Lloyd's MARKET magazine winter 2013

inside: a viral threat assessment

p28

why political risk insurance is on the rise p10 hackers vs critical infrastructure p17 getting to grips with russia’s $50bn games p18 the legacy of lloyd’s longest-serving ceo p24 winter 2013 www.lloyds.com

High taxation, cancelled orders and cyber risk are seen as the major risk priorities by global business leaders

LLOYD’S RISK INDEX 2013 p22

WINTER 2013 www.lloyds.com

Published on behalf of Lloyd’s (www.lloyds.com)

by Sunday (www.sundaypublishing.com) If you would like to contribute to the next issue, please email marketmagazine@lloyds.com COVER ILLUSTRATION BY BEN WISEMAN

Care has been taken to ensure accuracy of information, but neither Lloyd’s nor the publishers can accept responsibility for omissions or errors.

Lloyd’s is regulated by the Financial Services Authority. © Lloyd’s 2013.

03

winter 2013 www.lloyds.com

Regulars 05 introDuction We welcome you to Market magazine and tee up this issue’s top stories.

Features the politics of risk Since the terrible events of 11 September 2001, the world has become a more volatile place. It’s little wonder, then, that political risk is high up the agenda in boardrooms around the globe…

17

06

foresiGht News from the market, including: the factors fanning the flames of wildfire risk; why demand for IP insurance is growing; changes to Canada’s offshore liability regime; and Lloyd’s tools for tapping into new territories.

situation: critical Cyber attacks on vital facilities are not a hypothetical scenario. From a Saudi Arabian oil company to Iran’s power infrastructure, infiltrations have already occurred – and the market is developing products to meet the demand.

28

cover story: pandemics

The World Bank estimates that, in a worst-case scenario, a novel flu virus could infect 30-40% of all people, with staggering insured losses. So what can be done to mitigate the impact of an outbreak?

18 always look before you leap 33 the new money market The 2014 Winter Games in Sochi, Russia, will be the most expensive in Olympics history – and insurers involved cannot speak about it. Market explores the complexities of providing cover for this type of event.

It’s predicted that around $100bn of alternative capital will flood into the reinsurance business over the next five years, prompting diversification into non-traditional sectors.

22 lloyD’s risk inDex 2013 The gravest threats to corporates – as voted by global business leaders.

34 a whale of a tale We return to 1965: the year the market covered a 22-foot, five-ton male orca to the tune of $20k.

35 market upDate Upcoming events, movers in the Lloyd’s market and international contacts.

24

interview with: richard ward

He was at the helm during the worst financial crisis in living memory – and when the market posted one of its greatest-ever losses. But the outgoing CEO leaves Lloyd’s in rude health.

INSIGHT AND ANALYSIS YOU CAN TRUST. IT’S YOUR GLOBAL ADVANTAGE MARKET INTELLIGENCE YOUR GLOBAL ADVANTAGE www.lloyds.com/marketintelligence

05

“The world is recognising the importance of pandemic risk.

Although great strides have been made in preparedness efforts, we must not take a complacent attitude” Nita Madhav, air worldwide

“Lloyd’s today has more capacity than ever before, a stronger reputation and ratings, and a bold vision that signposts the path to future success. It’s not easy to drive change in the market given its unique structure. But I think people will come to appreciate the strategic framework Richard has created for future change, as well as the improvements implemented during his time in office.”

Aon’s Steve McGill is, of course, referring to the legacy that Lloyd’s longest-serving chief executive, Richard Ward, leaves on his departure in late 2013. In this issue, from p24, we speak to Ward about the complexities that come with the top job – and we ask some of the industry’s leading figures how the market has changed during his time in charge.

On p28, meanwhile, we assess the threat of a global pandemic, the preparedness levels in the event of a severe outbreak, and what insurers can do to mitigate the risk through specialist lines of business. We also look forward to the $50bn Winter Olympics in Sochi, Russia, exploring the many calamities that confront this type of large-scale sporting event (p18).

And finally, from regime instability and high seas piracy to resource nationalism and broader trade credit risk concerns, we examine why the political risk market is seeing remarkable growth – and grabbing attention at board level (p10).

We hope you find this issue interesting. If you haven’t already done so, sign up to receive Market magazine or enewsletter at lloyds.com/marketmagazine @LloydsofLondon

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Foresight

insights From the world oF lloyd’s. by the market, For the market

emerging risks

Wildfires: a burning issue Climate change and urbanisation are fanning the flames when it comes to wildfire risk

A wildfire that destroyed over 140,000 acres of Yosemite wilderness grew to become the fourth-largest California wildfire on record in early September.

It passed within a mile of the Hetch Hetchy Reservoir, the source of 85% of San Francisco’s drinking water and power for a number of key city buildings.

On 30 June, 19 firefighters were killed at the Yarnell Hill fire in Arizona, the deadliest event for firefighters since 9/11. It followed the Black Forest fire, which became wildfire losses in the us, 2002-2011 (2012 $ millions) Overall losses/insured losses

Colorado’s most destructive wildfire after it killed two people and destroyed 511 homes, worth close to $500m, according to AIR Worldwide.

These events reflect the above-average forecast for fire activity in the US in 2013. Over 22,000 wildfires destroyed 1.5 million acres from 1 January 2013 to 1 July 2013, according to the National Interagency Fire Center.

Around the world, the risk of wildfires is increasing too. In Australia, recent blazes that consumed parts of New South Wales were the worst to strike the state since the 1960s – with estimated insured losses of 2002

260/200

2003

4,305 /2,492

2004

14/8

2005

137/35

$132.5m at the end of October 2013.

The Intergovernmental Panel on Climate Change’s latest assessment notes the frequency of heat waves has increased in large parts of Europe, Asia and Australia. The combination of more droughts and higher temperatures are conditions that make wildfires more likely to occur and, when they do, more severe.

Changes in land use also increase the exposure. The rapid rise in the number and value of property builds in the Wildland-Urban Interface in the US over the past 20 years is resulting in greater losses when fires occur.

2006

810/559

2007

3,411 /2,714

2008

2,243 /633

2009

294/194

07 words by helen yates illustrations by jamie portch

growth areas

InsurIng patent wars with frequent intellectual property (ip) Disputes in sectors such as software anD pharmaceuticals, DemanD for ip insurance is growing

There are significant implications for the insurance industry. Between 2002 and 2011, wildfires accounted for $7.9bn of claims in the US, up substantially on the previous decade.

North America and Australia – areas with significant insurance penetration – are among the regions that will likely see an increase in fire probability in the coming years. The challenge for insurers is how to accurately underwrite the risk, given historical experience is now a less reliable proxy for future wildfire activity.

DownloaD lloyD’s 2013 wilDfires report: lloyDs.com/riskinsight 2010

336/217

2011

1,924 /854

2012

1,100/595

apple’s well-documented patent battles with samsung demonstrate how expensive ip disputes can be. the two software giants are locked into patent disputes in at least ten countries over samsung’s galaXy tablet and whether it infringes apple’s ipad design. in 2011, a german court banned the sale of the samsung galaXy tab 10.1 in europe for alleged patent violations. the ban was later lifted, but not before the korean company had lost a significant amount of revenue – up to half a million unit sales in germany, according to one estimate – in the double-digit million-pound range. this is where ip insurance can come in. “were samsung insured with us, we would have indemnified them for the loss of profit that they would have made from those sales, were it not for the injunction,” says thomas

hoad, an underwriter in the enterprise risk division of kiln syndicate 510. enterprise risk focuses on non-physical damage business interruption and how insurance can be used to provide indemnity against loss of revenue. “we insure the risk that a third party makes a legal challenge against a product or some form of intellectual property requiring the company to effectively stop doing what they’re doing,” says hoad. “what we pay an indemnity for is the outcome of losing against that legal challenge.” “in this day and age, there’s a shift from physical assets to these intangible things that make companies profitable in today’s modern era,” he continues. “this is reflected in just about every risk management survey you read. the key concerns are reputational risk, intellectual property, cyber and supply chain. there is now a real need for insurance products to complement this shifting risk landscape.”

Foresight market services

tools to tap into latin america lloyd’s mArket intelligence helps mAnAging Agents, brokers And coverholders get the inside scoop on the rApidly-developing brAziliAn insurAnce mArket

new products

the darker side of celebrity A new progrAmme Aimed At potentiAl stAlker victims is bAcked by the lloyd’s mArket

Bjork, Victoria and David Beckham, Madonna, Catherine Zeta-Jones, and The Hunger Games actress Jennifer Lawrence have all been the victims of unwanted, intrusive and frightening attention from fanatical individuals. Of course, the most infamous stalker case is that of John Lennon, who was shot by deranged fan Mark Chapman in 1980, just hours after he had asked the former Beatle for his autograph.

A new stalker policy, backed by Lloyd’s, is founded on the premise that mitigating risk is a more effective way of tackling stalking than calling in law enforcement once a crime has occurred.

Stalker Shield 365 is a protection programme that combines proactive stalker-threat assessment, expert security consultation, and training

and crisis management coverage.

It has been developed by security firm Andrews International in partnership with Exceptional Risk Advisors and Griffin Underwriting.

The focus on prevention is what separates it from previous attempts to insure against stalking, suggests Imogen Lyndon-Skeggs, Underwriter and Director at Griffin.

“A policy designed to help ensure it does not happen in the first place is more attractive to buy than one that only covers you once it’s happened.” stAlking: in numbers 14 in every 1,000 people aged 18+ were victims of stalking in a 12-month period.

46% of stalking victims experienced at least one unwanted contact per week. one in four stalking victims reported some form of cyber-stalking – such as email (83%) or instant messaging (35%). three in four stalking victims knew their offender in some capacity.

it’s the b in bric and soon to be hosting nation for the world’s two biggest sporting events: the world cup in 2014 and olympics in 2016. since the brazilian reinsurance market opened up to foreign competition in 2008, it has developed rapidly. lloyd’s, the first admitted reinsurer in brazil, has seen its business triple in four years. through the products within lloyd’s market intelligence toolkit, stakeholders interested in the brazilian market can quickly access information on the economy, insurance market and lloyd’s business. there is also a class review, benchmarking lloyd’s against its competitors in the brazil market. visit lloyds.com/mArketintelligence brAzil: vitAl stAtistics GDP: $2.959bn (global rank #7) Population: 198 million GDP per capita wealth: $12,600 GDP real growth: +2.6% Total Gross Written Premiums in 2012: $27bn Lloyd’s Gross Signed Premiums in 2012: $350m

09

regulatory changes

Canada: The $1bn quesTion New rules raise the liability for offshore oil aNd gas compaNies to $1bN

Ever since Deepwater Horizon, when 4.9 million barrels of oil spilled into the Gulf of Mexico, governments have been taking steps to better protect their waters and coastlines from oil spills and other environmental damage. Last June, the Government of Canada announced a raft of legislative changes to its laws governing offshore oil and gas activities.

Canada’s liability regime is founded on the ‘polluter pays’ principle and there is unlimited liability should parties be found ‘at fault or negligent’ for a spill. The new rules propose raising the absolute ‘no fault’ liability for offshore oil and gas companies from £30m to $1bn in the Atlantic and from $40m to $1bn in the Arctic.

This means companies operating offshore could be on the hook for hefty clean-up costs, even if fault or negligence has not been proved. Canada’s Minister

of Natural Resources, Joe Oliver, says: “[The] $1bn milestone in our plan for Responsible Resource Development will ensure that accountability for operators in the Atlantic offshore is updated and in line with international standards.”

A strong regulatory framework and robust environmental rules are essential for sustainable economic growth in the Canadian Arctic now and into the future, says Sean Murphy, President of Lloyd’s Canada. “We know climate change will produce opportunities for increased economic activity, both on-shore and offshore. We anticipate the biggest economic drivers will be oil and gas, mining and shipping.

“The Lloyd’s market is very active in the Canadian oil and gas industry, and provides much needed insurance capacity,” he adds. “Our professionals are well versed in assessing, managing and underwriting risks, and can produce innovative solutions to address changes in the regulatory environment.”

appreNticeships aim to attract youNg taleNt The new Lloyd’s Apprenticeship Programme gives young people the opportunity to begin their career in one of the world’s best-known organisations.

Aimed at students who want to start working after their A-levels or equivalent, the programme will combine employment with the achievement of an Advanced Apprenticeship in Providing Financial Services as well as an internationally recognised professional qualification with the Chartered Insurance Institute. Apprentices will take part in a number of placements within the Lloyd’s Corporation and the Lloyd’s market, giving them experience in insurance-specific roles such as underwriting, claims management and broking.

They will receive a salary of £16,000 a year, as well as a range of attractive benefits.

For more information, visit lloyds.com/apprenticeship put yourself forward for voluNteeriNg Lloyd’s Charities Trust has new partnerships with the Mayor’s Fund for London and Bromley

by Bow Centre as part of its Brighter Futures for Londoners programme. The Mayor’s Fund for London is helping to establish Count on Us – Maths Clubs, providing after-school maths support to children in some of London’s most disadvantaged areas. Bromley by Bow Centre’s Connection Zone will enable 2,000 individuals from Tower Hamlets, one of the most deprived wards in the UK, to receive support and access to services such as financial capability and debt advice and IT training. Find out more at lloyds.com/brighterfutures

10 / political risk words by david worsfold illustrations by PÂtÉ

the

11

of risk From Egypt and Syria to Argentina and Iraq, the world can be a volatile place. And awareness of political risk is growing – as is the market, which has tripled in value since 2001.

We explore the ambiguities and opportunities in this thriving space

It has become a clichÊ to say that the world has become a riskier place, especially since the attacks on the World Trade Center in September 2001. The intervening decade has seen major terrorist strikes on London, an epidemic of piracy at sea, and the eruption of political unrest in relatively stable countries in the Middle East. So it’s little wonder political risk has become a much larger concern in boardrooms across the globe. But are executives doing enough to tackle the more frequent threats they face? And how is the insurance industry coping? growing awareness

The political risk insurance market is certainly growing.

Since that dreadful day in New York 12 years ago, the capacity available to political risks underwriters has

12 / political risk

tripled from $1,811m to $5,4 31m, according to the Political Risks Insurance Report and Market Update by Gallagher London. The growth has been particularly rapid in the last four years – with a jump of 75% as new players have entered both the company and the Lloyd’s markets. This hasn’t been a simple upward trend, however. The market is very sensitive to major economic and political events – for instance, there was a dip in its value as it took stock of the full impact of the global financial crisis in the first half of 2010.

The increase in demand has been driven primarily by financial forces, says Andy Lennard, Founder and Director of Texel Finance, one of the leading specialist brokers in the field: “Why would you buy political risk insurance? You would if you had an equity investment or major trading relationship in a country you thought might be politically or economically unstable.”

Companies have also been investing in riskier markets following the slowing down of Western economies. As a result, a new and potent mix of political and economic risks is climbing rapidly up the boardroom agendas of large corporates.

Roger Schwartz, Senior Vice-President, Aon Risk Solutions in New York, agrees: “Many companies are coming around to realising that they are operating in some challenging markets. People at board level are taking notice. Risk managers and operational managers are taking notice.”

Take British companies that have sought to escape UK economic woes by investing in India over the past couple of years. Many may well be watching with alarm the recent mass street protests and strikes by utilities workers in the southern state of Andhra Pradesh over a government plan to split the state. This trend was highlighted by a major survey of European risk managers, chief operating officers and chief financial officers, published

by ACE in 2012.

However, interestingly, the survey found that their insurance buying behaviour lags behind this awareness: “Despite their concerns about the risk from terrorism and political violence, only 7% of respondents’ companies have insurance that covers both terrorism and political violence,” says the ACE report. This suggests there is still huge growth potential for political risk insurance.

Trade crediT risk

While massive upheavals across the Middle East and North Africa – which started with the wave of optimism around the Arab Spring, but have now descended into sustained instability in Egypt and a bloody civil war in Syria – grab the attention and heighten awareness of the risk of political violence, the biggest sub-sector of this market is the trade credit side.

Again, much of this is driven by the fallout from the global financial crisis. There has been a major squeeze on liquidity among the trade finance banks and this has led them to look for new ways of financing credit lines – and the insurance market has risen to the challenge.

“What the banks liked about us in the global financial crisis is that we didn’t make a drama out of a crisis,” says Nick Kilhams, Lead Political Risks Underwriter at Chaucer.

“We had a working party here at Lloyd’s that created templated loss reports and we became

13

from left: German frigate Hamburg patrols after destroying two fishing boats off the coast of Somalia in August 2011; libyan Prime minister Ali Zeidan, who was snatched from his hotel room by armed men recently; and police confronting antigovernment protestors during the red-shirt riots in thailand in 2010.

very slick at processing and paying claims.

There were hundreds of letters of credit and they were all being paid.”

For the banks, another attraction is that they are not offsetting risks to their competitors. This has, however, brought some challenges for the insurance market, says Kilhams: “A big problem in the market at the moment is aggregation. I have, for instance, increased my line in Russia to US$300m – small compared to Zurich’s US$1.5bn – but we could both still write more business in Russia.”

confidence and product innovation

The company and Lloyd’s market will welcome the growth potential, as the core political risks market – credit risk insurance – has a good track record with recovery, and has been stable and profitable in recent years.

Kilhams says: “The recoveries on paid claims – or salvage – far outstrip practically every other class of business. Not only can it be substantial, but it can be very quick. If I look back over the last seven years, the peak loss ratio was 140%, but even this came down to 85% after recoveries.”

Confidence in the ability to recover a large

14 / Political risk

“The market has responded extremely well, both in terms of levels of available capacity and flexibility of products on offer, although there are still areas where gaps exist”

threats, and says he is seeing this more joined-up approach: “There is an increased demand for more comprehensive products covering the full spectrum of economic and violent risks, not least because it avoids ambiguity.”

The sort of ambiguity he refers to is illustrated by the red-shirt riots in Thailand in 2010. These started as a series of protests in February of that year, mainly in Bangkok, against the government of Abhisit Vejjajiva – with the central demand of the disparate opposition groups, known as the red shirts, being early elections. The riots dragged on until May, before a ruthless military crackdown brought the protesters to the negotiating table.

During this period, about 80 people were killed and over 2,000 injured. To most of the world, these were political disturbances, albeit quite extreme.

But to the Thai Government they were terrorism, and under Thai law this is how they were classified – immediately throwing insurers into confusion.

It took two years to untangle, hence the drive to remove doubt from insurance coverage.

proportion of the claims paid has, in turn, given underwriters confidence to pay out quickly – which has put the whole asset class in a good light and attracted both clients and good quality capacity from highly-rated traditional sources. And this influx of capacity has brought new players into the market and boosted innovation as clients look for a more comprehensive, insurance-led solution to their problems.

Matthew Strong, a partner in the Political, Credit and Security Risk Division of JLT Specialty, says: “The market has responded extremely well, both in terms of levels of available capacity and flexibility of products on offer – although there are still some areas where gaps or shortfalls exist, such as non-trade and long-term credit business.”

Increasingly, underwriters and brokers say clients want coverage for political violence and terrorism to be provided alongside trade credit risk. Intangible risks such as cyber threats and reputational damage are also finding their way into the mix. Kiln, working alongside Lockton, recently devised policy wordings to cover intangible risks.

Zachery Rothstein, Associate Director, Global Risk Analysis at Control Risks, advises a lot of clients and underwriters on geo-political

Broader political risk concerns

matthew strong, partner, political, credit & security risk division, jlt specialty

Among trade credit underwriters, there is of course concern for the obvious global hotspots – whether that’s because of rule of law, political violence and terrorism, expropriation or regime stability. However, they tend to have broader worries arising from actions that don’t always grab media headlines.

“The Middle East and North Africa continues to be a concern for underwriters, focused around current events in Syria and Egypt. In addition, ongoing regulatory changes in the extractive industry in Africa continue to be on underwriters’ watch lists,” says JLT’s Matthew Strong. “Broader global trends of increasing levels of regulation and protectionism, coupled with high levels of unemployment and volatile commodity and food prices, means there is a heightened level of political risk across the globe.”

South America is another region insurers are keeping an eye on. In Argentina, the government’s seizure of the 51% stake that the Spanish firm Repsol had in oil company YPF, coupled with grabs from pension funds to address its deficit, have attracted attention. And, with high unemployment in Brazil driving millions of protesters out onto the streets, glances are being cast in that direction too.

15

global hotspots Violence and instability, terrorism in growth economies, social unrest driving regime change, resource nationalism… Below are some countries subject to key political risks

turkey has been classified as ‘extreme risk’ in the Terrorism Index by global risk analysts Maplecroft, due to increasing attacks by the separatist Kurdistan Workers’ Party. So

turkey

far, the effect on the country’s economy has been limited.

tunisia

lebanon

syria

libya egypt yemen

Venezuela

According to

Acts of violence

Maplecroft’s Political

and terrorism

Risk Atlas 2013,

and low levels of

among the countries

human security in

argentina

libya have seen

worst-affected by

it move from ‘high’

political violence is conflict-torn syria

to ‘extreme risk’

– a spill-over of this

in Maplecroft’s

violence is deepening

Conflict and Political Violence Index, while

In yemen, egypt

South America, post-

the proliferation

and tunisia,

Chavez Venezuela

of weapons from

popular frustration

Meanwhile, in

is a worry, despite its

the former Gaddafi

over corruption and

plentiful oil revenues.

regime continues to

the pace of political

And, as an economic

feed instability from

and economic reform

Mali to the Sinai.

continues to spur

risk concerning credit underwriters,

social unrest and

argentina is also

high levels of political

mentioned – the

uncertainty, says

government is on a

Maplecroft’s Societal

drive to nationalise

Forced Regime

economic resources.

Change Index.

sectarian fault lines in lebanon too.

16 / political risk

For a while, says Roger Schwartz at Aon Risk Solutions, Europe was also starting to ping on radars: “There were concerns about the rising political and economic risks in Europe, but that trend has eased off a lot as things have improved in the EU.” If underwriters are nervous about South America, they need nerves of steel to underwrite risks in countries like Iraq or Libya. “Our message is that it is possible to do business in the higherrisk areas if you understand where the manageable risks are. In Iraq, there is huge variation in the threats throughout the country,” says Zachery Rothstein from Control Risks.

Over at Kiln, Paul Culham puts that approach into practice: “Things which appear on the face of it to be very risky from a broad geo-political perspective may not be so difficult to underwrite.

The way the risk is structured can make it attractive.”

Many of these countries suffer from the threat of sudden violence and kidnappings – witness the recent abduction of Libyan Prime Minister Ali Zeidan – and underwriters have been

Piracy: a sea change?

looking at ways to mitigate those risks. In 2013, Beazley launched an emergency evacuation cover product in conjunction with Aon Worldaware, crisis management company Red 24, medical emergency company Specialty Assist and Hazelwood Street, who will deal with kidnappings.

Chris Parker, Head of Beazley’s Terrorism and Political Violence insurance team, says: “Expatriate or visiting employees working for foreign firms are frequently the targets of violence motivated by political anger or economic resentment. In extreme cases they can be held hostage for political or financial gain. In the face of such risks, as well as in situations of acute medical risk, where local treatment facilities are inadequate, on-the-ground capabilities and expertise are essential.” in summary

Political risk may be an unpredictable market, subject to the huge challenges of strong geo-political currents, but it is a buoyant one with a lot of potential to grow further. Kiln’s Paul Culham says: “When there is a major incident, you often hear people talk about insured loss and then a much bigger economic loss. We have the right products to help close that gap.”

maritime piracy off the coast of somalia

employing an increased number

in north-East africa cost the global

of armed guards to protect merchant

economy between $5.7bn and $6.1bn

vessels. OBP reveals that up to

in 2012, according to the Economic Cost of

$1.58bn was spent on armed guards

somali Piracy 2012 report by the Oceans

alone in 2012 – nearly triple the

Beyond Piracy (OBP) project. This figure

amount spent in 2011 ($530.6m).

was down by around $850m (or 12.6%)

The other side of the continent,

from 2011. although still frequent,

meanwhile, has seen a growing

the incidents of indian Ocean piracy

incidence of a more targeted campaign

have dropped significantly: at 851,

being waged in the niger Delta and Gulf

the number of attacks by somali

of Guinea. in 2012, the international

pirates in 2012 fell 78% from 2011.

maritime Bureau recorded 966 attacks

This appears to be attributable

off the coast of West africa. Estimates

to the return of a degree of political

of the insurance cost of west-coast piracy

stability in somalia following its first

last year top $430m. Whether the same

democratic elections in 20 years,

solutions that have seen somali-based

coupled with a series of actions by

attacks decline can be advanced in West

Western governments – in particular,

africa remains to be seen.

TOTal COsT Of sOmali PiraCy in 2012: $5.7-6.1Bn Counter-piracy Organisations less than 1% Military Operations 19%

Ransoms & Recovery 1% Insurance 10%

prosecutions & Imprisonment less than 1%

Labour 8% Increased Speeds 27%

Re-routing 5%

Security Equipment & Guards 29%

source: ecoP 2012 rePort, oceans beyond Piracy

cyber attacks words by roxane mcmeeken

Situation: critical

17

‘hacktivists’ aiming to make a political point, criminals seeking to extort a ransom from the target, corporate rivals, terrorists or even governments.

In the case of Stuxnet, malware that hit Iran’s power infrastructure in 2010 and disrupted its uranium enrichment programme, some experts believe one or more unfriendly governments launched the attack.

Cyber-based attacks are a particular threat to infrastructure simply because Shoring up vital infrastructure they are relatively difficult to detect and trace. Maurice Dawson, Assistant against cyber attacks is a Professor of Management Information Systems at Alabama A&M University, growing market, but keeping says: “For criminals, the cyber approach is low risk. You don’t need a bomb, just a on top of this risk is a challenge couple of laptops on the other side of the world – and you can hide your IP address.”

Worryingly, hackers are becoming smarter. Chris Newton, Managing Director of Principia Underwriting, says: “They have become less opportunistic and more sophisticated. In fact, there is evidence of an entire black economy based on hackers In August 2012, a computer virus struck identifying vulnerabilities in systems and selling the information to other parties.”

Saudi Arabian oil company Saudi Aramco.

With cyber threats to infrastructure having risen up the agenda in both the private The ‘Shamoon’ virus rendered 35,000 and public sector worldwide, specialist insurers have developed products to meet workstations permanently useless. Data the growing demand. However, Newton admits that this is a difficult risk to cover: on the machines was overwritten with “The insurance industry is based on the premise that fortuitous acts are spread and gobbledygook and critical files were replaced therefore so is risk – if you insure a range of properties, they’re unlikely to all be hit with an image of a burning US flag. by one event. But in this space, pretty much every risk you underwrite is exposed The Shamoon case highlights how one because hackers are looking to find weaknesses wherever they can. It’s as if you particularly alarming area of cyber risk had mobs with flaming torches around every single property you insure.”

– attacks on computer systems that operate Equally, if a piece of infrastructure is hit, it could have a knock-on effect on other critical infrastructure – is a very real danger. insureds. So, for example, insurers should factor in the consequences of a hack not So just how much havoc can such attacks just to their power station client, but any other clients relying on that power. cause and how prepared is the insurance Insured losses resulting from cyber-based sabotage industry for this threat? of infrastructure could be heavy indeed. Newton cites “ Imagine what “Anybody who relies on the network is the example of the hacking of an oil company’s control would happen at risk,” says Dan Westinghouse, Cyber system for a distribution plant. Erroneous data was Specialist at Miller Insurance Services LLP. if a hacker forced through to enable remote control of equipment, gained access The potential targets range from nuclear including pumps controlling the pipelines, resulting power plants to water treatment facilities in a pressurised oil well storage tank rupturing. to Heathrow’s and transport infrastructure, and the Newton says the costs for such an incident would be air traffic consequences could be eye-watering. “You spread over several areas: forensic IT to establish the control system, can imagine what would happen if a hacker entry point of the hack; clean-up costs associated with or made a gained access to Heathrow ’s air traffic any leakage; investigation by the authorities; interruption pipeline pump control system, or instructed a pipeline to in service resulting in contract frustration and triggering at a million pump at a speed it is not designed to.” liquidated damage penalties downstream; extra expense miles an hour Again, such scenarios are far from associated with managing the event; PR expenses hypothetical. In October last year, a associated with remediation and crisis management; and explode” US power plant was forced to shut down and environmental issues triggering class action suits. dan westinghouse, for three weeks after malware infected With forensics and litigation capable of running cyber specialist, its turbine control system. into millions of dollars, even before considering any miller Attacks could come from a fairly broad punitive fines and penalties and loss of income, he says a range of sources. These include so-called conservative estimate for insured losses would be $10m.

18 / sporting events words by chris wheal

always look before you leap Predicted to cost $50bn, the 2014 Winter Games in Sochi, Russia, will be the most expensive in Olympics history. The subscription market for the event’s insurance is shrouded in secrecy, but Market explores the complexities of providing cover for this type of large-scale sporting event

19 17

Late, over-budget and facing a potential boycott by the world’s elite, Russia’s hosting of the 2014 Winter Olympics in Sochi beside the Black Sea could lead to a series of major insurance claims.

The event is already estimated to have overrun in cost by 500%, with the total now predicted to be $50bn, versus the $12bn originally projected in 2007. Construction is well behind schedule, with as many as 70,000 people on site working flat out to try to finish on time. Russian opposition leaders – former cabinet member Boris Nemtsov and the anti-Kremlin Solidarity movement’s Leonid Martynyuk – have claimed that as much as $30bn has been siphoned out of the project through corruption and backhanders.

In fact, Nemtsov described the Sochi Olympics as “an unprecedented thieves’ caper in which representatives of [Russian President Vladimir] Putin’s Government are mixed up along with the oligarchs close to the Government.” The Economist has revealed that the most expensive contract – $9bn for a road that connects seaside venues to the nearby mountains – went to Russian Railways, the state rail monopoly headed by a former KGB general and personal friend of Putin.

In the UK, meanwhile, actor, author and TV personality Stephen Fry has demanded the event be moved from Russia because of the country’s anti-gay and lesbian laws. He is part of an international campaign, but such is the power of Fry’s Twitter and Facebook reach that the UK Prime Minister was forced to publicly comment. Fry has urged athletes to boycott Sochi. David Cameron said he shared Fry’s “deep concern about the abuse of gay people in Russia”,

“Ten years ago, only a handful of syndicates wrote liability cover for major sporting events.

Now there are perhaps 15 syndicates” Chris jones, liability underwriter, kiln

but did not back a boycott.

It all adds up to a nightmare for newly elected International Olympic Committee President Thomas Bach, himself a former gold medal-winning fencer from Germany. He has made clear that he also has an eye on potential civil unrest in Brazil – after protests about government spending on World Cup football while the population suffered austerity cuts – as the country is due to host the 2016 Olympic Games in Rio. Bach says his involvement in sports politics was driven by West Germany’s boycott of the 1980 Games over the Soviet invasion of Afghanistan, which he believes ignored the athletes’ views. He is a man who knows the risks of staging a large-scale sporting event.

An influx of cApAcity

Insurers involved cannot speak about it. As with previous Olympics events, those providing cover are bound by strict confidentiality clauses. With

an event of this size, it is safe to assume that pretty much every major player is on the team sheet. Aon is reported to be involved, but the firm said it couldn’t speak on the subject at all. Broker JLT is believed to have been a player in the London Games. All it will say is that it is a part of three of the four biggest events currently being organised.

As Elizabeth Seeger, Head of Contingency at Hiscox, says: “For major global events, brokers travel the world for capacity.” The Lloyd’s market, the major international insurers, US and Bermuda underwriters and reinsurers may all be part of the subscription market for the event’s insurance.

Indeed, the market is awash with capital from new entrants, looking for new ways to make money.

Yaël Mimran, Contingency Class Underwriter with Liberty Syndicates, says five or more syndicates in Lloyd’s have started writing contingency in addition to the traditional players.

Chris Jones, Liability Underwriter at Kiln, confirms this: “A decade ago, only a handful of syndicates wrote liability cover for major sporting events.

Now there are perhaps 15 syndicates.”

The result of this more competitive environment has been price cuts, despite losses. After 9/11, prices rose but have, according to Mimran, fallen back to below those before 9/11. For Seeger, it is the bottom of the traditional insurance cycle – or, at least, she hopes it is. understAnding the risks

JLT partner Duncan Fraser, who has 18 years’ experience in the market, says the process of underwriting Oympics-sized event starts with the cities bidding to run it. JLT provides

20 / sporting events

CloCkwise from right: protests over world Cup spending in Brazil; a new olympic stadium in sochi, russia; and the aftermath of the Christchurch earthquake in 2011

risk management and insurance advice to cities preparing their bids.

The types of risks to be covered include cancellation and abandonment, general liability, property, marine and transport, and accident and health.

Once a host city is selected, JLT’s construction team will begin work.

Risks vary. Some host nations have established stadia and infrastructure, others may need substantial refurbishment and some hosts will require complete new builds. For a football World Cup, that might be the difference between the UK, Brazil and Qatar, for example.

Each will also have different insurance opportunities, depending on the level of government support and the experience

of using insurance for major events.

For example, would the state bail out any overrun out of a sense of national pride, or to save international embarrassment?

Fraser suggests that even in Europe, outside the UK, governments are much more interventionist, altering the risk.

Then come the localised risks – natural catastrophes, such as earthquakes and hurricanes, political risks, construction control and health and safety standards.

The list rumbles on. Underwriters have a lot to take in. There are also the contractual obligations and liabilities that can vary from one event to another.

Beyond the construction phase comes the massive income at risk if an event fails to run to plan. There are usually two major clients. The

international sports governing body – for example, the IOC, FIA or FIFA – typically has responsibility for the major commercial rights, such as sponsorship, TV rights, licensing, hospitality and merchandising. The local organising committee in the host nation takes the money from ticket sales. Fraser says: “That means well over $1bn of capacity available for cancellation and abandonment.”

For a small event, an individual insurer might take the risk on its own. For larger events, Fraser reckons insurers will take 20-25% of the risk. But for the largest events, many more insurers take smaller stakes. Seeger points out that insurers have to be aware of what else they might be insuring in other lines of business in the same area that might also be affected by a claim. A natural catastrophe might cause a property claim in one line of business and a liability claim elsewhere, on top of the contingency claim for a rescheduled, relocated or cancelled major event.

Chris Jones, of Kiln, adds that an insurer with breadth can learn from other areas. “The lessons from a contractor’s employers’ liability claims in Australia will help you

21 17

“As an underwriter, the best way to learn your job is to pay claims.

It’s painful, but it is the way to learn” Yaël MiMran, ContingenCY Class Underwriter, libertY sYndiCate

better underwrite sporting events in Australia,” he says.

Mimran, of Liberty Syndicates, says insurers must also factor in a wealth of modern technological risks.

“Signal failure is a big risk. Imagine the Olympics takes place, but a signal failure means there’s no broadcasting for five minutes. You could face a huge loss if audiences around the world cannot see the games live at a crucial moment,” she says.

Jones agrees. Timing is vital, with events scheduled to suit specific worldwide TV audiences and negotiated with the TV rights buyers or the sponsors. “Goodness knows what ABC gets them to sign up to when they agree the TV rights, but imagine if the TV coverage could not get the American running in the final to the US audience at dinner time as scheduled,” he says.

Seeger says sometimes broadcasters and sponsors will take out their own contingency insurance if there are gaps in the contracts they have with an event’s organiser. “We always ask to see original contracts.

Each policy is different. We have a dedicated wordings team to write

each policy individually,” she says, adding that they are much clearer these days than they used to be. learning from claims

And claims are made. In the UK, 2012 was a washout. Mimran says there were 100 events cancelled, with contingency claims running as high as £20m to £50m in the summertime.

The 2013 British Grand Prix had a weather claim and one-day international cricket matches were hit for six. “Pricing for weather-related risks in the UK has gone up significantly,” says JLT’s Fraser. Seeger points out that too little rain can just as easily cause a claim as too much – for example, if the ground is too hard and therefore unsafe for participants.

Mimran says: “As an underwriter, the best way to learn your job is to pay claims.

It’s painful, but it is the way to learn.”

Events have also been cancelled, postponed or moved because of earthquakes (New Zealand), foot and mouth disease (UK), SARS (Toronto) and swine flu (Texas). The terrorist atrocities of 9/11 disrupted many events, including the Superbowl

and the Ryder Cup. That lead to terrorism being widely withdrawn from contingency cover – though not universally, insists Hiscox. It is now generally offered as a buyback.

The prospect of terrorism marring the Sochi Olympics is hardly remote, given the proximity of the city to the North Caucasus, a largely Muslim part of Russia that has suffered bloody civil conflict for two decades.

Each claim brings new lessons for underwriters, claims handlers and risk managers. “We’ll look closely at how prone the car parks are to flooding and whether metal tracks can be laid down to ensure cars can get out,” says Fraser.

That expertise still counts, adds Jones: “Clients have understood that it’s not just about finding the cheapest product in the market but the best product from an insurer that will be proactive in managing claims. If an event has a problem, their insurer saying, ‘I don’t know what to do either’ is not what they want to hear.” for individual summaries on lloyd’s key territories, including russia, visit www.lloyds.com/countryprofiles

When big events go bad

at the 1972 munich

the 2011 rugby world cup

monarchy give up its near-

olympics, palestinian

planned for earthquake-hit

absolute control over key

terrorist group Black

christchurch saw matches

policies and positions. many

september attacked

moved to alternative cities.

drivers expressed security

members of the israeli

the shuffle meant other

concerns ahead of the race.

team in their quarters in

games also had to be

the olympic village – 12

moved and rescheduled

new york mayor michael

people died.

for operational reasons.

Bloomberg cancelled

world football governing

also in 2011, prince sheikh

after residents protested

body fifa relocated the

salman bin Hamad al-khalifa

against it going ahead in the

2003 women’s world

called off the Bahrain

aftermath of superstorm

cup from china to the us

grand prix because of

sandy. millions had been

because of sars – on

anti-government protests

left without clean water,

the advice of the wHo.

demanding the ruling

food and electricity.

the city’s 2012 marathon

22 / infographic illustrations by la tigre

lloyd’s risk index 2013

Lloyd’s surveyed global business leaders’ perceptions of the greatest threats to their organisations, and how prepared they are to deal with them

top three risk priorities

!

37%

1. high taxation High taxation as a major risk proves consistent across all business types, whether they’re in established or fast-growing markets. Here’s how the level of priority and preparedness among businesses varies by region…

! Priority (very high)

!

2. cancelled orders

3. cyber risk

The World Trade Organisation recently lowered its estimate for global trade growth in 2013 by 1.2%, revealing a drop in confidence about continued consumer spending.

The average annualised cost of cyber breaches for 56 benchmarked organisations is $8.9m. The causes of data breaches can be broken down as follows:

4.5% Global trade growth: original WTO forecast

39% Employee negligence

3.3% Global trade growth: revised WTO forecast

24% Systems glitches

13%

Latin America

7%

Europe

13%

South Africa

10%

19% North America

10%

17% Asia-Pacific

23%

!

!

!

23%

Preparedness (very well prepared)

37% Malicious or criminal attacks

23

risks in emerging economies india

14,000+

The number of Indian websites hacked in 2012**. Coupled with other actual and suspected recent breaches, this could account for cyber risk’s number three ranking in the country.

brazil

US$60bn

The investment in rail, road and airport infrastructure to support the upcoming World Cup and Olympics – making critical infrastructure failure the number three risk.

mexico The country’s cyber risk priority ranking. A 2012 report* ranks Mexico bottom of the league table of those able to defend themselves against cyber attacks.

turkey

6.1%

The decline in GDP after the 1999 Marmara earthquake. 93% of Turkey, 70% of its population and 75% of industrial facilities are exposed to quakes, making natural hazards the number one risk in Turkey. source: ** cert-in

31 china

source: * McAfee And the security And defence AgendA

The number of places supply chain failure (now ranked three) has leapfrogged up the list since 2011. The number one priority for China is the price of material inputs.

24 / interview words by david worsfold PhotograPhs by joe mcgorty

RichaRd WaRd joined LLoyd’s in 2006 to impRove the efficiency of the maRketpLace, expand the Licence netWoRk and embed the fRanchise stRuctuRe. noW, the coRpoRation’s LongestseRving ceo is moving on to neW chaLLenges – and Leaves the maRket in Rude heaLth

Nearly eight years of managing ambiguity, against a backdrop of unprecedented global financial turmoil, might sound like a description of a period of crisis management – and responding to everyone else’s agenda. But that would be a superficial and misleading analysis of Richard Ward’s stewardship of Lloyd’s.

The ambiguity of his task was highlighted recently by Hiscox Chief Executive Bronek Masojada, and strikes right at the heart of the challenge that Lloyd’s longest-serving CEO has faced each day since he arrived in Lime Street: juggling the concurrent roles of CEO of the Corporation and CEO of the market you’re trying to shape.

Ward explains: “At times, it isn’t clear which hat you should be wearing. When I’m overseas, I talk to clients and brokers who don’t necessarily understand the way the market is organised –

the society of underwriters, the role of the Corporation.

They just see me as the CEO of Lloyd’s, and don’t distinguish between the market and the Corporation. They assume I’m the CEO of a 55-plus managing agency business. I work hard to dispel that right up front, because the moment you start to think you’re CEO of business in the marketplace, you lose all sense of reality and control. You need to recognise that it’s the managing agents who run those businesses, not the Corporation.”

In reality, he says, the job is rather more subtle than knowing which hat to wear, and when. “You have to listen to the market to really understand the things you need to do to help it deliver against its goals. We’re here to serve the market – we are the market here in the Corporation. We’ve got dozens of chief executives running their own businesses, with their own

26 / interview

strategies and visions. So, we listen to what they’re doing and saying, and then on the back of that come up with our own view of how we’re going to take things forward.”

Ward’s ability to work with the market and its stakeholders has been one of the hallmarks of his success, according to David Gittings, Chief Executive of the Lloyd’s Market Association: “He’s taken into account the managing agent position, and balanced that with the brokers and the company market outside of Lloyd’s as well… Someone who didn’t listen to what the market was saying and just tried to bludgeon his way through could upset the balance.”

Indeed, Ward recognised early on that, in order to align the Corporation’s strategy with the needs of the major players, there needed to be a new sort of market organisation: “Back in 2006, I felt there was an opportunity to change the way we interacted with the market, to become more of a business partner – more transparent and open.”

His achievements in this regard have been remarkable, as Lord Levene of Portsoken – now Chairman of Starr Underwriting, but Chairman of Lloyd’s for much of Ward’s tenure – readily acknowledges: “Richard launched some commendable initiatives in endeavouring to transform the Corporation infrastructure from a civil service-type bureaucracy into a working team. He put various initiatives

into place – such as the quarterly Staff Forums, which included the linking of the major overseas offices online, and the establishment of awards, which rewarded effective team players. I felt there was a distinct and palpable change in atmosphere and relationships, and what he did in pulling all those in the Corporation into a proactive group was very successful.”

Triumphing in a Time of Turmoil

It should be remembered that Ward presided over the market during the worst financial crisis in living memory.

Those grim days five years ago were the most worrying of his tenure, yet he maintains a sense of perspective about them: “I haven’t had bad days; I’ve had challenging ones.

Perhaps the most worrying was around the global financial crisis in 2008, when commentators were assuming RBS and Citi could collapse. We have enormous amounts of funds tied up with those financial institutions. But frankly, I had wider concerns than Lloyd’s – because at the time, you could just see the whole fabric of society unravelling.”

Lloyd’s came through relatively unscathed and has since gone from strength to strength, taking the mammoth claims of 2011 in its stride. Ward puts this down to the successful implementation of the franchise structure,

27

which was still in its infancy in 2006. “When I joined, the jury was still very much out as to whether the franchise model was the right approach. Would it actually work in times of stress?

I look at 2011 – one of the costliest years on record for Lloyd’s, with more than $20bn in claims paid out – and no-one questioned our financial strength.”

Ward believes that today, Lloyd’s has the confidence to grow in a sustainable, profitable manner. After years of uncertainty about its role in modern global insurance, and almost constant crisis management, it now feels as if the market is in control of its own destiny – a place where more people want to do business. It has been a huge turnaround.

“When I arrived, we were recording £16bn worth of gross written premium. Today it’s around £25bn. That in itself isn’t the measure of success. What I would look at is the number of businesses wanting to join the Lloyd’s marketplace and benefit from all the advantages we offer them.

“The number of syndicates has gone from something like 60 to 88, and the number of managing agents from 40 to 55.

So we’ve seen a significant expansion of the Lloyd’s market.”

Toby Esser, Cooper Gay CEO, agrees: “The Lloyd’s market looks a very different place to the one Richard Ward joined almost ten years ago. The market has grown exponentially.

It is well governed and regulated. Its reputation is now back to its very best over the course of its history.”

Ward singles out the work on Solvency II as one of his landmark moments. With most of the world’s insurance organisations scratching their heads over the implications of the Directive, the streamlined, business-focused structure he had put in place at Lloyd’s swung into action: “Delivering the Solvency II project – a £300m task with ill-defined targets and goals set by the regulators – on time and to budget in July 2012 was a fantastic achievement for everyone in the Corporation.

But more importantly, for everyone in the marketplace. To get that over the line was brilliant and, I think, has made us a far better-managed business today than a few years ago.” evolution… but not for its own sake

From the moment he set foot in the door, Ward has been a staunch proponent of modernisation – but never for its own sake: “When I joined, there was an assumption I would do what I did at the International Petroleum Exchange, which was demutualise the business, close the trading floor and make it go electronic. What surprised me when I arrived was actually how efficient the face-to-face trading is in Lloyd’s.

If you’ve got a billion-dollar risk you want placed, you can probably do that in an afternoon.”

There has been huge progress over the years, however, and new ideas for revolutionising the efficiency of the market have been brought to fruition. “We’ve introduced systems to improve processing and, very importantly, remove the

“ When I joined, the jury was still out as to whether the franchise model was the right approach.

Would it actually work in times of stress?”

extraordinary paper trail we have in the market. Now we have just one version of the truth, which everyone can access, wherever they are.”

This sensitive approach is widely acknowledged: “Richard arrived to deliver a remit of market change, but quickly identified the activities that needed to remain fundamental to Lloyd’s, such as face-to-face trading, and those which required overhaul,” says Charles Franks of RJ Kiln.

“He leaves the market in a stronger position than it has ever been.”

And it is not just Lloyd’s businesses that recognise how much the market has evolved during the Ward era – the world’s brokers do too. “Lloyd’s today has more capacity than ever before, a stronger reputation and ratings, and a bold vision that signposts the path to future success,” says Steve McGill at Aon. “It’s not easy to drive change in the market given its unique structure, but I think people will come to appreciate the strategic framework Richard has created for change, as well as the improvements implemented during his time in office. He leaves Lloyd’s in very good health and on a sound footing.”

the social value of insurance

Ward also leaves a team he is proud of: “The people I work with today are fantastic. We’ve built a great team, and we see that in the staff survey results, which, frankly, any other financial institution would bite their arm off to achieve.” His affection reaches beyond his own team, though: “It has been a pleasant surprise to me how nice everyone is in the insurance market. I think it is in part because we are in a business that provides a real service, doing something of social value. We’re helping communities rebuild after earthquakes or after fire, protecting business against risk... That attracts decent people.”

But what of his successor? Does Ward have any useful tips to pass on? “If there’s one thing to focus on, it’s the underwriting discipline this market needs to deliver real growth. Without it, we don’t have a marketplace. Our reputation, our brand, is built on the back of our ability to underwrite risks, price them correctly, manage them appropriately, set the capital to support those risks, and pay the claims when they come through.”

Words to heed from Lloyd’s departing CEO, who signs off with simply this: “I believe I have accomplished what I came in to do and it’s now time to move on to new challenges.” to see a video of our interview with richard ward, visit lloyds.com/richardward

28 / pandemics words by edward murray

According to the World Bank, a severe flu pandemic could cost 4.8% of global GDP – or more than $3tn. The statistic is a sobering reminder that, beyond the deadly human toll, pandemics pose a serious economic threat – and preventing them should be a priority, not just for health and agriculture experts, but for insurers too

29

A virus from an unknown source is infecting humans in an unidentified way, with an alarming mortality rate.

But just how quickly will this virus spread and, if it becomes a pandemic, what toll will it take on the social and commercial fabric of the world?

Middle East respiratory syndrome coronavirus, or MERS-CoV, came to public attention a little over a year ago and since then it has spread from its Middle Eastern roots to register deaths in both France and the United Kingdom. How the situation develops from here remains to be seen, but the World Health Organisation (WHO) is under no illusions about its deadly potential.

Dr Margaret Chan, the Director-General of the WHO, believes the virus is a “threat to the entire world” and, addressing the annual World Health Assembly in Geneva earlier in the year, she went on to say: “It is not a problem that any single affected country can keep to itself or manage all by itself. We do not know where the virus hides in nature. We do not know how people are getting infected. Until we answer these questions, we are empty-handed when it comes to prevention. These are alarm bells. And we must respond.”

The world got a glimpse of the toll a serious pandemic could take in 2003, when the SARS outbreak killed 800 of the 8,000 people infected and cost the world a staggering $54bn.

The World Bank estimates that, in a worst-case scenario, a novel flu virus could infect 30-40% of all people. Business and consumer confidence would plummet, worker absenteeism would rise sharply, and public services would falter. Olga Jonas, Economic Adviser for the World Bank Health Team says: “Disruptions would propagate across economies, and could include

“We do not know where the virus hides in nature. We do not know how people are getting infected. Until we answer these questions, we are empty-handed when it comes to prevention” Dr. Margaret chan, Director-general, worlD health organisation

breakdowns of food distribution and public order in megacities.”

Indeed, according to the World Bank, a severe flu pandemic could cost 4.8% of global GDP, or more than $3tn, as livestock and human densities increase alongside weak veterinary and public health systems in developing countries.

MERS-CoV might not mutate into an outbreak as costly as this. However, what is certain is that others will follow, and the priority must be in

creating a response that is both swift and effective. And investment is essential: veterinary and human health systems in developing countries will require $3.4bn annually, believes the Bank, compared with less than $450m currently. It argues that this sustained level of investment is justified in view of at least $37bn in annual expected benefits from prevented pandemics and other major outbreaks.

Pandemic PreParedness

One of the major problems in preparing for the next pandemic is identifying where it will come from and what it will look like.

Nita Madhav, Senior Scientist at catastrophe modelling firm AIR Worldwide, says: “A pathogen that has both high transmissibility and high virulence would be most likely to cause a severe pandemic. Influenza has the capability for both, as was seen during the 1918 Spanish flu pandemic.”

Until a virus actually shows itself and scientists understand its make-up and its mode of transmission, there is little they can do to create the drugs required to treat those who are infected and to vaccinate those who are not. Even where antiviral drugs can be developed – and this cannot be guaranteed – supplying them to enough people in a wide enough geographical area to outpace the spread of the pandemic is immensely difficult.

The ongoing trend towards globalisation also speeds up the likely spread of any virus, making it more difficult to contain. Airport hubs play host to millions of passengers

30 / pandemicsfood security

each year, while railway stations, tube systems and ferry terminals are busy virtually 24 hours a day. Goods are transported around the world, food is sourced from all four corners of the planet and there are few if any populous regions that are truly isolated.

Although this modernisation increases the ability of a virus to spread, Neil Smith, Manager of Emerging Risks and Research at Lloyd’s, says: “On the other side, you have to take into account developments in medical technology. Improved communication is also helpful as an outbreak can be

communicated very widely, very quickly, and that can create changes in behavior and help contain the spread of a virus.”

However, Smith is sceptical as to whether the world has the ability to stay ahead of a fast moving virus: “Whether it is enough… I would have my suspicions, particularly in terms of getting any resistance developed in time. By the time antibody vaccine is developed, the pandemic is likely to have spread quite widely.”

In addition to the speed at which a virus can spread, there is then the fact that the response to restrict its movement and mitigate its impact is far from consistent across the world.

The WHO represents 194 member states, and while they are all bound by the International Health Regulations (2005), there is a wide divergence in their individual ability to meet the core

MERS Cases and Deaths

saudi arabia

cases: 90_Deaths: 44

cases: 6_Deaths: 2

Qatar

cases: 5_Deaths: 2

cases: 3_Deaths: 2

united Kingdom

tunisia

cases: 3_Deaths: 1

cases: 3_Deaths: 0

Jordan

italy

Deaths

united arab emirates

cases

cases: 2_Deaths: 2

France

cases: 2_Deaths: 1

april 2012 – september 2013

Source: NatioNal ceNter for immuNiSatioN aNd reSpiratory diSeaSeS, diviSioN of viral diSeaSeS

capacities set out in these regulations.

Following the H1N1 influenza pandemic in 2009, the WHO commissioned the report Strengthening Response to Pandemics and Other Public Health Emergencies to examine the effectiveness of the International Health Regulations and how they helped in responding to this pandemic.

Its findings, released in 2011, stated: “The world is ill-prepared to respond to a severe influenza pandemic or to any similarly global, sustained and threatening public health emergency.” business impact

In the absence of a reliable, resilient and consistent global framework to mitigate the impact of a pandemic, it

31

becomes even more difficult for international businesses to accurately assess how hard they would be hit.

Even where businesses operate in a single country or location, assessing the potential impact of a pandemic is extremely complicated.

Madhav at AIR Worldwide says: “One of the largest impacts to the economy would come from employee absenteeism. For preparedness planning, absenteeism of around 30% is often assumed, although the experience during the 2009 swine flu pandemic was not this high. Employee absenteeism could have significant effects on business continuity, especially in industries that require employees to be physically present.” However, businesses need to look beyond the problems created by absenteeism and begin to examine both the flexibility and ultimately the viability of their model in the worst-case scenario.

Gary Lynch, Managing Director and Global Leader, Risk Intelligence and Supply Chain Risk at Marsh Risk Consulting, says businesses really need to question not only how hard they would be hit, but whether they could actually survive and what they would have to do to stay afloat. Companies, he says, need to ask: “Can I recover, will I recover, and if I can, how do I expedite that through a recovery or resilience strategy? Do I close my doors? Do I realise that I am going to be out of business, and is it time to get rid of the stock and think about starting from scratch if the pandemic goes past a certain point?”

He says they then need to examine

“Lloyd’s underwriters fully take into account not only the region and past history, but also the uncertainty regarding risk exposure”

simon wilmot-smith, specialist lines underwriter, talbot syndicate, singapore

the flexibility in their model and how they could use it to their advantage.

“What is it that I can do and what competencies do I have as a firm that may enable me to benefit from this type of disruption, and how should my strategy change?” insurable risk

For insurers, the impact of a pandemic would also create major problems and generate significant losses. Perhaps the most obvious market to suffer would be the life sector. To put a number on the potential losses, Gen Re Life Health carried out some research.

It remodelled the Spanish flu of 1918/19 on today’s population structure and calculated what affect it would have on a German life insurance portfolio. It found that the pandemic would generate net expense claims of €4.6bn for the German market as a whole. Depending on the scenario used, this figure fluctuates between €2.3bn and €9.1bn, and would soar to €43.5bn if calculated using the SARS scenario.

In the general insurance market, the status of a pandemic will have a major bearing on the losses borne by carriers.

In the travel insurance market, for example, formal notice of an outbreak will no longer allow it to be classified as an unforseen event, and this would effectively limit the losses sustained.

Insurers would also put exclusions on cover to the most affected areas, further curtailing their exposure.

Meanwhile, in specialist lines of businesses underwritten specifically for the risks posed by pandemics, the potential losses are pretty well quantified and understood.

Simon Wilmot-Smith, Specialist Lines Underwriter for Talbot Syndicate, Singapore, says: “Event organisers are very aware of the potential impact a pandemic would have on future events. Communicable Disease cover is available from the Lloyd’s contingency market, but underwriters carefully aggregate their exposures and charge premiums, which fully take into account not only the region and past history, but also the uncertainty regarding risk exposure, such as the complexity of a virus. Asia has been hit badly

by SARS and avian flu in the past, so the populations of Asian countries understand the potentially disastrous effects of a pandemic.

It is therefore surprising how few

32 / pandemics

insureds actually take up the cover.”

For carriers in other lines of business, coping with the wave of claims that a pandemic would generate is likely to create severe problems.

Employers’ liability claims would jump as employees questioned the practices and procedures their firm had in place to safeguard them, while D&O cases would also come to the fore, questioning everything from a company’s procedures to the impact that poor planning had had on its share price and underlying value.

If those affected could prove that the design of a building enabled a virus to spread more quickly or that the air filters in place were faulty or not up to the job in hand, then professional indemnity and product liability products could be triggered.

The list of possible claims is almost endless, although insurers may be protected by specific exclusions that relate to pandemics in their wordings.

Similarly, they may avoid certain losses such as business interruption because of the need for physical damage to trigger this aspect of a property policy.

However, there is little doubt that such exclusions would be stress tested to exhaustion in the storm of litigation that would follow any pandemic.

Commenting on exactly which claims would be repudiated, Lynch says: “We just do not know, as it comes down to how something is detected, how pervasive it is, and whether the policy has any sorts of exclusions.

Organisations have to take a good, hard look at the wordings of their cover, and ask their brokers and carriers whether this is an event that sits outside of the cover offered by the policy.”

The experience of recent pandemics has given governments, health organisations, insurers and commercial companies more experience of what might happen. Unfortunately, that

Pandemics: through the ages

the antonine Plague, thought to be smallpox, hit the italian peninsula between 165ad and 180ad. it claimed the lives of an estimated five million people.

“Organisations have to take a good hard look at the wordings of their cover, and ask… whether this is an event that sits outside of the cover of their policy” Gary Lynch, ManaGinG Director anD GLobaL LeaDer, risk inteLLiGence anD suppLy chain risk at Marsh risk consuLtinG

the Plague of Justinian occurred between 541ad and 750ad, and is the first outbreak of bubonic plague on record. it is accredited with killing between 25% and 50% of the population of the known world in those 200 years.

the Black death, an outbreak of bubonic plague, hit europe in the mid-14th century, and within six years had killed between 20 million and 30 million people. over the next 500 years, bubonic plague pandemics continued to strike the world right up until the san

does not mean they will react more effectively when it does.

Madhav concludes: “Preparedness levels vary from company to company and country to country. The world is increasingly recognising the importance of pandemic risk.

Events such as SARS, H5N1 avian influenza, and the 2009 swine flu pandemic have prompted the creation and revision of pandemic preparedness plans. More could be done to test the robustness of these plans. Although great strides have been made in preparedness efforts, we must not take a complacent attitude to the risks posed by a severe pandemic.”

Francisco Plague of 1900–1904.

influenza pandemics were described in ancient history, and since the 16th century they have been recorded every ten to 30 years. the most serious was in 1918 when the spanish flu claimed 50 million lives.

aids is an ongoing pandemic and has claimed the lives of 35 million people since it came to light a little over 40 years ago.

market investment words by Helen yates

33

works for you and limit the downside.”

Much of the capital market capacity is currently focused on peak natural catastrophe perils, such as US windstorms and earthquakes.

Willis Re predicts products like cat bonds, industry loss warranties and collateralised reinsurance could displace up to $40bn of traditional reinsurance Growing interest from alternative investment sources capital within a few years. This capital could help the market diversify into non-traditional sectors will need to be returned to shareholders or deployed elsewhere in the business.

“For the peak scenarios there will be more capacity in these markets, resulting in downward price pressure,” said Luca Albertini, Chief Executive of Leadenhall Capital Partners, speaking The insurance industry has attracted at the Munich Re Insurance-linked Securities (ILS) growing interest from capital market roundtable in Monte Carlo. “As a knock-on effect, investors over the past five years – at first some traditional business has been pushed out and from hedge funds and private equity, is looking for opportunities elsewhere.” but increasingly from pension funds and The next step is for the non-traditional sector institutional investors. Post-financial to diversify. Future cat bonds could cover a broader crisis, these investors discovered that range of risks, including casualty/financial lines, in the low-interest-rate environment, and longevity and mortality. Albertini recommends insurance offered decent returns and targeting uninsured risks, pointing out that the risks that were largely uncorrelated to majority of residential homes in California are the financial markets. not insured for earthquakes.

This trend is set to continue, with A growing number of Lloyd’s managing agents Aon Benfield predicting that around are taking advantage of the investor interest. $100bn of alternative capital will enter Some are actively involved in insurance-linked the reinsurance business over the next securities, while others have set up special purpose five years. This ‘new money’ offers syndicates. Last year, Hiscox announced it was opportunities and challenges. Mike partnering with hedge fund-backed Bermuda Van Slooten, Aon Benfield Analytics’ reinsurer Third Point Re to develop a catastrophe International Head of Market Analysis, reinsurance fund. In June, Hiscox launched believes it’s a double-edged sword for Kiskadee Re, a Bermuda-based special purpose the entire market because it’s potentially insurer. Meanwhile, Amlin acquired $75m of cover lowering the cost of capital generally. for US and Canadian earthquake perils via cat bond “Lloyd’s should be in a position to take Tramline Re II. Amlin was one of the first movers in advantage of some of the cheap capacity this space, setting up Leadenhall Capital Partners that’s available. But on the other hand, through a joint venture in 2008 to manage ILS there’s also a competitive threat in portfolios on behalf of institutional investors. certain cases and it’s having an impact Van Slooten says: “Today, that’s looking like a bit on pricing. You need to be nimble of real foresight, and they now stand to benefit enough to take advantage of it where it significantly from that relationship.”

The new money market

34 / HERITAGE words by glyn brown image from getty

A whale of a tale

and he became obsessed with trapping his own ‘horse in the ocean’to put the city on the map. He’d seen Moby Doll, and said of the During the 1960s, captive killer whales were the biggest meeting: “It was electric. I knew I would risk attractions in US aquariums – and in 1965, Lloyd’s issued everything to get a whale.” a $20,000 high-risk policy covering the loss of the orca Which he did when, less than a year later in July 1965, two fishermen accidentally netted a Namu against vandalism or natural death five-ton, 22-foot-long killer whale in the salmon waters off British Columbia. They offered to sell it alive to the first person who gave them a bid. Griffin scrounged together $8,000 Back in 1964, the first-ever captive killer – the cost of the damaged net – and named his whale Namu whale – the lovable, 15-foot Moby Doll – was after the little cannery town of its capture. put on display at Vancouver Aquarium. For Seattle went Namu-nuts. The name was instantly copyrighted the first time, press about killer whales was and Namu balloons, beanie hats, bumper stickers and bubble positive and, when Moby Doll sadly died, gum began to appear. This would be Griffin’s claim to fame – if marine parks across the US saw this as an he could transport Namu the 450 miles home. opportunity to have their very own orca.

The expedition began at 4am on 9 July. A flotilla of tugs and Entrepreneur and raconteur Ted Griffin, float planes congregated around a hastily assembled 40- by a 29-year-old with a nose for publicity, had 60-foot pen, a flimsy cage held together with welded iron rods built the Seattle Public Aquarium in 1962, and buoyed up by 41 empty 50-gallon oil drums salvaged from a nearby dump. Namu was nudged from his netting into the pen. An assistant said: “Griffin is a man with a basket of hot diamonds. A hot whale.Terribly valuable. My hair stands on end when I think of putting the towing boat into forward gear. We have to teach that whale to swim hundreds of miles at four knots an hour, inside a cage.”But when the vulnerable, jerry-built apparatus began to move, the whale amiably moved with it.

Along with the enthusiasm, though, came shame and retribution, made worse by a following pod of whales, thought to be Namu’s family. Earlier, a group of wildlife conservationists had hired Marine Casualty Detective Jack Hazzard to stop the expedition before it started. Hazzard had offered to skin-dive under the keep net one night, cut open the webbing and free Namu.

When his plan leaked to Griffin, Hazzard abandoned it. It was at this kIllER InsTIncT: point that Lloyd’s issued the $20,000 Entrepreneur Ted Griffin saw the high-risk policy – unique at the time potential in owning – to cover loss of Namu by vandalism a captive orca – or natural death. Lloyd’s declined, and insured namu however, to insure against escape. As against vandalism it turned out, Namu reached Seattle or natural death and was an instant success, his first during a 450-mile journey to seattle appearance attracting 5,000 people.

35

MArKet Movers

events

gloBAl ContACts

Nick Metcalf

dAtA And intelligenCe dAy

AustrAliA

President and Group Managing Director, Liberty Specialty Markets Liberty Mutual has restructured three of its businesses into a single operation, Liberty Specialty Markets. The new entity will write almost $3.5bn of gross premiums and be headed up by Metcalf. Metcalf has been CEO of the £1bn-stamp Lloyd’s business, Liberty Syndicates, since October 2010. He was previously Director of Underwriting at Arch’s European insurance operation and CEO of XL’s London market platform.

Lambros Lambrou

Chief Executive Officer, Aon Risk Solutions Australia

From January 2014, Lambrou will replace Steve Nevett as CEO of Aon Risk Solutions Australia, with the latter retaining his role as Chairman of the Pacific region. Lambrou is currently Head of Aon’s London Global Broking Centre and Chief Broking Officer for Europe, Middle East and Africa.

James Bavin

Head of Marine, Advent

Bavin, who is currently Vice President and Head of Marine at Arch Europe, and also underwrites its Art and Specie account, will take on his new role at Lloyd’s managing agent, Advent, in spring 2014.

Eric Joost

Chief Operating Officer, Willis North America

In his new role, Joost – previously Chief Executive of Specialty Practices at Willis Group’s North America division – will be responsible for developing and implementing operational strategy in the US. He has previously worked as a specialty broker and underwriter, with posts at Allianz and Aon.

11 december, old library, lloyd’s, london

Representatives from across the Corporation and the LMA will be demonstrating reports, tools and data available to Lloyd’s managing agents. The event will provide opportunities to meet the various specialists. Visit lloyds.com/events

AMrAe 2014 5-7 february, deAuville, frAnCe

Lloyd’s will be taking part in AMRAE 2014 by hosting a hospitality suite – along with a number of our managing agents – for the duration of the event, as we have done for the last three years. This year’s events theme is ‘Risk Management: No Frontier’, to respond to the internationalisation of the market.

Contact gloria.rolland@lloyds.com

MArKet presentAtions BrAzil

Lloyd’s, London uK

Lloyd’s, London irelAnd

Lloyd’s, London

28 november 3 december

BrAzil

Marco Castro Managing Director & General Representative, Brazil + 55 (21) 3266 1900 marco.castro@lloyds.com

CAnAdA

Sean Murphy President & Attorney in Fact, Canada +1 416 360 1512 sean.murphy@lloyds.com

ChinA

Eric Gao General Representative, China +86 21 6162 8200 eric.gao@lloyds.com

hong Kong

Kim Swan General Representative, Hong Kong +852 2918 9911 kim.swan@lloyds.com

JApAn

Iain Ferguson Representative & Chief Operating Officer, Japan +81 (0)3 5656 6926 iain.ferguson@lloyds.com

MexiCo

30 january 2014

for further information on any of these events, please visit:

lloyds.com/events

alternatively, email us at:

events@lloyds.com

Adrian Humphreys General Representative, Australia +61 (0)2 9223 1433 adrian.humphreys@lloyds.com

Gabriel Anguiano Manager, Mexico +44 (0)207 327 6137 gabriel.anguiano@lloyds.com

europe

Benno Reischel Head of Europe +44 (0)207 327 5327 benno.reischel@lloyds.com

singApore

Kent Chaplin Head of Asia Pacific, Lloyd’s Asia +65 64999 330 kent.chaplin@lloyds.com

uK, irelAnd, Middle eAst, AfriCA

Cameron Murray Head of UK, Ireland, Middle East and Africa +44 (0)207 327 6854 cameron.murray@lloyds.com

usA

Hank Watkins President of Lloyd’s America +1 212 382 4060 hank.watkins@lloyds.com

www.lloyds.CoM/lloyds/offiCes

Lloyd’s One Lime Street, London EC3M 7HA Telephone +44 (0)20 7327 1000 Fax +44 (0)20 7626 2389 www.lloyds.com Follow us on Twitter @LloydsofLondon