insurance-adviser-issue-5

InsuranceadviserIs s u e 5 / m a rc h 2 0 1 3I n s i g h t , f o r e s i g h t a n d p r a c t i c a l s o l u t i o n s
Inside
Thechanging
insuranceindustry
Uncertaintyover
UKflooding
CBI:catastrophic
claims?
multinationalcover
The roots of
Complex regulations are becoming
onerous as businesses branch out

2 www.dacbeachcroft.com DAC Beachcroft
These are exciting times for dac Beachcroft –
our insurance team was named Insurance team
of the Year 2013 at the legal Business awards in
london on 7 february.
In line with our strategy of following our
insurance clients to key emerging markets, we
have signed a new association agreement with
specialist insurance firm de la torre y monroy
in colombia, ranked no. 1 in chambers for
insurance.
our global reach means we are ideally placed
to assist with international issues such as the
challenges associated with multinational
insurance coverage (page 10) and contingent
business interruption (page 20).
nevertheless, the foundation of our
continuing success (page 4) is still our people:
over half our uK partners are listed as leaders in
their field in the chambers and partners uK
2013 edition. In this issue we offer a special
four-page analysis of the emerging issues that
are most affecting the insurance industry (page
6). our expertise also offers clarity in areas
where uncertainty reigns, such as changing
regulations relating to flooding in the uK (page
14) and rapidly evolving cyber risks (page 24).
The firm’s unrivalled reputation in the
insurance field and our expansion means that,
despite some uncertainty in the insurance
industry, we are confident of a bright future.
Welcome
20
4
24
david Pollitt
head of Insurance
10

Executiveagenda
appeal upholds 9/11 ‘two-events’
ruling; insurance team of the year;
tax-avoidance claims – the posh ppI;
court upholds standard life decision;
political violence affects insurance.
Specialfeature
Marketreview
as the insurance industry undergoes
an almost unprecedented period of
upheaval, we gather together a panel
of experts to assess the implications.
Coverstory
Multinationalinsurance
careful consideration is needed to
avoid falling foul of ever more onerous
compliance requirements.
awatertightresponse
despite a national rethink of the roles,
responsibilities and liabilities around
flooding, realising a coherent strategy
may be challenging.
4
6
10
14
Stemmingyoungroaddeaths
James dalton, assistant director and
head of motor and liability at the
association of British Insurers (aBI),
explains a proposed overhaul of how
youngsters learn to drive.
Businessinterrupted
natural catastrophes in 2011 were
a reminder of nature’s terrifying
and disruptive power. many of the
associated business interruption
concerns have yet to be resolved.
Caughtinthenet
cyber exposures are a bigger risk
than ever before. as attacks increase
and legislation tightens, the rapidly
evolving cyber insurance market still
has room to grow.
Inpractice
efforts by industry bodies to raise
professional standards in the uK
insurance industry are essential in a
post-banking-crisis world to avoid
overregulation.
16
20
24
26
Contents
16
14
Insurance Adviser / March 2013 3DAC Beachcroft
Insurance Adviser is a dac Beachcroft publication.
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please contact david pollitt on
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Claims management companies are turning
their attention to mis-selling claims against
professionals who introduced, arranged or
promoted tax-avoidance schemes.
“The schemes in question are usually based
around an unregulated collective investment
scheme (UCIS),” says Hans Allnutt, Associate,
DAC Beachcroft. “During the last two years,
many of these schemes have failed or
reached settlement with HMRC such that
the investors’ losses have crystallised.”
One claims management company believes that there could be 85,000
possible claimants, with a total value of claims of £20–40 billion.
Insurers need to investigate tax-avoidance scheme claims very carefully,
Allnutt adds, especially those brought against non-investment
professionals including accountants and brokers. “Insurers should make
sure that such activities fall within the nature of their insured’s business
and FSA authorisations that have been disclosed to insurers. In light of
the volume of potential claims, insurers should also be sure to preserve
any aggregation rights.”
Taxavoidance:theposhPPI?
ExecutiveagendaEmerging issues for senior decision-makers in the UK insurance sector
InsuranceTeamof
theYearaward
DAC Beachcroft’s insurance team, led by
Partner David Pollitt, was named Insurance
Team of the Year 2013 at the Legal Business
Awards in London on 7 February. Senior
Partner, Simon Hodson, and Managing
Partner, Paul Murray, received the
Management Partners of the Year prize.
Legal Business highlighted DAC Beachcroft’s
high-profile success in a crucial challenge to
the Court of Appeals’ original announcement
in the personal injury case of Simmons v
Castle. The Association of British Insurers (ABI)
estimated that the revised decision has saved
the insurance industry £300 million.
“We are delighted to win this award,” Pollitt
says. “Having been shortlisted in 2012, we feel
fully deserving of the title this year following
our recent mergers and continued market-
leading work.”
An English court has upheld an arbitration award that concluded
losses from the 9/11 attack on the World Trade Center arose from
two events, rather than one. This issue, which has broader
significance for the London market, has not been the subject of
any previous English court ruling
“Following 9/11, a large number of actions were started against
the airlines and their security operators,” explains Julian Miller,
Partner, DAC Beachcroft. “The claims were settled and paid by
their insurers under various aviation liability policies. In turn, the
insurers were indemnified by their reinsurers on the basis that the
attacks on each of the Twin Towers were two separate events.”
Reinsurers were entitled to be indemnified on an ‘each and
every loss basis’ but a dispute arose concerning whether one event
or two had taken place, resulting in an arbitration in London.
“Disputes of this nature are ordinarily resolved by arbitration and
it is rare for this issue to come before the courts,” says Parminder
Badhan, Associate, DAC Beachcroft. “The outcome should provide
clarity for the London market.”
9/11rulingupholdstwo-eventsaward
From left to right:Michael Portillo,DAC Beachcroft’sAndrew Parker and David Pollitt,and Martin
Ellis,Managing Director,Prime Risk Solutions,sponsor of the InsuranceTeam of theYearAward.
Allnutt:many of the
schemes have failed

executive agenda
Since its launch in May 2010, Insurance
Adviser magazine has been a visible
expression of DAC Beachcroft’s expansion and
success.
In his welcome, David has already alluded to the
exciting growth our firm has undergone since the
merger of Davies Arnold Cooper and Beachcroft
in 2011. Between us we have over 100 years of
experience in the sector and we now work with
almost all of the world’s leading insurance
companies. We hope that the Adviser magazines
help demonstrate that expertise in an accessible
format.
Indeed, we know that our readers are both time
poor and inundated with case-related material.
We use guest journalists from leading insurance
publications, who combine their knowledge with
contributions from clients and industry experts,
to ensure Insurance Adviser offers insight into the
issues that keep you awake at night.
To complement the editorial content, we strive
for an intriguing yet thoughtful approach to
aesthetics. With this fifth issue, the 12th from the
DAC Beachcroft Adviser stable, we decided that
the time was right to progress the visual feel of the
magazine.
Our previous cover illustrator, Diana at Rooftop
Illustrations, helped craft bespoke images for
previous issues. Kerry Lemon, who has worked
with UK and US broadsheets, high-quality
magazines and other demanding clients, is now
taking the aesthetics of the Adviser publications
forward with her distinctive style – we hope you
like it.
As ever, we welcome any comments or
feedback about anything to do with
Insurance Adviser.
Clouding the issue:
unrest has insurance
implications
CourtofAppealupholdsStandardLifedecision
The UK Court of Appeal on 18 December 2012 upheld a
High Court decision, allowing Standard Life Assurance to
recover in full a £100 million cash injection it had made into
its suffering Life Pension Fund, under a mitigation costs clause.
The Court of Appeal held that the whole payment was
incurred for the insured purpose; it was irrelevant that the
insureds’ reputation was also protected. The Court rejected
the insurers’ proposition that apportionment should apply
where both the insured and the insurer benefited from the
payment in question.
The case could encourage financial services institutions to
take advantage of mitigation costs clauses when taking
action for the dual purpose of placating aggrieved investors and protecting their brand,
prior to claims actually being made.
“Insurers should review and, if necessary, amend their wordings. It is important to
consider whether the mitigation costs cover in question, is as extensive as the one in this
case,” says Richard Highley, Partner, DAC Beachcroft.
Highley:insurers
should review and
amend their wordings
Politicalviolenceimpactsinsurance
The insurance industry now faces a
spectrum of societal risks, from simple
economic riots through to terrorism and
war-related incidents. “The insurance issues
will depend on the types of covers
purchased but are likely to include
property damage and business
interruption (BI),” says Hermes Marangos,
Head of International Disputes at DAC
Beachcroft. “Property damage cover
typically excludes losses arising from any
act of terrorism but bespoke covers can be
purchased. In relation to BI this could also
include contingent claims.”
There are also likely to be a variety of
other covers impacted such as medical
expenses, kidnap and ransom, and claims
related to identification and repatriation.
“A detailed examination of the cause for
the specific loss and whether it arises from
an excluded peril will likely be at the heart
of coverage disputes,” explains Iftikhar Ali,
Senior Associate, DAC Beachcroft,
“especially in inter-pleaders between
insurers as to which insurance is more
specific.”
CORBIS
ClaireWright,
Headof
Marketingand
Communications,
DACBeachcroft
Platform

Insurersoftensaytheyface
unprecedentedlevelsofregulatory
change.Isthistrue?
David Pollitt (DP):There is a huge amount
of regulatory and legislative change, but that
is not an unusual situation for insurers to be
in. However, the unusually high degree of
uncertainty is different: delays and concerns
over the direction of Europe’s Solvency II,
the new regulatory framework in the UK
and potential changes to the provision of
insurance for flood risk present a real
difficulty.
Andrew Parker (AP):Compared with a
decade ago, the industry and individual
insurers are now much closer to and more
involved with proposed regulatory and
legislative change, and that leads to more
uncertainty because politicians and
governments change their positions.
Mathew Rutter (MR): Many of the issues
insurers face today are international, and not
just limited to Europe.The scale and impact
of change for some multinational insurers is
far more significant. For example, the debate
about whether insurers are systemically
important – and therefore subject to
additional capital requirements – is part of a
common theme that sees banking rules being
increasingly applied to insurers.
DP:The principles underpinning Solvency II
are pretty unarguable. But timing and
additional cost of getting ready for Solvency
II and other major regulatory changes is
frustrating for insurers at a time when their
bottom lines are under pressure.
Isregulationalsobecomingmorecomplex?
MR:There have been incremental increases
in complexity in some areas. Solvency II is
designed to be more sophisticated, subjective
and risk sensitive, as well as introducing new
levels of risk governance and reporting – and
so is more complex.And as the rule book
gets thicker and more complicated, firms are
more likely to trip up or get caught by
something coming out of left field, such as
the implications of the ECJTest-Achats
ruling on the use of gender in risk selection
and pricing.
Whatarethedriversofregulatoryand
legislativetrends?
MR: Different issues have different causes,
but many of the changes are the result of the
financial crisis and a more protectionist view
on the part of the government in response to
mis-selling scandals like Payment Protection
Insurance. Changes can also be seen as a
response to pressure from the media to take
action and to prevent a repeat of previous
regulatory failings. However, to respond with
more regulation ignores the fact that the
quality of regulation is not measured by
volume, but by being in tune with the risks
posed. Often, less regulation is more
UK and multinational insurers are working in a rapidly
evolving environment, from incoming European solvency
rules, to efforts to control escalating legal costs and a potential
re-writing of Britain’s century-old insurance contract laws.
As these potentially revolutionary changes take hold,
DAC Beachcroft’s influential Insurance Market Conditions
Report finds that decisive, responsive insurers with robust
governance may end up one step ahead of the competition.
Insurance Adviser brought together experts to discuss how
insurers are coping at a time when balance sheets are under
pressure, and look at the possible implications.
DavidPollitt
Some regulatory and legislative changes
are more favourable than others,and are
often driven by insurers themselves.
landscape
A changing

Insurance Market analysis
>
effective as it allows people to focus on the
important issues.
AP:Insurers are also at the mercy of the political
ebb and flow.The last two years have been about
unpicking the previous 13 years of a Labour
government – for example the Jackson reforms
of civil litigation and the LegalAid,Sentencing
and Punishment of OffendersAct (LASPO) are
dealing with the consequence of the previous
government’s mistake in introducing conditional
fee agreements (CFAs) with recoverable
success fees.
DP: It is worth considering that some
regulatory and legislative changes are more
favourable than others, and are often driven
by insurers themselves. For example, LASPO
is designed to cure the malaise of Britain’s
growing compensation culture and fraudulent
claims, while other moves could address
insurers’ growing problem with flood claims.
Istheindustrygettingbetteratdealing
withregulatoryissues?
AP:The insurance industry is more
co-ordinated and better at coming together
to formulate a collective view.
DP:But there is still a long way to go.You
could say that insurers have yet to find a
unified voice on the issue of flooding and that
there is an opportunity for the industry to do
better.
AP:Trade bodies do a good job. But if you
have six potential fights with the government
you have to prioritise.This is one of the areas
of greatest difficulty for the industry and for
individual insurers.
Whatadvicedoyouhaveforinsurers?
DP:Keep calm and carry on.At the end of
the day it comes down to cost, but the effort
is doubled at a time when premiums are
under pressure, investment income is down,
natural catastrophes have been increasing and
when insurers’ value chain is under threat.
MR: Insurers need to ensure that they are
well connected in terms of information, and
that they have a person responsible in the
organisation for identifying and responding to
regulatory and legislative change, as well as
having the authority to ensure that things get
done.They also need to be able to sense the
‘mood music’ and read between the lines of
what the regulator is saying. Before specific
rules are proposed, indications of policy
direction are often trailed in speeches from
the regulator or shots across the bow. If an
MathewRutter
Many of the issues insurers face
today are international,and
not just limited to Europe.
AndrewParker
The insurance industry is more
co-ordinated and better at coming
together to formulate a collective view.
NickYoung
We don’t know what the Law Commission
will run with but it could have a significant
impact on commercial insurers.
Differentissueshavedifferentcauses,butmanyofthechangesaretheresult
ofthefinancialcrisisandamoreprotectionistview.

insurer can pick up on these
signs early, it is more likely to
respond and develop products and
processes accordingly. Smarter
thinking means not simply waiting
for the rules to change, but seeing
which way the wind is blowing
and not getting caught out.
Whatissuesarelikelytohave
themostimpact?
DP:I would pick Solvency II, the
Consumer InsuranceAct,
Financial ServicesAct, LASPO
and the resolution of the flooding
debate.
AP:To that I would add pricing, as
that underlies some of the other
changes, like LASPO,
compensation culture, whiplash
claims and the Competition
Commission’s inquiry, which is a
significant issue for motor
insurers.
Doesthepoliticalsituationin
Europealsocreateuncertainty?
MR:We have US clients that are
looking to set up in Europe and
use the passporting regime to
underwrite across borders.
Clearly, uncertainty over the UK’s
future role in Europe could tip
the balance in favour of choosing
another jurisdiction. I would be
surprised if any future changes
would mean the UK could not
take advantage of passporting into
the financial services markets in
Europe, but the current situation
could create uncertainty, despite
any change being some years
away.
Whatabouteffortsto
harmoniseregulation?
DP:The harmonisation model is
flawed as there are limitations of
what can be achieved once you
get beyond Europe. One of
problems with the harmonisation
of insurance regulation is when
you come across regions that have
very different legal and regulatory
systems, such as the USA.
MR:The USA is a big hurdle for
harmonisation and will first
require more harmonisation of
rules between US states – but this
will be a long process.
Manychangesareduetobe
implementedinthenextyear
orso.Doesthissuggestthatthe
paceofchangemayslow?
DP:It might suggest that the
underlying pace of change may
slow down, but every model you
look at over the past ten years
shows the pace of change
increasing.
MR:The sense in Europe is of
continual review – each time
legislation is passed there is now a
working assumption that there
will be a drive for further
amendments even before the ink
is dry. For example there are
moves for new versions of the
Insurance Mediation Directive,
Markets in Financial Instruments
Directive, and there is even some
talk of Solvency III.
AP:There are areas where
insurers agitate for change – for
example the insurance industry
has pushed for LASPO to help
control the rising cost of personal
injury claims.And if there is a lull
in regulatory reform, the industry
could look hard at its own agenda,
and push for more action and
delivery on flooding, civil reform
and so on.
NickYoung (NY):A good
example of legislation that should
have changed, but hasn’t, is the
Riot (Damages)Act 1886.
Eighteen months on from the
riots ofAugust 2011, and with on
going protests in Northern
Ireland, the government has yet to
decide on who will review that
particular statute – the impression
James Reader, Chief Executive Officer
of Covéa Insurance, explains how his
company manages regulatory risk and
highlights the importance of clear and
properly implemented rules.
QHowdoyourespondtoregulatory
andlegislativechanges?
Weconstantlymonitorexternalinformation
sources,suchasregulatorandtradebodypublicationsandtradepress,to
identifyimportantdevelopments.Wealsohaveconnectionswithanumber
oflegalandprofessionalorganisationsand,aspartofaninternationalgroup,
benefitfromcentralsupportonmatterssuchasEUlegislationandother
internationalissues.
Oncewehaveidentifiedanimpendingchange,ourresponsewilldepend
onitsnature.Wewillalwaysensurethatanindividualwithinourbusiness
hasprimaryresponsibilityformanagingourresponse,andthatappropriate
peopleareinvolvedfromacrossourbusiness,includingthespecialist
professionalsinourriskandcomplianceteams.
QHowdoyouprioritisewhichchangestoacton?
Prioritisationcanbeadifficultconceptinthisaspectofbusiness.Thecritical
thingforusisthatweremaincompliantwiththecurrentregulationsand
legislation,whatevertheyareataparticularpointintime.Thatmeansitis
importantthatweunderstandtheimpactofchangesatanearlystageso
thatwecanplanourresponseandtakethenecessaryactionsingoodtime.
QWhichissuesareoccupyingyoumostatpresent?
We’ve recently had to deal with the implementation of the new rules on
gender rating, and are continuing to assess their impact. Looking
forward, we are focused on a number of important developments,
including the Consumer Insurance Act, Solvency II and, of course, the
replacement of the FSA as our lead regulator.
QHowisseniormanagementinvolvedintheprocess?
Ourgovernancestructureincorporatesarangeofcommitteesandgroups
withresponsibilitiesforensuringwecomplywithparticularregulatory
requirements.Adesignatedexecutivedirectorwillhaveoverallresponsibility
forcompliancewitheachspecificpieceofregulation.TheExecutive
Committeeregularlydiscussesregulatoryissues,withaparticularfocuson
changeswhichwillmostsignificantlyimpactonourbusiness.
Ourriskandcompliancefunctionalsohasacriticalroletoplay,inhelping
thebusinesstounderstandregulatoryissuesandensuringthatweare
respondingappropriately.
QIsthereacompetitiveadvantageinstayingaheadofthegame?
Inmyview,theredefinitelyshouldbelong-termcompetitiveadvantagein
beingcompliantandavoidingthecostsanddistractionsthatbeingfoundto
benon-compliantinevitablybrings.Whatislesscleartomeisthesituation
intheshortterm.
Therearedefinitelyexamplesoforganisationsthathavegaineda
competitiveadvantagefromamore‘aggressive’interpretationofregulations
–andofothersfeelingitnecessarytofollowthatleadtoremain
competitive.Inmyview,regulatorshaveacriticalroletoplayinensuringthat
newregulationsareclearandtakingactionsataveryearlystagetoensure
thattheyarebeingappliedastheyexpect.
Aninsurer’sperspective
>

Insurance Market analysis
is that it is not a high priority
for the government or that it is
on the‘too difficult’ pile.
Whatisworthwatchingout
forin2013?
AP:Many of these issues will
run and run, partly because of
their complexity and because
they are interlinked.And this is
what causes the timing issues
and delay – none of these things
happen as quickly as you would
expect. Many of the proposed
regulatory and legislative
changes covered by the Market
Conditions Report are unlikely
to be resolved quickly, creating
uncertainty and delays.
NY: One good example of this
is theThird Parties (Rights
Against Insurers)Act 2010
which we have been trailing for
many years.The Ministry of
Justice said in December that it
is coming, but we still don’t
know exactly when.That could
drop below the radar of some
insurers, but it is on its way.
MR: It will be interesting to see
how the new UK regulatory
authorities conduct themselves
under the new Financial
ServicesAct.TheAct gives the
FSA’s two successor bodies new
powers, particularly on the
conduct side, that would allow
them to act first and legislate
later.They will be under
pressure to prove themselves
early on and will be looking for
some easy wins.
NY:The Law Commission’s
ongoing reform of insurance
contract law is also a topic to
continue to watch.The
Consumer Insurance
(Disclosure and
Representations)Act 2012 is
due to come into effect onApril
6, 2013.This has been a long
time coming but heralds
significant changes in the law
and the systems of insurers will
have to change if they are to
comply. For example the
abolition of certain contract
clauses and the introduction of
compensatory remedies will
require insurers to rewrite their
proposal forms and review their
underwriting guidelines, as well
as put more specific warranties
into their policies
There could also be a draft
bill dealing with fraud and
damages for late payment and
potentially warranties and
business non-disclosure by the
end of the year.
We don’t know what the Law
Commission will run with –
and the business side is a lot
more difficult – but it could
have a significant impact on
commercial insurers.
MR: Regulators are increasingly
focusing on governance.
Insurers need to demonstrate
good governance because a lot
of the regulatory issues
discussed can be dealt with
through good governance. It’s
about getting the right people
in place at the top and having
the right processes and being
able to evidence decisions.And
governance needs to be kept
under constant review.
Stuart Collins freelances for several
insurance titles.
Insurersshouldbeproactiveandengagewith
policydiscussionsastheyhavemuchtooffer,
saysStephenLewis,ChiefExecutiveOfficerfor
GeneralInsuranceintheUKatZurichInsurance.
QHowdoyourespondtoregulatoryand
legislativechanges?
Regulatoryandlegislativedevelopmentsaffectevery
aspectofourbusiness,fromacapitalmanagement
perspective,tothewayweinteractwithcustomersandthewaywerunoperations.
Weinvestconsiderableresourcestayinguptodatewithchangesandanalysingtheir
impactthroughseniorappointmentsonrepresentativebodies(suchasmyroleonthe
BoardoftheAssociationofBritishInsurers),directinteractionwithpolicymakersand
throughdedicatedGovernmentandIndustryAffairsandLegalandCompliance
functions.
QIsitimportanttobeproactiveintalkingregulatoryrisk?
Intoday’sworldwefaceacocktailofrisksandlong-termtrends,manyofwhichare
complexandinterconnected,forexampleeconomicandenvironmentalstress.This
complexitymeansthatindustrytakesareactiveapproachtolegislationandregulationat
itsperil.Takingaproactiveforward-lookingapproachiskey–Zurichengagesinpolicy
discussionswithindustrybodiesandpolicymakersanddevelopsworkableand
collaborativesolutionstoinsurance-relatedissues.
QHowdoyouprioritisewhichchangestoacton?
Inachangingworld,whereregulatoryandlegislativechangeisconstant,prioritiesare
directlylinkedtoourbusinessstrategyandcorefocusareas.Wehaveablendofboth
industry-ledissuesandissueswhereZurichhasdirectinvolvement.Ihavenodoubt
thatZurich’sexperienceandperspectiveenrichesthedebate.
Forexample,allinsurershavehadtofocuscollectivelyonSolvencyIIandthe
changingfinancialregulatoryarchitecture.Inthesedebates,theSwissSolvencyTestand
‘TwinPeaks’regulationthatZurichhasalready‘road-tested’addsreal-lifeexperienceto
thetheoreticaldebate.Similarly,ourleadingroleincommercialandpublicsector
insurancehasenabledustoprovidepolicymakersreformingthepersonalinjuryand
healthandsafetylandscapeintheUKwithconcretesuggestionsintermsoflessons
fromthepast,changesrequiredandtheimpacttheyarelikelytohave.
Lookingahead,wefaceanumberoflong-termquestionsthatwillrequirethe
governmentandsectorssuchastheinsuranceindustrytoworktogethertodeliver
public/privatesolutions,particularlyasthepublicpurseremainssqueezed.
QHowisseniormanagementinvolvedintheprocess?
Allbusinessesneedgoodregulation.However,regulationshouldalwaysbe
co-operativeandnotconstrictive.Assuch,regulatoryissuesareacoreandregularpart
oftheagendaoftheleadershipteamsthroughoutourbusiness.Weregularlyreview
ourprioritiesandtakeadvicefromexpertsinthisfield.Wealsotakestepstoensureall
ouremployeesstayuptodatewithregulatorydevelopmentsandcurrenttrends.In
addition,ZurichBasicsisasetofprinciplesthatarticulateourbasicvaluesandthekey
behavioursbywhichweabidetohelpensurethatweactinaccordancewiththe
highestethical,legalandprofessionalstandards.Livingandrealisingthecodeof
conductisessentialandisanobligationofeveryemployee.
QIsthereacompetitiveadvantageofstayingaheadofthegame?
Stayingaheadofthegameisnotnecessarilyaboutgainingcompetitiveadvantage;it’s
aboutbuildingasoundandorderlybusiness.Thechangingrisk,regulatoryand
legislativelandscapemeansweneednotonlytostayaheadofthegame;weneedto
helpgovernmentsandothersshapeit.
Manyoftheseissueswillrunandrun,partlybecause
oftheircomplexityandbecausetheyareinterlinked–this
iswhatcausesthetimingissuesanddelay.

The complexityassociatedwith
multinational insurance programmes has grown partly
due to the globalisation of economies and companies,
with more and more organisations having overseas entities
and operating across borders. But a tightening of insurance
laws and regulations also plays a role.
In the wake of the global economic crisis, regulatory
and tax authorities around the world are taking a much
tougher stance, making it more difficult for global
programmes to be compliant, explains ChrisWilkes,
Partner, DAC Beachcroft.“This is partly about protecting
their markets and the consumers in their markets, as well
as tax raising through insurance premium taxes,” he says.
The changes are also a consequence of governments
trying to keep more money domestically, says Karen
Gorman, Partner, Global Service Risk Practice, JLT
Specialty.“Argentina, for example, is
trying to keep as much premium
income within the country, which
means that the regulators are all over
every placement involving foreign
insurers – they are really cracking down on global
programmes. So, inArgentina, if you have a global
programme with a captive, it means less money coming
back to that captive and more retained locally.”
But financial issues are not the only driver. Emerging
economies increasing their economic output – especially
BRIC countries – may regard their nascent insurance
industries as entitled to protection, says Ken McKenzie,
Partner, DAC Beachcroft.“The fact that economies are
developing is actually encouraging people to take a more
rigorous compliance approach from a protectionist
point of view.”
The result is that rules are becoming stricter in many
jurisdictions. Gorman says that many parts ofAfrica,
where in the past regulation was quite loose, are
becoming more regulated: Nigeria and Ghana will start
Multinational insurance programmes have
changed considerably in the last few years, finds
Tony Dowding, becoming broader, more complex,
and more challenging than ever before. Careful
consideration is needed to avoid falling foul of ever
more onerous compliance requirements.
multinationalinsurance
Getting to the root of
>

Multinational programmes
Branching out:the
regulatory implications
for expansion must
be considered
Thefactthateconomiesaredevelopingis
actuallyencouragingpeopletotakeamore
rigorouscomplianceapproachfroma
protectionistpointofview.

to see more business being retained locally because regulators
are now enforcing regulations, for example. Conditions are
becoming tougher in Europe too: the Netherlands has just
increased its insurance premium tax to 21%, for example.All
of this has a knock-on effect on clients and their global
programmes, she says.
Companies need to look at the local regulations before
deciding whether to include a country in the global
programme, she advises. If the regulations state that 100% has
to be retained locally, there may be no point in bringing that
territory into the programme –it should perhaps be treated as
a stand-alone coverage instead. But this route is not without
disadvantages – the company loses central control over claims
and premiums.
Regulators’ tougher stance, therefore, means less flexibility in
programmes.
Complexity
Suresh Krishnan, General Counsel, Multinational Client Group,ACE
Group, a leading multinational and specialty insurer, says that the
compliance landscape is increasingly complex.“In many ways it is not
just the insurer that is regulated but increasingly the insured and broker
too. In this increasingly proactive regulatory and compliance
environment, risk managers are looking for transparency and no last
minute surprises.Above all, they are looking for certainty – where may
a claim be paid and to whom, and who is ultimately responsible for
premium taxes and other taxes that may be assessed on a global
insurance programme,” he says (see box).
Krishnan says that focusing solely on the question of whether the
insurer is admitted or non-admitted in a given jurisdiction tends to
respond only to the insurance company’s obligations.“The
corresponding analysis also needs to be done about how and
under what terms the risk can be‘exported’ to get the full
picture on compliance. It is vitally important that the risk
manager works together with their finance, tax and legal teams to
ensure that there is a clear understanding about premium
allocation and claims payments in different jurisdictions.”
The picture is further complicated by an expansion of
multinational programmes beyond the traditional focus on
property and casualty covers. Krishnan saysACE is seeing
increasing demand across Europe, notably from the upper middle
market, in terms of the usual lines, such as property and marine.
There has also been increased demand from larger companies for
lines of business that have not traditionally been insured on a
multinational basis.
For example, directors’ and officers’ (D&O) liability is now
being included in many programmes, on an admitted
basis, together with financial lines such as errors and
omissions (E&O) and crime, as well as environmental
liability (EL) and business travel accident (BTA). Many in
the market are predicting that employment practices
liability will also be included in global programmes in the
next few years.
Weareseeingmorecontrolcomingfromthecentre.Clientswant
sightofwhatisbeingissuedatalocallevel,whetheritisinvoices,
policies,certificatesandsoon.Transparencyisthekey.
Aquestionofcompliance
The increasing importance of compliance has led to much debate as to
who is ultimately responsible: the risk manager, the broker, or the insurer.
Chris Wilkes, Partner, DAC Beachcroft, says that each is partially
responsible for compliance. “The risk manager’s role is to ensure that a
policy complies with the company’s insurance obligations in each relevant
jurisdiction, though the actual checking may be delegated to the broker.
Generally, the insurer takes the lead on compliance, predominantly
because they want to be able to sell the service that goes with the policy.”
Karen Gorman, Partner, Global Service Risk Practice, JLT Specialty,
believes that compliance should be a collaborative effort. “The insurers all
have their licences to protect, and so they have their own rules and
regulations about what they can do where. But sometimes they are overly
compliant and will insist on issuing a local policy everywhere that
non-admitted is not allowed. But it’s not just about whether non-
admitted is permitted or not: there are other factors, such as whether you
can buy the cover in that territory, what the policy will say, or whether
there is a risk in that country.”
She highlights that there are always different opinions on what
compliance means from all sides as there are so many grey areas. “As
brokers, we have to take what the insurers say, take our own data and
experience, and then present it to the client, so that they can make an
informed decision on how far they want to go in terms of compliance.”
>
12 www.dacbeachcroft.com DAC Beachcroft12 www.dacbeachcroft.com

Multinational programmes
ChrisWilkes
There are all sorts of
reasons as to why a
financial interest
clause might be
appropriate
SureshKrishnan
It is not just the
insurer that is
regulated but
increasingly the
insured and
broker too
“In the past companies may have had, for example, one single policy
for D&O covering worldwide and they are realising that this may no
longer work effectively,” says Krishnan,“and non-executive directors
are asking more questions, and the need for local policies is increasing.”
The procurement process for big multinational companies is about
rationalising, says McKenzie.The goals of a global programme are
realising economies of scale, reducing costs, and producing as
homogenous a result as possible “so the fewer divergent carriers and
brokers the better.”
“Ideally,you want to get as many different classes of insurance into the
programme as possible,”he adds.“Sometimes a degree of specialist cover
may be required in certain areas,which means it remains outside of the
self-retained element,or the captive structure,or the master policy.If
you are trying to achieve a programme with as few carriers as possible,
then the pool of truly multinational insurers is relatively small.”
There are many insurers that can play a part in a multinational
programme put together by a broker using a panel of insurers,and others
that rely on partners and correspondent insurers.Yet only a small number
of insurers have a network of offices around the world capable of
servicing a programme,rather than just contact offices.Such a network
clearly has some advantages,for example providing consistent cover
worldwide,with local expertise and local claims handlers.
Solutions
The classic model for multinational insurance programmes is a
combination of local covers and a master programme with a difference
in conditions/difference in limits (DIC/DIL) infill.This helps to ensure
that the programme is compliant and enables the parent company to
have a level of control over the programme, with standard terms and
conditions and limits in each territory.
Achieving this‘gold standard’ can be very difficult (especially at a
sensible cost), saysWilkes, not least because DIC/DIL may be
considered as non-admitted insurance.
The financial interest clause is a possible solution to the quandary of
non-admitted insurance created by the insurance industry.This allows
for a payment route that goes back to the parent of the company rather
than the local insured, because it is a policy that insures the parent
company’s financial interest in the local entity. But this, of course,
means that the payment is to the parent, and not to the local entity that
suffered the loss, and raises the issue of how that local entity can be
reimbursed without tax implications.
This is a popular solution, saysWilkes,“but whether it is a complete
or just partial solution in some circumstances is a matter of heated
debate amongst lawyers. In some cases, the company may find other
ways to refinance the local operation affected by the loss, or they are
not worried about insuring the local entity, they are only concerned
with insuring their investment in the local entity. So there are all sorts
of reasons as to why a financial interest clause might be appropriate.”
McKenzie adds that, while claims have been and are being paid
without challenge, the financial interest clause has not been tested in
every jurisdiction.With local regulators tightening the screw on
compliance, seeing it as a means to protect their home insurance
industry, there might in the future be scrutiny of this mechanism
if not correctly constructed.“As a result, there is a need for the
insured that buys a policy including a financial interest clause to
understand the legal implications fully themselves, and their
treasury function must understand the tax implications and know
how they can make their payment route work if they intend to
refinance the local operation.”
He stresses that the treasury function must understand what
the financial interest mechanism does and plan accordingly. Most
importantly, McKenzie advises a clear transactional record so
that, in the event of a challenge, there is evidence ready to show
that the financial interest clause is an appropriate mechanism.
The whole process of setting up and managing global
programmes is becoming more complex and time consuming.
JLT’s Gorman underlines the importance of awareness of the
local regulations, and ensuring that all the documentation is
back-to-back and it is following form all the way through.“It used
to be that everything was issued on a good local standard at a
local level. Now we are seeing more control coming from the
centre. Clients want sight of what is being issued at a local level,
whether it is invoices, policies, certificates and so on.
Transparency is the key.”
To discuss the issues raised in this article,
please contact Ken McKenzie on +44 (0)20 7894 6480
or kmckenzie@dacbeachcroft.com
i

More frequentand intense periods of heavy
rainfall need‘urgent and fundamental changes’, found Sir Michael
Pitt’s Review of the national floods in the summer of 2007.The
government’s response wasThe Flood andWater ManagementAct
2010 (FWMA).
The legislation seeks to drive a more localised and effective
response to the ongoing threat of flooding, creating a number of new
roles and responsibilities for local authorities, the Environment
Agency and developers alike.
Change can often create unintended consequences, however, and
foreseeing areas of friction and limiting their impact will be crucial in
ensuring the overall effectiveness of the new legislation. But there
remains significant uncertainty in key areas.
Friction
For example, the duty on local authorities to maintain a register of
structures that have a‘significant impact on flood risk management’
(which ties in with the government’s localism agenda) is likely to
have implications for private and commercial property owners trying
to secure insurance.
As these flood-important structures are identified and their impact
on water levels is detailed, it is very possible premiums and terms of
cover for properties nearby will be affected.A clear understanding of
what constitutes‘a significant impact on flood risk management’ is,
therefore, important.
It is as yet unknown what level of information will then be made
public about these structures – consistency on who has access to
what information is important.
There is also some vagueness about where responsibilities lie.
Although local authorities have been empowered with new duties
under the FWMA, the EnvironmentAgency
maintains its existing legal obligations for the
strategic management of national flood and coastal
erosion risk contained in theWater ResourcesAct
1991 and Coastal ProtectionAct 1949.
“We have said that if local authorities are to be given more
authority and responsibility to manage flood risks, then they must
have the right tools and expertise to do the job.This means having the
ability to assess and nominate the structures accurately that will have
an impact,” says MalcolmTarling, spokesperson for theAssociation of
British Insurers (ABI).
Contradiction?
The exact legal fit between the new FWMA and existing legislation
will come out in the coming months and years. In the meantime
there are more immediate issues for local authorities struggling to
ensure they have the correct skill sets and resource levels required to
carry out their new duties.This may be particularly challenging at a
time when austerity measures are restricting budgets and stretching
existing resources to their limits.
It is likely to take some time before real practical improvements
are delivered by the FWMA – many of the changes enshrined in the
legislation are still to be put in place.
A watertight
Major floods have become frequent in the UK over the
last 15 years, writes Edward Murray, forcing a national
rethink of the roles, responsibilities and liabilities around
flood protection and management. But realising a
coherent strategy may be challenging.
MalcolmTarling
If no agreement
is reached then
we will just
revert to a free
market
responsetoflooding?

flooding
reached then we will just revert to a free market.We are very
aware that 30 June is not far away and we are doing everything we
can.We want to ensure and work towards a situation where the
affordability and availability of flood insurance is maintained.We
remain in intensive discussions with the government over our
proposal that would safeguard the future affordability of flood
insurance, and while we cannot guarantee we will reach
agreement, we are doing all we can to ensure a
satisfactory outcome.”
Should the government and the insurance industry
fail to find common ground on how to move
forward, the unpalatable outcome for the 200,000
homes in question would be denial of insurance
altogether, or cover at significantly increased and potentially
unaffordable levels.
Whether it is around the responsibilities that local authorities
and government agencies bear, the way legislation dovetails, or the
availability of insurance for the most vulnerable, there are many
complex issues to unravel.
Unfortunately, as recent flooding has shown, time is not on our
side.A strategy that is both consistent and coherent at an
individual, local and national level is needed to keep the flood
waters at bay.
istockimages
However, in the same way that the newAct must be made to
gel effectively with existing water management laws, it must also
work with other rules and regulations to be truly effective.
The newAct demands, for example, that property developers
construct new sustainable drainage systems as part of future
projects.This greater burden on developers comes as the
government has announced its intention to streamline planning
regulations amid increasing pressure to build new houses.
New planning rules should not be allowed to supersede the
need for developers to commit to building sustainable drainage
systems or to increase potential flood problems by allowing more
buildings to be constructed on flood plains.
Coherence
Ambiguity persists for those with properties already constructed
on flood plains and guaranteed insurance under the Statements of
Principle agreement between the government and insurance
industry.This agreement only runs until 30 June 2013 and as
2012 came to a close, negotiations between the two parties had
come to an impasse.
Commenting on the issue,Tarling says:“If no agreement is
please contact Andrew Parker +44 (0)20 7894 6232
or aparker@dacbeachcroft.com
i
Wehavesaidthatiflocalauthoritiesaretobegivenmoreauthority
andresponsibilitytomanagefloodrisks,thentheymusthavetheright
toolsandexpertisetodothejob.
TheFloodandWaterManagementAct2010
•Localauthorities will have new responsibilities
to provide strategic management and
co-ordination of local flood risk from
groundwater, surface water runoff and ordinary
water courses.
Local authorities will also have to establish and
maintain a register of structures that have an
effect on flood risk management in their areas.
•TheEnvironmentAgency (EA) is required to
draft a flood and coastal erosion risk
management strategy for England to be
approved at ministerial level. Welsh ministers will
be responsible for drafting a Welsh strategy.
•Floodriskmanagementauthoritieswill have to
co-operate and act consistently within the
framework of local and national flood risk
strategies.
•Propertydevelopersmust construct new
Sustainable Drainage Systems (SuDS) as part of
future projects.

Car crashesarethe single biggest cause of
accidental deaths for young people.They are also much more
likely to be involved in very serious crashes: in 2011, almost
15 people died or suffered life-changing injuries each day on
Britain’s roads as a result of car accidents involving young
drivers.TheAssociation of British Insurers (ABI) has
responded by calling for a complete overhaul of the system
for learning to drive.
To cut the number of young people dying on our roads,
theABI wants the government to introduce a new learner-
driver scheme, which would allow new drivers to gradually
develop their skills and gain experience behind the wheel.
TheABI’s proposals include a one-year minimum learning
period, a limit on the number of passengers allowed in the
car with a young driver, a night-time curfew and a no-alcohol
policy. Countries that already have similar‘graduated driver
licensing schemes’ in place, such as the US, Canada,Australia
and New Zealand, have seen a marked decrease in the
number of accidents involving young drivers.
Unhurried safety
Under theABI’s proposal, in addition to the one-year
minimum learning period, a novice driver would be required
to accumulate sufficient experience behind the wheel before
being eligible to take a driving test. Intensive
driving courses would not be permitted.
TheABI has also advised that a curriculum
be drawn up: every learner driver would
need to take lessons in all seasons, weather
conditions and types of road.The learner driver’s experience
would be detailed in a logbook, which could be produced for
inspection by the examiner before taking their driving test.
The proposal will make those who pass their test safer and
more competent drivers, says James Dalton, theABI’sAssistant
Director and Head of Motor and Liability. Evidence from a
number of countries that already have minimum learning
periods, ranging from six months up to two years, shows that
people who take longer to learn to drive become safer drivers.
“Creating a minimum learning period means that you will be
required to learn to drive in a range of different driving
conditions,” Dalton explains.“Under the current system, if you
began learning in early spring and passed your test in early
autumn, for example, you probably won’t have driven in ice
and snow. It’s also possible you may not have taken lessons at
night, so you may have little experience of driving in the dark
before getting your licence.”
To compensate for the longer time it would take to get a full
licence,teenagers would be able to start to learn to drive at 16½.
Passenger restrictions
New drivers under 25 should not be allowed to carry
passengers under the age of 21 for the first six months after
passing their test, theABI recommends, unless there is a
Stemming
Faced with an epidemic of car crashes involving
young drivers, James Dalton, Assistant Director and
Head of Motor and Liability at the Association of
British Insurers (ABI), says the insurance trade body
wants to completely overhaul how youngsters learn
and drive immediately after they pass their test.
young road deaths

supervising driver in the car also: someone over the age of
21 who has held a full licence for at least three years.
The reason for this, Dalton says, is that evidence shows
the more passengers a young driver has in the car the more
likely they are to have an accident.“AnAmerican study on
crashes involving teen drivers shows that a young driver is
three times more likely to have a crash if they have more
than three passengers in the car with them.”
Having friends in a car with a young driver can create a
lethal cocktail combining showing off, high speed and
irresponsibility that all too often can end in disaster, he says.
“By taking passengers out of the equation, at least at the
beginning, young drivers are likely to be safer.”
But theABI is keen to point out that exemptions will
apply for youngsters driving to work or to college.
Mostyoungpeople
abidebythelaw,andifthe
lawischangedtosaythere
arecertainthingstheycan’t
doforalimitedperiodof
timeaftertheygettheirfull
licencesthenmostwould
acceptthat.

foRESIGHT interview
CVJamesDalton
James Dalton is an Assistant Director and Head of Motor and
Liability at the Association of British Insurers (ABI). He leads
the ABI’s efforts on improving the personal injury
compensation system, tackling uninsured drivers and
improving road safety, particularly for young drivers.
He was previously the ABI’s Senior European Adviser,
responsible for analysing the impact of regulatory
developments in Brussels on the insurance industry and for
lobbying European institutions.
He has also been a Senior Adviser at the New Zealand
Ministry of Economic Development.

a breath test after a crash or in roadside checks than any
other age group, according to results of theAssociation of
Chief Police Officers’ Christmas 2012 drink-driving
campaign.Also, nearly one in five young drivers polled by
the RAC admitted they had got behind the wheel either
knowing or suspecting they are over the limit.
a mixed reception
TheABI’s proposals have had a mixed response: the police
and some road safety groups, such as BRAKE, have
welcomed them, whereas motoring groups have been
more cautious.
In press reports, the Institute ofAdvanced Motoring
called theABI’s recommendations negative and said they
would dissuade young people from learning to drive.The
AA also criticised the proposals on restricting night-time
driving and carrying young passengers, claiming they
would be almost impossible to enforce and would penalise
young drivers trying to get to and from work.
TheABI has argued that the proposed rules would boost
safety and be no more difficult to police than the rest of the
system.“Most of the driving laws in the UK are self-
enforcing,” says Dalton.“You wear a seatbelt, you don’t talk
on a mobile while driving or get behind the wheel having
drunk too much alcohol because the law requires you to do
so. Most young people abide by the law, and if the law is
changed to say there are certain things they can’t do for a
limited period of time after they get their full licences then
avoiding the risks
TheABI’s call for all young drivers to be prevented from
driving between 11pm and 4am for the first six months after
they have passed their test is based on government statistics
showing that over half of all serious car crashes in the UK
involving teenage male drivers occur at night. Just over 20%
of serious crashes involving older male drivers (aged 60–79)
take place after dusk. Male teenage drivers are 17 times
more at risk of having a crash at night than all male drivers,
according to research by the University of London’s Centre
forTransport Studies.
“The evidence is clear: the risk of crashing is much higher
at night for young drivers than during the day,” says Dalton.
“Preventing them from being out on the roads very late at
night straight after they have got their licence should help to
reduce that risk.”
The adverse effects of drinking and driving are already
well known: alcohol affects a motorist’s ability to judge
speed and distance, may encourage them take more risks,
and also slows their reaction time by up to 15%.
Yet, theABI believes the existing limit of 80mg alcohol
per 100ml of blood is too high, proposing a legal limit of
20mg.This means that drivers would not be able to drink
even a small glass of wine or half-pint of beer and still drive:
essentially‘none for the road’.
This should help to reduce the number of crashes
involving young drivers, who are known to be more likely to
drive after having a few drinks. More drivers under 25 failed

recessionhit–thedownturnandroaddeaths
car crashes involving young drivers have actually fallen, the latest
government statistics show. The number of deaths in accidents
involving young car drivers in 2011 fell by 6% from the previous year
– compared with a rise of 6% in all car occupant deaths over the
same period.
The number of killed or seriously injured young car drivers has
dropped by 36% from the 2005–09 average, while passengers of
young car drivers killed or seriously injured have dropped by 45%;
other casualties (occupants of other vehicles and pedestrians
involved in the accident) have decreased by 28%, department for
transport data shows.
The recession and high fuel prices are also having an effect. data
provided by the rac foundation shows that motoring patterns and
habits are changing as fewer miles are driven at slower speeds to help
save fuel as a cost-cutting measure. speed has a huge effect on both
crash likelihood and crash consequences. further analysis of the data
shows that car/van usage has decreased since 2007 while train use
has increased.
The downturn seems to have succeeded in what road safety
campaigners have been trying to achieve for years: a cut in the
number of crashes involving young drivers.
fewer male teenagers are learning to drive, while those that do
have a car are using it less. The proportion of young men aged 17–20
holding a full driving licence fell from 41% in 2007 to 35% in 2010,
while the distance driven by young drivers, particularly young men,
has fallen more quickly over the same period than for drivers of all
ages, according to data from the national travel survey (nts 0201).
But the news does not undermine the aBI’s campaign, dalton says:
if the changes in young drivers’ habits are due to the tough
economic climate, then it is quite possible that the improving crash
statistics might reverse as the economy picks up and more young
people can afford to get on the roads.
Wearehopefulthegovernmentwilllookattheevidencebehindthese
proposalscarefullyandwillmovetowardsimplementingaprovensystem
foryoungdriversthatdeliversbetterroadsafety.

most would accept that.”
Dalton also points to the failure of Pass Plus as proof that
voluntary schemes to help young drivers sharpen their skills have
not helped improve road safety.“It didn’t bring down the number
of deaths.You can devise a new post-test training course, but my
question is:‘Why not just make sure a driver can drive properly
before passing the conventional test?’”
The government has now said that‘all options are on the table’
and that it would consider theABI’s proposals, but it is also
looking at a number of other measures such as pre- and post-test
training.
“We are hopeful the government will look at the evidence
behind these proposals carefully and will move towards
implementing a proven system for young drivers that delivers
better road safety,” Dalton says, adding that polling done by the
ABI shows a large majority of people are in favour of imposing
restrictions on young drivers after passing their test.
Introducing a graduated licensing scheme in the UK will also
bring down the cost of young drivers’ insurance premiums, which
the government has said it is committed to bringing about, the
ABI points out.
But the main thrust of its campaign is to help reduce the
carnage being caused by young drivers. Dalton says:“If people
were fully aware of the number of road traffic accidents involving
young people, and understood the likely impact of our
recommendations on reducing the number of accidents then they
probably wouldn’t question what we’re proposing.”
Simon Challis is a writer and media consultant specialising in insurance.
ForESIgHT InTErvIEW
To discuss the issues raised in this article, please contact Andrew Parker
on +44 (0)20 7894 6232 or aparker@dacbeachcroft.comi
VerVerIdIsVasIlIs/shutterstocK.com
17–24-year-olds with two years or less
driving experience are much more likely
to make a catastrophic claim than
37–44-year-old drivers with the same
driving experience.
This clearly demonstrates that it is the age
of the driver – as opposed to their
experience – that is the key factor
impacting upon the likelihood of
suffering a catastrophic injury in a crash.
The figure of £500,000 is the
benchmark for what is known as a
‘catastophic claim’. These claims are
not ‘bumps and shunts’ but major
crashes that will have serious
consequences for the driver, their
passenger and other road users, often
involving lifetime care requirements
for those injured in the accident.
* In may 2012 the aBI undertook a widespread data collection on young driver claims, asking members to say how many individual motor claims they settled, or are expected to
settle, between 2007 and 2011 for more than £500,000. more than 2,500 claims were analysed from data provided by all major motor insurers, providing the sample for this chart.
Proportionofcatastrophic
claimsbyyearsofdriving
experienceandage
Proportionofcatastrophic
claimsbyage
80%
70%
60%
50%
40%
30%
20%
10%
0%
Proportionofclaims driving experience
2 years or less 3–5 years
Frequencyof
catastrophicclaims*
0.30
0.25
0.20
0.15
0.10
0.05
0.00
17–24
25–29
30–34
35–39
40–44
45–49
50–54
55–59
60–64
65–69
70–74
75–79
80–84
85+
age
17–24-year-olds
37–44-year-olds

Theinternational
communityregardswhat
happenedassomethingofa
blipbutresidentsofNew
Zealandexperience
earthquakesallthetime.

business interruption
Duringthe course of 2011, natural disasters
– including the JapaneseTsunami, New Zealand earthquake
andThai floods – claimed the lives of over 30,000 people and
cost the worldwide economy around $350 billion.After the
tragic and shocking loss of life, perhaps of most concern is
that events on this scale are no longer considered‘black
swans’ – large scale, devastating events are becoming
increasingly regular.
The grim tallies above, although hugely significant, do not
tell the full story. Lurking beneath is the impact of business
interruption and, more particularly, contingent business
interruption (CBI).
As business has globalised and production has followed
suit, it has become increasingly difficult for manufacturers to
get a clear understanding of their supply chain.The
dependence upon and fragility of these supply chains was
brutally laid bare by the events of 2011.
Paper chain
The lack of resilience was particularly striking.“The flooding
disaster inThailand showed that business interruption at a
key supplier can cause a ripple effect felt across an entire
industry,” explainedAllianz Global Corporate Solutions
property insurance expertVolker Münch.
Outsourcing,‘just-in-time’stock management,
centralised procurement and distribution, and
the increasing complexity of business supply
chains all increase the reliance a business has on
its suppliers. But insurance can provide only so much
protection and, even when protection is in place, claiming on
the policy is not always straightforward.
“A big discussion point early on was whetherThailand was
one event or several events and how should 72-hour clauses
(which were really designed primarily for NorthAmerican
windstorm risk) be applied in this pretty unique scenario,”
says Ben Nicholson, Partner, DAC Beachcroft.“The question
commonly asked is whether or not the 72-hour clause has
the effect of resetting the‘event’ after each 72-hour period
so that‘the floods’ are treated as several events. If so, then,
given that the floods continued to progress over the space of
a month, there were some who argued that they should be
treated as 11 or 12 events.”
This difficulty around interpretation of clauses was
mirrored in New Zealand following the series of earthquakes
the‘Shaky Isles’ experienced in 2010–11.Without the large
manufacturers that were hit inThailand, the brunt of the
effect of the earthquakes was felt by the local SME
community.
“By and large it was normal for SMEs to have an extension
for CBI to standard commercial business BI cover as opposed
to having specialised wordings,” saysAntony Holden, Partner,
DAC Beachcroft.
NigelSpiers/Shutterstock.com
Business
interrupted
A series of natural catastrophes in 2011 were a reminder
of nature’s terrifying and disruptive power. Many of the
associated business interruption concerns have yet to
be resolved, Martin Friel finds.


As a result, in many respects, the CBI exposures of these types
of businesses were not properly assessed or understood. In fact, as
Holden explains, the cover was often provided for free or, at the
most, a small fee. It appears this cover was not properly considered
by those who held it, or indeed those who sold it, and, as such,
there was little understanding around what it was there for.This in
turn led to confusion when it came time to claim.
“Some of the issues that arose were around the inadequacy of the
definitions of supplier and customer in the extensions,” says
Holden.“There was confusion as to the extent of the ability of
affected businesses to claim and the extent of the indemnity
available.That has been one of the material issues.Another was
that, in many cases, because CBI cover was an extension, it was
limited to 10% of the sum insured.”
For businesses with CBI in place, the interpretation of clauses
within policies may result in drawn out negotiations and even
litigation to secure the claims payout.
Meanwhile, the affected business continues to suffer as it sits in
limbo. For example, there is a still a cordon around parts of the
Central Business District in Christchurch two-and-a-half years
since the earthquakes struck.
Strong links
Simple steps, such as avoiding using a single source for a product or
component and selecting providers based in different geographical
area that are not at risk from the same peril, can help.
But it will take a lot more than a few tips to properly protect
against a business’s exposures.A better defence lies in mitigation of
the risk rather than reliance on financial protection.A combination
of insurance cover and a robust risk management programme is the
best approach.
Businesses must be much clearer not only about who supplies
them but also who supplies their suppliers and their suppliers’
suppliers.Without having a proper understanding of the supply
chain, its complexities and its weaknesses, a business cannot have a
true understanding of the risks it faces.
The shocks ofThailand and New Zealand appear to have woken
both the business community and their insurers up to the fact that
CBI is the great hidden risk that most puts the survival of
businesses at risk in the face of a catastrophic event.
Businesses reliant upon supply chains that stretch across the
globe need to wake up and understand that the threats are real and
the impact they can have even more so, Nicholson argues.“It could
absolutely happen again. Every indication is that the next
Thailand-type event will be inThailand.There are always going to
be natural weather catastrophe hazards and we have seen changing
weather patterns across the world – in general the weather
AntonyHolden
Changes to the scope
of cover mean that
businesses are more
aware of supply
chain issues
BenNicholson
In general the weather
patterns are less
predictable
Undercurrent
TheThai floods were
predicted but more
severe than expected


Inexactmodels
Not only businesses were impacted by the
2011 natural catastrophes – insurers also
found that they didn’t fully appreciate the
world’s dense interconnectivity and the
impact that CBI claims would have.
For example, the first estimates of the cost
of the Thai floods were around $3 billion, a
drop in the ocean compared to the final $45
billion bill. How did they get it so wrong?
“These things get looked at with hindsight,”
says Ben Nicholson, Partner, DAC Beachcroft.
“The pervading view that we hear seems to
be that the effect of the transition to
just-in-time production and supply chain
models, the increased fragmentation of the
supply chain and the specialisation in
particular components, probably wasn’t
sufficiently well understood by the insurance
and reinsurance market in general.”
Nicholson stresses that this does not mean
that the CBI market as a whole was caught
napping, but rather that some less specialist
underwriters were perhaps not fully aware of
the risks that they were taking on. “Historically
CBI was a specialist, standalone cover that was
bought and underwritten in a very
considered way but we have seen a number
of examples of CBI being included as an
extension to standard BI cover.”
It appears that the ‘less specialist’
underwriters who had moved into this
market had, as is often the case with new
capacity, softened rates in the market. A lack
of understanding over the true scale of the
interconnectivity of the global supply chain
was compounded by the fact that the risks
were not necessarily being written at the
right price.
Needless to say, rates have since hardened.
Some estimates say that Thai flood
premiums, for example, have more than
tripled and reinsurance rates on line have
increased. In New Zealand, rates for property–
catastrophe reinsurance were up by more
than 50%.
But have insurers merely hiked prices and
hoped for the best? Not necessarily but
improvements to the CAT modelling
following each of these disasters may not be
the panacea that many hope. In Thailand, for
example, the floods were predicted although
the scale of the event exceeded expectations.
Going forward, Thailand lacks the historical
data to model effectively.
“I’m not sure that modelling is the answer,”
says Nicholson. “However, it may be possible
to deal with more detailed business-specific
modelling and business processes”.
The specialist CBI underwriters will not
necessarily be doing anything different as a
result of Thailand, Nicholson adds, as they are
more familiar and comfortable with the risks
they are underwriting. It is perhaps
those that do not have that
expertise and experience that are
investing in modelling these risks
or are pulling back altogether.
In New Zealand, however,
awareness of the complexities of
supply chain management and the risks that
are inherent in these chains has increased
significantly and has affected the way insurers
approach these risks.
Underwriters have tightened up their
definitions of supplier and customer and
stipulated that the cover will only apply to
direct or second-tier suppliers. Some have
removed earthquake cover entirely and where
it is present, it is aggregated. “Those changes
to the scope of cover have meant that many
businesses have become more aware of
supply chain issues,” says Antony Holden,
Partner, DAC Beachcroft.
He adds that some insurers have started
using supplier and customer questionnaires
when putting businesses on cover in an
attempt to better understand the risks that
individual businesses face.
“They establish whether they have a supply
chain policy, who their tier one customers
and suppliers are, whether they are self
suppliers, have contingency strategies, a
particular reliance on a particular port or
airport and whether they request the supply
chain management from their own suppliers,”
says Holden.
These measures have had the effect of
educating businesses and some are now able
to get better cover now that they have taken a
proactive approach to their risk, adds Holden.
“In the past, in the SME sector, there was not
much detailed engagement in the risk.”
business interruption
the quake ranging from about three to five on the Richter scale.”
Nevertheless, protecting assets in the modern global economy
may prove to be a steep learning curve.
A robust risk management plan that understands and attempts to
mitigate the weaknesses in the supply chain, coupled with CBI
cover, is currently the best that a business can do to prepare for the
next unexpected catastrophe.
Martin Friel is a former editor of InsuranceAge.
shutterstock
patterns seem to be less predictable.”
In New Zealand, local authorities are being pushed by the
government to prepare for the worst to happen again.There has
been a nationwide assessment of buildings and their ability to
withstand earthquakes of the magnitude seen two years ago and
all local authorities must have a policy to deal with this need to
strengthen buildings.
If the international community has been slow to wake up to
this new reality, the people of New Zealand have not.“The
international community regards what happened as something of
a blip but residents of New Zealand experience earthquakes all
the time,” says Holden.“There have been 3,000 aftershocks since
To discuss the issues raised in this article, please contact
BenNicholsonon+6562135902orbnicholson@dacbeachroft.com
i
Hardgoing
Insurers found
2011’s CBI claims
unexpectedly high

“Thereare onlytwotypes of businesses;thosewho
have been hacked and those who are going to be hacked,” says DAC
Beachcroft Partner Patrick Hill.The depressing inevitability of
cybercrime is underlined by the fact that it is one of the fastest-
growing criminal areas, costing global consumers $110 billion in the
past 12 months, according to a survey by internet security provider
Norton. In the past year, 556 million people have become victims of
cybercrime, which equates to 1.5 million victims per day or 18
victims per second.
The increasing number of cases comes as tighter regulation looms
over the EU: the European Commission’s draft replacement data
protection legislation, General Data Protection Regulation, is due for
implementation in 2015 or 2016.
Complacency coupled with a lack of understanding about the
consequences means businesses are exposed to both risks from data
and irreparable brand reputation damage, Hill says.“I think there is
an element of‘it won’t happen to me’ because they believe their
business is not important or high profile enough.”
A risk more ordinary
While the high-profile cases of data breach such asTJ Maxx, LinkedIn
and Sony garner more attention, Hill says that cases involving “more
ordinary” organisations are equally, if not more important. One such
case occurred in March 2012, when Britain’s largest abortion
provider, the British PregnancyAdvisory Service (BPAS), was hacked
by 27-year-old James Jeffery, a self-identified member of the
international hacking groupAnonymous. Jeffery defaced the
company’s website and stole 10,000 records of women who had
registered with BPAS, which he threatened to make public. BPAS
issued a statement at the time stressing no patient records had been
stolen, only records of registration. BPAS promised to increase its
online security measures.
Hill warns neglecting the risk could be a business’s downfall.
Lockton’s Cyber risks decoded report found the
average data breach cost in the US cost $7.2
million, and in the UK £1.9 million.A recent
study conducted by risk management members
association,Airmic, found a typical business
interruption cyber event costs approximately £250,000. Other
estimates have put the total cost of a significant cyber event in the
region of £500,000.
However, in tough economic climates, insurance may be first on
the block for businesses cutting costs.“I think there is an element
of:‘Why should I buy this insurance if I haven’t traditionally
needed to?’” says Hill.
Into the breach
Businesses that want to arrange cover may encounter difficulties in
financially quantifying potential losses from a data breach, DAC
BeachcroftAssociate HansAllnutt says.“Nevertheless, the potential
losses arising from a data breach have driven the appetite to
purchase cyber risk insurance products,” although he says that it is
important to note that cyber risk products are not limited to data
breach insurance but offer a wide range of covers.
Allnutt advises insureds to educate themselves about the cost of
Cyber exposures are a bigger risk to businesses than ever
before. As attacks increase and legislation tightens,
Lauren Gow finds that the rapidly evolving cyber
insurance market still has room to grow.
inthenet
Aninsurer’sperspective
Cyber data breach laws differ significantly in different countries so
shaping product offerings is challenging. Coverage needs to
include a range of liabilities, not solely concerned with
unauthorised disclosure or loss of personal information or data
(as was the case with BPAS). There is also a much wider range of
risks associated with cyber data breaches including business
interruption (BI) and denial of service (DoS). In some cases,
coverage can be achieved through an existing first-party
commercial property and BI policies or third-party general liability
policies. But specialised cyber risk policies as an extension or
supplement for existing policies may be the real boon for insurers.
Caught

Thetruecostofcybercrime
Up to $1 trillionThe value of intellectual property stolen from businesses
worldwide by cyber criminals.
£20 billiona year
Total estimated cost of cybercrime in the UK. It has been
estimated that intellectual property theft costs £8 billion,
industrial espionage costs £7 billion, extortion costs of £2
billion and direct online theft costs in excess of £1 billion. In
addition, an estimated £1 billion is lost through theft of
customer data.
14 days
Average time it takes an organisation to resolve a cyber attack.
$17,696 a day
The average cost to the organisation while a cyber attack is
resolved.
CYBEr rISKS
foreseeable cyber events and have a strategic plan in place.“It is
also a matter of changing attitudes – seeing cyber risk insurance
as an investment; protection for cash flow and business
concerns.”
Airmic says the available capacity in this line has‘increased
substantially during the past two to five years’ with a typical
premium in the US $100,000 for a limit of indemnity of $10
million, covering both first-party and third-party risks.
Typically, a limit of indemnity of £1 million to £5 million is
more common in the UK, although some organisations may
buy up to £10 million.An indicative cost for a limit of
indemnity of £1 million (with no US exposure) would be about
£30,000 or a premium of £150,000 for a £10 million limit.
Airmic says its US insurance partners are reporting they are
now using up to eight years of claims data to set premiums
levels but, overall, insurers are still finding pricing limits
challenging.
Allnutt and Hill agree that the market is wide open for
insurers.While the US market (currently estimated to be worth
between $500 million and $800 million gross written
premiums) is further ahead than the European market, there is
still enormous potential.
“Our view is that that sum is a very small amount when one
thinks of the exposures in NorthAmerica. So there is potential
in the US and even more potential in Europe as the demand
increases with legislation. Insurers are poised to take advantage
of the anticipated increase in demand.A number of insurers
have launched products in the last 12 months alone.”
Lauren Gow is a freelance writer who has worked for publications such as
InsuranceTimes and Global Reinsurance.
gettYImages
PatrickHill
I think there is an
element of‘it won’t
happen to me’
HansAllnutt
The potential losses
arising from a data
breach have driven
appetite for cover
To discuss the issues raised in this article, please contact
Patrick Hill on +44 (0)20 7894 6930 or phill@dacbeachcroft.com
i

Growing scrutiny from
the government and regulators means
companies across all sectors are under
pressure to improve their conduct.The
pressure is greatest in financial services:
regulators have promised to impose stricter
rules on financial services since the banking
crisis and the Libor scandal last year again
saw banks pilloried.
While the insurance industry has been at
pains to differentiate itself from the banking
sector, it too faces overregulation unless it
can clearly articulate the difference between
insurance and banking and demonstrate its
own house is in order.
An insurance industry drive to raise the
bar for professional standards may appease
regulatory bodies.The Chartered Insurance
Institute (CII) is championing various
initiatives intended to instil best practice,
improve training, development and levels of
professionalism within all areas of insurance,
including broking, underwriting, claims and
management.
The London market often sets the tone for
Europe-wide initiatives, taking a lead on
issues such as Solvency II.The UK could,
therefore, set a benchmark in its approach to
best practice for Europe and beyond.
People could be a key area of
differentiation.Talent is one of the fastest-
growing risks according to Insurance Banana
Inpractice
please contact Bill Paton
on +44 (0)20 7894 6256
or bpaton@dacbeachcroft.com
i
Skins 2011, a study conducted by the Centre
for the Study of Financial Innovation (CSFI)
in association with PwC.The industry has
woken up to the need to nurture its talent
and do a better job of promoting the industry
to top graduates.
The insurance industry may become the
beneficiary of talent that would have once
been attracted to the banking sector.A recent
surge in quality graduate applications at
Lloyd’s suggests this could already be
happening as old perceptions of insurance
being the‘poor cousin’ to banking begin to
change.
That may be helped by theAldermanbury
Declaration on 4 March 2010 published by
the Insurance ProfessionTask Force.This
endeavour aims at shaping a common
framework for professional standards, which
it argues will lead to a more sustainable and
profitable industry.
The Declaration requires high entry
standards; continuous professional
development (CPD); and adherence to a
code of ethics. It specifies that firms meet
common professional standards covering:
commitment to excellence; training and
development; professionalism within
insurers; professionalism within brokers,
broking, underwriting, claims and
management standards.
However, demonstrating better practices
and improvements to regulators and other
stakeholders may be a challenge for the
insurance industry. Demonstrating a link
between improving standards and a better
outcome for customers and society is even
more difficult.The CII is attempting to do this
by linking standards to better outcomes:
• Customers should have access to better
quality products designed to meet their
needs, better service, and higher standards
of advice and information;
• Corporate clients should find their
businesses more sustainable with positive
effects on the economy;
• Society should benefit from higher levels
of trust in the insurance sector and better
levels of protection and provision for the
future;
•The taxpayer should incur lower costs to
support uninsured catastrophes;
•The need for regulatory oversight should
reduce along with regulatory and
compensation costs;
• Employees should improve their human
capital and self-esteem through training and
ethical behaviour; and
• Firms adopting higher standards should gain
a competitive advantage, attract and retain a
more competitive talent pool and achieve
higher returns.
Effortsbyindustrybodiesto
raiseprofessionalstandardsinthe
UKinsuranceindustryare
essentialinapost-bankingcrisis
worldtoavoidoverregulation,
saysBillPaton,CEOof
DACBeachcroftClaimsSolutions.
TheLondonmarketoftensetsthetoneforEurope-wideinitiativessothe
UKcouldsetabenchmarkinitsapproachtobestpractice.

PatrickHill
Partner, Specialist
International Risk Group
SpecialistareasInsurance
litigation, professional
financial risk, political risk,
cyber risk
Patrick has extensive experience defending a range
of professionals and institutions. He handles claims
concerning financial institutions and directors and
officers, including domestic and international trust
related claims. He has also advised insurers on the
interpretation and adjustment of complex high
value contentious global political risk claims .
+44 (0)20 7894 6930 / phill@dacbeachcroft.com
DAC Beachcroft offers strategic counsel and transaction
support on all aspects of financial products and services
to financial institutions, and is a market leader in global
insurance. It also provides litigation and claims handling
services, commercial and corporate advice. It
understands the challenges its clients face, and helps
them exploit business opportunities in this tough
environment. The following are some of the Partners
quoted in this issue. For details of our other financial
sector specialists visit www.dacbeachcroft.com
David Pollitt
Partner, Head of Insurance
Specialist areas Insurance, banking
litigation, commercial dispute resolution,
professional risk, professional regulation
David has advised financial institutions
for a number of years on contentious
and regulatory matters. As Head of the sector he also speaks to
clients about their requirements, to ensure service delivery is
aligned. David also fulfils the role of Advisory Partner, ensuring
service delivery is constantly improving to meet clients’ needs.
+44 (0)117 918 2226 / dpollitt@dacbeachcroft.com
BenNicholson
Partner
SpecialistareasInsurance,
policy coverage, reinsurance
Ben is a specialist insurance
and reinsurance lawyer who
advises on high-value, complex and specialist lines
disputes. He has particular expertise in construction
and engineering risks in the power generation and
distribution sectors and infrastructure development
projects, and also advises on other non-marine lines
of business.
Ben has advised on disputes globally and recently
launched Beachcroft’s Singapore office.
+65 6213 5902 /bnicholson@dacbeachcroft.com
AndrewParker
Partner
SpecialistareasStrategic
litigation, insurance, personal
injury, market issues
Andrew is at the forefront of strategic litigation,
advising insurers on a range of emerging issues
affecting injury claims. He has played a leading role in
monitoring such issues as periodic payments and
compensation system/costs reforms, and was one of
Lord Justice Jackson’s assessors. He has also worked
closely with the government on legislation.
+44 (0)20 7894 6232 / aparker@dacbeachcroft.com
NickYoung
Partner
Specialistareas Dispute
resolution, insurance coverage
disputes, property loss,
construction, engineering and
energy insurance
Nickisdescribedas‘themantohaveinyourcorner
whenthegoinggetstough’byLegal500UK2012
Edition,InsuranceandReinsuranceLondon.Nickhas
beeninvolvedinanumberofsignificantand
high-profilemattersovertheyearsandspecialisesin
advisinginsurersandtheirinsuredsoncrisis
managementissuesfollowingmajorlosses.
+44 (0)20 7894 6100 / nyoung@dacbeachcroft.com
ChrisWilkes
Partner, Reinsurance group
Specialistareas Financial
services, insurance, major
incident management,
commercial dispute
resolution, policy coverage,
property and construction insurance, reinsurance
Chris specialises in policy and reinsurance
coverage – particularly product liability,
construction/engineering and business
interruption disputes. He also has considerable
experience in DO and fidelity matters. Chris
focuses on international and cross-border issues.
+44(0)2078946844/cwilkes@dacbeachcroft.com
MathewRutter
Partner, Financial Institutions
Specialistareas Financial
services, insurance
Mathew has considerable
experience of regulatory
issues as they affect financial institutions. His areas
of expertise include corporate governance, capital
requirements, financial promotions and conduct
of business, including TCF and general handbook
issues as well as consumer credit. Mathew
regularly advises on transactions in the regulated
sector, new authorisations, perimeter issues and
outsourcing.
+44(0)2078946322/mrutter@dacbeachcroft.com
Meettheexperts

© DAC Beachcroft 2013
Auckland Birmingham Bristol Dublin Edinburgh Glasgow Leeds London Madrid
Manchester Mexico City Newcastle Newport Singapore Santiago Wellington Winchester
www.dacbeachcroft.com
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