market magazine summer 2013

8/16/2019 Market Magazine Summer 2013

1/19

325 YEARS OF LLOYD’S Insert ROBERT HISCOX ON REGULATION p19

STAYING AHEAD OF THE NEXT SUPERSTORM p24 FOOD SECURITY: FOOD FOR THOUGHT p30

INSIDE: BRIGHT LIGHTS, BIG CITIES p10

SUMMER 2013 WWW.lloyds.com


2/19

e has been taken to ensure a ccuracy of information, but neither

d’s nor the publishers can accept responsibility for omissions or errors.

d’s is regulated by the Financial Conduct Authority and the

dential Regulation Authority. © Lloyd’s 2013.

UMMER 2013 www.lloyds.com

blished on behalf of Lloyd’s (w ww.lloyds.com)Sunday (www.sundaypublishing.com)

you would like to contribute to the next issue,ease email [email protected]

VER ILLUSTRATION BY JAMES JOYCE

In 1984,we launcheda successfulmission tosalvage tworogue satellites,sending ashuttle and five astronautsinto orbit

325 YEARS OF LLOYD’S Insert

03

18 MAKING AN IMPACT When a meteor strike over Russia

caused $30m in damage, it gave the

insurance industry pause for thought

INTERVIEW WITH…

ROBERT HISCOX

We talk to the retired chairman about

the perils of heavy-handed regulation and

the biggest item in his art collection

24 THE CALM BEFORE THE STORM At least five intense hurricanes are

anticipated in 2013. And, with more

people living on the coast in high-value

centres, the cost could be catastrophic.

We explore what insurers can do to

mitigate the impact of a perfect storm

29 WHEN THE LIGHTS GO OUT What happens when blackouts – caused

by electricity shortfalls, solar storms

or natural catastrophes – become a

feature of the future?

30 FOOD FOR THOUGHT With the world population due to hit nine

billion by 2050, food security presents a

huge global challenge – and insurers have

a role to play in innovating new products

COVER STORY: MEGACITIESBy 2025, it is predicted that 13.6% of the world’s

urban population will live in ‘megacities’, most of them

in emerging markets. And with megacities come mega

risks. So, what are the implications for insurers?

Features

05 INTRODUCTION

We welcome you to Market magazine

and tee up this issue’s top stories

06 FORESIGHT

News from around the market, including

the technological innovations helping

to de-risk the groundbreaking Te Coldest

Journey, plus Lloyd’s brand new report on

the key threats faced by corporates

22 INFOGRAPHIC

Wreck removal is getting more costly –

Market reveals some extraordinary stats

34 THE GREAT PEARL ROBBERY

Edwardian London was the setting for

the audacious theft of a string of pearls

35 MARKET UPDATE

Upcoming events, movers in the Lloyd’s

market and international contacts

Regulars

PLUS: 325 YEARS OF LLOYD’S OF LONDON

From City of London Coffee House to global hub for specialist insurance and reinsurance,

we bring you ten moments that ensured the market’s reputation as a pioneer on the world

stage – from the San Francisco earthquake to the first cover for space satellites

SUMMER 2013 www.lloyds.com


3/19

For 325 years, Lloyd’s has been a pioneer on the world stage. We’ve dealt inthe most complex, unusual and extreme risks, been a powerful agent for changeand an enabler of the global economy.

In this anniversary issue of Market , we celebrate that extraordinary history with ten moments that made us the world’s centre for specialist insurance andreinsurance (see insert) – from Cuthbert Heath’s unconventional new covers tokicking off the ambitious Vision 2 025 programme.

Key to our vision is pursuing profitable growth in underinsured, emergingeconomies – not least because, in a little over a decade, they will be home toeight of the world’s top ten megacities. On p10, we look at the rapid andunorganic rise of these densely populated, infrastructure-intensive conurbations,and the megarisks they’re most vulnerable to. We also talk to outspoken legend Robert Hiscox about why the industry

should be allowed to self-regulate (p19). And, with severe hurricane activitypredicted for 2013, we explore the makings of a perfect storm, plus whatinsurers can do to mitigate their exposure (p24).

Finally, we get to grips with a massive emerging risk issue – global food security(p30) – and investigate the audacious theft of a string of pearls in 1913 (p34). We hope you find this issue interesting – and if you haven’t already done so, sign

up to receive Market magazine or enewsletter at lloyds.com/marketmagazine

05

@LloydsofLondon www.facebook.com/lloyds www.lloyds.com

“One ofthe biggest

threats iscompetition

from China .Tey can

underwrite,

free of the sortof regulationwe have,

with strong government

support” ROBERT HISCOX


4/19

ForesightSIGHTS FROM THE WORLD OF LLOYD’S. BY THE MARKET, FOR THE MARKET

THE JOURNEY IN NUMBERS

-89.2˚C: Antarctica boasts the

lowest recorded temperature

anywhere on the planet

-33˚C: Temperature when

Sir Fiennes developed frostbite

after taking off his outer gloves

Six months: How long the

2,000-mile crossing will take,

mostly in complete darkness

Five years: Time spent

preparing for the expedition

£6.6m: How much the

expedition hopes to raise for

charity Seeing is Believing

ANTARCTICA

AS SIR RANULPH FIENNES’ TEAM CONTINUES

TS PIONEERING EXPEDITION, WE LOOK AT

THE INNOVATIONS HELPING TO MITIGATE THE

RISK, AND THE ROLE INSURANCE HAS PLAYED

Billed as Te Coldest Journey, Sir RanulphFiennes and his team of five explorers setoff this March to conquer Antarctica inwinter. Unfortunately, Fiennes had topull out after developing frostbite, butthe rest of the Ice eam has continuedthe arduous 2,000-mile trip. Te Coldest Journey Chairman,

ony Medniuk, describes some of thetechnological innovations necessary forthe expedition to take place – and thesignificance of the insurance policy,which was placed by broker JL and 55%underwritten in the Lloyd’s market:

“We spent five years researching everything we would need, starting with specialisedequipment for Sir Ranulph Fiennes andmembers of the Ice eam to wear, given

we were anticipating temperatures downto -90˚C. Lung tissue seizes up at around-45˚C. We had to demonstrate – with thehelp of the Ministry of Defence in theirtesting areas – that specially designedclothing and masks could recycle themoisture in your breath back into yourbody so the very dry cold air wouldn’tfreeze-dry your lungs as you were breathing.

“Te effect of welding in such a cold,hostile environment also had to be takeninto account – and whether conventional

welding techniques would still give therequired bonding support. We were able

to persuade ourselves it would not andall the jointing for the two modifiedCaterpillar D6N vehicles was donein silicone – another world first.

“Tere was also concern thatregular diesel fuel would freeze, so

we had to have the engines adaptedto use aviation fuel.

“And we had to demonstrate we hada depth of contingency in our planning– and that the expertise in our Ice eam

was deep and well-founded enoughthat they could take a hit and stillbe able to continue the expedition.None of us would have wanted tosee that contingency invoked so earlyinto the mission, but it had to be.

“We required insurance as acontingent asset against two typesof peril. First, we might need to invokesearch and rescue costs, bearing inmind the hazardous nature of thisexpedition. Secondly, if for anyreason there was a mishap to ourkit or machinery, we had to be ableto remove it and clean it all up.

“In recent times there has not been,to my knowledge, anything thatcontemplates an expedition of thissize and scale. It has been contingenton all of the pieces coming together:getting the ship; finding the right,qualified team; finding sponsors to

help us buy kit and equipment; andabsolutely core to it is the insurance.“Tis is the market at its best. It does

these things really well. Te programmeis led at Lloyd’s and without a topbroker and London lead, the ability toattract the co-insurance just wouldn’thave happened. Tey did a stellar job.”

FOR MORE INFORMATION

Visit The Coldest Journey site

at thecoldestjourney.org

Get regular updates on the team’s progress at

facebook.com/TheColdestJourney or by

following them on Twitter: @coldestjourney

ASIA

WARRANTY AND INDEMNITY

INSURANCE CAN BE AN EFFECTIVE

WAY TO ‘DE-RISK’ OUTBOUND

MERGERS AND ACQUISITIONS

Japanese outbound mergers and

acquisitions (M&A) activity has

increased steadily, in both deal

volume and value, over the past

three years. As indicators point

to reduced domestic demand,

many companies, aided by a

strong yen, have attempted

to derive greater revenue and

profit from overseas.

Many expect this trend to

continue, leading to levels of

outbound M&A activity at or

beyond the highs of the 1990s.

In 2012, Japanese outbound

M&A deals reached $110.5bn,

according to Dealogic, second

only to the US with $165.4bn.

One of these, Japanese telecom

and internet firm SoftBank’s

proposed takeover of US

wireless company Sprint Nextel,

for $21.6bn, will be the country’s

largest ever overseas deal.

While many Japanese

companies have learned from

past experiences, for some,

the different laws, culture,

business environments and

processes can create concern

about the risk management

of an international M&A deal.

This is often managed through

consideration, post-completion

adjustments, deal warranties,

escrow funds or other forms of

guarantee. However, these don’t

always provide reassurance that

a deal can be completed within

acceptable risk tolerance.

Warranty and indemnity (W&I)

insurance is a way to ‘de-risk’ the

transaction. It is increasingly

used to identify and transfer

risks to insurers, thereby giving

reassurance and assisting the

smooth completion of the deal.

The new W&I product license

obtained by Lloyd’s Japan

allows Lloyd’s underwriters to

bring modern and competitive

M&A insurance to Japan. Two

leading underwriting teams,

Beazley and Pembroke, offer

significant capacity, experience

and expertise in M&A. Many

of their underwriters are

former corporate lawyers who

understand the complexity of

outbound M&A transactions.

07

WORDS BY HELEN YATES

ILLUSTRATIONS BY TANG YAU HOONG


5/19

Foresight

EUROPE

AS THE COST OF INSURANCE CLAIMS

FRAUD RISES, LLOYD’S FIGHTS BACK

nsurance claims fraud has

become a big issue for the

ndustry and insurance buyers

n recent years. In the UK, it

s estimated to cost more than

£2bn a year, up from £860m

n 2000, adding an estimated

£44 to each household’s

general insurance costs,

according to the Association

of British Insurers (ABI). The

mpact of a tough economic

climate and the involvement

of organised criminal gangs

– particularly in third-party

motor claims – is thought

to be behind the rise in

fraudulent claims.

Reforms have helped to tackle

the UK’s growing compensation

culture, which should help

deter opportunists. Recent

years have seen the industry

come together to fight

fraud, sharing and analysing

industry-wide claims data in

an effort to spot suspicious

patterns. Last year the ABI

and City of London Police

set up the Insurance Fraud

Enforcement Department

(IFED), which ABI members

are jointly funding. Lloyd’s

is soon to join. Under the

agreement, managing agents

will be able to refer suspected

insurance fraud cases

to IFED for investigation.

THE WORLD

THE THIRD LLOYD’S RISK INDEX WAS

LAUNCHED EARLIER THIS MONTH AT A

LONDON EVENT HOSTED BY BUSINESS AND

FINANCIAL NEWS SERVICE, BLOOMBERG

In 2011, when Lloyd’s last surveyedglobal business leaders, their top risk

was loss of customers and cancelledorders. More surprising, given theclimbing levels of middle and seniormanagement unemployment, wasthat in second place they put lack ofavailable talent and skills shortages. Tis year, the faltering of the much

vaunted ‘two-speed’ recovery has hitbusiness confidence in all areas of the

world, with Latin America in particulartaking a hit. But the new number onerisk across the world? High taxation. Te Lloyd’s Risk Index 2013

discusses how the recent mood musicaround corporations ‘paying their way’,rather than the reality of droppingcorporate tax rates, is affectingbusinesses in all regions of the world.It also welcomes the fact that, finally,cyber risk has shot up the league tableto become the overall number threerisk for business.

TO READ THE FINDINGS OF THE LATEST

RISK INDEX REPORT:

Download it at www.lloyds.com/riskindex

THE IFED’S FIRST

YEAR OF OPERATION:

Total number of arrests: 260

Total number of cautions: 76

Total number of convictions at court: 12

Current number of insurers

referring cases: 49

Total value of fraud under

investigation:£11m

WHO’S WINNINGTHE RISK RACE?

09

BRINGING TOMORROW’S SPECIALIST

UNDERWRITERS INTO THE MARKET

In his speech marking the centenary

of the Chartered Insurance Institute’s

Royal Charter last year, CII President

Julian James acknowledged the need

to boost talent in the industry and

urged the market to get to grips with

the recruitment challenge.

And Lloyd’s is doing just that. In support

of its Vision 2025 initiative, which has a key

aim of retaining, attracting and developing

the best candidates from the widest talent

pool, it is introducing a new apprenticeship

programme for school leavers this autumn.

The programme will see 12 exceptional

recruits spend 18 months working in the

market, while acquiring a professional

qualification. The successful applicants

will undertake placements in different

areas of insurance, such as claims

handling, broking and underwriting

in certain classes of business.

Another talent-expansion initiative for

both the Corporation and the market is

the year-long Lloyd’s Market Professional

Mentoring Network, which will see

participants tailor-matched according to

their experience level, allowing them to

develop a network of relationships,

enhance skills and build their careers.

TO FIND OUT MORE:

Check out www.lloyds.com/careers

EUROPE

ASIA

TRUSTEES IN THE DOCKA NEW PRODUCT COVERS

DIRECTORS OF ASIAN CHARITIES

AND NOT-FOR-PROFITS WHO

ARE EXPOSED TO LITIGATION

Te high-profile trial of six seniorreligious leaders in Singaporebegan in May, the latest in a spateof cases involving the directorsof not-for-profit and charitableorganisations. Te six CityHarvest Church leaders areaccused of embezzling more than$40m to fund the pop musiccareer of the wife of the religiousorganisation’s founder.

“In Singapore there has been aspate of regulatory investigationsagainst non-profit organisationsincluding government agenciesand statutory bodies as well ascharitable organisations,” saysMarsh’s FINPRO Practice Leaderfor Southeast Asia, Gary Chua.“We are seeing more of that, andin particular we are seeing thisbeing focused on the areas ofimproper behaviour committed by

key officers in these organisations.”Marsh and Catlin Singapore

have launched a product thattackles exposures for charities andother non-profit groups. It givesup to SG$3m for legal defencecosts in respect of any claimalleging fraud and dishonesty– which is typically excludedunder normal D&O policies.In Singapore there are morethan 2,500 registered charities.

Teir exposure mirrors an uptickin D&O litigation in generalacross Asia. “I would put itdown to competition for foreigninvestment and foreign capitalthat continues to flow into thispart of the world,” says Chua.“In that process, the whole notionof legal liability and corporateresponsibility to variousstakeholders has now beenincreased compared to before.”


6/19

17


7/19

Tey’re attractive prospects for specialist insurers, not leastin terms of large-scale infrastructure investment. But whilemegacities in emerging markets are poised for substantialpremium growth, they’re also very vulnerable to diversemacro risks – from earthquakes to industrial accidents

In 2007, a milestone was reached inhistory: for the first time there weremore people living in cities than in thecountry. Tis mass migration, coupledwith rapid urbanisation and explosivepopulation growth, is a mega trend forour time – and one that’s gathering pace.

Recent United Nations (UN) researchreveals that between 2011 and 2050the world population should jump by2.3bn to 9.3bn, with two-thirds (6.3bn)calling cities home. Populations won’t beevenly dispersed between metropolitancentres, though – they’ll be concentratedn a few, sprawling conurbations.“What we are seeing,” says Jomo

Kwame Sundaram, AssistantSecretary-General for Economic

Development at the UN’sDepartment of Economic andSocial Affairs (DESA), “is the

very rapid growth of megacities.”Predictions include some 630 million

people, or 13.6% of the world’s urbanpopulation, living in megacities by2025 – in contrast to 359 million in2011, and just 39 million in 1970.

But what constitutes a megacity?Is it the agglomeration of a population?Population density? In the 1970s,it used to be defined as eight millioninhabitants. oday, it’s ten million.

Tere are megacities we don’t knowabout yet. In China, satellite imagesshow urban areas coming together thatamount to a type of city when you look

at them – but they’re not conceived of assuch, because there’s not a political bodyoverseeing them. Look at the Ruhr areain Germany; or Switzerland, whichsome see as one large city. Whatever

your definition (here, it’s a city with morethan ten million people), experts agreethe real growth in megacities over thenext few decades will come fromdynamic emerging economies.

Swiss Re’s figures indicate that, within 12 years, eight of the world’stop ten megacities will be in emergingmarkets. And the UN’s DESA concurs,anticipating the biggest increases incountries such as India, China, Nigeriaand Indonesia: over the next 40 years,India alone will add half a billion to itsurban population. Meanwhile, inUrban World: Cities and the Rise of theConsuming Class , McKinsey suggeststhat by 2025, 20 megacities in emergingmarkets will collectively contribute$5.8tn to global growth. Te majority ofthese – from okyo, Mumbai, Shanghaiand Beijing, to Delhi, Calcutta andDhaka – will be in Asia.

PREMIUM PROSPECTS

A number of countries offer distinctencouragement for the international(re)insurance market, with Indonesia’sproperty casualty primary insurance

volume set to more than double insize from almost €3bn in 2012 to €7.3bnin 2020. Average growth rates of otheremerging countries – such as Vietnam,the Philippines, Malaysia and Tailand– range between 6% and 8%. Overall,premium income for the insuranceindustry in the Asia-Pacific willdouble by 2020, according to a studyby Munich Re’s Economic ResearchDepartment. Unsurprisingly, thereinsurer expects China to evidencethe highest increase in primaryinsurance premiums worldwide until2020, with an additional €425bn.

/ MEGACITIES

ORDS BY MARCUS ALCOCK

USTRATIONS BY HALF PAST TWELVE

13

INFRASTRUCTURE INVESTMENT

Te market should be buoyed bythese findings, given the potential forsupporting large-scale risk in the region.Indeed, the prospects in the mediumterm in the Asia-Pacific look bullish,

with demand set to increase off the backof significant infrastructure investment. According to McKinsey, annual

infrastructure investment in cities willrise from $10tn to $20tn by 2025, withthe lion’s share in emerging economies.

Te resulting building boom wouldrequire $80tn of construction.

Says Daniel Chan, Head ofProperty and Engineering Facultative

for Munich Re Southeast Asia:“We see quite a few big infrastructureprojects in power and energy. Forexample, there’s the huge metroproject in Indonesia, which istechnically very challenging andcaters to our risk appetite really well.”

Port developments, like that ofBoom Baru in Indonesian Sumatra(see panel, p15), present a lucrativeprospect too. McKinsey anticpatesthat cities of the near future willrequire two-and-a-half times thelevel of today’s port infrastructure.

Rainer Egloff, Emerging RisksManager at Swiss Re, also flags up

opportunitie s through the supplychain, for political, terrorismand business interruption covers,and for broader co-operation andinnovation. “In the future, it’s possibleto think of having a risk managerfor a city analogous to a country riskmanager. Tere are so many singlerisk transfer and purchase risk transfermechanisms in play. I see cities bandingtogether on a global level for knowledgesolutions such as water managementplans. And insurers and reinsurers canbe very important in these alliances.”

In fact, this is already happening:in the wake of Superstorm Sandy,

Megacities and beyond:global urban giants – present and future (POPULATION IN MILLIONS)

Tokyo,JAPAN

Tokyo,JAPAN

Delhi,INDIA

Shanghai,CHINA

Mumbai,INDIA

Mexico City,MEXICO

New York-Newark,US

São Paulo,BRAZIL

Dhaka,BANGLADESH

Beijing,CHINA Karachi,

PAKISTAN

Delhi,INDIA

Mexico City,MEXICO

New York-Newark,US Shanghai,

CHINASão Paulo,BRAZIL

Mumbai,INDIA

Beijing,CHINA

Dhaka,BANGLADESH

Kolkata,INDIA

37.2

38.7

22.7

32.9

20.4

28.4

20.4

26.6

20.2

24.6

19.9

23.6

19.7

23.2

15.6

22.9

15.4

22.6

14.4

20.2

2011

2025 SOURCE: UNITED NATIONS


8/19

and floods in Jakarta and São Paulo, theClinton Global Initiative Commitmentto Action sees a network of citiescollaborating to create a commonframework for assessing climate risk.Insurers would be able to value risk in auniform way, ensuring continuedinvestment in urban infrastructure.

BIG CITIES, BIG RISKS

As attractive as all of this is for theinternational (re)insurance industry,the loss potential in these megacitiescan be enormous – whether fromnatural catastrophes, epidemics, or,say, accidents in the industrial sector. is is largely attributable to the

high concentrations of people, valueand infrastructure in confined areas.But it’s also because many of thesemega-urban regions have grownrapidly and unorganically, leavingthem more vulnerable. Explains

Egloff: “In these explosively growingurban centres, the planning is usuallybehind the growth process, with a lotof crowding and congestion, poor airquality, pollution and other issues.”

One just has to look at the recentdisaster in Dhaka, Bangladesh – when1,100 workers were killed by a collapsedbuilding – to appreciate how accelerated,unstructured urbanisation mightcompromise construction standards.

TEMBLOR TROUBLES

e main risk associated withmegacities, though, is one ofaccumulation. Because of the closeinterdependence between flows ofgoods, finance and information intoday’s global cities, a single lossoccurrence can have far-reachingnegative consequences acrossnumerous economic sectors.

Says Bernd Kohn, CEO of MunichRe, Southeast Asia: “For us as a riskcarrier, the accumulation of value isof huge interest, and we invest a lot inour pricing models to manage it.”

Munich Re’s report, Megacities – Megarisks , cites Tokyo as an exampleof a peak accumulation scenario:“Today, a severe earthquake in the Tokyo-

Yokohama conurbation would result inhundreds of thousands of fatalities,damage running into trillions of dollars,and global economic repercussions.”

Earthquakes can be particularlydevastating to megacities becauseof their intensity and the geographicalextent of damage they inflict. eKobe quake of 1995 caused economiclosses of well over $100bn, and morerecently the Great Tohoku earthquakeof 2011 in Tokyo resulted in insuredlosses of some $25bn. Transport structures are especially

vulnerable here: according to reports,the earthquake forced the suspensionof trains in the Tohoku and Tokyo

“In theseexplosively

growing urbancentres, the

planning isusually behind the

growth process,with a lot of

crowding andcongestion, poor

air quality, pollution and

other issues” RAINER EGLOFF, EMERGING

RISKS MANAGER, SWISS RE

/ MEGACITIES 15

areas, including bullet train services. Although most services resumed againsoon after the quake, the volume oftrains was reduced for some time dueto electricity shortages. A further,stark example was the East JapanRailway (JR East) propertyprogramme’s 71bn yen ($910m) lossfollowing the Tokohu earthquake– from property damage and disruption(the programme covered both propertydamage and business interruption).

OTHER NAT CATS

eir very location means megacitiesare virtually predestined to suffersome form of natural catastrophe.Says Swiss Re’s Egloff: “A largenumber of these agglomerations areconveniently situated near goodtransport link s – on the coast, forexample – and if there is a rise in sealevels, they will be directly impacted.”

Kohn picks up on the point, usingIndonesia as an example: “Propertycat programmes are a big feature, andreinsurers are assessing what is beingdone by the government in terms ofphysical risk and flood management.

Jakarta, like Bangkok, is sinkingevery year and becoming more proneto flooding. It’s being modelled as amajor potential catastrophe risk.” Another observed climate effect

is that megacities are heat islands, with the mean temperature at thecentre up to several degrees Celsiushigher than in the surroundingcountryside. is is most pronounced

when there are heat waves, because thenormal counterbalancing night-timecooling is less effective. During theEuropean summer heatwave of 2003,the number of people who died in cities

was vastly disproportionate to thepopulation as a whole – despite thegreater availability of healthcareservices in urban areas.

Palembang, Indonesia : Refning risk

Often cited as one of the future

megacities to watch, Palembang is the

capital city of the South Sumatra province

in Indonesia. Located on the Musi River

banks on the east coast of southern

Sumatra island, it has an area of just over

400 sq km and is currently the second-

largest city in Sumatra after Medan,

and the seventh-largest city in

Indonesia – though this position

could be set to change d ramatically.

According to Gan Kwee Lin, Client

Portfolio Manager for Munich Re in

Indonesia: “There are currently policy

discussions ongoing in Indonesia about

spreading the economy of the country

more evenly, shifting it across the

country from Jakarta to Sumatra. And

Palembang is the capital of Sumatra,

so the potential for it to become an

economic powerhouse is there. And

there are some exciting projects which

will help facilitate this, such as the

Surumandra Bridge, which is more

than 2,000 km long and connects

Jakarta and Sumatra.”

Some of the greatest potential for

underwriters relates to Boom Baru,

Palembang’s largest port and a

deep-water port situated on the

banks of the Musi River. Boom Baru has

been a major driver of the economic

growth of the province by attracting large

oil refineries, rubber plants, textile mills,

fertiliser factories, and food-processing

plants, making it an extremely attractive

prospect for industrial property players

in particular. In the long term, however,

the hope is that this emerging megacity

can offer a broader appeal. Gan Kwee

Lin notes: “We’re hoping to see casualty

develop but at the moment it’s n ot

that developed as it’s still not really

in people’s minds. It’s a cultural issue:

it’s very much part of the mind-set in

Indonesia not to buy casualty products.”


9/19

Other weather-related risksinclude hurricanes and h igh-intensitystorms, which, even when mild,can lead to severe losses. us, when

Typhoon Nari passed over Taipei inSeptember 2001, albeit with relativelylow wind speeds, it caused insureddamage of around $500m. Heavyrains left the city’s undergroundrailway stations flooded after thepumping system failed, paralysing itsmost important traffic artery for weeks. e Port Authority of New York and

New Jersey, meanwhile, said 25% oftrucks servicing its ports, and as manyas 2,000 containers, were damaged bySuperstorm Sandy when, in 2012, 14 ftstorm surges and 90 mph winds toppledstacks onto each other. Rail tracks werealso washed out, and cranes and cargo-handling equipment broken. Insuredlosses from Sandy stand at $22bn.

INDUSTRIAL ACCIDENTS

Conurbations in emerging marketsare prone to industrial hazards too.

e biggest civil industrial tragedy everoccured in 1984, when a toxic gas leakfrom a pesticide plant in the Bhopal

santiago, chile: construction opportunities

Founded in 1541, Santiago has been

the capital city of Chile since colonial

times, and is also its industrial and

financial centre, generating 45%

of the country’s GDP. Santiago is

considered a mature megacity given

that migration from rural areas has

slowed, the birth rate is sinking and

ife expectancy has increased.

Currently under construction is the

Costanera Center, a huge infrastructure

project in the financial district which

ncludes a 3,000,000 sq ft mall, two

office towers and a hotel.

While its Latin American neighbours

may have experienced a greater

degree of volatility, two decades of

uninterrupted economic growth have

transformed Santiago into one of

Latin America’s most sophisticated

metropolitan areas, with extensive

suburban development, dozens of

shopping malls, and impressive high-rise

architecture. The city also boasts some

of Latin America’s most spectacular

infrastructure, such as the Santiago

Metro and the new Costanera Norte,

a highway system that passes below

downtown and connects the eastern

and western extremes of the city.

Yet there is more to come, according

to Mike Hughes, CEO of Aon Benfield

Latin America: “You’ve got a lot going

on in Santiago, especially after the

[2010] quake, with building codes being

changed. There are lots of construction

projects. Then there’s the airport

development and other really huge

programmes. There’s no doubt about it,

Santiago will be massive, with plenty to

write for. The economy is stable and it’s

a safe place to live and work. And a

lot of the Lloyd’s market already has

strong relationships with Chile, s o a lot

of the mega-risks will flow from Chile

into the London brokers.”

“Jakarta,like Bangkok,is sinking every

year and becomingmore and more

prone to flooding. It is beingmodelled as amajor potentialcatastrophe risk” BERND KOHN, CEO,

MUNICH RE SOUTHEAST ASIA

/ MEGACITIES 17

district of India killed up to 20,000people. A settlement of $470m wasagreed, $200m of which was insured– but the consequences could have beenhigher had Bhopal been a megacit y. Also in 1984, a fire ripped through

a propane and butane storage facility within the municipal area of MexicoCity. Since the early 1960s, 40,000people had moved into the originallyuninhabited area surrounding theplant – with the consequence thatmore than 500 d ied. A decade later,Mexico would again grab headlinesafter explosive substances spreadthrough the sewers of Guadalajara,eventually destroying entire streets.

Te city’s large and complex publicutility network is believed to haveexacerbated the risk significantly.

THE FINAL ANALYSIS

Despite substantial premium growthexpectations across various classes ofbusiness, emerging markets megacitiesare likely to be underinsured – especially

when it comes to natural catastrophes.But there are plenty more risks for

which to deliver bespoke products. Acautionary word, though, because thehazards that go hand in hand with thesedrivers of future economic growth aren’tordinary risks – they’re megarisks. Andtheir complexities pose a challenge – notonly for insurers, but aid agencies too.

Most humanitarians are not trainedto respond efficiently to disasters inbuilt-up, densely populated areas,explains international disaster reliefcharity, RedR. Which is why Lloyd’sCharities rust is supporting RedR’sthree-year project that aims to fill thegaps in specialist knowledge, skills andsystems required by aid agencies to deal

with large-scale urban emergencies.

FIND MORE ON THIS COLLABORATION AT

WWW.LLOYDS.COM/READYTORESPOND

Cairo, Egypt: Political violence potential

The capital of Egypt and a cultural centre

of the Arab world, Cairo is the largest city

in the Middle East and Africa, and host

to several key companies. These include

engineering multinational Orascom and

the Talaat Moustafa Group, one of the

largest conglomerates in the region.

Yet Cairo remains one of the greatest

examples of untapped potential among

the world’s megacities. That said, if it

manages to negotiate its recent political

and economic stagnation, the possibilities

for growth in one of the powerhouses of

the region are impressive.

An indication of what could be

achieved was the surge in industrial and

commercial activity from 2004 to 2008,

when the country adopted an aggressive

policy of economic reform intended to

attract foreign investment and facilitate

GDP growth. Despite such economic

acceleration, Cairo’s recent history has

been more troubled, however. After

unrest erupted in January 2011 as the first

wave of the ‘Arab Spring’, the Egyptian

Government drastically increased

social spending to address public

dissatisfaction, with political uncertainty

reducing the government’s revenues.

Tourism, manufacturing and construction

have been among the hardest-hit sectors

of the Egyptian ec onomy.

Yet even here – a megacity in stasis –

the (re)insurance market, and Lloyd’s in

particular, has been able to help mitigate

risk. As civil unrest has increased in

recent years, there has been an increase

in demand for insurance against damage

to property, and business interruption

from social perils such as riots, strikes,

insurrections and coups détat.

Michael Burle, Liberty Syndicates’ Class

Underwriter for War and Terrorism, Fine

Art and Specie, comments on this uptick in

political violence enquiries in the past two

years: “The loss occurrences for clients

that didn’t necessarily have the cover

from their property all risks [insurance]

forced them down the line of buying a

comprehensive political violence policy.

And that’s from individual clients, such as

a single hotel owner in Cairo, to th e major

manufacturers with worldwide assets.

It’s across the whole spectrum.”


10/19

On 15 February, a meteor exploded over the Russian cityof Chelyabinsk. Te resulting shockwave injured morethan 1,000 people and reports suggest losses will top $30m.However, according to Lloyd’s managing agent QBE, thisevent was ‘relatively small’. S o how concerned about meteorsshould the insurance world be?

Simon Webber, Head of Exposure and CatastropheManagement at QBE, says that there are three categorie s ofmeteor strike . One is the micro category, where space debrisenters the atmosphere and either burns up or hits the groundwith minimal impact. Te second is the mid-range category.Chelyabinsk is at the sma ll end of this. At the larger end isthe unguska incident of 1908, when the ai r burst of a largemeteor over central Siberia created a blast equivalent to 1,000times that of the nuclear bomb dropped on Hirosh ima in1945. A third-category event would be comparable to theone that wiped out the dinosaurs 65 million years ago. With the first level being too small to cause serious damage

and what Webber describes as the ‘dinosaurs k iller’ too bigfor the planet to survive, insurance can only concern itselfwith the mid-range level. Despite this, there has been littlerisk modelling of mid-level meteors – or meteorites as theyare known – if they contact the Earth’s surface.

Hélène Galy, Head of Proprietary Modelling at Willis,says: “Tese incidents are considered so rare that there has

been no real demand for modelling.Ironical ly, we know more about thebigger ones that could wipe us out.”

However, RMS has done a study of what would happen if a unguska-sizedincident occured over New York City.Robert Muir-Wood, Chief Risk Officer,says: “Tere are no particular reasons

why any one location is more or less likelythan another to have an impact. So themodelling is fairly straightforward interms of probability and size of impacts .”

RMS has found that a unguska-sized event probablyhad a 500-year or 1,00 0-year return period worldwide.Chelyabinsk, meanwhile, may have a 100-year return period.

As for losses, Muir-Wood says: “A Chelyabinsk-size impactmight have a 1% chance of causing $1bn of economic los s

worldwide and the unguska-size impact might have a10% chance of causing $1bn, and 5% chance of $100bn.” Tat would be a 5,000-year return period loss of

$1bn and 20,000-year return period loss of $100bn worldwide. He adds that these are economic losses, of

which about 20% might be insured.Dorian Blake, Head of Underwriting Review at QBE,concludes that while severe meteor strikes are e xtremelyrare, their potential severity means we can’t ignore them.“Tey should form part of any insurer’s general riskmanagement strategy,” he says. “Insurers must be awarethe risk exists, assess and quantify it, and then thinkabout whether it is tolerable.”

Blake adds that insurers can mitigate exposure throughreinsurance or other forms of cover. However, he admits that,“if we are talking about a single insurer facing an $80bn loss,it almost certainly would not survive.” Ten again, “if that’sonly going to happen once every few thousand year s, is it

worth preparing for? Te truth is that insurance is generallynot geared up or capitalised for 1,000-year plus events.”

/ METEOR STRIKESORDS BY ROXANE MCMEEKEN

Making an impactIt sounds like science fiction, but after a meteor exploded inthe sky over central Russia earlier this year, should insurersbe considering how to mitigate their exposure to such risks?

OUTSPOKEN INDUSTRY LEGEND ROBERT HISCOX

TALKS CANDIDLY ABOUT WHY THE MARKET

SHOULD BE ALLOWED TO REGULATE ITSELF…

AND HIS BRUSH WITH DEATH IN AFRICA

“ regulators areobsessed with

taking the riskout of insurance,which is a risk-taking business ”

19 / INTERVIEWINTERVIEW BY ROXANE MCMEEKEN

PHOTOGRAPHS BY JOE MCGORTY


11/19

Robert Hiscox’s relaxed demeanor contrasts starkly withthe news he delivers as soon as we meet in the atrium of theLloyd’s build ing. He has been in Accident & Emergency allweekend following a hunting injury sustained by a relative.Tankfully, it emerges, the accident was a minor one.

Even so, his cheery take on a terrifying episode saysmuch about his attitude to risk: he’s all for it. Which mightexplain how he managed to build the family fi rm from aLloyd’s syndicate with ten employees writing £2m inpremium in 1970, to the £1.7bn premium, 1,250-strongunderwriting force it is today.

It certainly took resolve and a willingness to break themould when, as Deputy Chairman of Lloyd’s from 1993to 1995, he helped shepherd the organisation through achallenging reconstruction and renewal period –championing the introduction of corporate capital thatcontinues to reinforce the market’s strong financial footing.

Clearly, Hiscox is a man who knows how to grow a businessn tough conditions. Which is why – in risk-averse andeconomically depressed times – we a sked the sprightly70-year-old former Chairman of the eponymous insurerwhat the biggest issue for the sector will be in coming years.And he is typically unequivocal: regulation, and in particularregulation that prevents insurers from taking risks.

REGULATION STIFLES RISK-TAKING

“Regulators are obsessed with taking the risk out ofnsurance, which is a risk-taking business,” says Hiscox.

“In the old days, if there was trouble somewhere in the world– say a war or terrorism – we were there. We were creative andwrote policies on the spot. I felt like a buccaneer and I couldnsure anything, thanks to being backed up by Lloyd’s.”In today’s more tightly regulated environment, he says,

the London market is di fferent: “What I love about Lloyd’ss its bravery in underwriting. But now, due to regulation,I question whether there is that scope for creativ ity.” Te main regulatory offenders for Hiscox all emanate

from the European Union: the Solvency II di rective,EU employment regulations and the proposed financialtransactions tax. In fact, Hiscox says he wants the UK toeave the EU and has added his name to a list of 50 0 businesseaders behind the Business for Britain campaign. Te groups urging the government to repatriate powers from Brussels.Hiscox’s main gripe with the UK’s membership of the EU

s what he sees as the country’s resulting lack of control over itsown destiny. “I believe you should never get into a situationwhere you can be brought down by others. If you’re a businessdoing well, why tie yourself to other companies that aren’t?”

In the UK, Hiscox believes supervision of the i nsurance

industry will be equally challengingfor the sector in the years ahead.“At Hiscox we’ve spent our livesassess ing risk. But then the [former]Financial Services Authority (FSA)told us we should have a risk officer.

Tey said: ‘If your business is risk, why don’t you have a risk structure?’Our whole life is risk; we know

what we’re doing.”Indeed, Hiscox’s decision to

choose an insider – former ChiefUnderwriting Officer RobertChilds – as his successor wasthought by some to run counter tothe FSA’s preference for firms tobring in fresh talent. “Te FSA liked

you to appoint outsiders,” he says.“But it’s not true to say I defiedthem.” Te very fact that Childshas been with the firm for morethan 20 years, Hiscox says, makeshim ideal to take the helm.

His antipathy towards regulatorybodies doesn’t mean Hiscox isagainst regulation per se. “ We must

have regulat ion. I’m in favour of it.” However, he believes thesector can best face the challenges ahead if it regulates itself.“Why can’t we regulate ourselves? Everybody has an interestin stopping banditry from within.”

He refutes the idea that “no one is prepared to opine on theirpeers”. He cites the case of the failed insurer Quinn in 2011:“We all told the regulator Quinn was going bust.”

Hiscox would like to see the UK’s various organisations,

such as the Association of British Insurers and the CharteredInsurance Institute, come together to form a self-regulatorybody. But with little hope of this anytime soon, insurers inthe West face a growing chal lenge from the developing

world. “One of the biggest threats is competition fromChina,” says Hiscox. “Tey can underwrite, free of the sortof regulation we have, with strong government support.”

How best to respond, then? “Lloyd’s must maintain itsdistinctiveness,” he says. “Its uniqueness is what keepspeople coming here.” It is also essentia l for Lloyd’s to havehubs in different timezones to compete with burgeoningcompetitors. o tackle the regulatory burden, he advisesmore lobbying at government level.

Hiscox, meanwhile, will remain with his firm as honoraryPresident – championing the right to take risks.

“ In the olddays, we werecreative andwrote policieson the spot.

I felt like abuccaneer and

I could insureanything,thanks to

being backedup by Lloyd’s”

/ INTERVIEW 21

FOUR THINGS

YOU DIDN’T

KNOW ABOUT

ROBERT HISCOX:

He’s happy

to be standing

down because…

“I’ve always been a

slave to the business

in a terribly middle-

class way. Now I have

a delicious lack of

responsibility!”

The most surprising

item in his art

collection is…

“The 90-tonne

millennium arch by

Andy Goldsworthy.

People can’t believe

how big it is.”

If he hadn’t

gone into the

family business

he would have…

“Run a construction

company. I’m happy

on a building site –

making beauty out

of chaos.”

The closest he’s

come to dying is…

“Being charged by

a buffalo in Africa.

It was the most

exciting moment

of my life.”


12/19

/ INFOGRAPHICLUSTRATIONS BY ROMUALDO FAURA

16,000(TEU: 20-foot equivalent units) The capacity of the

largest container ship in service, the Marco Polo

Tere have been a numberof high-profile marinewrecks in recent years: theNapoli in the EnglishChannel; the Rena , runaground off New Zealand;and the Costa Concordia ,which foundered off the coastof Italy in 2012. Te costof removing these wrecks isspiraling – in part due toincreasing vessel sizes andgrowing cargo volumes, butalso because of the inevitableglobal media coverage andenvironmental lobbying

that accompanies them.

Typical fuel recovery costs in 2012, versus $1m-$4m in 2000INTERNATIONAL GROUP OF P&I CLUBS

17,047,014TONNESThe amount of pollutants

salved by International Salvage

Union Members from casualty

vessels in the past 17 yearsINTERNATIONAL SALVAGE UNION

138The number of bulkers in service

with a deadweight of more than

250,000 tonnesLLOYD’S LIST INTELLIGENCE, 2012

CMA CGM

51The number of cruise liners

weighing more than 100,000

tonnes in 2013. This compares

with 40 in 2007LLOYD’S LIST INTELLIGENCE, 2012

Wreckremovalin the 21stCentury

TO FIND OUT MORE, DOWNLOAD

LLOYD’S REPORT, THE CHALLENGES

AND IMPLICATIONS OF REMOVING

SHIPWRECKS IN THE 21ST CENTURY,

AT WWW.LLOYDS.COM/RISKINSIGHT

23

The number of wrecks in the

last ten years that have cost

more than $100m to removeINTERNATIONAL GROUP OF P&I CLUBS

458 METRESThe length of the largest ship ever built, Knock Nevis.

The Empire State Building stands at 438 metresSHIPPINGDATABASE.COM

The amount of

reinsurance capital in

the maritime sector in

2012 – a new recordAON BENFIELD

INTERNATIONAL GROUP OF P&I CLUBS

LLOYD’S LIST INTELLIGENCE, 2012

PRESS CENTRE: ROYALCARIBBEAN.CO.UK

The total cost of the 20 most expensive wreck removals of the past decade

The average number of

serious incidents every year

The gross weight of the Oasis of

the Seas, the largest passenger

ship currently in service


13/19

/HURRICANES

ORDS BY DAVID CRICHTON

USTRATIONS BY SAWDUST

25

Professor Mark Saunders and Dr Adam Lea of TropicalStorm Risk.com (TSR) at University College Londonhave an enviable reputation for forecasting tropical storms.In April 2005, their predict ions for the coming hurricaneseason were sent to a contact in the British Consulate inHouston, Texas. e Consulate later earned praise for itspreparedness to help British citizens during HurricaneKatrina, one of the strongest storms to impact the coastof the United States during the last 100 years, and wh ichcaused devastation along the central Gulf Coast states. is April, TSR said: “Based on climate signals, Atlantic

basin tropical cyclone activity is foreca st to be about 30%above the 1950-2012 long-term norm.” eir announcements have since been followed by alerts

from Weather Services International, which predicts“16 named storms, nine hurricanes and five i ntensehurricanes” for 2013, consistent with TSR predictions.

WARMER OCEANS, STORMIER CONDITIONS Sea surface temperatures in the North Atlantic are alsoon the rise. Research published in Nature Geoscience in2012 by Professor Rowan Sutton, Director of ClimateResearch at the UK’s National Centre for AtmosphericScience, suggests that the UK’s recent run of recordrainfal l is influenced by a major warming of the North

Atlantic Ocean, which started in around 1996. It maybe significant that the TSR forecast for 2013 is forincreased Atlantic cyclone activ ity but near-normalNorthwest Pacific typhoon activity. A warmer ocean is well known to contribute to stormier

conditions. e last time the Atlantic was this warm(1931-1960), it produced a run of wet summers a nd severestorms, in particul ar the 1953 storm, which caused nearly500 deaths in the UK and over 1,800 in Holland. equestion is whether the current spell will also last 30 years.

Many reports suggest the climate is changing, with themost detailed findi ngs for the second half of the 21stcentury emerging out of t he PRUDENCE Project,completed in 2004 and involving universities from acrossEurope and Scandinavia. e main predictions, al l of

which have since occurred, include:• Increases in winter rainfal l in Central and Northern

Europe and decreases in the South.• Major increases in summer rainfa ll in North-East

Europe and decreases in the South.• Longer summer droughts in Mediterranean countries.• Winter storms: extreme wind speed increases betw een

45°N and 55°N.

RISK FACTORS

One thing all resea rchers seem to agree on is that windstorm hazard is likely to become more severe. So, what about the risk of damage? When assessing any type ofphysical risk, it’s crucia l to remember that hazard is just onecomponent. e others – exposure and vulnerability – areas important. e Crichton Risk Triangle (©Crichton,1999) has been used by insurance catastrophe modellersfor many years and suggests that the amount of risk

As the Atlantic warms and the worldsees accelerated, high-value, high-densitydevelopment in potentially vulnerable urbancentres, Market explores the makings of the perfect storm, the ri sk factors at play andwhat insurers can do to mitigate the impactof extreme hurricane events


14/19

depends on the interaction of all three factors. If a ny onefactor can be reduced, then risk can be reduced.

HAZARD

Te power of windstorms is impressive. Te University ofthe Highlands and Isla nds (UHI) in Stornoway, WesternIsles, has been operating wave measu rement buoys for twoyears off the west coast of Scotland. During a storm thisFebruary, record wave heights of 23m were achieved.

If wave power machines had been installe d at the time,UHI calculates the electricit y generated that day couldhave exceeded that of 120 modern nuclear powe r stationsthe size of orness. Under normal conditions, they claimthat wave power machines there could generate an averageoutput equivalent to 12 nuclear power stations. Windstorm severity is best measured by the atmospheric

pressure. In general, the lower the pressure, the more severethe windstorm. Te wind was so fierce during the Braerstorm of January 1993 that the Lerwick coastguard’s Land

Rover, fully laden, was blown over a cliff. We don’t knowhow fast the w ind was because both the harbourmaster’sand the coastguard’s anemometers were blown away.However, it can be deduced that it was more than 170mph –the most powerful storm previously recorded in Shetland.Losses were trivial, though. Even though it may have beenfar more severe than Sandy or Katrina, the Braer stormcaused little damage. Te answer lies in the other sidesof the risk triangle: exposure and vulnerability.

EXPOSURE

Both Sandy and Katrina affected areas with high expo surein terms of population density and propert y value. Sandyaffected nearly 1,000 mi les of coastline, a bigger area thanany previously recorded hurricane in the US. Not onlythat, but it produced a record storm surge of 4 .2 metres incentral Manhattan. Te surge also affected expensi ve realestate in New Jersey and Long Island – not to mention thedisruption caused by the closure of a major airpor t. As with

CLOCKWISE FROM BOTTOM:

With sustained winds during landfall

of 125mph, Katrina caused widespread

devastation along the central Gulf Coast

states of the US. In its day, Hurricane

Andrew was the costliest storm eve r,

causing more than $26bn in loss es at 2012

prices. The record surge from Superstorm

Sandy affected expensive real estate in

Manhattan, New Jersey and Long Island

/ HURRICANES 27

Katrina, much of the damage w as due to flooding in thelow-lying coastal zones. Te Braer storm, by contrast, struck unpopulated areas

in Scotland, so exposure was low. Compare Shetland withShanghai in China. Te construction of the T ree GorgesDam has meant a reduction in silt flowing dow n the

Yangtze River, which had previously been deposited at itsmouth. Te silt had helped to protect Shanghai from stormsurges, but is now gradually disappearing. Also, the area tothe north of the city, which is ultra-exposed to hurrica nedamage and was previously undeveloped, has now beenbuilt on with high-density, high-value properties – soexposure has grown massively in just 20 years. After Hurricane Hazel in 1954, major reductions in

exposure were introduced in Ontario, Canada. Propertiesin flood hazard areas w ere bought by the government anddemolished, with the land returned to its natural state.

Te flood defence on one bank of the Tames River in thecentre of London, Ontario, is no longer needed while theopposite bank is now an attractive city-centre park .

Flooding is often a major factor in the dama ge resultingfrom hurricanes. Swiss Re estimates that only half of thedamage caused by Superstorm Sandy was wind damage.Huge storm surges can occur too – for example, HurricaneGilbert in 1988 produced 100mph winds and a 5.8 metrestorm surge. It killed 318 people and devastated Jamaica.

Flooding caused by ty phoons is a problem in countriessuch as Japan, where government figures show that, afterthe Naka River and Kokubu River flood s of 1998 and theFukuoka floods of 1999, half of the cost of the flood sconsisted of repairing the flood defences themselves.

Even where exposure remains high, risk ca n be reducedby reducing vulnerability.

VULNERABILITY

Hurricane Andrew in 1992 generated a sea change inattitudes to vulnerability in the US. In its day, it was thecostliest storm ever, but it is now ranked fourth. Tanks toan effective warning system, the death rate was low at 43people, but so many houses lay in its path that a sustained

wind speed of 145mph and a 5-metre storm surge causedmore than $26bn of damage at 2012 prices. More than200,000 homes and businesses were damaged or destroyed.Even so, Dr Mark Maslin of the AON Benfield HazardResearch Centre at UCL points out in his book, StormyWeather , that if the hurricane had struck just 20 mi lesfurther north, in Miami, the costs might have doubled. After Andrew, steps were taken to make Florida’s

buildings more resilient to windstorm by raising standardsand giving better training to building inspectors. Tesemeasures have now been extended nationally under theFortified programme, managed by the Insurance Institute

for Business & Home Safety. It has guidance for retrofittingexisting residential structures, including the modification of

vulnerable areas such as roofs and gable walls.In Australia, the insurance and banking industries have

gone further. When government ignored their pleas formore resilient building standards, the fi nance sector simplydeveloped its own – known as ‘blue book’ standards. Banksstopped giving mortgages on residential properties thatdidn’t meet these standards and insurers would not insurethem. Despite the government’s continued updates of itsown unsatisfactory standards, these were universallydisregarded by the construction industry. Tere is much tobe said for a similar approach being taken elsewhere.

Human vulnerabilit y can be reduced by effective early warning systems. However these are very dependent ona good communications infrastructure and this is notalways availa ble in less developed countries. For example,Hurricane Mitch struck Honduras in 1998 with very little

warning to the people living there. Conservative estimatessuggest that 20,000 people died, and a further two million were left homeless. Yet the hurricane is estimated to havecost only around $2bn at 1998 prices.

It has also been suggested that underwriters shouldbeware a ‘black s wan’ event, defined by Nancy Green,Executive Vice President of AON Risk solutions, as“a highly improbable occurrence with three characteristics:• It is impossible to predict.• It carries a massive impact.• Its shock value is st unning because people could never

conceive of such an event occurr ing.”Green’s examples include the September 11 attacks,

the 2008 credit crisis, the BP Gulf oil spill in 2010 andthe 2011 Japan earthquake.

If morestorms tracksouth of 55°,as predicted,this could meanbig increases indamage becauseof the exposureof vulnerable property incontinental Europe


15/19

THE COSTS To predict the cost of a hurricane scenario, it is necessary toobtain data on mean loss ratios for different severit ies andocations. In the UK, for example, the author set up such a

database at Aberdeen University in 1998 using claim s datafrom the leading UK insurers (Loss Prevention Councilreport LPR 8). is database shows that in the UK,windstorm mean loss ratios depend almost entirely on therelevant building standards, which vary by location anddate of construction. us, the most vulnerable homes inthe UK are in the south of England and built after 1971. A storm in October 1987 in England was not nearly as

severe as some of those experienced in Scotland. But becauset tracked across the south of the country where exposure and

vulnerability are high, it was the most damaging since 1953.e Building Research Establishment (Report 138) foundthat most of the damage was to gable wal ls caused by failureof prefabricated roof trusses. As more houses a re built withprefabricated trusses, the costs of successive storms inEngland could increase.

OUTLOOK

Despite the Fortified programme, the US remainsthe region most vulnerable to hurricane dama ge. Of the40 biggest insurance losse s recorded since 1970, 20 werefrom hurricanes or tornadoes that struck the US. Aon’s Global Risk Management Survey currently ranks

weather and natural disasters at 16 on its list of risk concernsfacing companies, but projects this will jump to ninth placen the next three years. In the sur vey, Gail McGovern,

President and CEO of the American Red Cross, points outthat more than half of Americans live on or near the coast,where they are vulnerable to hurricanes, storm surges andother weather-related disasters – a nd that this fig ure isexpected to increase to 75% by 2025.

In the Far East, an increasing population density,especiall y near the coast, is likely to be vulnerable to stormsurges. Flash floods wil l remain a major problem in Japandue to the topography and population densities. Japan hasnow changed its policies to promote sustainable floodmanagement, which should reduce the problem over time.

In Europe, if more storms track south of 55°, as predicted,this could mean big increases i n damage because of theexposure of vulnerable property in continental Europe.Indeed, a 2013 disaster scena rio used by Lloyd’s predicts apotential loss of €23bn should such a storm hit England,France and Germany. Interestingly, seven Europeanwindstorms appeared in the top 40 most costly insuranceosses since 1970 – all of them south of 55° latitude.

David is a Fellow of the Chartered Insurance Institute. Hehas advised the UN, NATO, the OECD and government s andinsurers on four continents on flooding and natural disasters

WHAT CAN INSURERS DO?

Help build more resilient communities

by working with policymakers to

encourage customers to adopt risk-

mitigating measures such as ‘code plus’

standards for new building and retrofits.

Incentivise policyholders to take risk

mitigation measures through reduced

premiums – for example, lower premiums

could be offered to home owners who

install fire-resistant, non-wood shingles

in fire-prone areas. Insurers could also

encourage policyholders to share a

greater proportion of risk by offering

policies with higher deductibles. This will

provide a financial reason to implement

risk mitigation measures in order to keep

losses as low as possible.

Explain to customers the advantage

of retrofits in hazard-prone areas and

consider offering home inspections /

retrofit recommendations.

Share findings on weather-related

catastrophe risks more widely

with government researchers, and

advocate additional data collection

and development of tools that will

benefit underwriting, risk mitigation

and adaptation planning.

Work with policymakers to improve

hazard mapping and data quality.

/HURRICANES

DOWNLOAD THE REPORT, HURRICANES

AND LONG-TERM CLIMATE VARIABILIT Y,

AT WWW.LLOYDS.COM/HURRICANES

Britain faces a looming electricityshortage and could be hit by 1970s-styleblackouts if nothing is done to increasesupply. Around a fth of Britain’spower plants are set to close by2020 as European environmentallegislation curbs electricity suppliesfrom polluting coal and oil plants.

UK energy watchdog Ofgem andutility company SSE have voicedconcern over future electricityshortfalls. With fewer power plants,spare capacity could tighten to as low a s4%, compared to 14% at the moment.

“Te government is signicantlyunderestimating the scale of the capacitycrunch facing the UK in the next three

years and there is a very real risk of thelights going out as a result,” said SSEChief Executive, Ian Marchant.

SOLAR STORMS

Electricity networks are also vulnerableto solar storms. Swiss Re has considereda scenario of a geomagnetic storm overNorth America, with the potential toaffect 130 million people and cost theeconomy $1trn. Tere are plenty of historical examples

of disruption to electrical transformersand grids from solar flares, according toa Lloyd’s report on the impacts of space

weather on earth. Te issue came toprominence in March 1989, when the

power grid in Quebec failed in 92 seconds during a hugemagnetic storm, it notes. It took nine hours to restore normaloperations, during which time five million people had noelectricity, and businesses across Quebec were disrupted.

Cyprus, meanwhile, experienced rolling blackouts in 2011after an explosion tore through the Vassilikos power station,

which provided close to half of the island’s electricity. Te blast was caused by containers of nitroglycerine andgunpowder detonating after resting in the sun at a naval base.Forced to import energy, the island’s economy suffered .

BEWARE THE DARK SIDE

If blackouts are to become a feature in the future, they willhave a profound impact on business. Te ohoku earthquakeand tsunami in March 2011 showed how businesses andsupply chains can be disrupted by power cuts. Several

Japanese prefectures were hit by rolling blackouts in theaftermath of the disaster and Level 7 meltdowns at theFukushima nuclear reactor. A proportion of this disruption was not insured. Tis was

because contingent business interruption (CBI) policies werenot triggered if physical damage had not taken place. “Tere

were instances where there actually wasn’t property damageat the supply side, but because the utility company was down,there was no power coming in,” says om eixeira , a partnerin the global solutions consulting group at Willis. “Or there

was disruption because there was logistical interference. So,for instance, they couldn’t ship workers in or out of the site.

“A lot of companies would have had [insurance] protectionif there had been a lack of power to their own operations, butthey hadn’t really considered the scenario of the supplier notbeing able to produce because they weren’t gett ing the power.”

Only 20% to 25% of business interruptions , such as supplychain disruptions, are related to physical loss, points out aChief Risk Officer Emerging Risks Initiative paper,PowerBlackout Risks . Terefore organisations should be aware theymay be exposed to signicant uninsured losses, triggeringdemand for new risk-transfer solutions related to powerblackout risks in the future.

Since the Japanese earthquake some supply chain insuranceproducts have been developed, triggered by non-physicaldamage business interruption, and the market is growing.Limits of $25m to $100m are already available for standaloneCBI covers and pricing is based on the scope of coverage(such as the number of rst-tier suppliers covered).

29

Electricity shortfalls, solar storms, earthquakes…business interruption from blackouts can wreak

havoc through the supply chain

When thelights go out

BLACKOUTS

WORDS BY HELEN YATES


16/19

Horsegate is the name given tothe horsemeat-in-beef scandal thatgalloped through Europe’s foodproduction and distribution sectorsduring the past 12 months. Andt looks set to whip up the biggestshake up in food security since themad cow disease outbreak in 1984.

Horsegate exposed the lack ofcontrols in supermarkets and foodprocessing firms. “It started inIreland and then the UK, and thenwe pointed the finger at Polish andRomanian suppliers,” says ProfessorChris Elliott, Director of the Institutefor Global Food Security at Queen’sUniversity Belfast. “But actually itwas someone in the middle of thesupply chain in Holland doing it.”

Elliott believes firms face t wo choices:simplify the supply chain for their meatproducts – often with 12 or more linksfor a single product – or introduce newchecks and testing at each and everystage. Both are expensive options.

But the consumer preference forlocally sourced food means the safemoney is on supermarkets shorteningtheir supply chains. Says Elliott:“For the first time in living memory,consumers are starting to ask,‘did this come from a local farm?’.I would expect to see a blossomingof artisan food producers.”

Supermarkets are already rethinkinghow they sell meat. One possibility isto employ old-fashioned butcherssupplying locally sourced meat, rather

Te recent horsemeat scandal put food securitytowards the top of the news agenda. But with

the world population forecast to hit ninebillion by 2050, this is just one facet of a huge

global risk issue . And insurers have a role to play – in helping to manage the risks facing

the food-growing, processing and distributionindustries through the supply chain

than the aisles of pre-cut cellophane- wrapped cuts and bags of mince.

SUPPLY CHAIN CONTAMINATION

Elliott points out that the kind ofcontamination seen with Horsegatehas been around for years. “Whereverthere’s an opportunity to make a quickbuck, the human race will take it.”

In this case, meat suppliers and foodmanufacturers were blamed, but it wasalso supermarkets squeezing pricesthat led to the contamination. Itbecame impossible to provide pure beefat the prices the supermarkets had set.Even so, Tesco has said that the resultof Horsegate will likely be that peoplepay a higher price for their food.

In Germany, meanwhile,competition from a new buyer causedsignificant accidental contamination inthe arable sector – specifically wheat.Biodiesel producers were prepared topay more for Bavarian wheat than thetraditional food producers. With

virtually all the local wheat sold at ahigher price outside the food chain,dairy and livestock farmers turnedinstead to wheat from Serbia.

However, a warmer, drier summer –possibly the result of climate change –meant a fungi not normally found asfar north as Serbia grew in the wheat,releasing a poison called aflatoxin.

Untested, the contaminated wheat was mixed into animal feed and fedto cattle on 4,000 farms. eysupplied milk to 35 dairies. All thefarms and dairies had to be closedand quarantined, with thousandsof litres of milk recalled. at recallextended to the products to whichthe contaminated milk was added. ere is little doubt insurers can help

companies manage these growing risksby developing risk management andrisk transfer solutions along the foodsupply chain. e winners will be thoseprepared to innovate and adapt.

/ FOOD SECURITYORDS BY CHRIS WHEAL

USTRATION BY ANGUS GRIEG

31


17/19

Food security risks

CLIMATE CHANGE

n Somalia and the DR Congo, already-

vulnerable food security has been

worsened by drought and the ensuing

ood crisis. In 2010, Russia banned

grain exports after severe drought and

wildfires ruined 10m hectares of grain.

FOOD RIOTS

During the 2007-2008 food crisis,

ood riots broke out in more than 30

countries,from India and Morocco

o Mexico and Argentina.

FOOD PRICE VOLATILITY

n 2009, the Philippines Government

panic bought 1.5m tonnes of rice, equal

o 5% of annual international grain trade.

Coupled with export restrictions, this

hoarding forced up world food prices.

MARKET SPECULATION

Unregulated speculation on world

commodities market s can add to price

volatility in agricultural commodities,

with ruinous consequences for the lives

of smallholder farmers and purchasing

power of those in developing countries.

SUPPLY RISKS

Brazil, Argentina and the US produce 90%

of global corn and soybean exports. While

only 3.6% of global rice exports come

rom China, fluctuations in its exports

could have a significant impact due to the

hinning world rice export market.

RISING DEMAND

Between 2000 and 2050, global

cereal demand is set to ri se by a

projected 75%, while demand for meat

is expected to double. Developing

countries are expected to account for

more than 75% of this growth.

BIOFUELS

The substantial growth of non-feed

uses of agro-commodities since

the 1990s is largely attributable to

increasing biofuel production that

often receives government subsidies.

CONFLICT

Causing displacement, disruption of

trade and high transport costs, conflict

impedes efforts to deliver humanitarian

(including food) assistance, and

negatively impacts on agriculture.

PRODUCT INNOVATION

Aquaculture provides an exampleof how insurers can make a splash.Paddy Secretan is Managing Directorof Aquaculture UnderwritingManagement Services (AUMS). Hefirst wrote an aquaculture insuranceproduct in Lloyd’s back in 1973. Hesays insurance in the sector is about togo through a sea change, from insuringa species you can count – the number offish in a lake – to something more akinto crop insurance, looking at yield. Tis

will open up the massive internationalaquacultural market for shellfishproduction, for example.

“Te role insurance is going to playis going to change in the next year ortwo,” says Secretan. He flags up the

importance of the shrimp industry inthe Far East, plus farms for musselsand oysters. “Farming shrimps isanalogous to farming corn,” he says.“You put a lot of small things in and afew months later either you have a lot or

you have none. You can’t count themlike you can count salmon or trout.”

Secretan explains that traditionalinsurance in the sector has coveredfish farms, where you can quantifythe damage after an incident – watertemperature change, pollution,plankton contamination and so on. Teinsurer can count the number of deadfish and compensate accordingly. Teycan also exclude certain risks. Te newmarkets need a new way of thinki ng.

“We want to make crop-typeinsurance available to aquaculture –not counting, but insuring the outputor yield,” says Secretan, who reckonsthis issue will dominate next year’sconference on aquaculture insurance inIstanbul. He mentions that in urkeyan agreement between the insuranceindustry, brokers, farmers and thegovernment means the governmentpays half the aquaculture insurancepremiums for urkish producers. It’s amodel other countries are looking at. Yet, Secretan says: “Te aquaculture

insurance market is highly specialised, with few people in it, and the insurancemarket is not growing with the

aquaculture industry. It eithercontinues in its current vein, providingspecialised products for salmon andtrout farmers, or it has to change.”

One Lloyd’s underwriter confirmsthat insurers already cover a wholerange of food industry perils acrossthe supply chain, from raw materialproducers to high-tech food processingfirms, distributors and retailers.

“We cover events – a spillage, anexplosion – for bodily injury fromproducts or operations. Tere iscover for gradual pollution andenvironmental liability. Product

/ FOOD SECURITY 33

“ Innovativeinsurancesolutions,in both thedeveloped anddevelopingworld, have the

potential to playa larger role in

progress towards food security”

Top ten food risk countriesrecall can be covered. What yousee with developing markets is, themore regulation grows, the moreinsurance follows,” he says.

SETTING THE AGENDA

Regulators worldwide are already atthe starting barrier. Internationalorganisations, such as the WorldEconomic Forum, are discussing worldfood security. In 2011, the World BankGroup introduced the AgriculturalPrice Risk Management (APRM)product to enable farmers and foodproducers in emerging economies toaccess financial derivatives to hedgerisks posed by price volatility. Te UN and the EU have food

security issues on their agendas.Governments worldwide are steppingin. Tere have been agriculturalinsurance schemes introduced for basiccrops such as rice in Vietnam and China.In other countries, microinsurancefor small producers is developing andexpanding. And in developed countries,regulation is veering the other way totackle waste and obesity. Expect thepace of regulation to pick up.

Not every risk can be covered,however, and not every problem hasinsurance as its solution. But between2005 and 2011, agricultural insurancepremiums have almost tripled to$23.5bn, according to a recent Swiss Re

report. With food production needingto grow by 60% to meet world demandby 2050, and with new marketsopening up to insurance, the potentialis huge. Food production risks alsoinclude perils associated with property,employment, transport and globaltrade, including political risk. Te potential has prompted

Lloyd’s to publish a report entitledFeast or Famine: Business and

Insurance Implications of Food Safetyand Security . It highlights how foodsecurity will be one of the largestthreats to global society over the

next ten years, warning that thereis a perfect storm of risks: “Onthe demand side, global populationgrowth, demographic change,increasing affluence and migrationto urban centres are leading togrowth in demand for food andchanging patterns of consumption.On the supply side, climate change,

water scarcity, resource competition

and political drivers, among otherfactors, influence food security.” Te report says: “Risks can be

categorised as physical, operational,financial, reputational, geopolitical,regulatory, and societal.” But itsuggests that insurers have anincreasing role to play: “Innovativeinsurance solutions, in both thedeveloped and developing world,have the potential to play a larger rolein progress towards food security.” According to Neil Smith, Lloyd’s

Manager of Emerging Risks andResearch: “Te report is not intendedto be a compendium of all food-related issues, but it is flaggi ng up

where insurance has a role to play. Tere is an increasing world populationand something has to change to meetthe growing demand for food.”

DOWNLOAD LLOYD’S REPORT,

FEAST OR FAMINE: BUSINESS

AND INSURANCE IMPLICATIONS OF

FOOD SAFETY AND SECURITY, AT

WWW.LLOYDS.COM/FEASTORFAMINE

Haiti Chad

DR Congo

Burundi

South Sudan Ethiopia

Eritrea

Somalia

Comoros

Afghanistan

SOURCE: MAPLECROFT FOOD SECURITY RISK INDEX 2012


18/19

In the summer of 1913, Hatton Gardendiamond merchant Max Mayer sent astunning necklace with 61 flawless palepink pearls to a potential buyer in Paris.

Te necklace, known as ‘Te Mona Lisaof Pearls’, was insured by Lloyd’s for

£150,000, and was coveted by jewellersand criminals worldwide. After choosing not to buy the pearls, the

prospective buyer returned the necklace byregistered post. But when Mayer broke theintact seals and opened the box, the necklace

was gone, replaced with sugar lumps.Devastated, Mayer contacted his Paris

agent, then Scotland Yard, who sent oneof their most highly regarded officers,

Chief Inspector Alfred Ward. Along with Mayer, severalpolice officers and Mr Price – one of the two Lloyd’sunderwriting assessors who originally valued the necklace– Ward met Mayer’s French representative, Henri Salamons,

who had travelled to London from France. A specialcommittee of Lloyd’s underwriters, headed by MontagueEvans, was set up to handle the affair. After discussions thatlasted all night, it was announced that Lloyd’s would pay a

£10,000 reward for the necklace’s return.Chief Inspector Ward then began his investigation – and

at its centre was Joseph Grizzard, a debonair man who posedas a legitimate Hatton Garden jewel trader, but who was alsoknown as the ‘King of Fences’ . Ward’s first lead was a Paris dealer called Brandstatter, who

claimed that during a recent vis it to Antwerp he had beenapproached and asked if he would be interested in a necklacethat looked very much like Mayer ’s. Brandstatter and twoother dealers arranged to meet the thieves at a hotel inHolborn, but while the assignation went ahead, there was nosign of Grizzard or the necklace. A second meeting, atChancery Lane tube station, was arranged at which time thenecklace was to be exchanged for 100,000 French francs. Tistime, though Grizzard was arrested, the necklace remainedelusive. However, it wasn’t to remain so for very much longer. Just two weeks after Grizzard’s arrest, piano-maker

Augustus Horne was walking to work in Highbury whenhe saw a man drop something in a gutter. When heinvestigated, Horne discovered a broken string of pearls.

Assuming them to be imitation, he gave one to a streeturchin to use as a marble, and the rest tothe police, where he was astonished to beoffered the reward for the missing pearls.It’s thought the final suspect felt thepolice closing in, and disposed of them. When the gang came to trial, the

facts about the pearls’ disappearancebecame a little clearer. Mayer’snecklace, it seems, had been returnedfrom Paris. But on the way to Mayer’s,the postman had called at the shopof dealer Simon Silverman – anotherof Grizzard’s gang. Silverman, whohad access to forged seals, bribedthe postman to let him examine thepackage before exchanging the pearlsfor sugar, resealing the parcel, andsending i t on its way.

FIND OUT MORE ABOUT OUR AMAZING

PAST AT WWW.LLOYDS.COM/HISTORY

The GreatPearl RobberyIt was one of the most audacious thefts of itstime, its resonance eclipsed only by oncomingwar – and it concerned a breathtaking stringof pearls, insured by Lloyd’s for £150,000

/HERITAGE ORDS BY GLYN BROWN

USTRATION BY JAMES BENN

AUSTRALIA

Adrian Humphreys General Representative, Australia+61 (0)2 9223 [email protected]

BRAZIL

Marco CastroManaging Director & GeneralRepresentative, Brazil+ 55 (21) 3266 1900

[email protected] CANADA

Sean MurphyPresident & Attorney in Fact, Canada+1 416 360 [email protected] CHINA

Eric GaoGeneral Representative, China+86 21 6162 [email protected] HONG KONG

Kim SwanGeneral Representative, Hong Kong+852 2918 [email protected]

JAPAN

Iain FergusonRepresentative & Chief Operating Officer, Japan+81 (0)3 5656 [email protected] NORTHERN EUROPE

Benno Reischel Head of Northern Europe+44 (0)207 327 [email protected]

SINGAPORE

Kent ChaplinHead of Asia Pacific, Lloyd’s Asia

+65 6538 [email protected]

SOUTHERN & EASTERN EUROPE, & AFRICA

Enrico Bertagna Head of Southern, Eastern Europe & Africa+39 026 378 [email protected]

UK/IRELAND

Keith SternUK & Ireland Regional Manager+44 (0)207 327 5933 [email protected]

USA

Hank Watkins President of Lloyd’s America+1 212 382 [email protected]

WWW.LLOYDS.COM/LLOYDS/OFFICES

MONTE CARLO RENDEZVOUS6-12 SEPTEMBER, MONACO

An annual gathering of more than 2,500reinsurance professionals, marking thebeginning of the annual negotiation processahead of renewals. Lloyd’s will be hosting anetworking reception on behalf of theLloyd’s market on Monday 9 September.

FERMA29 SEPTEMBER-2 OCTOBER,

MAASTRICHT, NETHERLANDS

Lloyd’s will be participating in the annualconference by hosti ng a booth (47-48) for theduration of the event. Please come and visitus to find out more about Lloyd ’s, and tomeet market representatives.

CIAB29 SEPTEMBER-2 OCTOBER,

COLORADO SPRINGS, US

Lloyd’s will host a dinner and networkingreception at one of the largest gatherings ofChairmen and CEOs from all the majorinsurance operations in the US and overseas.

MARKET PRESENTATIONSSINGAPORE/HONG KONG 10 SEPTEMBER

Lloyd’s, London

SWITZERLAND 24 SEPTEMBER

Lloyd’s, London

FRANCE 1 OCTOBER

Lloyd’s, London

ITALY 8 OCTOBER

Lloyd’s, London

ISRAEL 8 OCTOBER

Lloyd’s, London

IBERIA 22 OCTOBER

Lloyd’s, London

GERMANY/AUSTRIA 31 OCTOBER

Lloyd’s, London

MEXICO 8 NOVEMBER

Lloyd’s, London

FOR FURTHER INFORMATION ON ANY OF

THESE EVENTS, PLEASE VISIT:

lloyds.com/events

ALTERNATIVELY, EMAIL US AT: [email protected]

Jim McCannNon-executive Chairman, Willis

Jim succeeds Joe Plumeri when the latterretires from his post th is July. Jim hasserved on the board since 2004 and beenan independent director since 2012 . “I amdelighted to welcome Jim McCann as thenew chairman of Willis,” says CEO

Dominic Casserly. “I am confident [we] will take Willis to the next level in the years ahead by providing our clients with an outstanding service.”

Lee MeyrickChief Underwriting Officer, XL

Te former Zurich CEO of Mari ne has joined XL as Chief Underwriting Officerfor Global Marine and Offshore Energy.He began his career at AIG before joinin gZurich in 2009 as Global Marine PracticeLeader. Says Neil Robertson, ChiefExecutive of Specialty at XL: “Lee willplay a critical role in continuing to driveour presence in a range of mature andemerging markets.”

Ron Carlier CEO, Cooper Gay Re

Te well-known broker has returned to themarket – this time at the Cooper GaySwett & Crawford (CGSC) reinsurancebroking subsidiar y. Ron will be based inNew York and report to Shaun Hooper,President and CEO of Swett & Craw fordNorth America. He is responsible for thefirm’s reinsurance strategy and tasked withexpanding its capabil ities in the US. Teformer CEO of RK Carvill has sp ent eight

years out of a frontline position, afterstepping down from his post in 2005.

GLOBAL CONTACTSEVENTSMARKET MOVERS

35


19/19

Lloyd’s One Lime Street, London EC3M 7HATelephone +44 (0)20 7327 1000 Fax +44 (0)20 7626 2389

market magazine summer 2013

Documents