09The Fac Report - Aon

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CARIBBEAN RENEWAL MOVE June sees the first renewal of the world’s first multi-country disaster insurance facility, the Caribbean Catastrophe Risk Insurance Facility (CCRIF) with several measures designed to further fill the liquidity gap for countries after a natural catastrophe. In a February bulletin, the CCRIF announced a 10% reduction in premiums charged to participating governments, a decrease in the minimum attachment point for hurricane policies from one in 20 year events to one in 15 year events, an increase in limits to USD100m per peril from USD50m and a minimum payment, when triggered, equivalent to the relevant country’s annual policy premium. The scheme, which in its first year made payments to Dominica and St Lucia in respect of the powerful earthquake which rocked the Caribbean at the end of November, also stated payment of legitimate claims will be accelerated to as little as 14 days. The CCRIF facility was structured in conjunction with Benfield, as sole adviser, using a mixture of aggregate catastrophe excess of loss layers and a catastrophe swap. As a result, the CCRIF also has the distinction of being the first insurance facility to develop a parametric insurance policy that is backed by both traditional reinsurance and capital markets. Just as important, it offers a fresh perspective on how governments can work with the commercial insurance and reinsurance sector. The scheme has overcome many of the issues which have historically hindered the development of such government-backed initiatives – including striking a workable balance between building capital and imposing compulsory contributions on individuals – by taking a far broader and more integrated intergovernmental approach. Critically the CCRIF provides participating governments, rather than individuals, with immediate liquidity if their countries are hit by a hurricane or earthquake. The CCRIF’s structure – which could be applied to anywhere from Central America to China to Africa – potentially points the way for future inter-government natural perils initiatives. Reflecting this, the World Bank, which provided support and seed capital for the project, has indicated it could serve as a pilot for similar initiatives in other regions with small states, such as the Pacific basin. david.simmons@benfieldgroup.com aidan.pope@benfieldgroup.com TAPPING INTO A GROWTH PROPOSITION Insurers are increasingly turning their attention to the possibilities offered by Latin America and the Caribbean (LAC) due to the current surge in infrastructure development fuelled, in large part, by revenues generated by the commodities boom. Such is the scale of current developments, that for the first time the combined value of the Top 50 strategic infrastructure projects in LAC, as selected by the Sixth Annual Latin American Leadership Forum which took place in early April, has exceeded USD50bn. The current focus on infrastructure development reflects a general acceptance that if LAC is to sustain and improve current growth rates, the region needs to invest significantly in all aspects of critical infrastructure ranging from greater power generation to better road links. Estimates published in August 2005 in Infrastructure in Latin America and the Caribbean: Recent Developments and Key Challenges, a report by World Bank economists Marianne Fay and Mary Morrison, indicated spending would need to reach 4% to 6% of GDP a year – as opposed to less than 2% at that time – for infrastructure to catch up or keep up with countries that once trailed it, such as Korea and China. The report added that while infrastructure had improved in BENFIELD FACULTATIVE SOLUTIONS NEWSLETTER | SPRING 2008 | ISSUE 09 | PAGE 06 most of LAC over the last decade, a sharp fall in investment in the sector was hindering economic growth, poverty reduction and the region’s ability to compete with China and other dynamic Asian economies. Using logistics costs (transportation and storage) as one example, it added that while these were about 10% of product value in industrialised countries, in LAC they ranged from 15% in Chile to 34% in Peru. Current projects range from the USD15bn plus oil and gas initiative featuring the USD5bn Camperj Petrochemical Complex in Rio de Janeiro and other strategic projects from Petrobras, Pemex and Petrojam through to USD3.2bn of ports and logistics developments featuring the Buenaventura port projects and including major highway and inter-modal logistics in Colombia. A number of projects in areas such as the Dominican Republic and Mexico are also looking at renewable energy generation through such technologies as bio-diesel, solar farms and wind farms. Against this background, demand for construction insurance is increasing significantly, as is demand for business interruption type covers including advance loss of profits – for instance, to protect against situations such as where a power station does not come on line as planned. In addition to the need for significant capacity, interest in the offerings of international markets is also being prompted by the desire to tap into the expertise of insurers versed in some of the state of the art technologies which are relatively new to LAC. Separately, the commodity boom has also created greater awareness of the value of insurance, partly because there have been a number of significant business interruption losses in the region affecting operations in various business sectors. Recent examples range from events impacting Brazil’s largest steelmaker, CSN and Sadia, one of the world’s leading producers of chilled and frozen foods through to Chile’s giant food producing company, Agrosuper. Given that up to 50% of ceded premium is being spent on facultative reinsurance, Latin America is being seen as a growth area for both facultative and treaty business. Reflecting this, Benfield is in the process of expanding its presence in the region and intends to open further offices in the near future. pablo.munoz@benfieldgroup.com
OPINION: SORTING THE WHEAT FROM THE CHAFF The ongoing turmoil in global financial markets may have created wide ranging uncertainty for a series of products including directors and officers (D&O), financial institutions, structured credit and financial guarantee business as well as certain types of errors and omissions (E&O) protections, but there is also a danger that it is blinding the insurance sector to potentially good business opportunities as well. At present, the one thing that is not in doubt is that there will be considerable activity on the legal front. Nor, on the basis of past experience, can it be assumed that the insurance world will be as insulated from such actions as might, at first glance, seem likely. Plaintiffs’ attorneys will be mustering their resources to find ways through to potential ‘deep pockets’ – a factor which raises the potential for creeping exposures on the D&O and E&O front, if only due to the need to defend against ‘phantom’, as well as potential, liabilities. Separately, the long-term security of the monoline financial guarantee insurers is still under close scrutiny. In this respect it is perhaps salutary to reflect just how damaging to their core business of guaranteeing municipal bonds such insurers’ forays into guaranteeing other products, such as wraps of synthetic financial structures, have been. Simply put, it took the monolines 25 years to develop a 50% penetration of the US municipal bond markets in the US. Now, in just a few short months, that market share has contracted to some 20%. Against this background, it is important not to lose sight of the fact that a significant portion of the very large losses recently announced by financial institutions flows from recently instituted accounting regulations involving mark to market assessments, rather than losses crystallised from the sale of assets. Such is the extent of impact of these regulations that at least one large financial institution has questioned whether the regulations need amendment. Accordingly, until the mortgage issues in the US unwind, the full extent of institutions’ exposures and ultimate losses will be unclear. It is also important to bear in mind that the mortgage related issues have not impacted all industry and trade sectors to the same degree. Financial assessments suggest that many industries are continuing to perform in an acceptable manner, despite tighter controls on credit. BENFIELD FACULTATIVE SOLUTIONS NEWSLETTER | SPRING 2008 | ISSUE 09 | PAGE 07 All of this means that, despite the current generally negative sentiment about the banking sector, financial institutions will continue to be a potential source of good quality risks, particularly in the trade credit, surety and political risk areas. Indeed, the very issue of banks’ reducing capital bases, combined with the requirements of Basle II, means many banks increasingly need to assess the best allocation of capital to maximise their returns – an area in which insurance can assist by reducing exposures to risks producing lower returns, so allowing banks to concentrate on those areas of businesses which produce the highest return on capital. As in all situations, it is important to differentiate between the varying types of risk that may originate from the banking sector and not to apply a rigid, and perhaps less than open view, to new opportunities. The insurance market is in a position to assist, and has the chance to grow its own portfolio whilst still maintaining a disciplined and conservative approach to the business. As ever, in problems also lie opportunities and it may just be that now is the time when those insurers that are prepared to look beyond sentiment to the actual risks in question may be pleasantly surprised by the flow of good quality risks coming to the market. It would be a shame if such an opportunity to make the most of a real underwriting opportunity were to be missed because perception was allowed to rule over reality. phil.bonner@benfieldgroup.com FACULTATIVE SOLUTIONS TEAM The Facultative Solutions team is part of the leading reinsurance and risk intermediary, Benfield, which is listed on the London Stock Exchange under the ticker symbol BFD. With a worldwide presence of experts from the property, casualty, financial lines and energy sectors, we operate as one team, regardless of international boundaries, with one profit centre, empowering every member with access to markets. Appropriately authorised Team Members in Benfield give us expertise in alternative capital solutions. Drawing on the Group’s actuarial and analytical skills, including Benfield’s market leading catastrophe modelling, dynamic financial analysis and dynamic portfolio optimisation capabilities, we use our own resources to structure and place optimum solutions for customers in all classes of reinsurance. Jeremy Goodman, Global Team Leader jeremy.goodman@us.benfieldgroup.com +1 917 320 4524 EUROPE Michael Papworth, Team Leader London and Global Property & Specialty michael.papworth@benfieldgroup.com +44 (0)20 7522 3956 Andrew Hopkins, Japan and AAA Team Leader, London andrew.hopkins@benfieldgroup.com +44 (0)20 7522 3902 Pablo Muñoz, Latin American & Caribbean Team Leader, London pablo.munoz@benfieldgroup.com +44 (0)20 7712 8515 Pierre Bruylants, Europe Team Leader, Brussels pierre.bruylants@benfieldgroup.com +32 2 709 21 91 NORTH AMERICA/BERMUDA Erik Nikodem, North America/Bermuda Team Leader, Bermuda erik.nikodem@us.benfieldgroup.com +1 441 278 4544 AUSTRALIA/NEW ZEALAND/SOUTH AFRICA Michael Lazarus, AAA Team Leader, Australia michael.lazarus@benfieldgroup.com +612 8209 4291 SINGAPORE Nigel Cross, Singapore Team Leader, Singapore nigel.cross@benfieldgroup.com +65 6512 0211 If you would like to register to receive The Fac Report, please contact us at thefacreport@benfieldgroup.com. © Benfield Group Limited 2008. Benfield has used due care in the preparation of this report. Our information has been obtained from sources we consider reliable, but its accuracy and/or completeness is not guaranteed. This report is made available on an “as-is” basis and Benfield will not accept liability to any person for the consequences of reliance placed on its content. Benfield reserves all rights to the contents of this document.
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