and pay claims upon the occurrence of an event.


Assuming the cells share capital with the core, the core company can automatically add capital to individual cell’s reserves on an as-needed basis if reserves dip below certain thresholds. Further, assuming a favourable loss history, the cells can reduce premiums charged to the insureds so long as capital rates maintain certain ratios. While these applications of cell companies are nothing new, these functions generally require the interplay of accountants, actuaries, and underwriters. Through blockchain security and proper programming, these features can be automated into robot insurance companies.


The Future of Insurance

The road ahead is exciting. As blockchain technology reaches ubiquity, the ability for governments to regulate insurance will become increasingly difficult. Once a safe and secure insurance DAO is established, there is no reason that the company needs to be domiciled in one jurisdiction versus another.


A blockchain established in the Philippines is indistinguishable from one in Russia, the US, or New Zealand. Quality insurance will be available via the Internet without any ability for governments to tax or regulate.


Whether distributed, autonomous insurance companies are good or bad is irrelevant – the fact that the technology exists is sufficient to ensure their eventual birth.


Consequently, new forms of insurance will arise. For example, people can universally pay into a supranational social security programme which pays out a stream of income upon the filing of a claim. The amount paid to the insureds would be a function of the amounts paid in premium over time, but there is no reason that citizens across the globe cannot pool resources for universal social security. Or unemployment. Or basic income.


This is the zenith of captive insurance. Insurance initially started with wealthy merchants pooling their resources to create large companies. Then individual companies create their own insurance policies due to inefficiencies in the market.


With blockchain, individuals can band together to create their own insurance policies free of any government regulation. This is the future and we are lucky to witness it all come together.”


UK Financial Services Industry Pays Record Taxes, ‘Underlining Need’ for Brexit Deal

Britain’s financial services industry paid a record £72.1 billion (US$96.2 billion) in tax during the past fiscal year, PwC said in a report that piles pressure on the government to secure favourable trading terms for banks after Brexit.


Tax revenues in the finance sector rose one percent in the year to March 2017, hitting their highest level in the ten years data has been collected, the report said. It was commissioned by the City of London, home to the “Square Mile” financial district.

“With Brexit edging ever closer, it is more important than ever to underline just how important the financial services sector is to the rest of the economy,” City of London policy chief Catherine McGuinness said.


“While it’s too early to gauge how the country’s tax-take might suffer if firms chose to move business away from the UK, these findings highlight how vital it is to meet the urgent needs of the sector as part of negotiations.”


The City has called for a transition deal by the end of the year to limit the amount of financial jobs moving to the EU’s other 27 member countries before Britain’s departure from the bloc in March 2019.


The Bank of England expects 10,000 financial services jobs to move by “Brexit Day” as London based banks, insurers and asset managers open or expand existing hubs in the bloc to maintain customer links there.


The report said 43.5 percent or £31.4 billion of tax receipts from firms tracked was in employment taxes paid by employees and their companies.


“If a large number of jobs were to leave the UK as a result of Brexit, then the tax revenues of the financial services sector would almost certainly be impacted,” the City of London said.


The sector accounted for 11 percent of UK tax receipts, and for the first time, the annual report showed where the majority of financial jobs are located.


A third of financial services jobs are in London, with Scotland accounting for 13.6 percent, and the south-east of England 12.4 percent.


UK P&I Club chooses Netherlands for EU subsidiary

The UK P&I Club has said that it will establish a subsidiary in the European Union authorised to insure ships registered in the European Economic Area (EEA).


The Club said that the UK’s decision to leave the EU had led to uncertainty as to whether UK insurers could trade within the single market after Brexit. It noted that UK P&I Club, in common with many international insurers, was established in the UK (as well as Bermuda), which made it necessary to make arrangements to continue trading after the UK’s exit from the EU, should the final arrangements for Brexit, or any transitional arrangements which are put in place, fail to offer adequate access to the single market.


UK P&I Club members with ships registered in the EEA are currently insured by UK (Europe) through its London office, but unless the UK remains part of the EEA this arrangement will not be possible post-Brexit. The Club said that about 20% of the UK P&I Club’s Members, measured by gross premium income, would be affected by Brexit.


Therefore, in order to ensure that these Members will not be not unduly inconvenienced by Brexit, the UK P&I Club will establish a subsidiary in the EU authorised to insure ships registered in the EEA.


The Club board has selected the Netherlands as the preferred location for the new subsidiary, and said that a further announcement would be made once it had been decided where in the Netherlands this subsidiary would be located.


The Club said that there would be no change for Members whose ships were not registered in the EEA. For Members whose ships were registered in the EEA there would be two (minor) changes:


  • the new subsidiary would be the insurer named on the certificates of entry
  • Members would be asked to pay the premium into a bank account belonging to the new subsidiary.


No other changes were expected. The usual contacts at the Club for Members would remain unchanged. Members whose underwriting and claims contacts were based in London or Greece would still be dealing with those contacts after Brexit.


The Club said that it expected Standard and Poor’s to extend the Club’s credit rating to the new subsidiary. The Club also said that the new subsidiary would be in a position to front for other Thomas Miller-managed clubs who could be affected by Brexit, meaning that costs could be shared.


UK P&I Club said it was anticipated that the new subsidiary would be fully operational sometime during the third quarter of 2018, well before Brexit on the 29th March 2019 and in time for the 2019 renewal season