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Market_Issue_Spring2013

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Sabrina Hartusch

This document is a magazine published by Lloyd's called "Market" from Spring 2013. It features articles on various insurance topics including: an interview with Lloyd's new Director of International Markets; exploring the complexities of global supply chains; a roundtable discussion with corporate risk managers on evolving risk attitudes; and how predictive flood models are helping to promote innovation. Other brief articles discuss opportunities in Mexico's growing economy, the implications of 3D printing, and new nuclear safety directives in Europe that could lead to compulsory insurance for nuclear risks.

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vincent vandendael on plans for growth p16 demystifying supply chain complexities p20 the evolution of corporate risk p24 exploring flood models of the future p30 Inside: the rise and rise of mexico p10 spring 2013 WWW.lloyds.com
03 coverstory:mexico Fuelled by a growing and increasingly diversified economy,Mexico offers exciting opportunities for foreign insurers1016 interview with… vincent vandendael We talk to Lloyd’s new Director, International Markets about his ambition to expand into new territories 20 shaping stronger links in the supply chain Unravelling the complexities of global supply chain ecosystems 24 risk managers’ round table Four corporate risk managers discuss changing attitudes to risk and what insurers can do to make their lives simpler 05 introduction We welcome you to Market magazine and reveal this issue’s features 18 infographic The consequences of the 2011 flooding in Thailand for global industry 35 market update Upcoming events, movers in the Lloyd’s market and international contacts Features Regulars spring 2013 www.lloyds.com 29 risky business The UK film industry is booming off the back of movies like Skyfall – which is great news for the market 30openingthefloodgates How the Lloyd’s Science of Risk prize is helping to promote innovation in predictive flood modelling 06 globalinsight News from around the world,including: the shift to Liquefied Petroleum Gas across Africa;the impact of 3D printing on manufacturing,the supply chain and liability;how new nuclear safety directives could lead to compulsory insurance for nuclear risks;why the future is bright for China’s liability market;and debunking the Hollywood take on international art theft gertrude ederle The first woman to swim the Channel34 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 ServicesAuthority.© Lloyd’s 2013. Spring 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 PAtrICk GeorGe Supplychain page 20
t’s been a tumultuous six months for the insurance industry,where total reported losses from Superstorm Sandy reached nearly $20bn earlier this year. The longer term picture is encouraging,however,with GDP predicted to rise in both developed and developing markets.The World Economic Forum estimates that developing markets alone will account for around 70% of global GDP growth by 2030. InthelatestissueofMarketmagazine, welookatoneof theseburgeoningpowerhouses:Mexico.Alreadythelargest contributortoLloyd’sLatinAmericabusiness,thisthriving economyneverthelessremainsunderinsuredandpromises plentyof potentialforgrowthacrossdiversesectors(page10). We also talk to the man spearheading the market’s expansion into new territories – Lloyd’s recently arrived Director, International Markets,Vincent Vandendael – about his roadmap for the future (page 16). In our round table debate,meanwhile,four experienced corporate risk managers come together to discuss the evolution of corporate risk,the implications of changing attitudes to risk at board level,and what insurers and brokers can do to help them better protect their businesses (page 24). Finally,wegettogripswiththecomplexitiesofglobalsupply chainecosystems(page20)and explorehowanincreasein catastrophicfloodeventsisforcinginsurerstoinnovatecheaper, fasterandmorerefinedpredictivemodels(page30). 05 @LloydsofLondon www.facebook.com/lloyds www.lloyds.com I Order a copy of the 2013 edition of this unique guide, containing key facts and figures about the Lloyd’s market, published in May 2013. The guide includes a summary of financial statements and the historical performance of all active syndicates, plus detailed statistics on capacity, premium income, claims, loss ratios, and much more. Pre-orderyourcopytodayorfindoutmoreat www.lloyds.com/stats StatisticsRelatingtoLloyd’s 2013edition–ordernow
Foresight Discover more about the UN and World Bank-led Global LPG Partnership: www.bit.ly/LPGpartnership FollowCelent’sinsuranceblogcovering3D printingandotheremergingtechnology: www.insuranceblog.celent.com insights From the world of lloyd’s. by the market, for the market 07 africa The impact of 3D printing on manufacturing, the supply chain and liability promises to be profound In the future, when a major event threatens global supply chains, the ability to print three-dimensional objects could provide the answer. The floods in Thailand in 2011 had a big impact on the computer industry, as factories that produce hard drives were inundated with flood water and alternative suppliers were thin on the ground. But in years to come, 3D printers could simply step in to fill the gap, producing the component parts needed to keep up with demand. In essence, the technology is additive. It only uses materials required to build the item a molecule at a time, rather than taking raw materials through a traditional manufacturing process that produces by-products and waste. Because 3D printing allows objects to be created and duplicated quickly and easily, anywhere in the world, it also removes many of the costs of manufacturing and distribution. This turns the idea of economies of scale on its head. Anyone with access to the technology and open source software, which offers an array of 3D designs, can generate unique one-off items without needing any particular skills. Beyond thermoplastics and metallic powders, the additive technology can even use living cells to print items. And the possibilities for sectors such as healthcare are compelling, particularly in the area of organ transplants, where surgeon Antony Atala has demonstrated the printing of a human kidney. As with any major new technology, there are challenges. The ability to duplicate popular merchandise raises the issue of copyright theft. The impact on manufacturing and supply chains promises to be profound. Production, the movement of goods, manufacturers’ liabilities and consumption of goods will all change. But as yet nobody can predict just how. Craig Beattie Insurance Analyst, Celent lloyd’s report analyses factors behind rising cost of wreck removal Costa Concordia is the most memorable wreck of late, but is only one example of numerous wrecks that need to be removed each year. Wreck removal is becoming increasingly expensive and to investigate why,Lloyd’s has brought together experts to analyse the main factors behind the rising cost of wreck removal. Lloyd’s is holding an event to launch the report on 21 March 2013.To find out more or read the report in full visit: www.lloyds.com/wreckremoval Lloyd’s shop Visit the Lloyd’s shop online or visit One Lime Street for quality business and personal accessories.From iPad cases to pens and postcards,there is a wide range to choose from. www.lloydsshop.com sign up to receive lloyd’s market magazine today Did you know you can download the latest edition of Market magazine from lloyds.com? Or sign up to receive a physical copy?You can even have a PDF version delivered to your inbox. However you choose to receive the magazine,we’d love to get your comments,with a view to including them in future issues. So please do drop us a line at marketmagazine@lloyds.com. It would also be useful to get your feedback on the style of Market magazine,and we’d appreciate it if you could take a minute to complete our online survey.To download your copy of Market, sign up to receive a physical or PDF version,or access our online survey,visit: www.lloyds.com/ marketmagazine North America Thefuturein3D The shift to liquefied petroleum gas across africa will require significant insurance support Most Africans use kerosene or traditional fuels like wood or charcoal for cooking,all of which have a negative impact on health and the environment.Growing demand for wood and charcoal is blamed for deforestation across Africa – putting additional pressure on agriculture and driving a food crisis – while indoor smoke is the second biggest cause of death after HIV/Aids in many African countries. Using other developing countries as a model,the UN and World Bank have launched the Global LPG Partnership to roll out Liquefied Petroleum Gas (LPG) to 50 million people across Africa by 2018.LPG is a more sustainable cookingfuel,andiseasilyandcheaplytransportedincylinders. AsanLPGsuccessstory,Indonesia’sapproachisamodelthat willbeusedforAfricancountries.TheIndonesianGovernment introducedanationalprogrammewithpublicandprivate sectorfundingasanalternativetothekerosenesubsidyand, coordinatedthroughthenationaloilcompany,itconverted 200millionpeopletoLPGinthreeandahalfyears. Three billion people are already using LPG successfully, mainly in poorer countries,and the International Energy Agency wants a further 1.2 billion to move to LPG by 2030 – Africa will be a key focus of these efforts.This will mean a significant increase in physical and economic activity, including shipping of LPG from producing countries such as Qatar in the Middle East to African importing countries. Expansion of LPG across Africa will require insurance support,but is not without its challenges.Questions remain over who will be liable for any harm or damage resulting from cylinders.Political stability is also an issue for insurers, who may be reluctant to provide cover in countries where there is upheaval.The countries selected for the first phase of expansion are largely stable,have good legislation in place and viable distribution models. Christine Eibs Singer Co-Founder and former Chief Executive Officer of E+Co Alex Evans Chairman of the Operating Committee of the Global LPG Partnership
09 Visit the European Commission’s site on Nuclear Safety: www.bit.ly/EUnuclearsafety FormoreonSwissReSigma’s2012studyon theglobalcommercialinsurancemarket: www.bit.ly/chinaliability Foresight Occasionally, art heists are the stuff of Hollywood movies. Check out these 10 amazing thefts: www.bit.ly/arttheft high-profile art thefts are rare, but do happen. and underwriters have a part to play in recovering lost works TheRotterdamartheistsawthievessteal sevenmasterpiecesinOctober2012– includingvaluableworksbyPicasso,Monet, Gauguin,MatisseandLucianFreud.And yet,despitethepopularbeliefthattheftisthe majorperilforartandspecie,itaccountsfor justathirdofclaimsoverallandmanyof thesearelow-level.Risingartvalueshave increasedinterestandpublicityaround high-profileartthefts,butthelevelofcrime itselfdoesnotappeartobeincreasing. Ahighnumberoftheftclaimsarefor artworksstolenfromcommercialgalleries, privatecollector’shomesortakenfrom publicplaces.Notalltheftsarethestuffof Hollywoodmoviesthough. Onerecent trendhasseenthetheftofpublicsculptures fortheirscrapmetal,whichissadlyoften onlyafractionoftheirvalueaspiecesof art.RecentlysnatchedHenryMooreand BarbaraHepworthartworksarethought tohavebeentakenforthisreason. Thereisaschoolofthoughtthatworksare stolentoorderfordishonestcollectors,but thisisunusual.Morelikely,theyareusedby criminalgangsascurrency.Orthetheftsare opportunistic,committedbyunsophisticated criminalsduetoagapinsecurity. Artandspecieunderwriters,whocould beaskedtoinsureapieceontheArtLoss Register,haveanimportantroletoplayin helpingtorecoverstolenartworks,which oftenreappearatsomepointinthefutureas theyaresoidentifiable.EdvardMunch’s TheScreamwasstolen,alongwithanother ofhisfamouspaintings,Madonna,in August2004.Insuredfor$141m,theywere recoveredtwoyearslater.InMay2012,The Screamsoldforarecord£75matSotheby’s. Giventhevastnumberofmasterpiecesheld incollectionsbynationalmuseums,galleries orlibrariesaroundtheworld,theincidenceof theftisrelativelysmall.Thedifficultytheyface isstrikingabalancebetweensecurityand providingaccessintheirroleascustodians. Insurerscoveringprivatecollections usuallywanttoinsurethetotalvalueatrisk. Premiumscanbemoreeconomicforsuch collectionsasthevaluesareoftenlowerthan museumcollections, withlittleornopublic access.Collectorsareencouragedtohave theirartworkrevaluedeverythreeyears. Robert Korzinek Fine Art Underwriter, Hiscox Ltd lloyd’s market intelligence toolkit offers tailored analysis Do you want tailored analysis of the world’s insurance industry from a geographic perspective? Our Market Intelligence toolkit includes: Compare Countries, with high level statistics for the economy, insurance market and Lloyd’s business, and regional heat maps illustrating key indicators for quick strategic overviews; Country Profiles, providing individual summaries for Lloyd’s key territories; Market Presentations, containing local insights offered by Lloyd’s Country Managers on opportunities and challenges in their markets;Class Review, which compares Lloyd’s business with its competitors in key territories,broken down by specialty class of business; and Country Roundup,which enables market participants to stay up to date with Market Intelligence news and events that regional offices want to highlight. For more information visit: www.lloyds.com/ marketintelligence dow jones news feed – easy access to news A Dow Jones news feed is available on Lloyds.com. It gives you access to news from across the globe that you can filter by country and news category – general,insurance and natural disaster/weather. www.lloyds.com/dowjones Lloyd’s online Also,don’t forget to regularly check our online content,find us on Facebook and follow us on Twitter to keep up to date with what’s happening in the Lloyd’s market and wider industry. www.lloyds.com europe newnuclearsafety lawsdrafted liability is one area of untapped potential in china’s thriving commercial insurance market China’scommercialinsurancemarket hasgrownanaverageof32%everyyear since2000tobecometheworld’sthird largestmarket,accordingtoSwissRe Sigma.Butexcludingmotorbusiness,it wouldslidetoseventhpositionglobally. TheChinesepropertyandcasualty marketoutpacedGDPexpansion forthetenyearsto2010,growingto $59bn.Totalinsurancepenetration, asapercentageofGDP,wasat3%in 2011,downfrom3.7%in2010. With its high-growth economy and increasing insurance penetration, it is likely motor will dominate for some time.Commercial motor business constitutes around 65% of total commercial premium volume ($31bn,according to Sigma).Liability accounts for just 6%.But as Chinese corporations become more international in their outlook it will trigger a more mature approach to risk management.As one of the world’s biggest exporters,the influence of regulation in markets such as the US and Europe is likely to drive take-up of covers such as product liability. Myviewis,everyoneiswaitingfor casualtyliabilityandfinanciallines productstotakeoffinChinaand therestofAsia.Abigdriverwillbe regulationandwhetheritcankeeppace withthegrowthinthesemarketsby introducinglegislativeframeworksto properlygovernsomeofthepotentially largeclaimareaslikedirectorsand officersandprofessionalindemnity. David Phillips Chief Operating Officer of JLT Re Asia asia EU operators could face compulsory insurance for nuclear risks While European nuclear power plants generally have high safety standards, EU Energy Commissioner Günther Oettinger supports tougher insurance requirements for nuclear operators. A revision of the nuclear safety directive is expected in early 2013, with amendments focusing on safety requirements, the role and powers of nuclear regulatory authorities, transparency and monitoring. This will be followed by proposals to extend liability conditions and compulsory insurance for nuclear risks. Owing to the rare but high loss potential associated with nuclear risks, it is unavoidable that – in addition to the insurance industry – the operators of nuclear power plants and the State continue to be involved as risk carriers. Torsten jeworrek Member of the Board of Management at Munich Re europe
10 / mexico Part three of a three-part series on emerging markets words by roxane mcmeeken 11 exico is a land of diversity.In Oaxaca,one of the largest states,75% of the population lives in extreme poverty. Mexico City’s affluent residents,meanwhile,enjoy income levels comparable to those in the US.But this heterogeneous country,situated advantageously between the US and the rest of Latin America,is unified by one trend:economic growth. According to Goldman Sachs,Mexico will be the world’s seventh largest economy within 40 years.It is currently worth more than $20bn in premium,second only in Latin America to Brazil. Interestingly,however,Mexico is on Lloyd’s list of underinsured nations.In 2011,insurance penetration was just under 2% of GDP.Says Lloyd’s Mexico Manager,Gabriel Anguiano:“Latin America is among the fastest-growing regions for Lloyd’s.And Mexico is the largest contributor in Latin America,accounting for $397m of Gross Signed Premiums.” Thriving economy Sound economic policy in Mexico means the World Bank classifies its economy as healthy“upper middle income, less indebted”.In 2012,national debt was at 44% of GDP, according to the International Monetary Fund.Inflation is low, at below 4% a year,and GDP stands at $15,177 per capita.The economy grew by 3.6% in 2012,which,though slower than 2011’s 3.9%,is nevertheless healthy. The outlook is bright.Mexico has a large,educated and young population of 112 million with a mean age of 26 M Mexico is the single biggest contributor to Lloyd’s Latin America business. And there’s still plenty of room for growth in this underinsured market that’s worth $20bn in premium – with potential in aviation, energy, marine and property…
12 / mexico 13 – the result of a marked decline in mortality rates due to public health improvements,which began in the 1930s, without a corresponding fall in birth rates. Mexico’s population growth rate is now falling,however, thanks to improved contraception and changing attitudes to having children.The United Nations forecasts that the birth rate will dip to below two children per woman from 2020.At the same time,with improved healthcare,people are living longer. The resulting ageing population and attendant economic strains in the pipeline means Mexico faces the challenge of maximising the benefits from its current population bonus. It must get this right in order to cope when its demographics become more challenging. For now,Mexico’s current pace of economic growth is expected to continue,with the government forecasting GDP to increase annually by 3.9% for the next five years. “We’re very optimistic about our country right now,”says Rafael Audelo Mendez ,Chief Executive of Seguros Inbursa, the insurance arm of Mexican financial services company, Grupo Financiero Inbursa. “There’s huge growth potential. Economic growth means salary growth,and people with money in their pockets means more demand for insurance.” Mexico’shealthygrowthisbeingledprimarilybythe servicessector,whichaccountedforaround65%ofGDPlast year,accordingtoMexico’scentralbank.Othersectorsdriving theeconomyincludeenergy,mining,tourismandagriculture. Butit’smanufacturingthatmakesupsome80%ofMexico’s exports–infact,Mexicoexportsmoremanufacturedgoods thantherestofLatinAmericacombined. From new economic ‘tiger’ colombia to ambitious panama, latin america is opening up to foreign insurers Total written premium has been growing in Latin America by an average of 14% a year for the past decade, according to market research company Latino Insurance. Swiss Re’s figures reveal total premium for the region is now $127.93bn. Yet insurance penetration is low, at just 2.8% of GDP. The Mexican insurance market, worth $22.23bn in premium, is the biggest contributor to Lloyd’s in the region, bringing in $397m a year. The second largest is Brazil, where the country’s $78.29bn total premium reflects its economic muscle. It contributes $298.5m to Lloyd’s. Chile Chile is the most developed market in the region. The $9.67bn premium country has the highest penetration in Latin America (excluding the Caribbean), at 4.1%. This maturity, coupled with a small population, means there’s less potential to grow in the long term. But in the near term, fuelled by a strong economy, business is thriving. Lloyd’s mainly provides reinsurance here and writes $174m in premiums annually. In the wake of the major Chilean earthquake in 2010, premiums have risen substantially, with demand for more sophisticated risks. Additionally, Chilean companies are investing in other countries in the region – which means there’s a need to offer some Chilean clients regional insurance programmes. colombia Colombia, meanwhile – where Lloyd’s writes $88.9m in premium – has plenty of potential. With its larger population, penetration in this $7.62bn market is just 2.3%. And its economy is expanding rapidly: in 2012 GDP rose by 5.9%, leading to the country’s ‘tiger’ name tag, with growth of up to 4.9% forecast for the year. With few exceptions, Lloyd’s underwriters are not licensed to write insurance in or from Colombia, while they can write reinsurance from Colombia on a cross-border basis. But with the implementation of the Financial Reform Bill, some risks – marine, aviation, transport and agriculture – will be open to non-resident insurers and offshore brokers. panama Panama is a smaller market for Lloyd’s, which writes $38m there, and a smaller market overall, with $1bn in premium. But the country has potential. It has high growth, and is second only to Chile in terms of penetration, at 3.4%. Its economy is set to be boosted by the Panama Canal extension project, which will allow larger ships to use the facility. Panama’s ambition to be a regional hub for reinsurance, featuring a multitude of foreign players, looks achievable. It has the legal framework in place, has empowered the regulator, and now requires companies writing reinsurance to be licensed. Lloyd’s underwriters are not licensed to write insurance in or from Panama, bar two exceptions. These are for the Panama Canal Authority, which is permitted to place insurance directly overseas, and when the cover required cannot be found locally. The reinsurance position is different: Lloyd’s underwriters are permitted to write reinsurance originating from Panama on a cross-border basis. But the underwriting must take place outside of the territory – some Latin American business is placed in Miami. argentina Argentina is worth $12.8bn in premiums and Lloyd’s had $78.4m of business there in 2011. However, in 2011 Argentina introduced legislation making it tough for foreign players to operate there. Lloyd’s, which only trades here in reinsurance, is affected by the stipulation that the first $50m of any reinsurance risk must be written by local reinsurers. Foreign organisations, including Lloyd’s, are only permitted to reinsure exceptional risks that can’t be covered locally, and retrocession business. While property catastrophe risks will continue to loom large due to Mexico’s long history of earthquakes, increasingly sophisticated products are required Lloyd’sinlatinamerica: countriestowatch $38MPanama’s bid to be a regional reinsurance hub should bolster the value of Lloyd’s business there $78.4mTough legislation in Argentina will make it difficult for Lloyd’s to increase business above 2011 levels 5.9%GDP growth in 2012 gave Colombia its ‘tiger’ name tag 4.1%Chile has the highest insurance penetration in Latin America Mexico belize panama colombia paraguay chile brazil bolivia argentina ecuador peru venezuela Guyana suriname french guiana honduras guatemala nicaragua costa rica el salvador uruguay
14 / mexico 15 is more than just a regional player.“Mexican companies are increasingly becoming truly multinational,trading and investing on all continents,and we’re helping them to do so. And Mexico is not an energy economy alone – it’s growing in many other sectors.”Mexican companies are among the world’s largest in telecoms,cement production,food and drinks,TV and financial services.“The Lloyd’s market is familiar with many of these accounts,”he adds. insurance opportunities Happily for Lloyd’s syndicates and brokers,a growing economy almost always means burgeoning demand for insurance and reinsurance.Patria Re forecasts that insurance penetration in Mexico will climb to between 2.2% and 2.5% by 2016.Hence Mexico is a key target for Lloyd’s Vision 2025 international growth strategy. An increasing number of foreign insurers and brokers are expanding in Mexico.For example,insurers from Ace to Zurich, alongside brokers from Aon Benfield and Willis, operate here.Lloyd’s underwriters are permitted to write reinsurance and,in exceptional cases,insurance in Mexico, where Lloyd’s is registered as a foreign reinsurer.The exceptional cases are when risks are declined by the local market and for imports owned by foreign exporters. The notion that government-related contracts,winnable only through tortuous procurement processes,dominate the Mexican opportunities for foreign players is not quite true, Anguiano says.Around half of Lloyd’s business in Mexico is government-related risks,with clients comprising regional and federal authorities as well as state-owned companies. However,key growth classes of business for Lloyd’s in Mexico are aviation,energy,marine and property,in both the public and private sector. Mike Hughes,Chief Executive at Aon Benfield Latin America,explains:“Aviation is a very big sector for us.We’re forecasting growth in the private middle market,ie regional airlines and helicopter services.”He also says property will grow in both the public and private sector,in line with the economy and driven by construction.In marine,“blue water marine will stay as is but [private] cargo and in-land transit will grow”,again driven by the expanding economy. A government drive to invest in infrastructure will create further opportunities for the Lloyd’s market.Under the National Infrastructure Plan for 2013-2018,the State will spend some $400bn on 1,138 projects in sectors including energy,tourism,transport,water and urban development. Rafael Audelo says:“Mexico needs to build highways, ports and dams.This will bring opportunities for foreign insurance and reinsurance because these projects entail large risks and the capacity that we have in Mexico is not enough.” Energy is an important growth area.Mexico plans to invest $20bn per year in its oil industry up to 2025 through state oil company Petróleos Mexicano.There will also be investments in renewable energy,including hydro and wind power.Says Anguiano:“There will be particular growth in offshore energy,which is where most of Mexico’s oil is. Production has fallen in the last decade because we have exhausted all the‘low hanging fruit’in shallow waters. Now we have to venture into deep waters.” The widely held view that property catastrophe cover is the only form in demand is also not correct.According to Battman:“Increasingly sophisticated products are required – for instance Mexican companies are beginning to need warranty and indemnity insurance for acquiring foreign companies.There is also more demand for directors and officers’coverage products as awareness grows of the exposures of management teams – not least when Mexican companies invest in the US economy”. Anguiano concedes,though,that property catastrophe risks will continue to loom large because Mexico has a long history of major earthquakes and hurricanes.But he says insuring this risk is more manageable.“There is much better information on Mexican catastrophe risks now,so we have a better understanding of exposures and aggregations.” a competitive market Mexico is not without downsides.“We have huge competition,”admits Rafael Audelo.“There are around 100 insurers in the market,including about 40 doing property.And the competition is mainly around price.” As a consequence,rates are not as encouraging for insurers as in some other regional markets. Ingrid Carlou says:“Mexico’s written premium only grew 58% in the last ten years,so its share of the Latin America market dropped from 32% to 15% over the same period.” A possible cloud on the horizon for foreign investors is that the Mexican economy is highly correlated with the US. Ingrid Carlou,Chief Executive at Patria Re,the country’s only Mexican-owned reinsurer,points out Mexico’s“top customer continues to be the US”,which buys eight of ten Mexican manufacturing exports. This was behind a brief recession in 2009,when Mexico’s GDP fell by 6.1% before returning to growth in 2010. David Battman,Managing Director,International Business Development,at Gallagher International,sees Mexico as one of their strategic growth markets.He believes the country’s perceived historical dependence on both the US economy and the oil industry is changing.In fact,the country has the ability to do business on good terms with many more countries than just its northern neighbour. “Mexico has 12 free trade agreements that allow it to trade preferentially with 44 countries,”he says,adding that Mexico This contrasts with Brazil,which has seen written premium grow more than 600% over the last 10 years and its share of the Latin America market rise from 27% to 50%. Encouragingly for Lloyd’s managing agents and brokers, though,Patria Re has found that on the reinsurance side, total ceded premium in both countries roughly doubled over the decade.And while Mexico’s overall share of the Latin American reinsurance premium may have declined by 4% to 25% ,it nevertheless remains larger than that of Brazil (20%),with significant scope for growth – penetration relative to total direct premium is at just 1.9% of GDP. Anguiano says:“Brazil has been getting more attention from reinsurers because it is not exposed to the same natural catastrophes as the US [which means it brings diversification],plus its insurance industry has grown much more quickly in the past decade.Meanwhile,there is a tendency to say that Mexico’s cat risks profile and economy are too closely correlated to the US.” This has led some Lloyd’s syndicates writing US risks to argue that there would be no point growing their business in Mexico because it would not deliver anything different or better from their US books of business.But although Mexico will remain closely correlated with the US due to geographical proximity,there is a diversity of opportunities – and not all are based on Gulf of Mexico wind exposure or the Mexico City earthquake key zone. For those ready to embrace Mexico,how can you develop an edge in this competitive market? A key strength Lloyd’s brings is the fact that its coverholders and service companies are allowed to set up onshore.Anguiano says:“No one is taking advantage of this yet so there’s a real opportunity to write medium-sized risks that don’t come to London.” UweFischer,GeneralManageratChaucerLatinAmerica, adds:“Being physically present gives you better access to the market.Doing business face-to-face is important here.” So Mexico offers a range of exciting opportunities,fuelled by a growing,diversified economy.“It’s a more interesting market than people think,”concludes Anguiano. “Mexiconeedstobuild highways,portsand dams.Thiswillbring opportunities, becausetheseprojects entaillargerisksand thecapacitywehavein mexicoisnotenough” Thenotionthat government-related contractsdominate opportunitiesfor foreignplayersis notquitetrue.key growthareasinclude aviation,energy, marineandproperty rafael audelo mendez, Seguros Inbursa FURTHER INFORMATION To find out more about Lloyd’s operations in Mexico visit www.lloyds.com/mexico. Also, view a range of market intelligence products on Mexico at www.lloyds.com/marketintelligence Under the 2013- 2018 National Infrastructure Plan, the Mexican Government will invest $400bn across sectors such as energy, tourism, transport, water and urban development – creating significant opportunities for the market images:getty/corbis
16 / interview words by marcus alcock illustration by Tadaomi Shibuya 17 Vincent Vandendael brings more than 22 years of international insurance experience to Lloyd’s, joining from Zurich Insurance Company where he was most recently CEO of the Global Corporate unit in Asia-Pacific. He joined Zurich in 1994, initially taking responsibility for building and leading the Financial Lines team in the Benelux region and rising to CUO for the Global Corporate unit in Asia-Pacific by 2009. Prior to Zurich, he held a number of roles at Chubb Insurance Company. rom the Benelux region to the Asia-Pacific, VincentVandendael arrives with a wealth of international experience and ideas – and the ambition to expand the market into exciting new territories… Market: Why join Lloyd’s? And why now? Vincent Vandendael: I’veneverworkedin theUK,sobeinghereisexciting.Ofcourse, whenyouthinkofinsurance,Londonis evenmoreofanattraction.Ibelieveit’s thecentreoftheworldforinsurance, andLloyd’sisthecentreofthecentre. Intellectuallythere’sawealthofcapability andexperience–morethan300years.It’s aplacewherewetakerisksandinnovate– botharecritical.Lloyd’sisuniqueand weshouldremindpeopleofthat. Financially it’s also robust.It’s had its troubles in the past but come through,and now it’s in an extremely strong position with A+ and A financial strength ratings. There’s a collegial atmosphere here too, which you don’t find everywhere.People want to help you be successful. Why now?There was a vacancy! Joking aside,I think that when you look at GDP growth,Asia,for example,is 7-8% compared to Europe and the USA at only 1-2% – this is pretty strong growth,so there’s a real opportunity there to bring more of Lloyd’s to those markets. How will your previous posts inform your role at Lloyd’s? Having been a CEO,I understand the range of priorities one faces – from capital management and competing priorities to people management.My skills are in leadership,building business and talent development.After all,you can be as good as you can,but it’s the team that makes the difference.I’ve also spent 20 years as a Chief Underwriter on the market frontline and I understand the pressures underwriters and brokers face on the floor. How will you seek to promote and further strengthen the market around the world? My first few week were about listening to the market and discovering what the various stakeholders want.Following that, I will start to think about how we can contribute toVision 2025 and deliver in our priority countries:India,China,Mexico, Brazil andTurkey.But I would want to go beyond this as well.In many emerging markets,business is expanding beyond country borders,but local insurance champions don’t necessarily have an international network.I see this as an opportunity to bring them into Lloyd’s and leverage our worldwide expertise and licences. I’m also a strong believer in segmentation.We can’t expect staff to be experts in all areas we promote,and you wouldn’t approach cedants in the same way you would coverholders,for example – it’s about adapting our approach to different stakeholders and different markets,better reflecting their specific needs. Are there learnings from the Asia-Pacific economies you can bring to the market? Asiaissodynamic.There’sareal‘cando’mentality.Thereareno boundariestowhatcanbeachieved.Iwanttobringthatto Lloyd’s.Andofcourse,therearetherealgrowthopportunities, whichLloyd’sislookingtoexploitthroughVision2025. What else is so exciting about those economies? The population distribution offers huge potential.Look at Vietnam,where 70% of the population is under 30.They will be the insurance buyers and staff of the future.With wealth building in these countries,the amount of business opportunities and need for insurance can only grow,which is where Lloyd’s is ideally placed to provide the risk solutions and innovative products required. marketmeets… vincentvandendael Lloyd’snewdirector, internationalmarkets F FURTHER INFORMATION For more about Lloyd’s plan to cement its position as the global centre for specialist insurance and reinsurance visit www.lloyds.com/vision2025
18 / Losses and claims 19 As production networks and supply chains become increasingly globalised, localised incidents can have a number of major effects on every level of business at home and abroad - from manufacture to distribution to sales. Here, we can see how the 2011 flooding in Thailand had serious consequences for international industry, and provided considerable food for thought for the insurance sector GLOBALCOST ofthe2011 THAIflood Most affected Affected Unaffected EXTENTOFFLOOD Thailand was affected by 12 billion* cubic metres of floodwater during the disaster. At its worst, the water measured 10ft** deep Theimpactathome The World Bank estimated Thailand’s economic losses due to the floods were $45.7bn worldbank.org 660,000 Number of people left unemployed reuters 9,859 Number of factories that were forced to shut reuters *NYTimes.com **United Press International ImpactonHarddrive(hDD)manufacture Computers and parts are one of Thailand’s leading industrial exports, with a surge in prices resulting from the flooding 45%Percentage of the world’s hard drives made in Thailand prior to the flood 2tbhddiMacs suffered release delays due to a lack of 2TB hard drives HDD=£X2Within three months of the start of the flooding, the cost of hard drives had more than doubled hDD x2 bbc.co.uk reuters.com gizmodo.co.uk Impactoncarmanufacture An estimated 80,000 to 100,000 cars were not built as a result of the floods, with far-reaching consequences elsewhere 6,000The number of units per day that car manufacturers cut output by $88.3MThe amount that Honda lost due to lost inventories $67.6MNissan’s recovery costs in relation to the flood’s impact on global supply chains Japan Automobile Manufacturers Association Nissan Motor Co., Ltd. Aon Benfield Impactoncameramanufacture The camera industry was not immune, with a number of significant launch delays and a considerable loss in profits $107.2mSony’s losses in Q3 of 2011 due to repair and cleaning costs $603.6MThe losses incurred by Canon due to reduced camera sales $786.2mThe estimated amount Nikon lost due to reduced net camera sales reuters.com reuters.com canon inc. Chiang Mai Bangkok phuket Thailand Gulf of Thailand
20 / supply chain words by chris wheal illustrations by noma bar 21 mages of Japan’s tsunami in March 2011,then stagnant floodwater swamping Thai factories just a few months later,showed the enormous scale of nature’s destructive power. Theimpactlocallywascertainly devastatingenough,butweeksof disruptiontomanufacturingand productioncreatedaneconomiccrisis forbusinessesfarremovedfromthe region.Theglobalisationofsupply chainsanddistributionmeantthateven seeminglydisconnectedcompanies wereaffectedbythedisaster. Take computer chip manufacturer Intel.“Hard drive manufacturers with plants inThailand couldn’t make any new hard drives or ship any of their stock,”says Professor Mohan Sodhi from the Cass Business School. “This meant computer manufacturers couldn’t make computers or ship the stock that was still waiting for hard drives.As a result,they stopped buying chips from Intel. “As part of the supply chain ecosystem,Intel were badly hurt. It showed that the impact could come in unsuspected ways.” Insurers don’t like the word ‘unsuspected’.Many thought that events in Japan andThailand would prompt substantial claims under contingent business interruption policies,not all of which were as costly as imagined.But the key to providing accurately priced insurance is having a clear perception of the risks, along with quantifiable costs of the potential losses involved.Armed with that data,underwriters can write policy wordings and price insurance policies. Lloyd’sislookingathowsupply chainriskcanbebetterunderstood andthereforemanaged,workingwith expertsfromwithinandoutsideof theLloyd’smarket.Areportonthe issueisexpectedin2013. “Theuseofjust-in-timemanufacturing and outsourcing mean supply chains are increasingly brittle,”explains Neil Smith,Lloyd’s Emerging Risks and Research Manager. “There are questions around the extent of supply chain cover provided under (contingent) business I Global supply chains can be a minefield of unsuspected, complex risks.Having a clear perception of these risks, and the potential losses involved, will help insurers design products that provide effective cover across the entire ecosystem Shaping stronger linksin thesupply chain
22 / supply chain 23 different companies manage risk differently. Apple’s iphone is manufactured by one supplier in one location. samsung has a principal supplier, plus two others to cover temporary blips interruption policies.One of the challenges for insurers is developing products that meet customers’needs and cover supply chain risks comprehensively. “One of the challenges for buyers and sellers of insurance is developing products that accurately cover these risks,”Smith adds. “So,we’re examining to what extent customers understand the bespoke supply chain products currently available and how suitable they are. “We would like to see this market develop.It will be a two-way thing: what products can we further develop that cover these risks? And what data can customers provide us with to help us better quantify the risks?” the complexity of risk The risks are both complex and wide- ranging.Ford once reported that one of its major risks was the demise of its rival General Motors (GM),as they both sourced parts from the same suppliers.If GM folded,Ford would be unable to give enough work to the suppliers to keep them in business. That interdependence of firms in the same line of business is a common theme.Puerto Rico produces a huge chunk of the world’s pharmaceuticals, but is served by just one airline, American Airlines.That reliance presents a significant risk to the distribution of pharmaceuticals. Professor Sodhi says strike action at businesses far down a firm’s supply chain or distribution network can paralyse firms.A takeover of a supplier by a rival can be equally devastating. According to Professor Sodhi,Google bought Motorola’s handheld business, Motorola Mobility,for $12.5bn (£7.9bn) in May 2012“not because it needed it,but because it couldn’t afford to have someone else buy it”. Geopolitical issues raise another area of risk.The Arab Spring was important for supporters of democracy, but made the movement of parts and goods much more precarious for firms trading throughout the region. And then there’s product contamination after delivery to a retailer,retailers being unable to pay their bills,or banks being unable to process payments.All can impact on a firm’s bottom line. Different companies manage their risks in different ways.Apple has its iPhone manufactured by a single supplier in one location.Samsung,on the other hand,produces 80% of its phones from one source,but uses two other suppliers on small contracts to cover temporary blips in supply from its main firm.Neither system covers the risk of the main supplier completely ceasing to supply,or the reputational risks from negative publicity about supplying firms. Three suppliers producing equal numbers–eachcapableoftakingupthe slack should another suffer a setback –maymakesenseintermsofrisk,butit can be more expensive.Cheap,efficient supply chains often present greater risks.Safer supply chains can mean economic efficiencies are lost. how industry type impacts While some supply chain risks are universal,different industries face specific risks.Broker JLT has been proactive in marketing supply chain cover to high-value niche markets for the best part of a decade.It started in the big pharma sector with a suite of covers it markets as EPIC – Earnings and Product Integrity Cover. According to JLT PartnerTim Cracknell,these firms are often forced to choose single-supplier contracts because of confidentiality over ingredients and manufacturing techniques,or the expensive processes involved.Having several firms manufacturing exactly the same product components to the same standards in different parts of the world is simply not commercially viable. A specific risk they face is regulation. Drugs must meet regulatory requirements around the world,often made in a regulated way by a regulated provider.Any breach of regulation or change in approach by a regulator – sometimes on the other side of the world – could result in the closure of the manufacturing plant or the seizure of completed stock. Another risk is an intellectual property (IP) challenge.“If someone claims that a particular drug or process is the product of someone else’s patent, the whole process can be slowed down,”says Cracknell. It has already started extending it to the chemical industry,and food and drink sector,and has plans to roll it out to others such as technology and media. Kiln at Lloyd’s has been offering supply chain cover for a decade. “We call it trade disruption insurance,”explainsTom Hoad, Underwriter,Enterprise Risks at Syndicate 510.“It covers physical, political or marine perils that would stop transport of goods or supplies.We look at the delivery routes a client has concerns about.So the Egyptian crisis – the Arab Spring – raised political The manufacturing may go on but the company may not be able to use the profits while protracted court cases continue.Most drugs companies are making many high-volume products at low margins,but have one or two blockbuster drugs that make the bulk of their profits.Any interruption to the flow to market of these drugs or any restriction on the use of revenue from them – held up in legal processes over IP,forexample–canbedevastating. JLT also brokers cover for cyber risks to networks or data,trade disruption, transport blockages and political risks. risks.We would look at supplier routes through Egypt to the Port of Aden. We don’t necessarily require property damage.It could just be delay.” Kiln again wraps up cover for third-party injunctions over IP, hacking attacks,large-scale product recalls and regulatory interference. “We call the physical risks‘acts of God’,and the political risks,sabotage and hacking‘acts of man’,”says Hoad. creating bespoke products HoadsaysfirmsreportingunderUS SecuritiesExchangeCommissionrules usuallyreportthemajorriskstheyface. “We need to know what the potential cause of the loss is,and the effect of that loss.If you can identify the risk and exposure,then we can give a price that’s reasonable for the risk.This is a great opportunity for risk managers to help us develop bespoke solutions for their individual supply chain risks.” Cracknell,too,believes there is room for business development: “We’vebeenpartneringwitha numberofinsurersovertheyears,” hesays.“Clientstalkabouttheirtop tenrisksandinmanycasesanumber arepresentlyuninsurable. Thisgivesus theopportunitytonegotiatewithour insurerpartnerstoprovidearisktransfer solution. We’llthenwritethepolicy wordingandcreateanewmarket.” As Smith concludes:“Supply chain insurance could offer significant opportunities for the industry and benefits for customers.However, insurers will need to further develop the products available and this will require more data.” FURTHER INFORMATION For research, reports and studies on risk, visit Lloyd’s Risk Insight pages: www.lloyds.com/riskinsight There are lots of supply chain risks that haven’t been thought about, and products may not be entirely fit for purpose. with better data, insurers could offer more tailored cover
Market:Whatkeyriskshavebeenidentifiedbyyourbusiness? CliveClarke: Theoutlookfortheglobaleconomyand supplychainrisksareverymuchonouragenda,asarecyber andreputationalrisks.Changeimpactisalsoakeyconcern. Companiesareconstantlychangingandweneedtoensure ourskillsareuptodate.Inthemarineandenergyindustry, wehavetochangetosurvive;tostayleanandmean. SabineDesantoine: The financial and economic crisis is high on our agenda, with credit risk being a key issue that we monitor daily. To that I would also add increasing levels of regulation and the growing threat of cyber risks. We’re confident in our own security systems, but in the past few years there have been a number of hacker attacks targeting our clients’ systems. SabrinaHartusch:Asaglobal manufacturerandmulti-channel retailer,supplychainisoneimportant riskweface.Inthefashionindustry it’scrucialtobequicktomarket,and weoperateinsomanycountries. Qualitycontrolisanotherrisk,asitcan affectreputation.Andwe’veseenan increasingproblemwithfakeproducts. SD: Competition is a key risk for the banking sector. At ING we have seen competition get tougher – you need the right product, quickly, and it has to be interesting. Reputation is also becoming more important – in banking you need the trust of your clients. ChrisMcGloin::It’sinterestingthat theproductsmadebySabrina’sfirm areverydifferenttoourengineering softwareforrefineries,minesand nuclearplantsetc,butwefacesimilar risks,likesupplychain,product qualityandreputation. Havetheriskschangedoverthepastyear? CM: It’s not so much that the risks have changed, but the way they manifest themselves. Increasingly we see customers putting risk back on to us. 24 / Discussion iLLUSTRATIONs by danilo agutoli Words by stuart collins The world’s leading companies face an increasingly uncertain world. Every day they manage a complex number of threats to their businesses, ranging from natural catastrophes to cyber attacks and disruption to supply chains: risks that threaten their balance sheets and reputations. Market asks leading corporate risk managers about the implications of changing attitudes to risk, and what insurers and brokers can do to assist them in protecting their businesses… 25 Clockwise from top left: Sabrina Hartusch, Clive Clarke, Sabine Desantoine, Chris McGloin
26 / Discussion 27 SABRINAHARTUSCH isGlobalHeadofInsuranceat TriumphInternational,oneof theworld’slargestmultinational intimateapparelcompanies.She isresponsibleforinternationaland localinsurance,andisdeveloping thegroup’sriskmanagement function.Sheisalsoaboardmember ofSIRM,theSwissInsuranceand RiskManagementAssociation. CLIVE CLARKE is the Group Insurance Manager at Lloyd’s Register, which provides independent technical assurance to the energy and transportation sectors. He is responsible for the company’s global insurance purchasing, and is also a board member of Airmic, theUKrisk managementassociation. SABINE DESANTOINE is the Insurable Risk Manager at banking group ING in Belgium. She is responsible for insurance at ING in Europe and is a board member of BELRIM, the Belgian Risk Management Association. CHRIS MCGLOIN isVicePresidentofRisk Management&Insuranceat engineeringtechnologycompany Invensysplc.,responsiblefor drivingtheglobalenterpriserisk managementprogrammeand placingthegroup’sinternational insurance.HeisalsotheDeputy ChairofAirmic. Meet the panel Our experts from around the world bring vast experience to the discussion on corporate risk management SH:Risk and insurance management is also being formalised – it is becoming part of the DNA of the company. We see the board delegate risk accountability further down the management chain, encouraging more responsibility and accountability in the business. CC:Notonlyarerisksbeingidentified,butboardsare assigningownershipofrisk,andmakingresponsibilities clearintheriskregisterandreports.Andifthereisa changeinariskthatrequiresmitigation,theRisk Committeewantstobeabletoseetheoutcome–ifthe riskspersisttheywillaskwhymeasuresarenotworking. Sowe’reseeingfarmorevisibilityofriskinanorganisation. Doesthisformalisationofriskmanagementhaveimplications forinsurance? SD: In banking, risk management is well established by regulation – but what we are seeing now is the desire to match identifiable risks with insurance. So the board asks if there is a response from insurers to risks in the Risk Register. For me, the challenge comes when I am faced with the risk analysis and the scenarios developed by my colleagues. I have to check the insurance contract with the broker to see if we are covered, and that’s not an easy answer to give. CM:Theboardalsowantstoknowaboutblackswan scenarios.Theywanttoknowwhatcanbedonetoidentify them,mitigatetheriskandrecoverpost-event.Theyalso wanttoknowifwe’reinsured,andthere’salottheinsurance marketcoulddotoenablemetosayyeswithcertainty. Wouldyousaycompaniesarebecomingmoreriskaverse? SD: Since the financial crisis, governments, business and society are more aware of risk, but that’s not to say we’re more risk averse. We want to be aware, know about risk and be prepared. SH:Companiesarenotnecessarilymoreaverse,butthey arecertainlymoreliterateandconsciousofrisk. CC: If you’re not prepared to take risk then you are less likely to achieve and be successful. We work for major oil companies and I‘ve seen a step-change in recent years as they hand down challenging requests in contracts. If you can’t meet these requests then you’re no longer in the game. Companies that can take risks and mitigate them have a competitive advantage. As we get smarter at risk analysis, what may at first have been perceived as challenging may in fact be quite manageable. Whataboutproductinnovation? SD:Cyberriskisahottopicandwe’ve seensomenewproductsdeveloped. ButIdon’tseeasmuchproduct innovationininsuranceasI’dlike. Innovationofriskmanagementhas tocomefromtheindividualrisk manager–iftheyhavetheright personalitytheycandrivechange. Whatcaninsurersandbrokersdotohelp? SD:Iwouldliketoseethembemoreproactive, understandourbusinessandcometouswithnewideas andproducts.Forexample,wewouldliketoseegreater useofriskmapping,butwedon’tseethatcapabilityfrom manyinsurancebrokers.Irecentlyattendedabroker presentationwheretheytalkedaboutriskmappingand scenariosforcyberrisk.Thisisthetypeofservicerisk managersreallywant–wewanttohearthedifferent viewsofbrokersandinsurers. SH: Insurers are good at understanding the risks faced by sectors like pharmaceuticals and petrochemical, but I don’t feel they understand every industry quite so well. For example, I don’t think they understand the textile industry, how it works and how it’s all connected. Insurers need to develop their sector-specific expertise and be more open. CC:Informationgatheringisanotherareawhereinsurers couldmakelifeeasier.Theyrequirealotofinformation thatcanbeincrediblydifficulttocollectintherealworld ofbusiness.Iwouldliketoseeinsurersunderstandour businessmoreandthinkofdifferentwaystohelpassess risk,ratherthanjustkeepaskingthesamequestionsin proposalformsthatticktheircomplianceboxes.Iwould preferthemtothinkmorelaterally. CM:There’s a huge amount of data collected by insurers that could be played back to us to understand emerging and developing risks around the world. I think the industry is missing a trick in not doing that. And there’s also an awful lot insurers can do in the area of certification and legislation – by putting their heads together they could help us with a lot of the issues we have, which they do seem to recognise that they can do, and do well. SH:Wealsoseecustomerslooking toputriskbackontousthrough contractsandoutsourcing–especially inbusinessinterruption,property damageandliability,wherecompanies pushtheriskbackandforth. Arecompanyboardsbecomingmore involvedinrisk? CM: There’s more engagement and interest in risk from the top level – from both executive and non-executive board members. We now even have senior executives asking to join our risk committee. I have to compile a report for the risk committee and board on the top risks, how they’re changing and which ones are emerging – and develop a process to track and respond. CC:Weincreasinglyseecompanies establishriskcommitteesandrisk reportingtotheboard,whichdrives moreawareness.Boardsnowrealise theirresponsibilitiesmore,andare moreinclinedtoaskdetailedquestions –whichflowsbackintothebusiness. “riskandinsurance managementis beingformalised– itisbecoming partofthedna ofthecompany” sabrina hartusch Key Take-outs Insurers should understand disparate businesses and develop client- and sector-specific expertise – client discussion forums could help Insurers could help businesses to better understand emerging and developing risks globally Insurers could simplify the informationgathering requirements – plus they could respond more quickly in the event of damage to a business “iwouldliketosee insurersunderstand ourbusinessmore andthinkofdifferent waystoassessrisk… Iwouldpreferthemto thinkmorelaterally” Clive clarke
Largeclaimsaresaidtocauserisk managerssleeplessnights.Whatwould giveyouamorepeacefulsleep? CM:Whatalotofclientswantis certaintyofclaimspayment.Ifwe haveabiglosswewanttobeableto bookthatasrecoverableandtakethe benefitoftheclaimwithouthavingto waitthreeorfouryearsforalawyeror anadjustertomakeadecision. CC: Chris has a valid point. It can break a risk manager’s career if cover does not result in a claim being paid due to the small print or the complexity of the insurance structure. The amounts at stake are huge. When there’s enough money on the table, insurers sometimes look to wriggle and this devalues the product. SH:I’vehadverygoodexperiencesonstraightforward claims,butI’vealsohadsimilarexperiencestoCliveand Chris.Insurersemphasisepartnerships,butattheendof thedayI’maclientandIwanttobetreatedasaclientofa servicecompanyandnotmistrusted.Insurersshouldbe clearer,sticktotheirwordandbelievetheclient–it’sin bothourintereststogetbackupandrunningasquickly aspossiblefollowingaloss. SD: I agree. The question I’m usually asked first by senior management is whether we’re covered by insurance and the amount of indemnity. The board wants to see the results of risk analysis borne out by reality and get the indemnity we expected. It’s important if you have a claim that you have a quick answer to the question: are we covered? We need fast confirmation of coverage and indemnity. CC:Insurersarepartnersthattakeinsuranceriskoff thebalancesheet.Soifastorm,floodorfirecauses damagetomybusiness,weexpectthecontracttostand upandhelpgetusbackintobusiness.Ifinsurerswrote simplerpolicies,butchargedabitmoremoney,that wouldmakemehappier. Howcaninsurershelpyoudemonstratethevalueofaproduct totheboard? SH: Insurance helps to support business activities and is an enabler of business – for example, it can provide some comfort when entering a new market. It gives peace of mind that everything has been looked at from a risk perspective. CC:Thevalueofinsuranceisprovenwhenthere’sa claim–that’stheultimatetest.Theboardwantsassurance thatwhatseemslikeasimpleconceptworksinpractice. We’veallhadbadexperiencesofpersonallinesinsurance, sothere’sabuiltinsuspicionoftheinsuranceindustry. Theproductshoulddowhatitsaysonthetin. CM: Insurers and underwriters are good at sitting with clients to carry out scenario analysis. But they could do more to provide clarity of intention and help us demonstrate that certain scenarios are covered under the contract. FURTHER INFORMATION Read the Lloyd’s Risk Index 2011 at www.lloyds.com/riskindex 28 / Discussion “iattendedabroker presentationwhere theytalkedaboutrisk mappingandscenarios forcyberrisk.Thisis thetypeofservicerisk managerswant” sabine desantoine UK film indUstry words by helen yates 29 espite tough conditions, UK film continues to attract investment. The sector contributes over £4.6bn to UK GDP, with the overall picture one of long-term growth and job creation. Pinewood Shepperton Studios, the UK’s biggest film studio and home to the 007 films, had a good year in 2012 with the release of Skyfall. The latest James Bond movie broke UK box-office records after grossing over £94m from ticket sales in 40 days, beating previous record holder Avatar, which made £94m in 11 months. Pinewood, which returned to profit in 2012, has announced plans to build a new 45,000 square foot studio, including a new sound stage. All of this spells opportunity for insurers. With its big budgets and tight schedules, the film industry relies on its insurance backers to safeguard their investment. “On the larger-scale US studio movies, being covered is vital for the process of the film and the peace of mind of those involved,” saysShaunEmery,ClientServicesAdviser,AonRiskSolutions. Big-budgetUSproductionstypicallyrangebetween$80m and$140m,accordingtoEmery.Avatarisoneofthemost expensivefilmsmadetodate,withafinalfigureof$280m. ThePiratesoftheCaribbeanmoviesandSpider-Man3also brokepreviousrecords. “There still seems to be a theme of tried and tested,” says Emery. “Studios are quite good at remakes of films that have made previous good grossing at the cinema, and you have things like Marvel comic books, with characters that are already established and well-known. But investors are still a bit cautious about funding high-budget special-effects movies without pre-established characters or remakes.” In the UK, films tend to be more character-based, with more dialogue and fewer special effects, making them cheaper to produce. The ratio of studio filming to location filming can make a big difference to overall risk. “It could be an exotic area, a war zone, a remote location, and this will affect the risk and premium alike,” says Emery. There are numerous exposures associated with shooting a film, but key risks revolve around stop dates and key artists. “The slightest delay to filming, or knock back as a result of an artist, a location or weather-related issues, can seriously jeopardise a film,” says Emery. Typical film insurance products include producers’ professional indemnity, essential element cast coverage, errors and omissions cover, product liability, employers’ liability, and political risk and kidnap and ransom covers. Film completion bonds are often taken out to guarantee a movie will be finished, typically for non-studio backed films. Technologyhashelpedremovesome oftheriskassociatedwithbig-budget productionsthankstotheincreaseduseof computer-generatedimagery.“It’staking theriskoutofstunts,therearelotsofgreen rooms,hydraulicsandwires,”saysEmery. “It’sallalotsaferthesedays–thatgives underwriterspeaceofmind.Everything usedtobe35mmfilmingandnowwe’re inanHDdigitalenvironmentwhereit’s easiertoinstantlyback-updailyrushes andrawmaterialtoduplicateformats.” d Coverage is crucial for blockbuster movies. And growing investment in UK film spells opportunities for insurers riskybusiness FURTHER INFORMATION The Lloyd’s market has recently launched its first combined film insurance cover. Find out more at www.lloyds.com/filminsurance daniel Craig’s latest, action-packed James Bond adventure, Skyfall, was a box-office smash-hit image:c.colpics/everett/rexfeatures
30 flood risk / 31 words by richard willsher and stuart knott illustration by tang yau hoong Openingthefloodgates The increase in catastrophic flood events around the world is forcing the insurance industry to re-examine how it assesses flood risk t’s hardly the stuff of Waterworld or the apocalyptic 2012.We probably won’t be consigned to roaming the high seas on vast arks anytime soon.But the world over we are clearly seeing an increase in the number of catastrophic flood events,with both human and economic consequences.For the insurance industry,this global deluge and the accompanying exposures are forcing a re-examination of how flood risk is assessed – requiring access to more and better data,and cheaper,faster,more refined predictive modelling.Fortunately,thanks to the links being forged between the market and leading academics,through initiatives like the annual Lloyd’s Science of Risk prize,these leaps forward are already taking place. the tide rises Anecdotally,it appears the world is getting wetter. Witness Superstorm Sandy,which battered the eastern seaboard of the US and dominated newspaper headlines for weeks – or the recent UK floods.Then factor in the science.According to findings published in the journal Nature in February 2011,greenhouse gas emissions and the steady increase in temperatures they cause are making extreme rainfall events in the northern hemisphere more common.This man-made climate change may have almost doubled the risk of the wet weather that saw the Hampshire village of Hambledon submerged for six weeks in 2000 and cost the UK £1bn. Sea levels are also rising at an increasing rate – faster,in fact,than the projections released by the UN Intergovernmental Panel on Climate Change in 2007.Studies show that,whether through loss of land-based ice or thermal expansion caused by the warming of the oceans,levels have been rising at a rate of around 3mm annually since 1992,versus the 1mm to 2.5mm per year from 1900. Lloyd’s2012report,ArcticOpening: OpportunityandRiskintheHighNorth,reveals thatinSeptember2011,themonthwhenArctic seaiceistypicallyatitslowest,icecoveragefell toalowof4.33millionsquarekilometres–some 2.38millionsquarekilometreslessthanthe 1979–2000average.Accordingtoanewpaperin Science,AReconciledEstimateOf Ice-sheetMass Balance,themeltingofpolarseaicealonehasadded 11mmtoglobalsealevelsoverthepasttwodecades. And don’t forget the myriad of other atmospheric and geological events that come into play – from storm surges,high-intensity winds and El Nino Southern Oscillation Cycles to earthquakes and local factors,including river flow. Whatever the cause,the disasters that ensue tend to affect similar types of geographies. Coastal and low-lying regions are particularly at risk of flooding,as are areas where vast numbers of people and their economic activities are located. Research carried out in 2000 by the International Institute for Environment and Development calculated that low elevation coastal zones fewer than ten metres above sea level contain 2% of the world’s land,but around 10% of its population. feeling exposed The effects of flooding can be devastating. Beyond the horrific human toll,2011 was,says Swiss Re,an unprecedented year in which“natural catastrophes cost the global insurance industry roughly US$110bn”.And flood loss potential,it points out in its report,Natural Catastrophes and Manmade Disasters,“can be just as high as that of earthquakes and storms”– traditionally the major sources of exposure.The flooding inThailand that triggered US$12bn in claims,it concludes,is “a painful reminder that given the high risk of flooding in many countries,other parts ofthe globecouldbepronetosimilarlyhighlosses”. I
32 / flood risk 33 Which is perhaps why insurers are increasing the amount of flood cover they are writing throughout the world,particularly in emerging markets.“Because we are insuring in more places, the insured population and insured property is far greater than 20 years ago,”explains Mohammad Khan,who leads the Personal and Insurance Lines actuarial practice at consultants PwC. “For insurers,the issue is knowing what your exposure truly is.”He refers to theThai floods, where many of the insured losses stemmed from Thai risk that had been covered in policies written for Japanese multinationals with manufacturing and other operations in the Bangkok area. “This experience clearly shows that globalisation and internationalisation lead to a higher degree ofcomplexityintheworldeconomy,”writesClaudia Hasse,ChiefPropertyUnderwritingOfficerat MunichRe’sCorporateInsurancePartner. “Supply chains are often global and increasingly difficult to keep track of.For the insurance industry, this means a major lack of transparency in terms of risk exposure,thus increasing the challenges for accumulation management.” the super models This is far from the only problem confronting insurers,however.Although modelling flood behaviour is nothing new,the models themselves can be inadequate – though they are getting much better.Research by Professor Richard Dawson of Newcastle University,one of this year’s winners of Lloyd’s Science of Risk prize,has demonstrated how a wide range of factors can influence the analysis of the risks associated with flooding and cliff erosion – in the context of threats from rising sea levels,and increases in the frequency and intensity of storms. Together with colleagues from theTyndall Centre for Climate Change Research,Dawson developed an integrated assessment system that couples simulations of climate change projections, coastal hydrodynamics,coastal morphology,flood defence reliability,inundation and land use change – which in turn enables a variety of flood scenarios to be compared quantitatively for the first time,in terms of changes in expected annual damage. Although the research focused on the Happisburgh area of Norfolk in the UK,it is applicable to any flood risk area in the world. And with increasingly rigorous data collection and analysis in high-risk areas, such as those in low-lying and high population coastal centres in emerging markets, Dawson’s work can enable better management of flood risk,preservation of life and property,and limitation of related insurance losses. “By understanding some of the interconnected processes,”says Dawson, “we start to appreciate that flood protection is not just about building the biggest dyke possible.There are other ways of working more subtly with nature and natural processes rather than trying to tackle nature head on and fighting it with a wall.” Meanwhile,one of Dawson’s fellow Science of Risk prize winners,Professor Paul Bates of the University of Bristol,has developed algorithms that increase the accuracy of flood risk models. His work has enabled risk analysts such as RMS, Ambiental,HR Wallingford and Willis Re to produce models down to the accuracy of single buildingsinagivenlocationandrunfloodscenarios 1,000 times faster than previous models could. “You can view the benefits of our research on a number of levels,”explains Bates.“There’s a benefit to flood risk analysts because it will enable them to produce more accurate models and save a great deal of time and money.There is a benefit to the insurers in terms of better risk management for insurance and resinsurance companies. The general public will be able to buy the correct amount of flood insurance. Government maps will be better,so property purchase decisions can be improved. And finally,if a flood does take place,then the emergency services will have better,more accurate tools at their disposal to address the problem.” playing catch-up with data Both Bates and Dawson believe that as available data becomes more detailed and more widely sourced,the ability to model and predict extreme flood events – at a much lower cost – will be greatly enhanced.Dawson explains that,even in the UK,which is relatively data rich compared with many other countries,sufficient information can be hard to come by.But he is optimistic that as new types of data emerge from disparate sources,opportunities will expand: “Data is becoming cheaper and easier to acquire.There are gaps,but even in countries where you might not expect so much data,such as African nations with very few resources,you can still do something with the coarser data being collected on the ground.For example, in some places,communities are mapping their own areas – like the slums of Nairobi.” Michael Maran,Chief Science Officer at Catlin,the specialist property/casualty insurer and reinsurer,concurs.“We’re playing catch-up with nature.The increase in available data is something we want to encourage…and we are certainly going to get more data and more scientific input over time so that we can make a better assessment of each individual risk. This is not only in our interest,but also that of our clients.As the risks themselves evolve – through,for example,climate change – we are going to have to adapt our models and our pricing.But the aim is to understand the risks and price them fairly for our clients.” So as insurers push out into new territories, understanding flood risk and related probabilities of catastrophic events is the major global challenge. But knowing where exposures are and quantifying them accurately when providing cover is also a significant concern.Flood threats know no boundaries – so to limit control and manage their risks,insurers require more and better data,and better scientific tools than they currently have at their disposal.Tools borne out of initiatives like Lloyd’s Science of Risk prize. Launched in 2010, the annual Lloyd’s Science of Risk prize reflects the need to understand, reduce and manage risk that has always been the lifeblood of the Lloyd’s market. This year’s two prize categories were climate change and natural hazards. In the climate change category, Professor Richard Dawson, Chair of Earth Systems Engineering at Newcastle University and a co-leader of the Tyndall Centre’s Cities & Coasts, won for his pioneering work in the complex analysis of the risks associated with flooding and cliff erosion. The natural hazards prize was won by Professor Paul Bates, Professor of Hydrology and Director of the Cabot Institute at the University of Bristol. His work on algorithms used to power flood risk catastrophe models enables analysts to make more accurate flood predictions quicker and more cheaply. The benefits that such scientific research can bring to the insurance and reinsurance markets are considerable. If, for example, the research of this year’s prize winners can enable improved preparation for and responses to catastrophic flood events, then the cost in terms of human suffering and economic and insured losses may be significantly reduced. Harnessing the latest scientific techniques and tools is in the interest of all who use and work in our market. And the Science of Risk prize is a small encouragement to those who can help us do so. lloyd’s science of risk prize 8,000 years The time elapsed since the extent of Arctic sea ice was last as low as it was on 8 September 2011. (Lloyd’s 2012 ‘Arctic’ report) 150 million The number of people that could be exposed to a one-in-100-year coastal flood event by 2070. The financial impact of this could reach US$35tn. (OECD) US$108bn – $125bn The estimated economic losses associated with Hurricane Katrina in 2005. Latest estimates for Superstorm Sandy are in the region of US$50bn. (Various sources) US$12bn The value of insured claims triggered by floods in Thailand in 2011. “More than three times the size of any other insured loss of its kind in history.” (Swiss Re) 1.69 million The number of people displaced by the December 2004 Indian Ocean tsunami, triggered by an undersea earthquake off the coast of Sumatra. It is estimated to have killed 230,000 people in 14 countries. (US Geological Survey) flood risk… in numbers FURTHER INFORMATION To find out about the annual Lloyd’s Science of Risk prize or to enter visit www.lloyds.com/scienceofrisk Read the Lloyd’s report, Arctic Opening: Opportunity and Risk in the High North, at www.lloyds.com/ArcticReport2012 new research enables a variety of flood scenarios to be compared quantitatively for the first time, in terms of changes in expected annual damage as data becomes more detailed and widely sourced, the ability to model and predict extreme flood events at a much lower cost will be greatly enhanced
AustrAliA AdrianHumphreys General Representative, Australia +61 (0)2 9223 1433 adrian.humphreys@lloyds.com  BrAzil MarcoCastro Managing Director & General Representative, Brazil + 55 (21) 3266 1900 marco.castro@lloyds.com  CAnAdA SeanMurphy President & Attorney in Fact, Canada +1 416 360 1512 sean.murphy@lloyds.com  ChinA EricGao General Representative, China +86 21 6162 8200 eric.gao@lloyds.com  hongKong KimSwan General Representative, Hong Kong +852 2918 9911 kim.swan@lloyds.com  JApAn IainFerguson Representative & Chief Operating Officer, Japan +81 (0)3 5656 6926 iain.ferguson@lloyds.com  northerneurope BennoReischel Head of Northern Europe +44 (0)207 327 5327 benno.reischel@lloyds.com  singApore KentChaplin Head of Asia Pacific, Lloyd’s Asia +65 6538 7088 kent.chaplin@lloyds.com  southern&eAsterneurope,&AfriCA EnricoBertagna Head of Southern, Eastern Europe & Africa +39 026 378 8820 enrico.bertagna@lloyds.com  uK/irelAnd KeithStern UK & Ireland Regional Manager +44 (0)207 327 5933 keith.stern@lloyds.com  usA HankWatkins President of Lloyd’s America +1 212 382 4060 hank.watkins@lloyds.com www.lloyds.Com/lloyds/offiCes steAdfAst2013,AustrAliA 6-9 April, Sydney Lloyd’s will be jointly hosting a stand with Arch, Newline and Markel International at Steadfast this year. Steadfast is Australia’s largest broker cluster group facilitating over $3bn of premium per annum, the majority being SME business. This annual event typically attracts over 90 exhibitors and 2,500 attendees. For more inFormAtion About lloyd’S preSence At the event: adrian.humphreys@lloyds.com lloyd’sAllislAnd renewABleenergy ConferenCe, irelAnd 18 April, belFASt Withunprecedentedfocusandinvestment intherenewableenergyareaacrossIreland andtheUKatpresent,thisone-day conferencewillshowcasethespecialist insurancecapacityandexpertisetheLloyd’s markethastooffertoahigh-profileindustry audience.Mediatedpaneldiscussions willfollowkeynotespeakersfromthe finance,planning,legalandinsurance sectors,withopportunitiestomeet invite-onlystakeholdersfromthelocaland internationalrenewableenergyindustry. For more inFormAtion: eamonn.egan@lloyds.com rims,usA 21-24 April, loS AngeleS Lloyd’s will be attending RIMS this year in Los Angeles with over 80 underwriters and brokers from the Lloyd’s market. For more inFormAtion on the lloyd’S networking reception And exhibition StAnd: mac.castro@lloyds.com RobertHiscox Chairman, Hiscox Ltd. Robert Hiscox stepped down as Chairman of Hiscox Ltd. in February. He led the company since 1970, during which time it grew from a London underwriting agency to become a global insurance group. Robert Childs, who has worked at Hiscox since the mid-1980s and was formerly its Chief Underwriting Officer, succeeds him as Chairman. NickMoss Finance Director, RFIB Holdings International Lloyd’s broker RFIB Holdings has appointed CMC Markets Chief Financial Officer, Nick Moss, as Finance Director. Prior to his four years at CMC Markets, Nick gained experience in the insurance broking sector from his six years as Head of Group Finance for the Benfield Group. He has also held senior positions at Old Mutual and PwC. MikeReid &RichardFoster Respectively: Divisional Director for Specialist Liability, and Head of Global Open Market Property (US and International), Brit Group Brit Group has made two new senior appointments. Mike Reid joins as Divisional Director for Specialist Liability from ACE, where he held numerous senior underwriting positions, including Casualty Manager for the UK and Ireland. He will have responsibility for the management and strategic direction of Brit’s UK and International EL/PL account. Richard Foster, previously a Senior Property Underwriter with Channel Syndicate, has joined Brit to grow its open market property portfolio. Richard joined Channel in 2011 having moved from Zurich, where he was Head of International Property. gloBAlContACtseventsmArKetmovers 35 34 / HERITAGE hortly after 7am on 6 August 1926,Gertrude Ederle,smeared with grease and lanolin, waded into the English Channel at Cape Gris-Nez,France,dived into the water and headed for England. Born in NewYork in 1905,Ederle was well equipped for the energy-sapping challenge.One of the greatest swimmers of her generation,she had set numerous world records.In a single afternoon in 1922,she’d broken seven records at Brighton Beach,Brooklyn;and between 1921 and 1925 she held 29 amateur national and world records.Along with JohnnyWeissmuller,she was also a member of the successful US swimming team at the Paris Olympics in 1924. But swimming the English Channel was a real test of strength and endurance.Since 1875,only five men had successfully completed the crossing.For many others,the 21-mile journey through cold,choppy waters,changeable weather,and stinging jellyfish had proved too much. Indeed,Ederle’s first attempt 12 months earlier ended after nine hours when her coach believed she was in distress and went to help her. Ederle was resting,but the interventionsawherdisqualified. By 1926 she was back,this time with new coachTom Burgess – the second person to have swum the Channel. So,what were her chances? On the one hand,the Channel had defeated many great distance swimmers,and her coach Burgess had tried 15 times before succeeding.On the other,Ederle had set a strong,fast pace the year before. Judging these factors was brought into perspective for Lloyd’s when Ederle’s father,Henry,decided to back his daughter.Once known for taking the odd gamble,even in the first quarter of the 20th century,Lloyd’s set Ederle a premium of £293:10shillings.In the event his daughter swam the Channel before 31 December 1926,he would get a return of £1,863:10shillings. Despite an arduous crossing,in which she had to swim an indirect path, Ederle arrived in Kingsdown,England in 14 hours 31 minutes,beating the men’s record by nearly two hours. Remarkably,she swam more than 35 miles due to the winds and currents. Ederle’s crossing challenged the perception of female athletes and inspired generations of women to take up sport.In an era when female athletes were only just starting to be taken seriously,her achievement was a significant milestone that captured the public imagination.On her return to NewYork,she was greeted by a two million-strong parade,starred in a film and toured as a professional swimmer. Star American swimmer Gertrude Ederle walks into the chilly waters of the English Channel at Cape Grez-Niz, France in 1926 thegirlwhoswam againstthetide In 1926, a young American woman swam the English Channel and beat the existing men’s record by nearly two hours – securing a princely return of £1,863 on her Lloyd’s premium gertrude ederle S INSURING RECORD BREAKERS In 1973, legendary American racehorse, SECREtARIAt, won the Triple Crown – setting records in all three races. Retired for stud duties, Secretariat was insured for around $10m against failing a fertility test. Lloyd’s insured the supersonic thRUStSSC that set a new world land-speed record of 763 miles per hour in 1997. Personal accident cover for the driver, Andy Green, was also placed at Lloyd’s. Seven-time Formula One world champion MIChAEl SChUMAChER was insured through Lloyd’s. The market paid out in 1999 when he broke his leg and couldn’t race. image:getty
Lloyd’s One Lime Street, London EC3M 7HA Telephone +44 (0)20 7327 1000 Fax +44 (0)20 7626 2389 www.lloyds.com

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Market_Issue_Spring2013

  • 1. vincent vandendael on plans for growth p16 demystifying supply chain complexities p20 the evolution of corporate risk p24 exploring flood models of the future p30 Inside: the rise and rise of mexico p10 spring 2013 WWW.lloyds.com
  • 2. 03 coverstory:mexico Fuelled by a growing and increasingly diversified economy,Mexico offers exciting opportunities for foreign insurers1016 interview with… vincent vandendael We talk to Lloyd’s new Director, International Markets about his ambition to expand into new territories 20 shaping stronger links in the supply chain Unravelling the complexities of global supply chain ecosystems 24 risk managers’ round table Four corporate risk managers discuss changing attitudes to risk and what insurers can do to make their lives simpler 05 introduction We welcome you to Market magazine and reveal this issue’s features 18 infographic The consequences of the 2011 flooding in Thailand for global industry 35 market update Upcoming events, movers in the Lloyd’s market and international contacts Features Regulars spring 2013 www.lloyds.com 29 risky business The UK film industry is booming off the back of movies like Skyfall – which is great news for the market 30openingthefloodgates How the Lloyd’s Science of Risk prize is helping to promote innovation in predictive flood modelling 06 globalinsight News from around the world,including: the shift to Liquefied Petroleum Gas across Africa;the impact of 3D printing on manufacturing,the supply chain and liability;how new nuclear safety directives could lead to compulsory insurance for nuclear risks;why the future is bright for China’s liability market;and debunking the Hollywood take on international art theft gertrude ederle The first woman to swim the Channel34 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 ServicesAuthority.© Lloyd’s 2013. Spring 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 PAtrICk GeorGe Supplychain page 20
  • 3. t’s been a tumultuous six months for the insurance industry,where total reported losses from Superstorm Sandy reached nearly $20bn earlier this year. The longer term picture is encouraging,however,with GDP predicted to rise in both developed and developing markets.The World Economic Forum estimates that developing markets alone will account for around 70% of global GDP growth by 2030. InthelatestissueofMarketmagazine, welookatoneof theseburgeoningpowerhouses:Mexico.Alreadythelargest contributortoLloyd’sLatinAmericabusiness,thisthriving economyneverthelessremainsunderinsuredandpromises plentyof potentialforgrowthacrossdiversesectors(page10). We also talk to the man spearheading the market’s expansion into new territories – Lloyd’s recently arrived Director, International Markets,Vincent Vandendael – about his roadmap for the future (page 16). In our round table debate,meanwhile,four experienced corporate risk managers come together to discuss the evolution of corporate risk,the implications of changing attitudes to risk at board level,and what insurers and brokers can do to help them better protect their businesses (page 24). Finally,wegettogripswiththecomplexitiesofglobalsupply chainecosystems(page20)and explorehowanincreasein catastrophicfloodeventsisforcinginsurerstoinnovatecheaper, fasterandmorerefinedpredictivemodels(page30). 05 @LloydsofLondon www.facebook.com/lloyds www.lloyds.com I Order a copy of the 2013 edition of this unique guide, containing key facts and figures about the Lloyd’s market, published in May 2013. The guide includes a summary of financial statements and the historical performance of all active syndicates, plus detailed statistics on capacity, premium income, claims, loss ratios, and much more. Pre-orderyourcopytodayorfindoutmoreat www.lloyds.com/stats StatisticsRelatingtoLloyd’s 2013edition–ordernow
  • 4. Foresight Discover more about the UN and World Bank-led Global LPG Partnership: www.bit.ly/LPGpartnership FollowCelent’sinsuranceblogcovering3D printingandotheremergingtechnology: www.insuranceblog.celent.com insights From the world of lloyd’s. by the market, for the market 07 africa The impact of 3D printing on manufacturing, the supply chain and liability promises to be profound In the future, when a major event threatens global supply chains, the ability to print three-dimensional objects could provide the answer. The floods in Thailand in 2011 had a big impact on the computer industry, as factories that produce hard drives were inundated with flood water and alternative suppliers were thin on the ground. But in years to come, 3D printers could simply step in to fill the gap, producing the component parts needed to keep up with demand. In essence, the technology is additive. It only uses materials required to build the item a molecule at a time, rather than taking raw materials through a traditional manufacturing process that produces by-products and waste. Because 3D printing allows objects to be created and duplicated quickly and easily, anywhere in the world, it also removes many of the costs of manufacturing and distribution. This turns the idea of economies of scale on its head. Anyone with access to the technology and open source software, which offers an array of 3D designs, can generate unique one-off items without needing any particular skills. Beyond thermoplastics and metallic powders, the additive technology can even use living cells to print items. And the possibilities for sectors such as healthcare are compelling, particularly in the area of organ transplants, where surgeon Antony Atala has demonstrated the printing of a human kidney. As with any major new technology, there are challenges. The ability to duplicate popular merchandise raises the issue of copyright theft. The impact on manufacturing and supply chains promises to be profound. Production, the movement of goods, manufacturers’ liabilities and consumption of goods will all change. But as yet nobody can predict just how. Craig Beattie Insurance Analyst, Celent lloyd’s report analyses factors behind rising cost of wreck removal Costa Concordia is the most memorable wreck of late, but is only one example of numerous wrecks that need to be removed each year. Wreck removal is becoming increasingly expensive and to investigate why,Lloyd’s has brought together experts to analyse the main factors behind the rising cost of wreck removal. Lloyd’s is holding an event to launch the report on 21 March 2013.To find out more or read the report in full visit: www.lloyds.com/wreckremoval Lloyd’s shop Visit the Lloyd’s shop online or visit One Lime Street for quality business and personal accessories.From iPad cases to pens and postcards,there is a wide range to choose from. www.lloydsshop.com sign up to receive lloyd’s market magazine today Did you know you can download the latest edition of Market magazine from lloyds.com? Or sign up to receive a physical copy?You can even have a PDF version delivered to your inbox. However you choose to receive the magazine,we’d love to get your comments,with a view to including them in future issues. So please do drop us a line at marketmagazine@lloyds.com. It would also be useful to get your feedback on the style of Market magazine,and we’d appreciate it if you could take a minute to complete our online survey.To download your copy of Market, sign up to receive a physical or PDF version,or access our online survey,visit: www.lloyds.com/ marketmagazine North America Thefuturein3D The shift to liquefied petroleum gas across africa will require significant insurance support Most Africans use kerosene or traditional fuels like wood or charcoal for cooking,all of which have a negative impact on health and the environment.Growing demand for wood and charcoal is blamed for deforestation across Africa – putting additional pressure on agriculture and driving a food crisis – while indoor smoke is the second biggest cause of death after HIV/Aids in many African countries. Using other developing countries as a model,the UN and World Bank have launched the Global LPG Partnership to roll out Liquefied Petroleum Gas (LPG) to 50 million people across Africa by 2018.LPG is a more sustainable cookingfuel,andiseasilyandcheaplytransportedincylinders. AsanLPGsuccessstory,Indonesia’sapproachisamodelthat willbeusedforAfricancountries.TheIndonesianGovernment introducedanationalprogrammewithpublicandprivate sectorfundingasanalternativetothekerosenesubsidyand, coordinatedthroughthenationaloilcompany,itconverted 200millionpeopletoLPGinthreeandahalfyears. Three billion people are already using LPG successfully, mainly in poorer countries,and the International Energy Agency wants a further 1.2 billion to move to LPG by 2030 – Africa will be a key focus of these efforts.This will mean a significant increase in physical and economic activity, including shipping of LPG from producing countries such as Qatar in the Middle East to African importing countries. Expansion of LPG across Africa will require insurance support,but is not without its challenges.Questions remain over who will be liable for any harm or damage resulting from cylinders.Political stability is also an issue for insurers, who may be reluctant to provide cover in countries where there is upheaval.The countries selected for the first phase of expansion are largely stable,have good legislation in place and viable distribution models. Christine Eibs Singer Co-Founder and former Chief Executive Officer of E+Co Alex Evans Chairman of the Operating Committee of the Global LPG Partnership
  • 5. 09 Visit the European Commission’s site on Nuclear Safety: www.bit.ly/EUnuclearsafety FormoreonSwissReSigma’s2012studyon theglobalcommercialinsurancemarket: www.bit.ly/chinaliability Foresight Occasionally, art heists are the stuff of Hollywood movies. Check out these 10 amazing thefts: www.bit.ly/arttheft high-profile art thefts are rare, but do happen. and underwriters have a part to play in recovering lost works TheRotterdamartheistsawthievessteal sevenmasterpiecesinOctober2012– includingvaluableworksbyPicasso,Monet, Gauguin,MatisseandLucianFreud.And yet,despitethepopularbeliefthattheftisthe majorperilforartandspecie,itaccountsfor justathirdofclaimsoverallandmanyof thesearelow-level.Risingartvalueshave increasedinterestandpublicityaround high-profileartthefts,butthelevelofcrime itselfdoesnotappeartobeincreasing. Ahighnumberoftheftclaimsarefor artworksstolenfromcommercialgalleries, privatecollector’shomesortakenfrom publicplaces.Notalltheftsarethestuffof Hollywoodmoviesthough. Onerecent trendhasseenthetheftofpublicsculptures fortheirscrapmetal,whichissadlyoften onlyafractionoftheirvalueaspiecesof art.RecentlysnatchedHenryMooreand BarbaraHepworthartworksarethought tohavebeentakenforthisreason. Thereisaschoolofthoughtthatworksare stolentoorderfordishonestcollectors,but thisisunusual.Morelikely,theyareusedby criminalgangsascurrency.Orthetheftsare opportunistic,committedbyunsophisticated criminalsduetoagapinsecurity. Artandspecieunderwriters,whocould beaskedtoinsureapieceontheArtLoss Register,haveanimportantroletoplayin helpingtorecoverstolenartworks,which oftenreappearatsomepointinthefutureas theyaresoidentifiable.EdvardMunch’s TheScreamwasstolen,alongwithanother ofhisfamouspaintings,Madonna,in August2004.Insuredfor$141m,theywere recoveredtwoyearslater.InMay2012,The Screamsoldforarecord£75matSotheby’s. Giventhevastnumberofmasterpiecesheld incollectionsbynationalmuseums,galleries orlibrariesaroundtheworld,theincidenceof theftisrelativelysmall.Thedifficultytheyface isstrikingabalancebetweensecurityand providingaccessintheirroleascustodians. Insurerscoveringprivatecollections usuallywanttoinsurethetotalvalueatrisk. Premiumscanbemoreeconomicforsuch collectionsasthevaluesareoftenlowerthan museumcollections, withlittleornopublic access.Collectorsareencouragedtohave theirartworkrevaluedeverythreeyears. Robert Korzinek Fine Art Underwriter, Hiscox Ltd lloyd’s market intelligence toolkit offers tailored analysis Do you want tailored analysis of the world’s insurance industry from a geographic perspective? Our Market Intelligence toolkit includes: Compare Countries, with high level statistics for the economy, insurance market and Lloyd’s business, and regional heat maps illustrating key indicators for quick strategic overviews; Country Profiles, providing individual summaries for Lloyd’s key territories; Market Presentations, containing local insights offered by Lloyd’s Country Managers on opportunities and challenges in their markets;Class Review, which compares Lloyd’s business with its competitors in key territories,broken down by specialty class of business; and Country Roundup,which enables market participants to stay up to date with Market Intelligence news and events that regional offices want to highlight. For more information visit: www.lloyds.com/ marketintelligence dow jones news feed – easy access to news A Dow Jones news feed is available on Lloyds.com. It gives you access to news from across the globe that you can filter by country and news category – general,insurance and natural disaster/weather. www.lloyds.com/dowjones Lloyd’s online Also,don’t forget to regularly check our online content,find us on Facebook and follow us on Twitter to keep up to date with what’s happening in the Lloyd’s market and wider industry. www.lloyds.com europe newnuclearsafety lawsdrafted liability is one area of untapped potential in china’s thriving commercial insurance market China’scommercialinsurancemarket hasgrownanaverageof32%everyyear since2000tobecometheworld’sthird largestmarket,accordingtoSwissRe Sigma.Butexcludingmotorbusiness,it wouldslidetoseventhpositionglobally. TheChinesepropertyandcasualty marketoutpacedGDPexpansion forthetenyearsto2010,growingto $59bn.Totalinsurancepenetration, asapercentageofGDP,wasat3%in 2011,downfrom3.7%in2010. With its high-growth economy and increasing insurance penetration, it is likely motor will dominate for some time.Commercial motor business constitutes around 65% of total commercial premium volume ($31bn,according to Sigma).Liability accounts for just 6%.But as Chinese corporations become more international in their outlook it will trigger a more mature approach to risk management.As one of the world’s biggest exporters,the influence of regulation in markets such as the US and Europe is likely to drive take-up of covers such as product liability. Myviewis,everyoneiswaitingfor casualtyliabilityandfinanciallines productstotakeoffinChinaand therestofAsia.Abigdriverwillbe regulationandwhetheritcankeeppace withthegrowthinthesemarketsby introducinglegislativeframeworksto properlygovernsomeofthepotentially largeclaimareaslikedirectorsand officersandprofessionalindemnity. David Phillips Chief Operating Officer of JLT Re Asia asia EU operators could face compulsory insurance for nuclear risks While European nuclear power plants generally have high safety standards, EU Energy Commissioner Günther Oettinger supports tougher insurance requirements for nuclear operators. A revision of the nuclear safety directive is expected in early 2013, with amendments focusing on safety requirements, the role and powers of nuclear regulatory authorities, transparency and monitoring. This will be followed by proposals to extend liability conditions and compulsory insurance for nuclear risks. Owing to the rare but high loss potential associated with nuclear risks, it is unavoidable that – in addition to the insurance industry – the operators of nuclear power plants and the State continue to be involved as risk carriers. Torsten jeworrek Member of the Board of Management at Munich Re europe
  • 6. 10 / mexico Part three of a three-part series on emerging markets words by roxane mcmeeken 11 exico is a land of diversity.In Oaxaca,one of the largest states,75% of the population lives in extreme poverty. Mexico City’s affluent residents,meanwhile,enjoy income levels comparable to those in the US.But this heterogeneous country,situated advantageously between the US and the rest of Latin America,is unified by one trend:economic growth. According to Goldman Sachs,Mexico will be the world’s seventh largest economy within 40 years.It is currently worth more than $20bn in premium,second only in Latin America to Brazil. Interestingly,however,Mexico is on Lloyd’s list of underinsured nations.In 2011,insurance penetration was just under 2% of GDP.Says Lloyd’s Mexico Manager,Gabriel Anguiano:“Latin America is among the fastest-growing regions for Lloyd’s.And Mexico is the largest contributor in Latin America,accounting for $397m of Gross Signed Premiums.” Thriving economy Sound economic policy in Mexico means the World Bank classifies its economy as healthy“upper middle income, less indebted”.In 2012,national debt was at 44% of GDP, according to the International Monetary Fund.Inflation is low, at below 4% a year,and GDP stands at $15,177 per capita.The economy grew by 3.6% in 2012,which,though slower than 2011’s 3.9%,is nevertheless healthy. The outlook is bright.Mexico has a large,educated and young population of 112 million with a mean age of 26 M Mexico is the single biggest contributor to Lloyd’s Latin America business. And there’s still plenty of room for growth in this underinsured market that’s worth $20bn in premium – with potential in aviation, energy, marine and property…
  • 7. 12 / mexico 13 – the result of a marked decline in mortality rates due to public health improvements,which began in the 1930s, without a corresponding fall in birth rates. Mexico’s population growth rate is now falling,however, thanks to improved contraception and changing attitudes to having children.The United Nations forecasts that the birth rate will dip to below two children per woman from 2020.At the same time,with improved healthcare,people are living longer. The resulting ageing population and attendant economic strains in the pipeline means Mexico faces the challenge of maximising the benefits from its current population bonus. It must get this right in order to cope when its demographics become more challenging. For now,Mexico’s current pace of economic growth is expected to continue,with the government forecasting GDP to increase annually by 3.9% for the next five years. “We’re very optimistic about our country right now,”says Rafael Audelo Mendez ,Chief Executive of Seguros Inbursa, the insurance arm of Mexican financial services company, Grupo Financiero Inbursa. “There’s huge growth potential. Economic growth means salary growth,and people with money in their pockets means more demand for insurance.” Mexico’shealthygrowthisbeingledprimarilybythe servicessector,whichaccountedforaround65%ofGDPlast year,accordingtoMexico’scentralbank.Othersectorsdriving theeconomyincludeenergy,mining,tourismandagriculture. Butit’smanufacturingthatmakesupsome80%ofMexico’s exports–infact,Mexicoexportsmoremanufacturedgoods thantherestofLatinAmericacombined. From new economic ‘tiger’ colombia to ambitious panama, latin america is opening up to foreign insurers Total written premium has been growing in Latin America by an average of 14% a year for the past decade, according to market research company Latino Insurance. Swiss Re’s figures reveal total premium for the region is now $127.93bn. Yet insurance penetration is low, at just 2.8% of GDP. The Mexican insurance market, worth $22.23bn in premium, is the biggest contributor to Lloyd’s in the region, bringing in $397m a year. The second largest is Brazil, where the country’s $78.29bn total premium reflects its economic muscle. It contributes $298.5m to Lloyd’s. Chile Chile is the most developed market in the region. The $9.67bn premium country has the highest penetration in Latin America (excluding the Caribbean), at 4.1%. This maturity, coupled with a small population, means there’s less potential to grow in the long term. But in the near term, fuelled by a strong economy, business is thriving. Lloyd’s mainly provides reinsurance here and writes $174m in premiums annually. In the wake of the major Chilean earthquake in 2010, premiums have risen substantially, with demand for more sophisticated risks. Additionally, Chilean companies are investing in other countries in the region – which means there’s a need to offer some Chilean clients regional insurance programmes. colombia Colombia, meanwhile – where Lloyd’s writes $88.9m in premium – has plenty of potential. With its larger population, penetration in this $7.62bn market is just 2.3%. And its economy is expanding rapidly: in 2012 GDP rose by 5.9%, leading to the country’s ‘tiger’ name tag, with growth of up to 4.9% forecast for the year. With few exceptions, Lloyd’s underwriters are not licensed to write insurance in or from Colombia, while they can write reinsurance from Colombia on a cross-border basis. But with the implementation of the Financial Reform Bill, some risks – marine, aviation, transport and agriculture – will be open to non-resident insurers and offshore brokers. panama Panama is a smaller market for Lloyd’s, which writes $38m there, and a smaller market overall, with $1bn in premium. But the country has potential. It has high growth, and is second only to Chile in terms of penetration, at 3.4%. Its economy is set to be boosted by the Panama Canal extension project, which will allow larger ships to use the facility. Panama’s ambition to be a regional hub for reinsurance, featuring a multitude of foreign players, looks achievable. It has the legal framework in place, has empowered the regulator, and now requires companies writing reinsurance to be licensed. Lloyd’s underwriters are not licensed to write insurance in or from Panama, bar two exceptions. These are for the Panama Canal Authority, which is permitted to place insurance directly overseas, and when the cover required cannot be found locally. The reinsurance position is different: Lloyd’s underwriters are permitted to write reinsurance originating from Panama on a cross-border basis. But the underwriting must take place outside of the territory – some Latin American business is placed in Miami. argentina Argentina is worth $12.8bn in premiums and Lloyd’s had $78.4m of business there in 2011. However, in 2011 Argentina introduced legislation making it tough for foreign players to operate there. Lloyd’s, which only trades here in reinsurance, is affected by the stipulation that the first $50m of any reinsurance risk must be written by local reinsurers. Foreign organisations, including Lloyd’s, are only permitted to reinsure exceptional risks that can’t be covered locally, and retrocession business. While property catastrophe risks will continue to loom large due to Mexico’s long history of earthquakes, increasingly sophisticated products are required Lloyd’sinlatinamerica: countriestowatch $38MPanama’s bid to be a regional reinsurance hub should bolster the value of Lloyd’s business there $78.4mTough legislation in Argentina will make it difficult for Lloyd’s to increase business above 2011 levels 5.9%GDP growth in 2012 gave Colombia its ‘tiger’ name tag 4.1%Chile has the highest insurance penetration in Latin America Mexico belize panama colombia paraguay chile brazil bolivia argentina ecuador peru venezuela Guyana suriname french guiana honduras guatemala nicaragua costa rica el salvador uruguay
  • 8. 14 / mexico 15 is more than just a regional player.“Mexican companies are increasingly becoming truly multinational,trading and investing on all continents,and we’re helping them to do so. And Mexico is not an energy economy alone – it’s growing in many other sectors.”Mexican companies are among the world’s largest in telecoms,cement production,food and drinks,TV and financial services.“The Lloyd’s market is familiar with many of these accounts,”he adds. insurance opportunities Happily for Lloyd’s syndicates and brokers,a growing economy almost always means burgeoning demand for insurance and reinsurance.Patria Re forecasts that insurance penetration in Mexico will climb to between 2.2% and 2.5% by 2016.Hence Mexico is a key target for Lloyd’s Vision 2025 international growth strategy. An increasing number of foreign insurers and brokers are expanding in Mexico.For example,insurers from Ace to Zurich, alongside brokers from Aon Benfield and Willis, operate here.Lloyd’s underwriters are permitted to write reinsurance and,in exceptional cases,insurance in Mexico, where Lloyd’s is registered as a foreign reinsurer.The exceptional cases are when risks are declined by the local market and for imports owned by foreign exporters. The notion that government-related contracts,winnable only through tortuous procurement processes,dominate the Mexican opportunities for foreign players is not quite true, Anguiano says.Around half of Lloyd’s business in Mexico is government-related risks,with clients comprising regional and federal authorities as well as state-owned companies. However,key growth classes of business for Lloyd’s in Mexico are aviation,energy,marine and property,in both the public and private sector. Mike Hughes,Chief Executive at Aon Benfield Latin America,explains:“Aviation is a very big sector for us.We’re forecasting growth in the private middle market,ie regional airlines and helicopter services.”He also says property will grow in both the public and private sector,in line with the economy and driven by construction.In marine,“blue water marine will stay as is but [private] cargo and in-land transit will grow”,again driven by the expanding economy. A government drive to invest in infrastructure will create further opportunities for the Lloyd’s market.Under the National Infrastructure Plan for 2013-2018,the State will spend some $400bn on 1,138 projects in sectors including energy,tourism,transport,water and urban development. Rafael Audelo says:“Mexico needs to build highways, ports and dams.This will bring opportunities for foreign insurance and reinsurance because these projects entail large risks and the capacity that we have in Mexico is not enough.” Energy is an important growth area.Mexico plans to invest $20bn per year in its oil industry up to 2025 through state oil company Petróleos Mexicano.There will also be investments in renewable energy,including hydro and wind power.Says Anguiano:“There will be particular growth in offshore energy,which is where most of Mexico’s oil is. Production has fallen in the last decade because we have exhausted all the‘low hanging fruit’in shallow waters. Now we have to venture into deep waters.” The widely held view that property catastrophe cover is the only form in demand is also not correct.According to Battman:“Increasingly sophisticated products are required – for instance Mexican companies are beginning to need warranty and indemnity insurance for acquiring foreign companies.There is also more demand for directors and officers’coverage products as awareness grows of the exposures of management teams – not least when Mexican companies invest in the US economy”. Anguiano concedes,though,that property catastrophe risks will continue to loom large because Mexico has a long history of major earthquakes and hurricanes.But he says insuring this risk is more manageable.“There is much better information on Mexican catastrophe risks now,so we have a better understanding of exposures and aggregations.” a competitive market Mexico is not without downsides.“We have huge competition,”admits Rafael Audelo.“There are around 100 insurers in the market,including about 40 doing property.And the competition is mainly around price.” As a consequence,rates are not as encouraging for insurers as in some other regional markets. Ingrid Carlou says:“Mexico’s written premium only grew 58% in the last ten years,so its share of the Latin America market dropped from 32% to 15% over the same period.” A possible cloud on the horizon for foreign investors is that the Mexican economy is highly correlated with the US. Ingrid Carlou,Chief Executive at Patria Re,the country’s only Mexican-owned reinsurer,points out Mexico’s“top customer continues to be the US”,which buys eight of ten Mexican manufacturing exports. This was behind a brief recession in 2009,when Mexico’s GDP fell by 6.1% before returning to growth in 2010. David Battman,Managing Director,International Business Development,at Gallagher International,sees Mexico as one of their strategic growth markets.He believes the country’s perceived historical dependence on both the US economy and the oil industry is changing.In fact,the country has the ability to do business on good terms with many more countries than just its northern neighbour. “Mexico has 12 free trade agreements that allow it to trade preferentially with 44 countries,”he says,adding that Mexico This contrasts with Brazil,which has seen written premium grow more than 600% over the last 10 years and its share of the Latin America market rise from 27% to 50%. Encouragingly for Lloyd’s managing agents and brokers, though,Patria Re has found that on the reinsurance side, total ceded premium in both countries roughly doubled over the decade.And while Mexico’s overall share of the Latin American reinsurance premium may have declined by 4% to 25% ,it nevertheless remains larger than that of Brazil (20%),with significant scope for growth – penetration relative to total direct premium is at just 1.9% of GDP. Anguiano says:“Brazil has been getting more attention from reinsurers because it is not exposed to the same natural catastrophes as the US [which means it brings diversification],plus its insurance industry has grown much more quickly in the past decade.Meanwhile,there is a tendency to say that Mexico’s cat risks profile and economy are too closely correlated to the US.” This has led some Lloyd’s syndicates writing US risks to argue that there would be no point growing their business in Mexico because it would not deliver anything different or better from their US books of business.But although Mexico will remain closely correlated with the US due to geographical proximity,there is a diversity of opportunities – and not all are based on Gulf of Mexico wind exposure or the Mexico City earthquake key zone. For those ready to embrace Mexico,how can you develop an edge in this competitive market? A key strength Lloyd’s brings is the fact that its coverholders and service companies are allowed to set up onshore.Anguiano says:“No one is taking advantage of this yet so there’s a real opportunity to write medium-sized risks that don’t come to London.” UweFischer,GeneralManageratChaucerLatinAmerica, adds:“Being physically present gives you better access to the market.Doing business face-to-face is important here.” So Mexico offers a range of exciting opportunities,fuelled by a growing,diversified economy.“It’s a more interesting market than people think,”concludes Anguiano. “Mexiconeedstobuild highways,portsand dams.Thiswillbring opportunities, becausetheseprojects entaillargerisksand thecapacitywehavein mexicoisnotenough” Thenotionthat government-related contractsdominate opportunitiesfor foreignplayersis notquitetrue.key growthareasinclude aviation,energy, marineandproperty rafael audelo mendez, Seguros Inbursa FURTHER INFORMATION To find out more about Lloyd’s operations in Mexico visit www.lloyds.com/mexico. Also, view a range of market intelligence products on Mexico at www.lloyds.com/marketintelligence Under the 2013- 2018 National Infrastructure Plan, the Mexican Government will invest $400bn across sectors such as energy, tourism, transport, water and urban development – creating significant opportunities for the market images:getty/corbis
  • 9. 16 / interview words by marcus alcock illustration by Tadaomi Shibuya 17 Vincent Vandendael brings more than 22 years of international insurance experience to Lloyd’s, joining from Zurich Insurance Company where he was most recently CEO of the Global Corporate unit in Asia-Pacific. He joined Zurich in 1994, initially taking responsibility for building and leading the Financial Lines team in the Benelux region and rising to CUO for the Global Corporate unit in Asia-Pacific by 2009. Prior to Zurich, he held a number of roles at Chubb Insurance Company. rom the Benelux region to the Asia-Pacific, VincentVandendael arrives with a wealth of international experience and ideas – and the ambition to expand the market into exciting new territories… Market: Why join Lloyd’s? And why now? Vincent Vandendael: I’veneverworkedin theUK,sobeinghereisexciting.Ofcourse, whenyouthinkofinsurance,Londonis evenmoreofanattraction.Ibelieveit’s thecentreoftheworldforinsurance, andLloyd’sisthecentreofthecentre. Intellectuallythere’sawealthofcapability andexperience–morethan300years.It’s aplacewherewetakerisksandinnovate– botharecritical.Lloyd’sisuniqueand weshouldremindpeopleofthat. Financially it’s also robust.It’s had its troubles in the past but come through,and now it’s in an extremely strong position with A+ and A financial strength ratings. There’s a collegial atmosphere here too, which you don’t find everywhere.People want to help you be successful. Why now?There was a vacancy! Joking aside,I think that when you look at GDP growth,Asia,for example,is 7-8% compared to Europe and the USA at only 1-2% – this is pretty strong growth,so there’s a real opportunity there to bring more of Lloyd’s to those markets. How will your previous posts inform your role at Lloyd’s? Having been a CEO,I understand the range of priorities one faces – from capital management and competing priorities to people management.My skills are in leadership,building business and talent development.After all,you can be as good as you can,but it’s the team that makes the difference.I’ve also spent 20 years as a Chief Underwriter on the market frontline and I understand the pressures underwriters and brokers face on the floor. How will you seek to promote and further strengthen the market around the world? My first few week were about listening to the market and discovering what the various stakeholders want.Following that, I will start to think about how we can contribute toVision 2025 and deliver in our priority countries:India,China,Mexico, Brazil andTurkey.But I would want to go beyond this as well.In many emerging markets,business is expanding beyond country borders,but local insurance champions don’t necessarily have an international network.I see this as an opportunity to bring them into Lloyd’s and leverage our worldwide expertise and licences. I’m also a strong believer in segmentation.We can’t expect staff to be experts in all areas we promote,and you wouldn’t approach cedants in the same way you would coverholders,for example – it’s about adapting our approach to different stakeholders and different markets,better reflecting their specific needs. Are there learnings from the Asia-Pacific economies you can bring to the market? Asiaissodynamic.There’sareal‘cando’mentality.Thereareno boundariestowhatcanbeachieved.Iwanttobringthatto Lloyd’s.Andofcourse,therearetherealgrowthopportunities, whichLloyd’sislookingtoexploitthroughVision2025. What else is so exciting about those economies? The population distribution offers huge potential.Look at Vietnam,where 70% of the population is under 30.They will be the insurance buyers and staff of the future.With wealth building in these countries,the amount of business opportunities and need for insurance can only grow,which is where Lloyd’s is ideally placed to provide the risk solutions and innovative products required. marketmeets… vincentvandendael Lloyd’snewdirector, internationalmarkets F FURTHER INFORMATION For more about Lloyd’s plan to cement its position as the global centre for specialist insurance and reinsurance visit www.lloyds.com/vision2025
  • 10. 18 / Losses and claims 19 As production networks and supply chains become increasingly globalised, localised incidents can have a number of major effects on every level of business at home and abroad - from manufacture to distribution to sales. Here, we can see how the 2011 flooding in Thailand had serious consequences for international industry, and provided considerable food for thought for the insurance sector GLOBALCOST ofthe2011 THAIflood Most affected Affected Unaffected EXTENTOFFLOOD Thailand was affected by 12 billion* cubic metres of floodwater during the disaster. At its worst, the water measured 10ft** deep Theimpactathome The World Bank estimated Thailand’s economic losses due to the floods were $45.7bn worldbank.org 660,000 Number of people left unemployed reuters 9,859 Number of factories that were forced to shut reuters *NYTimes.com **United Press International ImpactonHarddrive(hDD)manufacture Computers and parts are one of Thailand’s leading industrial exports, with a surge in prices resulting from the flooding 45%Percentage of the world’s hard drives made in Thailand prior to the flood 2tbhddiMacs suffered release delays due to a lack of 2TB hard drives HDD=£X2Within three months of the start of the flooding, the cost of hard drives had more than doubled hDD x2 bbc.co.uk reuters.com gizmodo.co.uk Impactoncarmanufacture An estimated 80,000 to 100,000 cars were not built as a result of the floods, with far-reaching consequences elsewhere 6,000The number of units per day that car manufacturers cut output by $88.3MThe amount that Honda lost due to lost inventories $67.6MNissan’s recovery costs in relation to the flood’s impact on global supply chains Japan Automobile Manufacturers Association Nissan Motor Co., Ltd. Aon Benfield Impactoncameramanufacture The camera industry was not immune, with a number of significant launch delays and a considerable loss in profits $107.2mSony’s losses in Q3 of 2011 due to repair and cleaning costs $603.6MThe losses incurred by Canon due to reduced camera sales $786.2mThe estimated amount Nikon lost due to reduced net camera sales reuters.com reuters.com canon inc. Chiang Mai Bangkok phuket Thailand Gulf of Thailand
  • 11. 20 / supply chain words by chris wheal illustrations by noma bar 21 mages of Japan’s tsunami in March 2011,then stagnant floodwater swamping Thai factories just a few months later,showed the enormous scale of nature’s destructive power. Theimpactlocallywascertainly devastatingenough,butweeksof disruptiontomanufacturingand productioncreatedaneconomiccrisis forbusinessesfarremovedfromthe region.Theglobalisationofsupply chainsanddistributionmeantthateven seeminglydisconnectedcompanies wereaffectedbythedisaster. Take computer chip manufacturer Intel.“Hard drive manufacturers with plants inThailand couldn’t make any new hard drives or ship any of their stock,”says Professor Mohan Sodhi from the Cass Business School. “This meant computer manufacturers couldn’t make computers or ship the stock that was still waiting for hard drives.As a result,they stopped buying chips from Intel. “As part of the supply chain ecosystem,Intel were badly hurt. It showed that the impact could come in unsuspected ways.” Insurers don’t like the word ‘unsuspected’.Many thought that events in Japan andThailand would prompt substantial claims under contingent business interruption policies,not all of which were as costly as imagined.But the key to providing accurately priced insurance is having a clear perception of the risks, along with quantifiable costs of the potential losses involved.Armed with that data,underwriters can write policy wordings and price insurance policies. Lloyd’sislookingathowsupply chainriskcanbebetterunderstood andthereforemanaged,workingwith expertsfromwithinandoutsideof theLloyd’smarket.Areportonthe issueisexpectedin2013. “Theuseofjust-in-timemanufacturing and outsourcing mean supply chains are increasingly brittle,”explains Neil Smith,Lloyd’s Emerging Risks and Research Manager. “There are questions around the extent of supply chain cover provided under (contingent) business I Global supply chains can be a minefield of unsuspected, complex risks.Having a clear perception of these risks, and the potential losses involved, will help insurers design products that provide effective cover across the entire ecosystem Shaping stronger linksin thesupply chain
  • 12. 22 / supply chain 23 different companies manage risk differently. Apple’s iphone is manufactured by one supplier in one location. samsung has a principal supplier, plus two others to cover temporary blips interruption policies.One of the challenges for insurers is developing products that meet customers’needs and cover supply chain risks comprehensively. “One of the challenges for buyers and sellers of insurance is developing products that accurately cover these risks,”Smith adds. “So,we’re examining to what extent customers understand the bespoke supply chain products currently available and how suitable they are. “We would like to see this market develop.It will be a two-way thing: what products can we further develop that cover these risks? And what data can customers provide us with to help us better quantify the risks?” the complexity of risk The risks are both complex and wide- ranging.Ford once reported that one of its major risks was the demise of its rival General Motors (GM),as they both sourced parts from the same suppliers.If GM folded,Ford would be unable to give enough work to the suppliers to keep them in business. That interdependence of firms in the same line of business is a common theme.Puerto Rico produces a huge chunk of the world’s pharmaceuticals, but is served by just one airline, American Airlines.That reliance presents a significant risk to the distribution of pharmaceuticals. Professor Sodhi says strike action at businesses far down a firm’s supply chain or distribution network can paralyse firms.A takeover of a supplier by a rival can be equally devastating. According to Professor Sodhi,Google bought Motorola’s handheld business, Motorola Mobility,for $12.5bn (£7.9bn) in May 2012“not because it needed it,but because it couldn’t afford to have someone else buy it”. Geopolitical issues raise another area of risk.The Arab Spring was important for supporters of democracy, but made the movement of parts and goods much more precarious for firms trading throughout the region. And then there’s product contamination after delivery to a retailer,retailers being unable to pay their bills,or banks being unable to process payments.All can impact on a firm’s bottom line. Different companies manage their risks in different ways.Apple has its iPhone manufactured by a single supplier in one location.Samsung,on the other hand,produces 80% of its phones from one source,but uses two other suppliers on small contracts to cover temporary blips in supply from its main firm.Neither system covers the risk of the main supplier completely ceasing to supply,or the reputational risks from negative publicity about supplying firms. Three suppliers producing equal numbers–eachcapableoftakingupthe slack should another suffer a setback –maymakesenseintermsofrisk,butit can be more expensive.Cheap,efficient supply chains often present greater risks.Safer supply chains can mean economic efficiencies are lost. how industry type impacts While some supply chain risks are universal,different industries face specific risks.Broker JLT has been proactive in marketing supply chain cover to high-value niche markets for the best part of a decade.It started in the big pharma sector with a suite of covers it markets as EPIC – Earnings and Product Integrity Cover. According to JLT PartnerTim Cracknell,these firms are often forced to choose single-supplier contracts because of confidentiality over ingredients and manufacturing techniques,or the expensive processes involved.Having several firms manufacturing exactly the same product components to the same standards in different parts of the world is simply not commercially viable. A specific risk they face is regulation. Drugs must meet regulatory requirements around the world,often made in a regulated way by a regulated provider.Any breach of regulation or change in approach by a regulator – sometimes on the other side of the world – could result in the closure of the manufacturing plant or the seizure of completed stock. Another risk is an intellectual property (IP) challenge.“If someone claims that a particular drug or process is the product of someone else’s patent, the whole process can be slowed down,”says Cracknell. It has already started extending it to the chemical industry,and food and drink sector,and has plans to roll it out to others such as technology and media. Kiln at Lloyd’s has been offering supply chain cover for a decade. “We call it trade disruption insurance,”explainsTom Hoad, Underwriter,Enterprise Risks at Syndicate 510.“It covers physical, political or marine perils that would stop transport of goods or supplies.We look at the delivery routes a client has concerns about.So the Egyptian crisis – the Arab Spring – raised political The manufacturing may go on but the company may not be able to use the profits while protracted court cases continue.Most drugs companies are making many high-volume products at low margins,but have one or two blockbuster drugs that make the bulk of their profits.Any interruption to the flow to market of these drugs or any restriction on the use of revenue from them – held up in legal processes over IP,forexample–canbedevastating. JLT also brokers cover for cyber risks to networks or data,trade disruption, transport blockages and political risks. risks.We would look at supplier routes through Egypt to the Port of Aden. We don’t necessarily require property damage.It could just be delay.” Kiln again wraps up cover for third-party injunctions over IP, hacking attacks,large-scale product recalls and regulatory interference. “We call the physical risks‘acts of God’,and the political risks,sabotage and hacking‘acts of man’,”says Hoad. creating bespoke products HoadsaysfirmsreportingunderUS SecuritiesExchangeCommissionrules usuallyreportthemajorriskstheyface. “We need to know what the potential cause of the loss is,and the effect of that loss.If you can identify the risk and exposure,then we can give a price that’s reasonable for the risk.This is a great opportunity for risk managers to help us develop bespoke solutions for their individual supply chain risks.” Cracknell,too,believes there is room for business development: “We’vebeenpartneringwitha numberofinsurersovertheyears,” hesays.“Clientstalkabouttheirtop tenrisksandinmanycasesanumber arepresentlyuninsurable. Thisgivesus theopportunitytonegotiatewithour insurerpartnerstoprovidearisktransfer solution. We’llthenwritethepolicy wordingandcreateanewmarket.” As Smith concludes:“Supply chain insurance could offer significant opportunities for the industry and benefits for customers.However, insurers will need to further develop the products available and this will require more data.” FURTHER INFORMATION For research, reports and studies on risk, visit Lloyd’s Risk Insight pages: www.lloyds.com/riskinsight There are lots of supply chain risks that haven’t been thought about, and products may not be entirely fit for purpose. with better data, insurers could offer more tailored cover
  • 13. Market:Whatkeyriskshavebeenidentifiedbyyourbusiness? CliveClarke: Theoutlookfortheglobaleconomyand supplychainrisksareverymuchonouragenda,asarecyber andreputationalrisks.Changeimpactisalsoakeyconcern. Companiesareconstantlychangingandweneedtoensure ourskillsareuptodate.Inthemarineandenergyindustry, wehavetochangetosurvive;tostayleanandmean. SabineDesantoine: The financial and economic crisis is high on our agenda, with credit risk being a key issue that we monitor daily. To that I would also add increasing levels of regulation and the growing threat of cyber risks. We’re confident in our own security systems, but in the past few years there have been a number of hacker attacks targeting our clients’ systems. SabrinaHartusch:Asaglobal manufacturerandmulti-channel retailer,supplychainisoneimportant riskweface.Inthefashionindustry it’scrucialtobequicktomarket,and weoperateinsomanycountries. Qualitycontrolisanotherrisk,asitcan affectreputation.Andwe’veseenan increasingproblemwithfakeproducts. SD: Competition is a key risk for the banking sector. At ING we have seen competition get tougher – you need the right product, quickly, and it has to be interesting. Reputation is also becoming more important – in banking you need the trust of your clients. ChrisMcGloin::It’sinterestingthat theproductsmadebySabrina’sfirm areverydifferenttoourengineering softwareforrefineries,minesand nuclearplantsetc,butwefacesimilar risks,likesupplychain,product qualityandreputation. Havetheriskschangedoverthepastyear? CM: It’s not so much that the risks have changed, but the way they manifest themselves. Increasingly we see customers putting risk back on to us. 24 / Discussion iLLUSTRATIONs by danilo agutoli Words by stuart collins The world’s leading companies face an increasingly uncertain world. Every day they manage a complex number of threats to their businesses, ranging from natural catastrophes to cyber attacks and disruption to supply chains: risks that threaten their balance sheets and reputations. Market asks leading corporate risk managers about the implications of changing attitudes to risk, and what insurers and brokers can do to assist them in protecting their businesses… 25 Clockwise from top left: Sabrina Hartusch, Clive Clarke, Sabine Desantoine, Chris McGloin
  • 14. 26 / Discussion 27 SABRINAHARTUSCH isGlobalHeadofInsuranceat TriumphInternational,oneof theworld’slargestmultinational intimateapparelcompanies.She isresponsibleforinternationaland localinsurance,andisdeveloping thegroup’sriskmanagement function.Sheisalsoaboardmember ofSIRM,theSwissInsuranceand RiskManagementAssociation. CLIVE CLARKE is the Group Insurance Manager at Lloyd’s Register, which provides independent technical assurance to the energy and transportation sectors. He is responsible for the company’s global insurance purchasing, and is also a board member of Airmic, theUKrisk managementassociation. SABINE DESANTOINE is the Insurable Risk Manager at banking group ING in Belgium. She is responsible for insurance at ING in Europe and is a board member of BELRIM, the Belgian Risk Management Association. CHRIS MCGLOIN isVicePresidentofRisk Management&Insuranceat engineeringtechnologycompany Invensysplc.,responsiblefor drivingtheglobalenterpriserisk managementprogrammeand placingthegroup’sinternational insurance.HeisalsotheDeputy ChairofAirmic. Meet the panel Our experts from around the world bring vast experience to the discussion on corporate risk management SH:Risk and insurance management is also being formalised – it is becoming part of the DNA of the company. We see the board delegate risk accountability further down the management chain, encouraging more responsibility and accountability in the business. CC:Notonlyarerisksbeingidentified,butboardsare assigningownershipofrisk,andmakingresponsibilities clearintheriskregisterandreports.Andifthereisa changeinariskthatrequiresmitigation,theRisk Committeewantstobeabletoseetheoutcome–ifthe riskspersisttheywillaskwhymeasuresarenotworking. Sowe’reseeingfarmorevisibilityofriskinanorganisation. Doesthisformalisationofriskmanagementhaveimplications forinsurance? SD: In banking, risk management is well established by regulation – but what we are seeing now is the desire to match identifiable risks with insurance. So the board asks if there is a response from insurers to risks in the Risk Register. For me, the challenge comes when I am faced with the risk analysis and the scenarios developed by my colleagues. I have to check the insurance contract with the broker to see if we are covered, and that’s not an easy answer to give. CM:Theboardalsowantstoknowaboutblackswan scenarios.Theywanttoknowwhatcanbedonetoidentify them,mitigatetheriskandrecoverpost-event.Theyalso wanttoknowifwe’reinsured,andthere’salottheinsurance marketcoulddotoenablemetosayyeswithcertainty. Wouldyousaycompaniesarebecomingmoreriskaverse? SD: Since the financial crisis, governments, business and society are more aware of risk, but that’s not to say we’re more risk averse. We want to be aware, know about risk and be prepared. SH:Companiesarenotnecessarilymoreaverse,butthey arecertainlymoreliterateandconsciousofrisk. CC: If you’re not prepared to take risk then you are less likely to achieve and be successful. We work for major oil companies and I‘ve seen a step-change in recent years as they hand down challenging requests in contracts. If you can’t meet these requests then you’re no longer in the game. Companies that can take risks and mitigate them have a competitive advantage. As we get smarter at risk analysis, what may at first have been perceived as challenging may in fact be quite manageable. Whataboutproductinnovation? SD:Cyberriskisahottopicandwe’ve seensomenewproductsdeveloped. ButIdon’tseeasmuchproduct innovationininsuranceasI’dlike. Innovationofriskmanagementhas tocomefromtheindividualrisk manager–iftheyhavetheright personalitytheycandrivechange. Whatcaninsurersandbrokersdotohelp? SD:Iwouldliketoseethembemoreproactive, understandourbusinessandcometouswithnewideas andproducts.Forexample,wewouldliketoseegreater useofriskmapping,butwedon’tseethatcapabilityfrom manyinsurancebrokers.Irecentlyattendedabroker presentationwheretheytalkedaboutriskmappingand scenariosforcyberrisk.Thisisthetypeofservicerisk managersreallywant–wewanttohearthedifferent viewsofbrokersandinsurers. SH: Insurers are good at understanding the risks faced by sectors like pharmaceuticals and petrochemical, but I don’t feel they understand every industry quite so well. For example, I don’t think they understand the textile industry, how it works and how it’s all connected. Insurers need to develop their sector-specific expertise and be more open. CC:Informationgatheringisanotherareawhereinsurers couldmakelifeeasier.Theyrequirealotofinformation thatcanbeincrediblydifficulttocollectintherealworld ofbusiness.Iwouldliketoseeinsurersunderstandour businessmoreandthinkofdifferentwaystohelpassess risk,ratherthanjustkeepaskingthesamequestionsin proposalformsthatticktheircomplianceboxes.Iwould preferthemtothinkmorelaterally. CM:There’s a huge amount of data collected by insurers that could be played back to us to understand emerging and developing risks around the world. I think the industry is missing a trick in not doing that. And there’s also an awful lot insurers can do in the area of certification and legislation – by putting their heads together they could help us with a lot of the issues we have, which they do seem to recognise that they can do, and do well. SH:Wealsoseecustomerslooking toputriskbackontousthrough contractsandoutsourcing–especially inbusinessinterruption,property damageandliability,wherecompanies pushtheriskbackandforth. Arecompanyboardsbecomingmore involvedinrisk? CM: There’s more engagement and interest in risk from the top level – from both executive and non-executive board members. We now even have senior executives asking to join our risk committee. I have to compile a report for the risk committee and board on the top risks, how they’re changing and which ones are emerging – and develop a process to track and respond. CC:Weincreasinglyseecompanies establishriskcommitteesandrisk reportingtotheboard,whichdrives moreawareness.Boardsnowrealise theirresponsibilitiesmore,andare moreinclinedtoaskdetailedquestions –whichflowsbackintothebusiness. “riskandinsurance managementis beingformalised– itisbecoming partofthedna ofthecompany” sabrina hartusch Key Take-outs Insurers should understand disparate businesses and develop client- and sector-specific expertise – client discussion forums could help Insurers could help businesses to better understand emerging and developing risks globally Insurers could simplify the informationgathering requirements – plus they could respond more quickly in the event of damage to a business “iwouldliketosee insurersunderstand ourbusinessmore andthinkofdifferent waystoassessrisk… Iwouldpreferthemto thinkmorelaterally” Clive clarke
  • 15. Largeclaimsaresaidtocauserisk managerssleeplessnights.Whatwould giveyouamorepeacefulsleep? CM:Whatalotofclientswantis certaintyofclaimspayment.Ifwe haveabiglosswewanttobeableto bookthatasrecoverableandtakethe benefitoftheclaimwithouthavingto waitthreeorfouryearsforalawyeror anadjustertomakeadecision. CC: Chris has a valid point. It can break a risk manager’s career if cover does not result in a claim being paid due to the small print or the complexity of the insurance structure. The amounts at stake are huge. When there’s enough money on the table, insurers sometimes look to wriggle and this devalues the product. SH:I’vehadverygoodexperiencesonstraightforward claims,butI’vealsohadsimilarexperiencestoCliveand Chris.Insurersemphasisepartnerships,butattheendof thedayI’maclientandIwanttobetreatedasaclientofa servicecompanyandnotmistrusted.Insurersshouldbe clearer,sticktotheirwordandbelievetheclient–it’sin bothourintereststogetbackupandrunningasquickly aspossiblefollowingaloss. SD: I agree. The question I’m usually asked first by senior management is whether we’re covered by insurance and the amount of indemnity. The board wants to see the results of risk analysis borne out by reality and get the indemnity we expected. It’s important if you have a claim that you have a quick answer to the question: are we covered? We need fast confirmation of coverage and indemnity. CC:Insurersarepartnersthattakeinsuranceriskoff thebalancesheet.Soifastorm,floodorfirecauses damagetomybusiness,weexpectthecontracttostand upandhelpgetusbackintobusiness.Ifinsurerswrote simplerpolicies,butchargedabitmoremoney,that wouldmakemehappier. Howcaninsurershelpyoudemonstratethevalueofaproduct totheboard? SH: Insurance helps to support business activities and is an enabler of business – for example, it can provide some comfort when entering a new market. It gives peace of mind that everything has been looked at from a risk perspective. CC:Thevalueofinsuranceisprovenwhenthere’sa claim–that’stheultimatetest.Theboardwantsassurance thatwhatseemslikeasimpleconceptworksinpractice. We’veallhadbadexperiencesofpersonallinesinsurance, sothere’sabuiltinsuspicionoftheinsuranceindustry. Theproductshoulddowhatitsaysonthetin. CM: Insurers and underwriters are good at sitting with clients to carry out scenario analysis. But they could do more to provide clarity of intention and help us demonstrate that certain scenarios are covered under the contract. FURTHER INFORMATION Read the Lloyd’s Risk Index 2011 at www.lloyds.com/riskindex 28 / Discussion “iattendedabroker presentationwhere theytalkedaboutrisk mappingandscenarios forcyberrisk.Thisis thetypeofservicerisk managerswant” sabine desantoine UK film indUstry words by helen yates 29 espite tough conditions, UK film continues to attract investment. The sector contributes over £4.6bn to UK GDP, with the overall picture one of long-term growth and job creation. Pinewood Shepperton Studios, the UK’s biggest film studio and home to the 007 films, had a good year in 2012 with the release of Skyfall. The latest James Bond movie broke UK box-office records after grossing over £94m from ticket sales in 40 days, beating previous record holder Avatar, which made £94m in 11 months. Pinewood, which returned to profit in 2012, has announced plans to build a new 45,000 square foot studio, including a new sound stage. All of this spells opportunity for insurers. With its big budgets and tight schedules, the film industry relies on its insurance backers to safeguard their investment. “On the larger-scale US studio movies, being covered is vital for the process of the film and the peace of mind of those involved,” saysShaunEmery,ClientServicesAdviser,AonRiskSolutions. Big-budgetUSproductionstypicallyrangebetween$80m and$140m,accordingtoEmery.Avatarisoneofthemost expensivefilmsmadetodate,withafinalfigureof$280m. ThePiratesoftheCaribbeanmoviesandSpider-Man3also brokepreviousrecords. “There still seems to be a theme of tried and tested,” says Emery. “Studios are quite good at remakes of films that have made previous good grossing at the cinema, and you have things like Marvel comic books, with characters that are already established and well-known. But investors are still a bit cautious about funding high-budget special-effects movies without pre-established characters or remakes.” In the UK, films tend to be more character-based, with more dialogue and fewer special effects, making them cheaper to produce. The ratio of studio filming to location filming can make a big difference to overall risk. “It could be an exotic area, a war zone, a remote location, and this will affect the risk and premium alike,” says Emery. There are numerous exposures associated with shooting a film, but key risks revolve around stop dates and key artists. “The slightest delay to filming, or knock back as a result of an artist, a location or weather-related issues, can seriously jeopardise a film,” says Emery. Typical film insurance products include producers’ professional indemnity, essential element cast coverage, errors and omissions cover, product liability, employers’ liability, and political risk and kidnap and ransom covers. Film completion bonds are often taken out to guarantee a movie will be finished, typically for non-studio backed films. Technologyhashelpedremovesome oftheriskassociatedwithbig-budget productionsthankstotheincreaseduseof computer-generatedimagery.“It’staking theriskoutofstunts,therearelotsofgreen rooms,hydraulicsandwires,”saysEmery. “It’sallalotsaferthesedays–thatgives underwriterspeaceofmind.Everything usedtobe35mmfilmingandnowwe’re inanHDdigitalenvironmentwhereit’s easiertoinstantlyback-updailyrushes andrawmaterialtoduplicateformats.” d Coverage is crucial for blockbuster movies. And growing investment in UK film spells opportunities for insurers riskybusiness FURTHER INFORMATION The Lloyd’s market has recently launched its first combined film insurance cover. Find out more at www.lloyds.com/filminsurance daniel Craig’s latest, action-packed James Bond adventure, Skyfall, was a box-office smash-hit image:c.colpics/everett/rexfeatures
  • 16. 30 flood risk / 31 words by richard willsher and stuart knott illustration by tang yau hoong Openingthefloodgates The increase in catastrophic flood events around the world is forcing the insurance industry to re-examine how it assesses flood risk t’s hardly the stuff of Waterworld or the apocalyptic 2012.We probably won’t be consigned to roaming the high seas on vast arks anytime soon.But the world over we are clearly seeing an increase in the number of catastrophic flood events,with both human and economic consequences.For the insurance industry,this global deluge and the accompanying exposures are forcing a re-examination of how flood risk is assessed – requiring access to more and better data,and cheaper,faster,more refined predictive modelling.Fortunately,thanks to the links being forged between the market and leading academics,through initiatives like the annual Lloyd’s Science of Risk prize,these leaps forward are already taking place. the tide rises Anecdotally,it appears the world is getting wetter. Witness Superstorm Sandy,which battered the eastern seaboard of the US and dominated newspaper headlines for weeks – or the recent UK floods.Then factor in the science.According to findings published in the journal Nature in February 2011,greenhouse gas emissions and the steady increase in temperatures they cause are making extreme rainfall events in the northern hemisphere more common.This man-made climate change may have almost doubled the risk of the wet weather that saw the Hampshire village of Hambledon submerged for six weeks in 2000 and cost the UK £1bn. Sea levels are also rising at an increasing rate – faster,in fact,than the projections released by the UN Intergovernmental Panel on Climate Change in 2007.Studies show that,whether through loss of land-based ice or thermal expansion caused by the warming of the oceans,levels have been rising at a rate of around 3mm annually since 1992,versus the 1mm to 2.5mm per year from 1900. Lloyd’s2012report,ArcticOpening: OpportunityandRiskintheHighNorth,reveals thatinSeptember2011,themonthwhenArctic seaiceistypicallyatitslowest,icecoveragefell toalowof4.33millionsquarekilometres–some 2.38millionsquarekilometreslessthanthe 1979–2000average.Accordingtoanewpaperin Science,AReconciledEstimateOf Ice-sheetMass Balance,themeltingofpolarseaicealonehasadded 11mmtoglobalsealevelsoverthepasttwodecades. And don’t forget the myriad of other atmospheric and geological events that come into play – from storm surges,high-intensity winds and El Nino Southern Oscillation Cycles to earthquakes and local factors,including river flow. Whatever the cause,the disasters that ensue tend to affect similar types of geographies. Coastal and low-lying regions are particularly at risk of flooding,as are areas where vast numbers of people and their economic activities are located. Research carried out in 2000 by the International Institute for Environment and Development calculated that low elevation coastal zones fewer than ten metres above sea level contain 2% of the world’s land,but around 10% of its population. feeling exposed The effects of flooding can be devastating. Beyond the horrific human toll,2011 was,says Swiss Re,an unprecedented year in which“natural catastrophes cost the global insurance industry roughly US$110bn”.And flood loss potential,it points out in its report,Natural Catastrophes and Manmade Disasters,“can be just as high as that of earthquakes and storms”– traditionally the major sources of exposure.The flooding inThailand that triggered US$12bn in claims,it concludes,is “a painful reminder that given the high risk of flooding in many countries,other parts ofthe globecouldbepronetosimilarlyhighlosses”. I
  • 17. 32 / flood risk 33 Which is perhaps why insurers are increasing the amount of flood cover they are writing throughout the world,particularly in emerging markets.“Because we are insuring in more places, the insured population and insured property is far greater than 20 years ago,”explains Mohammad Khan,who leads the Personal and Insurance Lines actuarial practice at consultants PwC. “For insurers,the issue is knowing what your exposure truly is.”He refers to theThai floods, where many of the insured losses stemmed from Thai risk that had been covered in policies written for Japanese multinationals with manufacturing and other operations in the Bangkok area. “This experience clearly shows that globalisation and internationalisation lead to a higher degree ofcomplexityintheworldeconomy,”writesClaudia Hasse,ChiefPropertyUnderwritingOfficerat MunichRe’sCorporateInsurancePartner. “Supply chains are often global and increasingly difficult to keep track of.For the insurance industry, this means a major lack of transparency in terms of risk exposure,thus increasing the challenges for accumulation management.” the super models This is far from the only problem confronting insurers,however.Although modelling flood behaviour is nothing new,the models themselves can be inadequate – though they are getting much better.Research by Professor Richard Dawson of Newcastle University,one of this year’s winners of Lloyd’s Science of Risk prize,has demonstrated how a wide range of factors can influence the analysis of the risks associated with flooding and cliff erosion – in the context of threats from rising sea levels,and increases in the frequency and intensity of storms. Together with colleagues from theTyndall Centre for Climate Change Research,Dawson developed an integrated assessment system that couples simulations of climate change projections, coastal hydrodynamics,coastal morphology,flood defence reliability,inundation and land use change – which in turn enables a variety of flood scenarios to be compared quantitatively for the first time,in terms of changes in expected annual damage. Although the research focused on the Happisburgh area of Norfolk in the UK,it is applicable to any flood risk area in the world. And with increasingly rigorous data collection and analysis in high-risk areas, such as those in low-lying and high population coastal centres in emerging markets, Dawson’s work can enable better management of flood risk,preservation of life and property,and limitation of related insurance losses. “By understanding some of the interconnected processes,”says Dawson, “we start to appreciate that flood protection is not just about building the biggest dyke possible.There are other ways of working more subtly with nature and natural processes rather than trying to tackle nature head on and fighting it with a wall.” Meanwhile,one of Dawson’s fellow Science of Risk prize winners,Professor Paul Bates of the University of Bristol,has developed algorithms that increase the accuracy of flood risk models. His work has enabled risk analysts such as RMS, Ambiental,HR Wallingford and Willis Re to produce models down to the accuracy of single buildingsinagivenlocationandrunfloodscenarios 1,000 times faster than previous models could. “You can view the benefits of our research on a number of levels,”explains Bates.“There’s a benefit to flood risk analysts because it will enable them to produce more accurate models and save a great deal of time and money.There is a benefit to the insurers in terms of better risk management for insurance and resinsurance companies. The general public will be able to buy the correct amount of flood insurance. Government maps will be better,so property purchase decisions can be improved. And finally,if a flood does take place,then the emergency services will have better,more accurate tools at their disposal to address the problem.” playing catch-up with data Both Bates and Dawson believe that as available data becomes more detailed and more widely sourced,the ability to model and predict extreme flood events – at a much lower cost – will be greatly enhanced.Dawson explains that,even in the UK,which is relatively data rich compared with many other countries,sufficient information can be hard to come by.But he is optimistic that as new types of data emerge from disparate sources,opportunities will expand: “Data is becoming cheaper and easier to acquire.There are gaps,but even in countries where you might not expect so much data,such as African nations with very few resources,you can still do something with the coarser data being collected on the ground.For example, in some places,communities are mapping their own areas – like the slums of Nairobi.” Michael Maran,Chief Science Officer at Catlin,the specialist property/casualty insurer and reinsurer,concurs.“We’re playing catch-up with nature.The increase in available data is something we want to encourage…and we are certainly going to get more data and more scientific input over time so that we can make a better assessment of each individual risk. This is not only in our interest,but also that of our clients.As the risks themselves evolve – through,for example,climate change – we are going to have to adapt our models and our pricing.But the aim is to understand the risks and price them fairly for our clients.” So as insurers push out into new territories, understanding flood risk and related probabilities of catastrophic events is the major global challenge. But knowing where exposures are and quantifying them accurately when providing cover is also a significant concern.Flood threats know no boundaries – so to limit control and manage their risks,insurers require more and better data,and better scientific tools than they currently have at their disposal.Tools borne out of initiatives like Lloyd’s Science of Risk prize. Launched in 2010, the annual Lloyd’s Science of Risk prize reflects the need to understand, reduce and manage risk that has always been the lifeblood of the Lloyd’s market. This year’s two prize categories were climate change and natural hazards. In the climate change category, Professor Richard Dawson, Chair of Earth Systems Engineering at Newcastle University and a co-leader of the Tyndall Centre’s Cities & Coasts, won for his pioneering work in the complex analysis of the risks associated with flooding and cliff erosion. The natural hazards prize was won by Professor Paul Bates, Professor of Hydrology and Director of the Cabot Institute at the University of Bristol. His work on algorithms used to power flood risk catastrophe models enables analysts to make more accurate flood predictions quicker and more cheaply. The benefits that such scientific research can bring to the insurance and reinsurance markets are considerable. If, for example, the research of this year’s prize winners can enable improved preparation for and responses to catastrophic flood events, then the cost in terms of human suffering and economic and insured losses may be significantly reduced. Harnessing the latest scientific techniques and tools is in the interest of all who use and work in our market. And the Science of Risk prize is a small encouragement to those who can help us do so. lloyd’s science of risk prize 8,000 years The time elapsed since the extent of Arctic sea ice was last as low as it was on 8 September 2011. (Lloyd’s 2012 ‘Arctic’ report) 150 million The number of people that could be exposed to a one-in-100-year coastal flood event by 2070. The financial impact of this could reach US$35tn. (OECD) US$108bn – $125bn The estimated economic losses associated with Hurricane Katrina in 2005. Latest estimates for Superstorm Sandy are in the region of US$50bn. (Various sources) US$12bn The value of insured claims triggered by floods in Thailand in 2011. “More than three times the size of any other insured loss of its kind in history.” (Swiss Re) 1.69 million The number of people displaced by the December 2004 Indian Ocean tsunami, triggered by an undersea earthquake off the coast of Sumatra. It is estimated to have killed 230,000 people in 14 countries. (US Geological Survey) flood risk… in numbers FURTHER INFORMATION To find out about the annual Lloyd’s Science of Risk prize or to enter visit www.lloyds.com/scienceofrisk Read the Lloyd’s report, Arctic Opening: Opportunity and Risk in the High North, at www.lloyds.com/ArcticReport2012 new research enables a variety of flood scenarios to be compared quantitatively for the first time, in terms of changes in expected annual damage as data becomes more detailed and widely sourced, the ability to model and predict extreme flood events at a much lower cost will be greatly enhanced
  • 18. AustrAliA AdrianHumphreys General Representative, Australia +61 (0)2 9223 1433 adrian.humphreys@lloyds.com  BrAzil MarcoCastro Managing Director & General Representative, Brazil + 55 (21) 3266 1900 marco.castro@lloyds.com  CAnAdA SeanMurphy President & Attorney in Fact, Canada +1 416 360 1512 sean.murphy@lloyds.com  ChinA EricGao General Representative, China +86 21 6162 8200 eric.gao@lloyds.com  hongKong KimSwan General Representative, Hong Kong +852 2918 9911 kim.swan@lloyds.com  JApAn IainFerguson Representative & Chief Operating Officer, Japan +81 (0)3 5656 6926 iain.ferguson@lloyds.com  northerneurope BennoReischel Head of Northern Europe +44 (0)207 327 5327 benno.reischel@lloyds.com  singApore KentChaplin Head of Asia Pacific, Lloyd’s Asia +65 6538 7088 kent.chaplin@lloyds.com  southern&eAsterneurope,&AfriCA EnricoBertagna Head of Southern, Eastern Europe & Africa +39 026 378 8820 enrico.bertagna@lloyds.com  uK/irelAnd KeithStern UK & Ireland Regional Manager +44 (0)207 327 5933 keith.stern@lloyds.com  usA HankWatkins President of Lloyd’s America +1 212 382 4060 hank.watkins@lloyds.com www.lloyds.Com/lloyds/offiCes steAdfAst2013,AustrAliA 6-9 April, Sydney Lloyd’s will be jointly hosting a stand with Arch, Newline and Markel International at Steadfast this year. Steadfast is Australia’s largest broker cluster group facilitating over $3bn of premium per annum, the majority being SME business. This annual event typically attracts over 90 exhibitors and 2,500 attendees. For more inFormAtion About lloyd’S preSence At the event: adrian.humphreys@lloyds.com lloyd’sAllislAnd renewABleenergy ConferenCe, irelAnd 18 April, belFASt Withunprecedentedfocusandinvestment intherenewableenergyareaacrossIreland andtheUKatpresent,thisone-day conferencewillshowcasethespecialist insurancecapacityandexpertisetheLloyd’s markethastooffertoahigh-profileindustry audience.Mediatedpaneldiscussions willfollowkeynotespeakersfromthe finance,planning,legalandinsurance sectors,withopportunitiestomeet invite-onlystakeholdersfromthelocaland internationalrenewableenergyindustry. For more inFormAtion: eamonn.egan@lloyds.com rims,usA 21-24 April, loS AngeleS Lloyd’s will be attending RIMS this year in Los Angeles with over 80 underwriters and brokers from the Lloyd’s market. For more inFormAtion on the lloyd’S networking reception And exhibition StAnd: mac.castro@lloyds.com RobertHiscox Chairman, Hiscox Ltd. Robert Hiscox stepped down as Chairman of Hiscox Ltd. in February. He led the company since 1970, during which time it grew from a London underwriting agency to become a global insurance group. Robert Childs, who has worked at Hiscox since the mid-1980s and was formerly its Chief Underwriting Officer, succeeds him as Chairman. NickMoss Finance Director, RFIB Holdings International Lloyd’s broker RFIB Holdings has appointed CMC Markets Chief Financial Officer, Nick Moss, as Finance Director. Prior to his four years at CMC Markets, Nick gained experience in the insurance broking sector from his six years as Head of Group Finance for the Benfield Group. He has also held senior positions at Old Mutual and PwC. MikeReid &RichardFoster Respectively: Divisional Director for Specialist Liability, and Head of Global Open Market Property (US and International), Brit Group Brit Group has made two new senior appointments. Mike Reid joins as Divisional Director for Specialist Liability from ACE, where he held numerous senior underwriting positions, including Casualty Manager for the UK and Ireland. He will have responsibility for the management and strategic direction of Brit’s UK and International EL/PL account. Richard Foster, previously a Senior Property Underwriter with Channel Syndicate, has joined Brit to grow its open market property portfolio. Richard joined Channel in 2011 having moved from Zurich, where he was Head of International Property. gloBAlContACtseventsmArKetmovers 35 34 / HERITAGE hortly after 7am on 6 August 1926,Gertrude Ederle,smeared with grease and lanolin, waded into the English Channel at Cape Gris-Nez,France,dived into the water and headed for England. Born in NewYork in 1905,Ederle was well equipped for the energy-sapping challenge.One of the greatest swimmers of her generation,she had set numerous world records.In a single afternoon in 1922,she’d broken seven records at Brighton Beach,Brooklyn;and between 1921 and 1925 she held 29 amateur national and world records.Along with JohnnyWeissmuller,she was also a member of the successful US swimming team at the Paris Olympics in 1924. But swimming the English Channel was a real test of strength and endurance.Since 1875,only five men had successfully completed the crossing.For many others,the 21-mile journey through cold,choppy waters,changeable weather,and stinging jellyfish had proved too much. Indeed,Ederle’s first attempt 12 months earlier ended after nine hours when her coach believed she was in distress and went to help her. Ederle was resting,but the interventionsawherdisqualified. By 1926 she was back,this time with new coachTom Burgess – the second person to have swum the Channel. So,what were her chances? On the one hand,the Channel had defeated many great distance swimmers,and her coach Burgess had tried 15 times before succeeding.On the other,Ederle had set a strong,fast pace the year before. Judging these factors was brought into perspective for Lloyd’s when Ederle’s father,Henry,decided to back his daughter.Once known for taking the odd gamble,even in the first quarter of the 20th century,Lloyd’s set Ederle a premium of £293:10shillings.In the event his daughter swam the Channel before 31 December 1926,he would get a return of £1,863:10shillings. Despite an arduous crossing,in which she had to swim an indirect path, Ederle arrived in Kingsdown,England in 14 hours 31 minutes,beating the men’s record by nearly two hours. Remarkably,she swam more than 35 miles due to the winds and currents. Ederle’s crossing challenged the perception of female athletes and inspired generations of women to take up sport.In an era when female athletes were only just starting to be taken seriously,her achievement was a significant milestone that captured the public imagination.On her return to NewYork,she was greeted by a two million-strong parade,starred in a film and toured as a professional swimmer. Star American swimmer Gertrude Ederle walks into the chilly waters of the English Channel at Cape Grez-Niz, France in 1926 thegirlwhoswam againstthetide In 1926, a young American woman swam the English Channel and beat the existing men’s record by nearly two hours – securing a princely return of £1,863 on her Lloyd’s premium gertrude ederle S INSURING RECORD BREAKERS In 1973, legendary American racehorse, SECREtARIAt, won the Triple Crown – setting records in all three races. Retired for stud duties, Secretariat was insured for around $10m against failing a fertility test. Lloyd’s insured the supersonic thRUStSSC that set a new world land-speed record of 763 miles per hour in 1997. Personal accident cover for the driver, Andy Green, was also placed at Lloyd’s. Seven-time Formula One world champion MIChAEl SChUMAChER was insured through Lloyd’s. The market paid out in 1999 when he broke his leg and couldn’t race. image:getty
  • 19. Lloyd’s One Lime Street, London EC3M 7HA Telephone +44 (0)20 7327 1000 Fax +44 (0)20 7626 2389 www.lloyds.com