Insurance Jottings

Shareholder Notice dated the 15^th September 2017: OIL’s Exposure to Hurricanes Harvey & Irma

Over the past several weeks, Hurricanes Harvey and Irma have received unprecedented attention in the media because of their extraordinary size, power and damage potential attributes.

Harvey deposited more than four feet of rain in Texas, Louisiana and neighbouring states after slamming Corpus Christi while Irma tied the record for sustained time as a Category Five storm during its cataclysmic path through the Caribbean and eventual landfall in Florida.

The unprecedented level of damage and personal hardship these storms have created is hard to imagine. We at OIL certainly hope that your family, friends and associates safely made it through these events and that life is slowly getting back to some level of normalcy.

During the past two weeks, many of our shareholders have asked how these storms may have affected OIL so the intent of this memo is to address some of those concerns.

Let’s start with some factual information. To date, OIL has received four loss notices from Hurricane Harvey. Of those four, two of the companies have deductibles of US$2.5 billion for their very modest windstorm limit. The other two notices have not as of yet quantified or approximated any potential loss. Having said that, early indications suggest that any losses are unlikely to be significant.

In addition, you may have seen that a chemical plant outside of Houston sustained several explosions shortly after it lost power during the flooding. The owner of the plant is an ex-member of OIL who departed after the 2016 policy year. As a result, OIL has no exposure to these explosions.

In addition to the above information, many of our members who have both/either onshore/offshore exposures along the Gulf Coast have contacted us and unofficially advised that their facilities have not sustained losses that were likely to exceed OIL’s deductible.

Lastly, as of the date of this letter, OIL has not received any loss notices emanating from Hurricane Irma. I have been in touch with one member who has modest assets in the Caribbean and Florida and early indications suggest that their losses will not exceed OIL’s deductible.

In summary, early indications give OIL reason to think that these storms may not generate a significant loss for our company. While it is too early to be sure, we all are hopeful that these indications will remain true to form.

As more information becomes available, we will be sure to provide you with updates should the current status change.

Should you have any questions about this information, please contact me by e-mail on george.hutchings@oil.bm

Beale warns on marine market share loss

Lloyd’s CEO Inga Beale warned the International Shipping Week on the 14^th September of the risk that traditional players may lose market share to new competitors in marine business.

The size of the average cargo insurance claim is growing. In the last twenty years, large cargo claims as a proportion of total claims have doubled. This is partly because large ports and bigger ships routinely handle larger volumes of cargo. Partly it’s because of risk aggregation – when cargo concentrates in big ports for example, which are then hit by a disaster such as Superstorm Sandy or Tianjin explosions, and insurers are hit by bigger claims than they expect.

There are likely to be further cargo insurance losses stemming from Harvey and Irma, but actual losses from these events are still unknown.

All this means that in recent years cargo insurance as a class of business has seen decreasing profitability, with a combined ratio of more than 100 percent.

“If the insurance market doesn’t rise to the challenge then traditional players will lose market share to new competitors – like technology firms and asset managers – who are already investing and trying to capture market share from traditional underwriters,” Ms Beale said.

“It is important we get this right, not just for our own benefit, but more importantly for the benefit of our policyholders who rely on our insurers to pay out when disaster strikes.

“We are exploring the possibilities new technology offers our sector, including artificial intelligence, data collection and analytics. By bringing together statistical forecasting methods, big data techniques, telemetry solutions and high resolution satellite imaging, a more realistic view of cargo exposures could be achieved, leading to better risk selection, which could help underwriters improve their overall profitability.”

A new market insight report into cargo insurance aims to help cargo underwriters develop a greater understanding of cargo risks/and in particular how they aggregate. It suggests that underwriters should consider bringing together statistical forecasting methods, big data techniques, telemetry solutions and high resolution satellite imaging.

Altogether these solutions will not immediately solve the profitability issue – but they could help enhance risk selection and how insurers structure their reinsurance programmes, helping them manage their balance sheet exposures better, according to the report.

“Lloyd’s is working in partnership with a number of marine insurers to test the business impact of implementing a new smart data analytics platform for managing an insured vessel fleet,” Ms Beale said.

“Underwriters and their insureds will be able to use this live information source to ensure that vessels circumvent risky waters when they can, such as conflict zones, or areas prone to piracy or extreme weather. The system’s data can also be used to inform underwriting decisions, improve risk profiling and assist with claims.”

Insurtech risk selection may diminish the role of reinsurers: Swiss Re CEO

The insurtech revolution will have a massive impact on the primary insurance market and has the potential to shrink the business available to reinsurers, Christian Mumenthaler, the chief executive of Swiss Re, told risk managers at Monte Carlo.

Insurtech can help primary insurers to assess, select and price risks better, be it through the gathering of more accurate data through gadgets in health insurance, sensors in property insurance, or the use of advanced weather modelling software.

It can also help primary insurers during the underwriting process, through gathering information and finding correlations, to identify the most attractive risks.

But reducing the uncertainty and volatility in portfolios may also reduce their risk exposure and, consequently, the need for reinsurance, Mr Mumenthaler said. Reinsurers who fail to innovate and write business only passively will be most at risk.

“If you are simply a commodity provider and just wait for the business to come your way, the business will shrink,” Mr Mumenthaler said.

“Lower losses translate into declining premiums and less reinsurance. This shows how important it is to be deeply connected with the client and included in the process of building solutions and having reinsurance attached to them, allowing you to grow with the clients.”

Particularly for smaller insurers, keeping up with insurtech developments may involve significant investments and risks and Swiss Re is helping smaller insurers make this transformation. As part of its tech strategies, Swiss Re helps clients write business more efficiently, taking the role of the carrier for a brand owned by a client.

“This may result in a blurring between the lines of insurance and reinsurance, but I see demand for this from some clients,” Mumenthaler said.

In 2016 Swiss Re launched an insurtech accelerator to help start-ups develop business solutions that, it says, can ‘revolutionise the way re/insurers conduct business’. A number of themes identified for the programme include the Internet of Things (home, industrial, health and motor), systems of engagement (innovative distribution channels and models, digital assistants/robo advisers) and smart analytics (across the insurance value chain).

Mr Mumenthaler pointed to potential pitfalls when insurers apply insurtech to improve underwriting.

“In the end, it’s a zero-sum game for society. If some people start picking the best risks, the others will become more expensive. The question is, how much of that will society and regulators tolerate?” he asked.

Be that as it may, underwriting will not be the only area insurtech is likely to transform in the primary insurance sector.

Insurtech can help improve the sales process, such as finding the right customers, making the product more attractive and easier to buy, Mr Mumenthaler said. While many insurers may be focusing on this opportunity, it has a downside, as it may also increase costs, for example, through the development of a new interface.

Insurtech also has the potential to lower costs for insurers. “You can assume it may take out 50 percent of the costs of the insurance industry,” Mr Mumenthaler said.

“It is deeply unsexy, but in my view it is probably the biggest driver by far for what technology can do to improve your process,” he added.

Reducing costs through insurtech is a difficult process because it affects employees, but cost is an important topic for insurance clients, and Mr Mumenthaler expects more initiatives in the area in the future.

“Insurtech will have a massive impact on the primary business,” he said.

“It will take much longer to have a direct impact on the reinsurance value chain but I don’t see a downside, I see many upsides, especially to help our clients.”

Chubb selects France as EU hub

Chubb, the first insurer to pick Paris as its preferred post-Brexit trading location

The insurer said that the move to its “preferred post-Brexit” hub was dependent on it receiving all the necessary regulatory and other governmental approvals.

Evan Greenberg, chairman and chief executive officer at Chubb, said: “Paris is the principal office for our Continental European operations and we have a significant investment there in both financial and human resources, as well as a large portfolio of commercial and consumer insurance business throughout France.”

Tokio Marine picks Luxembourg for EU unit after Brexit

Tokio Marine Group has revealed its plan to set up an insurance company in Luxembourg for writing European business after Brexit.

The company has started the process with the Commissariat aux Assurances (CAA) to apply for the regulatory approval. Currently, the company has presence in the European Economic Area (EEA) through its subsidiaries, Tokio Marine HCC and Tokio Marine Kiln.

The new insurance company is expected to be incorporated and capitalised within the first half of 2018, enabling Tokio Marine HCC and Tokio Marine Kiln to start writing business.

The new company will have branches across Europe, and will be supported by the existing UK and EU group operations. The plan is to write all business classes which are currently offered by Tokio Marine in Europe.

Tokio Marine stated that the new insurance company will ensure that regardless of the potential outcome of the current Brexit negotiations, it will be able to continue servicing its clients in the EEA and offer a smooth transition.

EY, Maersk & Microsoft Create Blockchain-Based Marine Insurance Platform

Consultancy EY, data security firm Guardtime, Microsoft and ship operator Maersk have joined to build a blockchain-based marine insurance platform which will be the first real-world use of the nascent technology in the shipping industry.

EY and Guardtime said the platform had already been built and would be deployed in January, when A P Moller-Maersk, which was part of a 20-week trial of the new platform, would start using it for some areas of its business, along with insurers MS Amlin and XL Catlin.

A near decade-long slump in segments of the global shipping industry has led many companies to seek ways to cut costs and curb pressures on working capital.

The container shipping sector – which Maersk dominates – has been among the worst-hit, due to an oversupply of vessels and worries over global demand, pushing lines to find greater cost efficiencies.

Shaun Crawford, EY’s global insurance leader, said the 400-year-old marine insurance sector was one of the most inefficient areas of the insurance industry. Shipping companies pay US$30 billion in premiums paid annually.

Blockchain works as a tamper-proof database which is shared and updated across a network in real time. It can automatically process and settle transactions via so-called “smart contracts” using computer algorithms, with no need for third-party verification.

It has been touted as a potentially revolutionary technology in many fields including financial services and healthcare. But it has so far not been used much outside crypto-currencies such as bitcoin, where the technology originates.

“The significance of this from my perspective is this is the first real enterprise use-case for blockchain,” said Mike Gault, chief executive of Guardtime, a company based in Amsterdam.

Mr Gault said the blockchain was “absolutely essential” for this platform to function, as it was able to guarantee that all parties – from shipping companies to brokers, insurers and other suppliers – had access to the same database, which could be integrated into insurance contracts.

“Insurance transactions are currently far too tedious and frictional,” said Maersk’s head of risk and insurance, Lars Henneberg, in a statement. “Blockchain technology has the potential to facilitate the desired development that is long overdue.”

The platform is built on Microsoft’s Azure cloud-based technology.

International insurance industry standards body ACORD also collaborated on building the platform.