Energy Review 09-2017
29 September 2017
Officially the Atlantic hurricane season begins on the 1st June and ends on the 30th November. A month to six weeks ahead of the season, the number and ferocity of hurricanes to be expected is estimated and warnings are issued accordingly, at that time many predicted another relatively mild season. Since then the season has been extremely active, Harvey has broken records in Texas, and Irma has caused considerable damage in Florida after wreaking havoc in the Caribbean. It is potentially the costliest season on record.
You cannot control the weather but the principle of risk management maintains and one should be able to limit the damage hurricanes cause. How many risk managers or crystal-ball gazers could have anticipated the 51.88 inches (132 centimetres) of rain which fell on Cedar Bayou, TX? We report below on the estimates of damage caused by Harvey – this in addition to the tragic loss of life and acute discomfort suffered by hundreds of thousands. The response from state and federal bodies has been exemplary in the circumstances, as have the efforts of oil majors (and minors) as well as foreign countries.
Such circumstances obviously overshadow other events, such as oil and gas discoveries, new processes, alliances and completed operations. Here are some interesting headlines from the past month: Harvey’s wrath lays bare Mexico’s US natural gas addiction; Harvey’s global impact signals growing US clout in oil markets; France plans to end oil output by 2040 with exploration ban; gas to become world’s primary energy source by 2035; Lithuania receives first LNG from the United States; Total buying Maersk Oil in US$7.45 billion deal, and so on.
All this news has to compete with the latest on the Kim/Trump exchanges. In spite of what some people might think, President Trump may not pull the trigger on his own; there are protocols and advisers, as well as allies, all of whom he would have to listen to. As more and more humans occupy this planet, frictions will only increase and it is up to the politicians and crystal-ball gazers to manage risks such as this.
To most people, the insurance industry is not glamorous; to many others, developments in the industry are viewed with hardly a blip in blood-pressure readings and so it is encouraging to learn where the industry is a leader. Cyber, energy and political risks figure amongst the more active specialties, where knowledge and expertise drives moves within the market.
For many of our readers the holiday season is over and we hope that one and all had a happy and relaxing time. We look forward to hearing from you and how we can help resolve your questions and needs.
Energy Casualties
Harvey flooding, AIR Worldwide and AccuWeather estimates
AIR Worldwide
Boston-based catastrophe modelling firm AIR Worldwide has estimated property losses from the flooding in Texas caused by Hurricane Harvey’s record-breaking rainfall will be between US$65 billion and US$75 billion.
These figures include damage to all properties eligible for coverage, regardless of whether they are actually insured and without any application of deductibles or limits. They do not include losses from Harvey’s winds or storm surge.
AIR estimates that industry insured losses from wind, flood and storm surge combined are expected to exceed US$10 billion, with approximately US$3 billion of the losses resulting from winds and storm surge. These estimates do not include losses to the National Flood Insurance Program (NFIP).
According to AIR, before Harvey hit on the 24th August it had been almost a decade since the last hurricane landfall in Texas – Hurricane Ike in 2008. The last Category 4 storm to impact the state was Hurricane Carla in 1961. The last Category 4 hurricane to make landfall anywhere in the US was Charley in 2004, which struck south-western Florida.
Harvey brought excessive and record-breaking rainfall; 51.88 inches were recorded in Cedar Bayou near Houston, which shattered the previous 48-inch rainfall record from any tropical storm or hurricane in the contiguous United States, set by Tropical Storm Amelia in 1978 in Medina, Texas.
The National Weather Service in Houston officially recorded 43.38 inches and 32.47 inches were recorded at Houston Hobby Airport, which exceeded the previous three-day record for any major US city.
In Beaumont, 26.03 inches of rain were recorded on Tuesday 29th August, more than doubling its prior daily rainfall record of 12.76 inches set in 1923; the rainfall total there has been reported at 47.35 inches.
As of the 30th August, more than five stations across south-eastern Texas had surpassed 45 inches of rainfall. Reports indicate that Harvey dropped a total of 27 trillion gallons of rain on Texas and Louisiana in six days.
AIR’s property loss estimates for flooding from Harvey capture losses from inland flood both on and off the floodplain, based on simulated event scenarios which reflect uncertainty in precipitation observations, river flows and modelled levee failures. The modelled hazard intensities reflect the maximum estimated river flows and maximum excess runoff intensities during the event from the 25th to the 31st August.
Included in the estimates are onshore residential, commercial and industrial properties and their contents, automobiles and time element coverage (additional living expenses for residential properties and business interruption for commercial properties; the estimates do not, however, include contingent business interruption losses resulting from the closure of oil refineries in the region).
The range in AIR’s loss estimates reflects uncertainty in the payment of additional living expenses resulting from relocation, time spent in secondary housing, lost wages, loss of electricity, and damage to contents.
Total economic losses are expected to be higher than industry insurable loss estimates.
AccuWeather
Hurricane Harvey will likely wind up being the most expensive natural disaster in American history, costing the economy about US$190 billion, according to AccuWeather.
In fact, the weather forecasting firm predicts it will wind up costing more than Katrina and Sandy combined.
“This is a natural disaster that was not fully calculated,” Dr Joel Myers, AccuWeather’s founder and president, said in an interview with “Closing Bell” on the 31st August. “You had the greatest rainfall ever measured in the continental United States.”
Residential neighbourhoods near the Interstate 10 sit in floodwater in the wake of Hurricane Harvey on the 29th August in Houston.
In Houston, epic flooding caused tremendous water damage to houses, cars and businesses, many of which may not reopen, he pointed out.
“You also have damage to the supply chain across the country, which will increase the price of food, gasoline, heating oil.”
And with many areas still underwater, the hot climate also becomes a factor, Dr Myers said.
“The temperature and humidity are still very high and will be for another month or so, which is going to create all kinds of disease and after-effects, jobs lost, health problems.”
When Harvey came ashore late on the 1st September, it was the most powerful hurricane to hit Texas in a half-century. It has since been downgraded to a tropical depression.
At least 37 people were dead or feared dead in six counties including in and around Houston, according to local officials.
Harvey leaves Texans to clean up amid health and environmental dangers
Harvey has moved on from the US Gulf Coast, leaving behind a toxic stew of human sewage, dead cattle, leaking chemical plants, spilled gasoline storage tanks and abandoned pick-up trucks.
The clean-up will take patience, billions of dollars and fleets of heavy gear to clear acres of muck and enough debris to fill hundreds of football stadiums in an effort overseen by federal and state authorities.
“When the flood waters recede is when you really have to look at the damage,” Gina McCarthy, former administrator of the Environmental Protection Agency (EPA), said. “It’s going to take considerable time.”
Refineries are spewing pollutants as they restart. Homeowners risk dangerous mould and contamination from household chemicals. And there is a heightened threat from a dozen or more polluted Superfund locations around Houston which may have been under Harvey’s water.
Scores of people have been confirmed dead in one of the costliest natural disasters in the country’s history. Long after the 1st September, many areas in Texas and Louisiana remained inaccessible and rescues continued as more than 21,000 federal staff worked on relief efforts, according to the Federal Emergency Management Agency. The American Red Cross had more than 2,000 disaster workers on the ground, and more than 38,000 people sought refuge in shelters.
The parts of Texas slammed by Hurricane Harvey are host to more than 400 chemical and plastics plants and oil and gas refineries.
On the 31st August, French chemicals producer Arkema reported two explosions and black smoke coming from its flooded plant in Crosby, Texas.
The plant had been hit by flooding in the wake of Hurricane Harvey which overwhelmed its primary power and two sources of emergency backup power. As a result, the company lost critical refrigeration of the products on site. Some of its organic peroxides products burn if not stored at a low temperature.
Organic peroxides are extremely flammable and the best course of action was to let the fire burn itself out, the company said.
Local officials had previously established an evacuation zone in an area 1.5 miles from the plant, based on their assessment of the situation.
Organic peroxides are a family of compounds which are used in a wide range of applications, such as making pharmaceuticals and construction materials.
Following the explosions the EPA flew a chemical-sniffing plane in the area and said it did not find toxic concentrations away from the facility.
Environmental Hazards
Texas and US officials have warned residents to stay away from smoke plumes and flood water. Leslie Fields, Director of Environmental Justice with the Sierra Club, ticked off a list of hazards, including dead animals in flood water, gasoline from sunken cars and potentially leaks from a former paper plant which contains cancer-causing dioxin.
“It’s a bad situation,” Mr Fields said. “This water is some of the worst ever.”
Refineries generate extra pollution as they shut down and then turn back on, much as a cold automobile can spew clouds if it’s started after sitting idle for a time, according to Elena Craft, a senior health scientist with the Environmental Defense Fund. That has led to two million pounds of emissions in Texas since the 23rd August, the equivalent of 40% of last year’s total, according to state records, Ms Craft said.
“We don’t really know what communities might have been exposed to,” she said. “Their risk is, overall, increased.”
Pollution already lying in and under the ground in Superfund sites – heavily contaminated places tagged by the EPA for clean-up – can be spread by floodwaters, said Gina McCarthy, the agency’s former administrator.
Equipment Rentals
Workers will use an armada of gear including small loaders to clean streets, trucks with grappling hooks to lift debris from curb-side, and giant grinders to chew through muck which can contain trees and housing remnants.
Some of the waste will be riddled with fuel and other contaminants, and will need to be trucked to landfills that could be several states away.
Chemical spills and runoff unleashed by Harvey could disproportionately affect people of colour and the poor, including residents living in the shadow of south-east Texas refineries.
“Refineries and petrochemical operations in Houston, almost too numerous to count, have been venting a toxic mix of hazardous air pollutants which those trapped by rising floodwaters are forced to breath,” Michele Roberts, Co-Coordinator of the Environmental Justice Health Alliance, a policy group. “The long-term health consequences of this toxic air pollution are unknown.”
Fire breaks out Exxon’s refinery in Rotterdam
Exxon Mobil Corporation said on the 21st August that a fire broke out at its refinery in Rotterdam but that there were no injuries and most of the facility remained operational.
The fire erupted in the power-former unit of the complex and some flaring occurred to reduce pressure, Exxon said, adding it was cooperating with local emergency personnel.
The complex can process about 190,000 barrels per day, and the rest of the refining units, and a connected chemical plant, were still online, Exxon said.
“We regret the incident and any inconvenience caused to the community,” Exxon spokeswoman Ellen Ehmen said.
Last year Exxon started a US$1 billion, three-year expansion of the Rotterdam refinery to boost production of lubricants and other chemicals. According to a proposal for the expansion filed with Dutch authorities, hydro-cracking capacity at the plant would increase by 40% to about 70,000 barrels per day.
Kuwait battles oil spill in the Persian Gulf
On the 21st August it was reported that the northern Persian Gulf had been hit with a series of major oil spills, affecting Kuwait and Saudi Arabia with an estimated 35,000 barrels of crude in the first incident and an undetermined amount in the second, which followed two days later.
Already the beaches of Ras Al-Zour, where Kuwait is building a massive US$30 billion (Dh110.2 billion) oil complex, which includes a 615,000 barrel-per-day refinery, are being tarred, and residents are being asked to stay away from the contaminated shoreline and waters.
The second spill reached 1.6 kilometres in length at press time, and measures were taken to stop the leakage and limit environmental damage, according to the Gulf nation’s Environment Public Authority.
The Ras Al-Zour area is also home to two power and water desalination plants.
Boats and crews have been putting booms into the water to try and contain the spill. Officials want to protect waterways, power plants and water facilities first, and then clean surrounding beaches, according to a report on the state-run KUNA news agency.
“There will be severe consequences to those responsible for this incident, and we will prosecute them,” Sheikh Abdullah al-Sabah, a member of the ruling family who is head of the Environment Public Authority.
Fire breaks out at major PetroChina refinery in Dalian
A fire that broke out on the 16th August at state oil major PetroChina’s plant in north-eastern China, one of the country’s largest refineries, has been put out with no reported casualties, state media reported.
The fire came just two months after the Dalian refinery finished a planned major maintenance.
More than 600 firefighters extinguished the blaze at the plant’s 1.4 million-tonnes-per-annum catalytic cracker just after 09:00 p.m. (13:00 GMT), and stayed on the scene to make sure equipment at the refinery remained cool.
The inferno, the latest industrial incident to rock the port city of Dalian, started at around 06:40 p.m. due to a broken seal in a feed pump, it was reported.
The refinery in Liaoning province and owned by PetroChina Dalian Petrochemical Corporation, has three crude distillation units with total processing capacity of 410,000 barrels per day of crude oil. Catalytic crackers typically produce gasoline.
A spokesperson for PetroChina said the feedstock equipment connected to the catalytic cracker has been suspended. The other units in the refinery were not affected.
The unit which caught fire produces all oil products but is geared towards gasoline, according to a Singapore-based trader.
Firefighters battled huge flames and billowing smoke, images on the People’s Daily twitter account showed.
Local government officials were at the site as an investigation began into the cause of the inferno, state radio reported on its social media blog.
Environmental inspectors carried out checks but said containment pools installed at the refinery had prevented pollutants from entering coastal waters. Nearby air quality monitoring stations showed no signs of abnormal emissions in the area, CCTV reported.
The plant’s crude processing operations were not affected, although there may be a small reduction in output at the gas separation unit as a result of the incident, a refinery source said.
In 2013, an explosion at the refinery left two people injured and two missing.
Dalian was also the site of one of China’s biggest known oil spills, when a pipeline blast put at least hundreds of thousands of gallons of oil into the sea in July 2010.
Insurance News
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 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.
Guidance on maritime security transit corridor
Combined Maritime Forces (CMF) has issued guidance regarding transits in the Gulf of Aden and other recommended transits in the Red Sea/Indian Ocean following the recent piracy attacks in this region.
This guidance is in no way directive. Ships using these transit corridors should continue to use any other onboard piracy defensive measures that they apply in this region. To view the press release, please visit the CMF website: https://combinedmaritimeforces.com/
Hurricane Harvey puts pressure on regional insurers in Texas, says A.M. Best
Losses anticipated from Hurricane Harvey are unlikely to exceed the top reinsurance limits of insurers writing business in Texas, according to new Best’s Special Report, titled, “Texas Insurers Expected to Withstand Losses from Hurricane Harvey”.
Over the past several years, the soft reinsurance market has allowed primary insurers to obtain favourable terms from reinsurers, including higher limits on catastrophe programs and extended hours clauses. Given the scope of the event, it will be difficult to determine final damage assessments as the top priority remains on rescue efforts throughout south-east Texas.
A.M. Best does not anticipate a significant number of rating actions related to Hurricane Harvey, but does expect to see pressure on performance for regional property and auto writers, particularly those focused on writing business in the impacted area.
Currently, A.M. Best rates 15 insurers with Texas premium revenue accounting for greater than 50% of their total book of business; four of those insurers currently have a negative outlook at their current rating levels.
Companies which A.M. Best identifies as having a negative ratings outlook are Texas Farm Bureau Casualty Group, Germania Mutual Group, CEM Insurance Company and American Millennium Insurance Company.
“Leading up to Hurricane Harvey, several Texas insurers experienced a challenging first half 2017 as a result of spring weather losses,” said Angelo Lozano, a financial analyst with A.M. Best. “Combining those first half of 2017 losses with those from Hurricane Harvey may have an impact on company earnings and capitalisation, which could add additional negative rating pressure.”
In what is an unprecedented flooding disaster in the fourth largest city of the US, Hurricane Harvey is proving to be a major event for the commercial insurance sector. As was the case following Superstorm Sandy in 2012, commercial insurance claims are expected to comprise an outsized portion of overall covered losses from the storm, as flood – rather than wind – has been a driver of damage.
Commercial insurance policies, particularly those covering large and complex properties, may provide some coverage for flood as a covered peril. Given the complex nature of commercial claims related to flood, companies are not yet in a position to provide loss estimates.
“While earnings for the third quarter 2017 will clearly be impacted, at this time, A.M. Best does not anticipate that Harvey will prove to be a capital event for the commercial segment overall,” said Jennifer Marshall, Director, A.M. Best. “The impact on individual companies will continue to be assessed as the situation stabilises and loss estimates are made available.”
A.M. Best also notes in its report that, while auto insurance losses due to flooding are expected to be much higher than normally expected in a hurricane event, because “larger, geographically diversified writers” dominate the auto insurance market in Texas, auto losses “should be effectively absorbed by the overall size of carriers’ balance sheets.”
Drones face unprecedented test with Harvey insurance claims
Fleets of commercial drones are primed to hover over the destruction from Hurricane Harvey in an unprecedented test of unmanned aircraft’s ability to assess billions of dollars in damage for the insurance industry and accelerate pay-outs for harried policyholders.
“Harvey is an opportunity to see whose drones are capable and whose are merely toys,” said George Mathew, Chairman and Chief Executive of Kespry, a drone company based in Menlo Park, California. “Harvey is a seminal moment for the industry.”
Harvey marks the second major hurricane since the Federal Aviation Administration loosened restrictions on drones last June, allowing greater use for filming, inspecting facilities and other commercial activities.
Thousands of people have since obtained FAA certificates allowing them to fly drones commercially, and more than 770,000 drones have been registered with the FAA to fly in US airspace.
Allstate Corporation, the second-largest property insurer in Texas behind State Farm, expects its drone fleet to make at least thousands of flights a week in the damaged areas once its claims processing becomes fully operational, company spokesman Justin Herndon said.
Commercial drone launches have been delayed, however, because the FAA has restricted the airspace in and around Houston for rescue aircraft. Harvey has triggered catastrophic flooding in the city.
Once the airspace is cleared, the sky is expected to buzz with activity and potential danger as commercial users and hobbyists converge.
“It is legal, so many more people are flying them commercially,” said Mark McKinnon, a partner at law firm Dentons US LLP.
Obstacle avoidance technology in the newest drones and the ability to set exact flight parameters with global positioning, known as GEO-fencing, should minimise crashes which may have been unavoidable a few years ago, said Ryan Baker, CEO of Houston-based drone company Arch Aerial LLC. Goldman Sachs has estimated that industries such as construction, agriculture and insurance will spend US$13 billion on commercial drones between 2016 and 2020.
Farmers Insurance, the third-largest property insurer in Texas and part of Zurich Insurance Group, plans to use Kespry drones to assess damage in a joint effort with on-the-ground claims adjusters. Kespry drones fit in a suitcase-size carrying case packed in the trunk of a claims adjuster’s car.
Once on site, claims adjusters unpack the fully assembled drones and launch them from their iPads. Each drone has to remain in the line of sight of a claims adjuster while flying below 400 feet, according to FAA rules.
About five minutes later, the data collected by the drone is scanned and ready to be processed by the insurance company, Kespry’s Mr Mathew said. Kespry is equipping nearly ten insurance companies with drones in the areas ravaged by Harvey to help gather information to process claims.
Farmers Insurance said a drone could help a claims adjuster process three houses in an hour. Without a drone, only about three houses could be processed in a day.
“Our fleet of drones and the claims professionals who will be operating them are currently on standby and ready to deploy when conditions make it safe to do so,” Tim Murray, a property claims executive at Farmers Insurance, said in a statement.
After being hunkered down in the immediate aftermath of the storm, business and property owners are eager to get a look at the damage.
“The phone has been ringing off the hook with people looking to get eyes on their property and their assets,” Arch Aerial’s Mr. Baker said. “I’ve got enough work to get all of our pilots out in the field for a long time. But right now, nobody can get anywhere, so we’re waiting for the water to go down. After that obstacle clears, we’ll probably be bringing in quite a few people.”
CN sued by Mattagami First Nation over oil spills
On the 17th August it was reported that Mattagami First Nation, a northern Ontario Indigenous community, is suing CN Rail for alleged environmental and cultural damage caused by two 2015 derailments that led to significant oil spills.
The Mattagami First Nation alleges in its statement of claim that the spills near Gogama, Ontario, damaged the local environment and surrounding waterways.
The C$30 million suit alleges that the damage, in turn, has created health risks for the population and crippled community members’ ability to observe their Indigenous traditions including fishing, hunting and gathering.
It says the two oil spills, which took place in February and March 2015, collectively poured millions of litres of oil into the area around Gogama, which is about 200 kilometres north of Sudbury, Ontario.
CN declined to comment on the filing, but stated that it is committed to cleaning up environmental damage caused by the derailments.
Mattagami’s allegations have not been proven in court.
The First Nation claimed the 2015 spills impacted many facets of life for community members.
“Mattagami First Nation members have suffered stress, distress, anxiety and worry as a result of the contamination of the land, waters, plants and animals on which they rely,” reads the First Nation’s statement of claim, which was filed in March but served to CN on the 14th August.
The suit alleges negligence from CN and claims the rail company breached its standard of care when conducting operations ranging from track maintenance to staff training. It also alleges CN has created a corporate culture which valued speed over safety.
Canopius eyes further expansion as Sompo sells up to PE consortium
The senior executives of what will again be known as Canopius have said the business will seek growth through the recruitment of new teams and entry into new classes of business once its ownership passes from Sompo Japan Nipponkoa Insurance to a private equity consortium led by Centerbridge Partners.
It was revealed on the 1st September that a private equity consortium led by Centerbridge Partners, and including the private investment firm Gallatin Point Capital, will acquire Sompo Canopius for US$952 million.
On completion of the transaction, Canopius will become a standalone business led by incumbent Executive Chairman Michael Watson and Chief Underwriting Officer Mike Duffy.
The transaction is expected to close in the first quarter of 2018.
Since it was founded in 2003, Canopius has grown to become one of the biggest insurers at Lloyd’s, writing in excess of US$1.6 billion in premiums across the group in 2016.
UK insurers need to decide on moving EU policies by November
Insurers in Britain face crunch-time within weeks if the government and the European Union do not allow millions of cross-border policies to continue to run undisturbed beyond Brexit.
While Britain is not due to leave the bloc until March 2019, insurers say they need to know by November whether they must move contracts with EU customers out of Britain, due to the lengthy legal process involved.
Britain and the EU are currently negotiating divorce terms.
“The preferred option would be something in the negotiations that gives the regulators the appropriate political approval to start working on a mechanism to allow these existing contracts to continue operating as they are,” Hugh Savill, Director of Regulation at the Association of British Insurers, said.
Leaving contracts to operate unchanged after Britain has left the EU is known as “grandfathering”.
Without this, an insurer would have to move contracts for EU customers to a new EU subsidiary after 2019 for them to remain in the same legal jurisdiction as the customer, or sell that portion of their business. Both options involve a court process, which takes time to implement with Brexit only 19 months away.
“You have to go to court to get approval for transfer, and you also need the approval of the regulator at both ends. That means the transfer has to start by November 2017, otherwise you run out of time,” Mr Savill said, adding that the process could affect millions of contracts.
“If the government has not negotiated something that looks reasonably trustworthy in the next couple of months, companies will have to start putting this alternative contingency planning into action.”
The issue is particularly acute for long-term insurance contracts, such as pensions, or contracts where policyholders can make claims for years after the policy expires, such as professional indemnity cover.
The specialist Lloyd’s of London market has also called for grandfathering of contracts, saying it would be impossible to transfer all the contracts in time.
Insurers in Britain are regulated by the Bank of England’s Prudential Regulation Authority (PRA). A PRA spokesperson referred to a letter from PRA Chief Executive Sam Woods to parliament this month in which he said there is a possibility of a significant increase in the volume of transfers.
“We are engaging further with firms and trade bodies to examine the possible mitigants to these risks and determine which are likely to be most effective,” Mr Woods told parliament.
But Paul Merrey, a partner at accounting firm KPMG LLP, said some insurers have already begun court transfers, with others expected to start later this year.
“It’s an issue both ways, for UK and EU insurers, but it’s fair to say that the process might be easier for EU insurers transferring portfolios to the UK than for UK insurers transferring to the EU,” Mr Merrey said, adding that the process can vary between countries.
The Bank of England has said that about 7% of general insurance contracts undertaken in Britain and 3% of life insurance contracts are written by insurers elsewhere in Europe.
Early movers want to avoid potential court bottlenecks.
“There is not enough court time, there are not enough independent experts – the scale of the challenge and demands on the regulators’ time are significant,” Mr Merrey said.
Munich Re Syndicate launches new cyber insurance cover for oil and gas sector
Munich Re Syndicate at Lloyd’s said on the 21st August that it has introduced an insurance solution to cover cyber exposure for the independent oil and gas sector.
This cover will encompass both traditional data breaches and any physical loss or expense associated with a potential cyber-attack.
The operational and financial complexity of this particular sector presents growing threats to cyber risk, due to increased connectivity, sensitivity of data, unmanned operations and complex royalty payment structures for onshore operators, according to the statement. The likely recurrence of cyber-attacks is expected to intensify as the link between technology and business continues to evolve.
“There is a heightened level of awareness around the risk of a cyber-attack on the oil and gas sector, particularly in the wake of recent events which have caused significant economic disruption,” said Dominick Hoare, Chief Underwriting Officer of Munich Re Syndicate in London.
“As automation and integration expose the oil and gas industry to new vulnerabilities, Munich Re is working to deliver a product which will compliment companies’ contingency measures to ensure that they are well prepared should a cyber incident occur.”
Munich Re Syndicate’s offering will bring together a combination of cyber and energy underwriting skills and will deliver a product which meets the growing demand within the industry. There is an unmet need from a capacity standpoint for coverage across the oil and gas sector, as more companies are increasingly exposed to cyber risk, the company said.
The foundation cover is built upon expert risk assessment and competitive pricing with the provision of a full cyber-attack buyback and a data breach cover. The product will be predominantly focused on the upstream sector, covering the automated aspect of a company’s operations.
This product will complement the existing Munich Re Cyber Solution “Vector” partnership with Beazley, which focuses on very large corporate clients.
Ironshore launches dedicated cyber emergency response team
Ironshore has launched what it has called a Computer Emergency Response Team (CERT) comprised of cyber claims coordinators representing each specialty lines division tasked with managing cyber claims across all product lines.
CERT-Ironshore will be led by Director Howard Panensky, reporting to Mike Mitrovic, Ironshore Global Claims Officer.
CERT-Ironshore will provide insureds a single point of contact for cyber risk claim coordination and collaboration. Its coordinators will offer technical advice and support in response to cyber security incidents and third-party expertise will be available to policyholders at pre-negotiated Ironshore rates.
“CERT-Ironshore reflects our commitment to promoting cyber security situational awareness throughout its entire specialty product lines platform,” said Kurtis Suhs, Cyber Senior Vice President.
Mr Mitrovic added, “In the event of a cyber-related claim, policyholders will benefit from a coordinated claims strategy by accessing coordinators and resources with cyber claims handling expertise.”
UK financial services sector seeking ‘ambitious’ Brexit trade agreement
The UK’s financial sector is seeking an “ambitious” trade pact between Britain and the European Union to try to prevent a costly shift of jobs and business to the continent once the country leaves the bloc, according to a draft report.
Unless Britain negotiates new trading relations with the EU, banks, insurers and fund managers in Britain could be locked out of the bloc’s markets when it leaves the EU in March 2019.
The International Regulatory Strategy Group (IRSG) said in the draft report, to be submitted to the British government in September, that such a trade pact would allow UK firms to operate in the EU without the cost of having a local licence.
“The proposals in the report are intended to achieve a level of mutual access for EU and UK firms, which is as close as possible to the current levels of access that exist for such firms within the EU framework,” the report said.
It admitted negotiating such a pact could be challenging. Other EU capitals have been vying to attract London’s financial businesses since the Brexit vote.
Currently, banks authorised in London can “passport” or offer their services to customers across the EU without the need for a licence in each country, but this will end when Britain leaves, forcing the country to agree new trading terms.
Initially, the financial sector called for continued full passporting rights after Brexit, which is being negotiated over two years since Britain triggered the process in March, following a referendum vote in June last year.
The new proposals mark a departure from that stance, a recognition that the EU is likely to rule out future passporting.
The IRSG is sponsored by the City of London Corporation, home to London’s “Square Mile” financial district, and TheCityUK, Britain’s most powerful financial lobby.
Its report sets out how a trade pact for financial services could be structured and policed by a new dispute resolution body with powers to sanction breaches.
Punishment could include withdrawal of mutual access rights, the payment of “compensation” in the form of offsetting trade benefits, or retaliatory steps, such as measures which affect an equivalent value of trade, the report said.
No such trade pact in financial services has been tried before and the report said it was “ambitious in its intent.”
“The IRSG is aware that there will be challenges associated with developing the EU/UK Agreement…and require the parties to reach agreement on a number of novel issues – in particular, with regard to allowing a firm from the other party to have access to their markets without having to obtain a local licence.”
The report said it may be “appropriate to have a lighter touch regime” for wholesale financial business between banks, but this would not be appropriate when retail customers are involved.
Recent EU proposals to supervise clearing houses in Britain after Brexit or move them to the EU because they clear large amounts of euro denominated derivatives raise “potential complication”, the report said.
Britain and the EU could also create a “Financial Services Forum” to encourage “continuing alignment” by sharing information, and participating in the development of new laws and regulations.
The financial sector published an overview of mutual recognition in April, but the follow-up makes specific proposals.
TheCityUK Chief Executive Miles Celic said he has already been making the case for mutual recognition during visits to Brussels and other European capitals. “The general response has been that while ambitious, it is not unrealistic,” he said.
The future of London as Europe’s financial centre is one of the biggest issues in Brexit talks because it is Britain’s largest export sector and biggest source of tax, with rival cities battling to draw highly-paid banking jobs and the revenue which they bring with it.
Few banks and insurers believe such a trade pact can be in place by March 2019, and some have already announced they are opening locally licensed subsidiaries in the EU to avoid being cut off from customers on the continent.
Difficult Lift
The proposal comes as the financial sector is running out of time to shape government strategy; in October, Britain wants its divorce talks with Brussels to shift focus from exit bills to the future shape of trade relations.
Given its novelty, the trade pact could take years to negotiate even if there is goodwill in the bloc, bankers said.
But the proposals mark a formal rejection of relying on “equivalence”, the EU’s existing system of market access for companies from outside the bloc.
Equivalence in an adapted form is being promoted by Barney Reynolds, a lawyer at Shearman & Sterling, but dismissed by banks as too politicised and unpredictable.
“I don’t fault them for asking, but a mutual recognition trade deal will be a difficult lift. It requires potential unanimity among EU states, while my proposal is executable and gets to the same place,” Mr Reynolds said.
Anthony Belchambers, a founder of the Legatum Financial Services Forum which researches Brexit’s impact on the sector, said TheCityUK initiative is “both important and timely”.
“But,” he added, “we must be careful to ensure that the inevitable ‘price’ that will be exacted by Brussels for continued market access is justifiable and does not constrain UK sovereignty.”
Some member states may balk at a trade pact which reduces the need for banks, insurers and fund managers to shift staff to the bloc after Brexit, Mr Belchambers added. EU regulators have already warned that financial firms in Britain must sufficiently staff their new units in the bloc.
Bank of England Governor Mark Carney and Financial Conduct Authority Chief Executive Andrew Bailey have mooted a similar pact. But bankers involved say it might be hard to pull off as it has never been done before in financial services on such a scale.
“This is all new and this is our problem,” a banker involved in the proposal said. “We are offering a new paradigm and it will be difficult.”
People on the Move
New international head of underwriting and energy hire at MAPFRE Global Risks
Carlos Vasquez has been appointed as International Head of Underwriting at MAPFRE Global Risks (MGR), the MAPFRE unit which specialises in providing comprehensive insurance solutions for multinationals. He will be based in London.
MAPFRE Global Risks has also appointed Kieran Wilson as Energy Underwriter as part of its international growth strategy in London.
He has been hired to underwrite oil and gas risks and service MGR’s energy portfolio.
Mr Wilson will be based in London and will report to Senior Energy Underwriter Andrew Malcolm.
Mr Wilson most recently worked at Argo Global Syndicate 1200 at Lloyd’s as an onshore energy underwriter.
Navigators names new leader of energy/engineering business
Specialty insurance holding Navigators Group has promoted Patrick Milner to President of NavTech, succeeding Stephen Coward, who retired at the end of July after more than 15 years with the company.
NavTech is the company’s global business unit underwriting upstream and downstream energy, power generation, engineering/construction and other technical industrial-related risks.
Mr Milner has been with Navigators in London for nearly 30 years and worked with Coward at the formation of NavTech in 2009. Most recently, Milner led the company’s global upstream energy business.
In addition, Jerry Wosleger has been promoted to Senior Vice President of NavTech, responsible for building the NavTech business in North America, in addition to his current leadership of the global downstream energy practice. Mr Wosleger is based in New York City.
AGCS makes Vassallo senior downstream underwriter in London
Allianz Global Corporate & Specialty (AGCS) has promoted Anthony Vassallo to lead downstream energy underwriting at its London regional unit.
Vassallo, who was most recently responsible for strategy within the marine and energy business in the London hub, will oversee downstream energy underwriting in the UK, Ireland, Dubai, Russia, the Nordics and Australasia, as a senior underwriter. Vassallo joined Allianz in 2003.
He will report to Tracey Hunt, Regional Head of Energy.
Kroll appoints cyber security expert
Risk firm Kroll has appointed Iona Peters as Associate Managing Director of its cyber security and investigations practice in London.
Mr Peters joins the company following a 20-year career designing IT solutions to help businesses, government and law enforcement agencies manage risk.
Chubb hires underwriters for its APAC cyber team
Insurer Chubb has made two appointments for its regional cyber team in Asia Pacific.
Andrew Taylor has assumed the position of Cyber Underwriting Manager for Asia Pacific, responsible for the expansion of Chubb’s cyber insurance business in the region. Based in Sydney, he will lead efforts to craft solutions and deliver expertise to help clients manage and mitigate cyber risks.
Mr Taylor joined Chubb in 2009 in the information and technology team and started underwriting cyber risks in 2010.
John Depicters has been appointed as Cyber Underwriter for Asia Pacific. He is tasked with supporting Mr Taylor to drive the growth of Chubb’s cyber insurance business, including underwriting, marketing, training, product development and vendor expansion across the region.