Insurance Jottings

Giving insurance a voice: Brexit ‘nightmare’ for industry unless government breaks political deadlock

Article by Kennedys Law LLP

We are delighted to introduce our latest report – Brexit and the insurance sector: Towards 2020 and beyond – as part of Kennedys’ ongoing commitment to providing key business insights on Brexit and how it is likely to impact on the UK’s insurance sector.

 

Having moved beyond the first phase of the exit process, our report comes at a critical stage in the UK’s path towards leaving the European Union. With the focus now on the future trading relationship between the UK and EU, the outcome of the debate is vital for the long-term health of an extremely valuable sector to the UK economy.

 

This report builds on the findings of our previous report – The Insurers Speak – which we published in the weeks before the Brexit referendum on the 23rd June 2016. Once again, in answering what Brexit will mean for the UK’s insurance sector, we have undertaken in-depth interviews with senior insurance executives and policymakers.

 

As we predicted in 2016, the UK is now devoting huge energy and resource to reframing its trading relationships with the EU. A sustainable Brexit needs to be highly sensitive to the global competitiveness of the UK’s insurance sector. As the world’s leading financial centre, the City of London has built a global reputation for its skills and expertise in insurance and ancillary financial and professional services.

 

Our report in 2016 revealed a range of legitimate concerns if the UK did indeed vote to leave the EU. Two years on, with the UK now well down the road to exiting the EU, many of those concerns remain on the corporate risk agenda.

 

Part 2 of our report identifies the key strategic issues, including the potential ‘red lines’ for the insurance industry, arising from the 2016 referendum vote to leave the European Union.

 

The various options for a new trading relationship between the UK and EU are outlined in Part 3 of this report.

 

Given the ongoing political uncertainty around the exit negotiations, we look in Part 4 at the contingency planning issues firms are putting in place.

 

The potential threats to future innovation are highlighted in Part 5 of this report.

 

In response to our findings, we provide recommendations on what UK politicians should do to protect the sector and offer a six-point plan to secure the future of the insurance industry post-Brexit.

 

Our six key recommendations will safeguard future investment, talent and innovation in the insurance sector:

 

  1. Resolve the uncertainty surrounding the terms of the UK’s exit
  2. The UK should aim for flexibility around the exit
  3. Defining ‘best third country’ status – the new trading relationship
  4. The UK should not become a rule-taker
  5. Protecting workers’ rights
  6. Protecting investment in research and development.

 

In particular, we explore how long-term innovation in the insurance industry is core to maintaining the UK market’s leading position in established classes, as well as growth areas such as FinTech, InsurTech and RegTech. Our report outlines some key considerations including R&D, regional funding, data protection and the free movement of people, which must be given greater focus.

 

Ultimately, breaking the current political deadlock in the UK Parliament is key to moving forward.

 

If the industry is to retain its significant market shares in key industries – 60% in global aviation insurance, 52% in energy and 33% in marine insurance, to name but a few – it is imperative for the UK Government to listen to the industry and protect its interests.

 

The proposed implementation period to December 2020 offers an opportunity for common sense to prevail while the UK and EU forge a new trading relationship. We offer our report in the hope it will support the realisation of such opportunities.

 

Nephila Gets In-Principle Approval From Lloyd’s to Form Managing Agency

Bermuda-based Nephila Capital has announced that the Lloyd’s Board (previously called the Franchise Board) has given in principle approval to Nephila’s plan to form its own managing agency, subject to regulatory authorisation.

 

Nephila is the largest institutional asset manager of vehicles dedicated to investing in natural catastrophe and weather risk. Nephila’s Syndicate 2357, which is backed by funds managed by Nephila, has been managed by Asta, the leading third party syndicate manager at Lloyd’s, since its inception in 2013.

 

Adam Beatty, currently the active underwriter of Syndicate 2357, will assume the role of chief executive officer of Nephila Syndicate Management (NSM).

 

The risks and opportunities of cross-border energy sharing

Damage to deep-sea cables – such as those servicing offshore wind projects – has been a major driver of losses within the renewable sector. As grids seek to import and export more of their power via interconnectors, there is an opportunity to learn from these losses

 

In an effort to collectively meet their targets under the Paris Agreement, EU leaders pledged that renewable energy sources would fulfil at least 27% of energy consumption needs by 2030.

 

Cross-border energy sharing – in particular connecting isolated energy systems – is a big part of boosting the security of electricity supply and integrating more renewables into the energy markets.

 

Several ambitious projects are seeding the pipeline. They include IFA2, a 1,000 MW interconnector between the British and French transmission systems, Celtic Interconnector, a US$1.1 billion power interconnection project between Ireland and France, the Viking Link, a 750 kilometre long power cable linking the Danish and UK grids, and the Biscay Gulf Interconnector, a 370 kilometre submarine interconnection between Spain and France.

 

Such interconnections will allow transmission system operators to balance their national grid performance better. Speaking to Danish newspaper Copenhagen Post, Denmark’s energy minister Lars Christian Lilleholt has said the power connections were essential for small nations such as Denmark. “We will have the opportunity to sell out surplus green energy on a larger market. Meanwhile, we will get a larger supply of energy to Denmark when the wind is not blowing and the sun is not shining.”

 

The construction of interconnectors like the Viking Link is a significant undertaking with risks and exposures which have already been highlighted by the offshore wind sector, according to Andrew Norris, senior engineering underwriter, Swiss Re Corporate Solutions.

 

“Interconnector cables are complex things to design, construct, transport and service. They face the full range of physical damage risks. We have seen cables with material design defects during manufacture which were probably never capable of the service they were intended for,” he continued. “We have seen others which have sunk while being towed by barge, causing delays to the project.”

 

Project delays

One of the biggest issues with cable damage is the potential for substantial project delays during the construction phase, and business interruption during the operational phase. “With offshore cables you work during the summer months,” Mr Norris explained. “So you might only have a few months delay, but actually that could take you into the winter season and then you may have to wait until the following summer.”

 

Another issue is the limited number of specialist vessels available to transport and service the cables. If damage is caused by anchor strike or wear and tear it may take several weeks to secure the equipment needed to respond. “It’s prudent for risk managers to have preferred supplier agreements with vessel operators that equipment will be available in your time of need,” according to a production and broking specialist. “Because if your cable gets struck, there’s only a finite number available.”

 

It is prudent for risk managers to have preferred supplier agreements with vessel operators that equipment will be available in your time of need

 

Other ways of mitigating potential damage to interconnector cables once they have been laid is to wrap them in concrete – a process called “mattressing” – remove any nearby debris, such as shipwrecks, and clearly mark where the cables are on maritime maps. However, it is the complex challenge of moving subsea assets into place which is the critical moment in most projects.

 

“If a cable has bent beyond the recommended minimum radius it may not actually have any external damage that is visible to the human eye, but it is a problem we have time and time again,” Mr Norris said. “If observations show that a cable is bent beyond its minimum bending radius,  it’s potentially compromised and it can cost US$5 to US$10 million dollars to repair it. Sometimes these cables are then put into service and they might work for several years until one day they fail because it was compromised during that laying procedure.”

 

This is where the tripartite partnership approach between insurer, broker and insured can come into its own, with the opportunity to come up with innovative solutions. Faced with the potential that a cable had become compromised during the construction of a floating offshore wind array in Scotland, the claims experts came up with a solution which prevented any costly delays.

 

“We came up with an agreement with the insured that if, within a certain limitation period, there was a failure event at that location and could be equated with that potential damage, then we would honour the claim,” Mr Norris explained. “But if not, then after six years that would be the end of the matter and we would close our book on it.”

 

CNA Hardy’s EU Subsidiary Granted Insurer Licence in Luxembourg

CNA Hardy, the specialist commercial insurer writing business within the Lloyd’s and company markets, announced that its new European subsidiary has successfully been granted an insurance company license by Luxembourg’s regulator, the Commissariat Aux Assurances (CAA).

 

CNA Hardy chose Luxembourg as the optimum jurisdiction for its European Union base due to its geographic location between three of its Continental European offices, its stable economic and political environment and the professional approach of the Luxembourg regulator, the company said.

 

“Our preparations for Brexit are firmly on track. The granting of our insurance company licence by the Luxembourg regulator is an important milestone for us,” said Dave Brosnan, CEO, CNA Hardy. “It ensures continuity and certainty for our brokers, customers and our staff. We are committed to developing our European operations and our new European subsidiary, with a head office in Luxembourg, will enhance our ability to do just that.”

 

CNA CEO refocuses Lloyd’s syndicate for international turnaround

CNA Financial Corporation’s CEO Dino Robusto wants to turn around the international business unit by refocusing the Lloyd’s Hardy syndicate.

 

The underwriting profitability of CNA’s international business deteriorated further in the second quarter of 2018 after the underlying combined ratio of the unit had been around 100 percent for the last six quarters.

 

The international business unit provides insurance solutions tailored to the needs of international businesses.

 

The combined ratio in the international business unit deteriorated to 104.7 percent in the second quarter of 2018 from 100.1 percent in the same period of 2017, impacted by large property losses in Canada. The underwriting loss was US$11 million after an underwriting profit of US$1 million over the period.

 

But the Canada business is not the main focus for Mr Robusto’s plan to turnaround the unit. As he pointed out in the second quarter earnings call, over the last ten years the Canada business had a combined ratio under 90 percent. “We had some property losses which were higher than expectations in the quarter,” Mr Robusto admitted, but over the six first months of 2018, the combined ratio was “in-line,” he noted.

 

It’s in the Lloyd’s operations which Mr Robusto wants to make the bigger changes as loss ratios and the combined ratio there has been disappointing for some time.

 

Hardy syndicate 382 reported a loss of £34.2 million for 2017 after a loss of £6.8 million in 2016. The combined ratio in 2017 deteriorated to 116.3 percent from 111.2 percent in the previous year.

 

CNA Hardy specialises in commercial insurance for clients within the Lloyd’s and company markets, writing business across Europe. Via the Lloyd’s platform CNA writes business in more than 200 countries worldwide.

 

CNA is in the process of shifting products at Hardy from the standard Lloyd’s type products, the marine, the shared-in-layered property to focus on target markets where CNA has the expertise such as healthcare, technology, life sciences and certain aspects of the construction business, Mr Robusto said. “That’s a process that takes time,” he noted. The refocussing measures also include a shift away from aviation and political risk, he added.

 

“We had a very unprofitable accident & health (A&H), we had some of our classic cap property which we’re moving away from,” Mr Robusto noted. “That’s the way we see Lloyd’s playing up for us in the future and so we clearly expect more profitability from that,” he added.

 

“There are efforts clearly in particularly on the Lloyd’s syndicate to make that more profitable and we remain very optimistic about our international operation,” he said.