inside: brigHt LigHts, big cities p10

325 years of LLoyd’s Insert

robert Hiscox on reguLation p19 staying aHead of tHe next superstorm p24

food security: food for tHougHt p30

summer 2013 WWW.lloyds.com

01_LMM4_Cover_des5.indd 1 19/06/2013 12:43 03

In 1984, we launched a successful mission to salvage two rogue satellites, sending a SuMMER 2013 www.lloyds.com shuttle and five astronauts into orbit Features Regulars COVER STORY: MEGACITIES By 2025, it is predicted that 13.6% of the world’s urban population will live in ‘megacities’, most of them 325 years of lloyd’s Insert 05 INTRODUCTION in emerging markets. And with megacities come mega We welcome you to Market magazine risks. So, what are the implications for insurers? and tee up this issue’s top stories 18 MAKING AN IMPACT 24 THE CALM BEFORE THE STORM When a meteor strike over Russia At least five intense hurricanes are caused $30m in damage, it gave the anticipated in 2013. And, with more insurance industry pause for thought people living on the coast in high-value centres, the cost could be catastrophic. INTERVIEW WITH… We explore what insurers can do to ROBERT HISCOX mitigate the impact of a perfect storm We talk to the retired chairman about the perils of heavy-handed regulation and 29 WHEN THE LIGHTS GO OUT the biggest item in his art collection What happens when blackouts – caused by electricity shortfalls, solar storms or natural catastrophes – become a 06 feature of the future? FORESIGHT News from around the market, including 30 FOOD FOR THOUGHT Summer 2013 www.lloyds.com the technological innovations helping With the world population due to hit nine to de-risk the groundbreaking The Coldest billion by 2050, food security presents a Journey, plus Lloyd’s brand new report on huge global challenge – and insurers have a role to play in innovating new products Published on behalf of Lloyd’s (www.lloyds.com) the key threats faced by corporates by Sunday (www.sundaypublishing.com) 22 INFOGRAPHIC If you would like to contribute to the next issue, Wreck removal is getting more costly – please email [email protected] Market reveals some extraordinary stats CoveR ILLuStRAtIon by jAmeS joyCe 34 THE GREAT PEARL ROBBERY Care has been taken to ensure accuracy of information, but neither Edwardian London was the setting for Lloyd’s nor the publishers can accept responsibility for omissions or errors. Lloyd’s is regulated by the Financial Conduct Authority and the the audacious theft of a string of pearls Prudential Regulation Authority. © Lloyd’s 2013. PluS: 325 YEARS OF llOYD’S OF lONDON 35 MARKET UPDATE From City of London Coffee House to global hub for specialist insurance and reinsurance, Upcoming events, movers in the Lloyd’s we bring you ten moments that ensured the market’s reputation as a pioneer on the world market and international contacts stage – from the San Francisco earthquake to the first cover for space satellites

02_LMM4_Opener_des3.indd 1 19/06/2013 14:50 03_LMM4_Contents_des9.indd 1 19/06/2013 12:49 05

“One of For 325 years, Lloyd’s has been a pioneer on the world stage. We’ve dealt in the biggest the most complex, unusual and extreme risks, been a powerful agent for change and an enabler of the global economy. threats is In this anniversary issue of Market, we celebrate that extraordinary history competition with ten moments that made us the world’s centre for specialist insurance and from China. reinsurance (see insert) – from Cuthbert Heath’s unconventional new covers to They can kicking off the ambitious Vision 2025 programme. underwrite, Key to our vision is pursuing profitable growth in underinsured, emerging free of the sort economies – not least because, in a little over a decade, they will be home to of regulation eight of the world’s top ten megacities. On p10, we look at the rapid and unorganic rise of these densely populated, infrastructure-intensive conurbations, we have, and the megarisks they’re most vulnerable to. with strong We also talk to outspoken legend Robert Hiscox about why the industry government should be allowed to self-regulate (p19). And, with severe hurricane activity support” predicted for 2013, we explore the makings of a perfect storm, plus what robert hiscox insurers can do to mitigate their exposure (p24). Finally, we get to grips with a massive emerging risk issue – global food security (p30) – and investigate the audacious theft of a string of pearls in 1913 (p34). We hope you find this issue interesting – and if you haven’t already done so, sign up to receive Market magazine or enewsletter at lloyds.com/marketmagazine

@LloydsofLondon www.facebook.com/lloyds www.lloyds.com

05_LMM4_Intro_des5.indd 1 19/06/2013 12:50 07 words by helen yates illustrations by tang yau hoong

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

to persuade ourselves it would not and all the jointing for the two modified Caterpillar D6N vehicles was done in silicone – another world first. “There was also concern that regular diesel fuel would freeze, so we had to have the engines adapted to use aviation fuel. “And we had to demonstrate we had a depth of contingency in our planning – and that the expertise in our Ice Team asia was deep and well-founded enough that they could take a hit and still be able to continue the expedition. None of us would have wanted to see that contingency invoked so early into the mission, but it had to be. Warranty and indemnity business environments and “We required insurance as a insurance can be an eFFective processes can create concern contingent asset against two types Way to ‘de-risk’ outbound about the risk management of peril. First, we might need to invoke mergers and acquisitions of an international m&a deal. search and rescue costs, bearing in Japanese outbound mergers and this is often managed through mind the hazardous nature of this acquisitions (m&a) activity has consideration, post-completion expedition. Secondly, if for any increased steadily, in both deal adjustments, deal warranties, volume and value, over the past escrow funds or other forms of antarctica reason there was a mishap to our kit or machinery, we had to be able three years. as indicators point guarantee. However, these don’t to remove it and clean it all up. to reduced domestic demand, always provide reassurance that “In recent times there has not been, many companies, aided by a a deal can be completed within to my knowledge, anything that strong yen, have attempted acceptable risk tolerance. contemplates an expedition of this to derive greater revenue and Warranty and indemnity (W&i) size and scale. It has been contingent profit from overseas. insurance is a way to ‘de-risk’ the As sir rAnulph Fiennes’ TeAm ConTinues “We spent five years researching everything The journey in numbers on all of the pieces coming together: many expect this trend to transaction. it is increasingly iTs pioneering expediTion, we look AT we would need, starting with specialised -89.2˚C: Antarctica boasts the getting the ship; finding the right, continue, leading to levels of used to identify and transfer The innovATions helping To miTigATe The equipment for Sir Ranulph Fiennes and lowest recorded temperature qualified team; finding sponsors to outbound m&a activity at or risks to insurers, thereby giving risk, And The role insurAnCe hAs plAyed members of the Ice Team to wear, given anywhere on the planet help us buy kit and equipment; and beyond the highs of the 1990s. reassurance and assisting the Billed as The Coldest Journey, Sir Ranulph we were anticipating temperatures down -33˚C: Temperature when absolutely core to it is the insurance. in 2012, Japanese outbound smooth completion of the deal. Fiennes and his team of five explorers set to -90˚C. Lung tissue seizes up at around Sir Fiennes developed frostbite “This is the market at its best. It does m&a deals reached $110.5bn, the new W&i product license off this March to conquer Antarctica in -45˚C. We had to demonstrate – with the after taking off his outer gloves these things really well. The programme according to dealogic, second obtained by Lloyd’s Japan winter. Unfortunately, Fiennes had to help of the Ministry of Defence in their six months: How long the is led at Lloyd’s and without a top only to the us with $165.4bn. allows Lloyd’s underwriters to pull out after developing frostbite, but testing areas – that specially designed 2,000-mile crossing will take, broker and London lead, the ability to one of these, Japanese telecom bring modern and competitive the rest of the Ice Team has continued clothing and masks could recycle the mostly in complete darkness attract the co-insurance just wouldn’t and internet firm softbank’s m&a insurance to Japan. two the arduous 2,000-mile trip. moisture in your breath back into your Five years: Time spent have happened. They did a stellar job.” proposed takeover of us leading underwriting teams, The Coldest Journey Chairman, body so the very dry cold air wouldn’t preparing for the expedition wireless company sprint nextel, beazley and Pembroke, offer Tony Medniuk, describes some of the freeze-dry your lungs as you were breathing. £6.6m: How much the For more inFormation for $21.6bn, will be the country’s significant capacity, experience technological innovations necessary for “The effect of welding in such a cold, expedition hopes to raise for Visit The Coldest Journey site largest ever overseas deal. and expertise in m&a. many the expedition to take place – and the hostile environment also had to be taken charity Seeing is Believing at thecoldestjourney.org While many Japanese of their underwriters are significance of the insurance policy, into account – and whether conventional Get regular updates on the team’s progress at companies have learned from former corporate lawyers who which was placed by broker JLT and 55% welding techniques would still give the facebook.com/TheColdestJourney or by past experiences, for some, understand the complexity of underwritten in the Lloyd’s market: required bonding support. We were able following them on Twitter: @coldestjourney the different laws, culture, outbound m&a transactions.

06_LMM4_Foresight_des11.indd 1 19/06/2013 15:35 06_LMM4_Foresight_des11.indd 2 19/06/2013 14:36 09 Foresight

thE world Who’s Winning AsiA the risk race? the third lloyd’s risk index was TrusTees in The dock launched earlier this month at a a new product coVers key officers in these organisations.” london event hosted by business and directors oF asian charities Marsh and Catlin Singapore financial news service, bloomberg and not-For-proFits who have launched a product that In 2011, when Lloyd’s last surveyed are exposed to litigation tackles exposures for charities and global business leaders, their top risk The high-profile trial of six senior other non-profit groups. It gives was loss of customers and cancelled religious leaders in Singapore up to SG$3m for legal defence

orders. More surprising, given the EuropE began in May, the latest in a spate costs in respect of any claim climbing levels of middle and senior of cases involving the directors alleging fraud and dishonesty management unemployment, was of not-for-profit and charitable – which is typically excluded that in second place they put lack of organisations. The six City under normal D&O policies. available talent and skills shortages. Harvest Church leaders are In Singapore there are more This year, the faltering of the much Bringing tomorrow’s specialist accused of embezzling more than than 2,500 registered charities. vaunted ‘two-speed’ recovery has hit underwriters into the market $40m to fund the pop music Their exposure mirrors an uptick business confidence in all areas of the in his speech marking the centenary career of the wife of the religious in D&O litigation in general of the chartered insurance institute’s EuropE world, with Latin America in particular organisation’s founder. across Asia. “I would put it taking a hit. But the new number one royal charter last year, cii president “In Singapore there has been a down to competition for foreign risk across the world? High taxation. Julian James acknowledged the need spate of regulatory investigations investment and foreign capital The Lloyd’s Risk Index 2013 to boost talent in the industry and against non-profit organisations that continues to flow into this discusses how the recent mood music urged the market to get to grips with including government agencies part of the world,” says Chua. around corporations ‘paying their way’, the recruitment challenge. and statutory bodies as well as “In that process, the whole notion as the cost of insurance claims come together to fight rather than the reality of dropping and lloyd’s is doing just that. in support charitable organisations,” says of legal liability and corporate fraud rises, lloyd’s fights back fraud, sharing and analysing corporate tax rates, is affecting of its Vision 2025 initiative, which has a key Marsh’s FINPRO Practice Leader responsibility to various insurance claims fraud has industry-wide claims data in businesses in all regions of the world. aim of retaining, attracting and developing for Southeast Asia, Gary Chua. stakeholders has now been become a big issue for the an effort to spot suspicious It also welcomes the fact that, finally, the best candidates from the widest talent “We are seeing more of that, and increased compared to before.” industry and insurance buyers patterns. last year the abi cyber risk has shot up the league table pool, it is introducing a new apprenticeship in particular we are seeing this in recent years. in the uk, it and city of london Police to become the overall number three programme for school leavers this autumn. being focused on the areas of is estimated to cost more than set up the insurance fraud risk for business. the programme will see 12 exceptional improper behaviour committed by £2bn a year, up from £860m enforcement department recruits spend 18 months working in the in 2000, adding an estimated (ifed), which abi members to read the findings of the latest market, while acquiring a professional £44 to each household’s are jointly funding. lloyd’s risk index rePort: qualification.t he successful applicants general insurance costs, is soon to join. under the Download it at www.lloyds.com/riskindex will undertake placements in different according to the association agreement, managing agents areas of insurance, such as claims of british insurers (abi). the will be able to refer suspected handling, broking and underwriting impact of a tough economic insurance fraud cases in certain classes of business. climate and the involvement to ifed for investigation. another talent-expansion initiative for of organised criminal gangs both the corporation and the market is – particularly in third-party the ifed’s first the year-long lloyd’s market professional motor claims – is thought year of oPeration: mentoring network, which will see to be behind the rise in Total number of arrests: 260 participants tailor-matched according to fraudulent claims. Total number of cautions: 76 their experience level, allowing them to reforms have helped to tackle Total number of convictions at court: 12 develop a network of relationships, the uk’s growing compensation Current number of insurers enhance skills and build their careers. culture, which should help referring cases: 49 deter opportunists. recent Total value of fraud under to Find out more: years have seen the industry investigation: £11m Check out www.lloyds.com/careers

06_LMM4_Foresight_des11.indd 3 19/06/2013 14:36 06_LMM4_Foresight_des11.indd 4 19/06/2013 14:36 17

10_LMM4_MEGA_des12.indd 1 20/06/2013 17:18 10_LMM4_MEGA_des12.indd 2 20/06/2013 17:18 12 / Megacities 13 words by marcus alcock illustrations by half past twelve

at them – but they’re not conceived of as infrastructure investment for Munich Re Southeast Asia: opportunities through the supply such, because there’s not a political body The market should be buoyed by “ We see quite a few big infrastructure chain, for political, terrorism overseeing them. Look at the Ruhr area these findings, given the potential for projects in power and energy. For and business interruption covers, in Germany; or Switzerland, which supporting large-scale risk in the region. example, there’s the huge metro and for broader co-operation and some see as one large city. Whatever Indeed, the prospects in the medium project in Indonesia, which is innovation. “In the future, it ’s possible your definition (here, it’s a city with more term in the Asia-Pacific look bullish, technically very challenging and to think of having a risk manager than ten million people), experts agree with demand set to increase off the back caters to our risk appetite really well.” for a city analogous to a country risk the real growth in megacities over the of significant infrastructure investment. Port developments, like that of manager. There are so many single next few decades will come from According to McKinsey, annual Boom Baru in Indonesian Sumatra risk transfer and purchase risk transfer dynamic emerging economies. infrastructure investment in cities will (see panel, p15), present a lucrative mechanisms in play. I see cities banding Swiss Re’s figures indicate that, rise from $10tn to $20tn by 2025, with prospect too. McK insey anticpates together on a global level for knowledge within 12 years, eight of the world’s the lion’s share in emerging economies. that cities of the near future will solutions such as water management top ten megacities will be in emerging The resulting building boom would require two-and-a-half times the plans. And insurers and reinsurers can markets. And the UN’s DESA concurs, require $80tn of construction. level of today’s port infrastructure. be very important in these alliances.” anticipating the biggest increases in Says Daniel Chan, Head of Rainer Egloff, Emerging R isks In fact, this is already happening: countries such as India, China, Nigeria Propert y and Engineering Facultative Manager at Swiss Re, also flags up in the wake of Superstorm Sandy, and Indonesia: over the next 40 years, India alone will add half a billion to its urban population. Meanwhile, in Urban World: Cities and the Rise of the Megacities and beyond: They’re attractive prospects for specialist insurers, not least Consuming Class, McK insey suggests global urban giants – present and future in terms of large-scale infrastructure investment. But while that by 2025, 20 megacities in emerging (PoPulation in millions) megacities in emerging markets are poised for substantial markets will collectively contribute $5.8tn to global growth. The majority of 2011 premium growth, they’re also very vulnerable to diverse Delhi, mexico city, these – from Tokyo, Mumbai, Shanghai india mexiCo macro risks – from earthquakes to industrial accidents and Beijing, to Delhi, Calcutta and tokyo, new York-newark, JaPan us shanghai, Dhaka – will be in Asia. China são Paulo, Kolkata, premium prospects Brazil mumbai, Dhaka, india india Beijing, Bangladesh A number of countries offer distinct China In 20 07, a milestone was reached in Development at the UN’s encouragement for the international history: for the first time there were Department of Economic and (re)insurance market, with Indonesia’s 37. 2 more people living in cities than in the Social A ffairs (DESA), “ is the property casualty primary insurance 22.7 20.4 20.4 20.2 19.9 19.7 country. This mass migration, coupled very rapid growth of megacities.” volume set to more than double in 15.6 15.4 14.4 with rapid urbanisation and explosive Predictions include some 630 million size from almost €3bn in 2012 to €7.3bn population grow th, is a mega trend for people, or 13.6% of the world’s urban in 2020. Average grow th rates of other our time – and one that’s gathering pace. population, living in megacities by emerging countries – such as Vietnam, 24.6 23.6 23.2 22.9 22.6 20.2 Recent United Nations (U N) research 2025 – in contrast to 359 million in the Philippines, Malaysia and Thailand 32.9 28.4 26.6 reveals that bet ween 2011 and 2050 2011, and just 39 million in 1970. – range bet ween 6% and 8%. Overall, 38.7 the world population should jump by But what constitutes a megacit y? premium income for the insurance 2.3bn to 9.3bn, with two-thirds (6.3bn) Is it the agglomeration of a population? industr y in the Asia-Pacific will são Paulo, calling cities home. Populations won’t be Population densit y? In the 1970s, double by 2020, according to a study Brazil evenly dispersed between metropolitan it used to be defined as eight million by Munich Re’s Economic Research new York-newark, Beijing, centres, though – they’ll be concentrated inhabitants. Today, it ’s ten million. Department. Unsurprisingly, the tokyo, shanghai, us China Karachi, JaPan China Pakistan in a few, sprawling conurbations. There are megacities we don’t know reinsurer expects China to evidence Delhi, mumbai, mexico city, Dhaka, “What we are seeing,” says Jomo about yet. In China, satellite images the highest increase in primar y india india mexiCo Bangladesh Kwame Sundaram, Assistant show urban areas coming together that insurance premiums worldwide until Secretary-General for Economic amount to a type of city when you look 2020, with an additional €425bn. 2025 Source: united nationS

10_LMM4_MEGA_des12.indd 3 20/06/2013 17:18 10_LMM4_MEGA_des12.indd 4 20/06/2013 17:18 14 / Megacities 15

and floods in Jakarta and São Paulo, the Egloff: “In these explosively growing areas, including bullet train services. Clinton Global Initiative Commitment urban centres, the planning is usually Although most services resumed again to Action sees a network of cities behind the grow th process, with a lot soon after the quake, the volume of collaborating to create a common of crowding and congestion, poor air trains was reduced for some time due framework for assessing climate risk. qualit y, pollution and other issues.” to electricity shortages. A further, Insurers would be able to value risk in a One just has to look at the recent stark example was the East Japan “In these uniform way, ensuring continued disaster in Dhaka, Bangladesh – when Railway ( JR East) propert y explosively investment in urban infrastructure. 1,100 workers were killed by a collapsed programme’s 71bn yen ($910m) loss building – to appreciate how accelerated, following the Tokohu earthquake growing urban big cities, big risks unstructured urbanisation might – from property damage and disruption centres, the As attractive as all of this is for the compromise construction standards. (the programme covered both property planning is international (re)insurance industry, damage and business interruption). usually behind the the loss potential in these megacities temblor troubles growth process, can be enormous – whether from The main risk associated with other nat cats with a lot of natural catastrophes, epidemics, or, megacities, though, is one of Their very location means megacities crowding and say, accidents in the industrial sector. accumulation. Because of the close are virtually predestined to suffer This is largely attributable to the interdependence between flows of some form of natural catastrophe. congestion, poor high concentrations of people, value goods, finance and information in Says Swiss Re’s Egloff: “A large air quality, and infrastructure in confined areas. today’s global cities, a single loss number of these agglomerations are pollution and But it’s also because many of these occurrence can have far-reaching conveniently situated near good other issues” mega-urban regions have grown negative consequences across transport links – on the coast, for Palembang, Indonesia : Refining risk rainer egloff, emerging rapidly and unorganically, leaving numerous economic sectors. example – and if there is a rise in sea risks manager, swiss re them more vulnerable. Explains Says Bernd Kohn, CEO of Munich levels, they will be directly impacted.” Re, Southeast Asia: “For us as a risk Kohn picks up on the point, using carrier, the accumulation of value is Indonesia as an example: “Propert y often cited as one of the future surumandra Bridge, which is more of huge interest, and we invest a lot in cat programmes are a big feature, and megacities to watch, Palembang is the than 2,000 km long and connects our pricing models to manage it.” reinsurers are assessing what is being capital city of the south sumatra province Jakarta and sumatra.” Munich Re’s report, Megacities – done by the government in terms of in Indonesia. Located on the Musi river some of the greatest potential for Megarisks, cites Tokyo as an example physical risk and flood management. banks on the east coast of southern underwriters relates to Boom Baru, of a peak accumulation scenario: Jakarta, like Bangkok, is sink ing sumatra island, it has an area of just over Palembang’s largest port and a “ To d a y, a s e v e r e e a r t h q u a k e i n t h e To k y o - every year and becoming more prone 400 sq km and is currently the second- deep-water port situated on the Yokohama conurbation would result in to flooding. It’s being modelled as a largest city in sumatra after Medan, banks of the Musi river. Boom Baru has hundreds of thousands of fatalities, major potential catastrophe risk.” and the seventh-largest city in been a major driver of the economic damage running into trillions of dollars, Another obser ved climate effect Indonesia – though this position growth of the province by attracting large and global economic repercussions.” is that megacities are heat islands, could be set to change dramatically. oil refineries, rubber plants, textile mills, Earthquakes can be particularly with the mean temperature at the according to Gan Kwee Lin, client fertiliser factories, and food-processing devastating to megacities because centre up to several degrees Celsius Portfolio Manager for Munich re in plants, making it an extremely attractive of their intensit y and the geographical higher than in the surrounding Indonesia: “there are currently policy prospect for industrial property players extent of damage they inflict. The countryside. This is most pronounced discussions ongoing in Indonesia about in particular. In the long term, however, Kobe quake of 1995 caused economic when there are heat waves, because the spreading the economy of the country the hope is that this emerging megacity losses of well over $100bn, and more normal counterbalancing night-time more evenly, shifting it across the can offer a broader appeal. Gan Kwee recently the Great Tohoku earthquake cooling is less effective. During the country from Jakarta to sumatra. and Lin notes: “We’re hoping to see casualty of 2011 in Tokyo resulted in insured European summer heat wave of 20 03, Palembang is the capital of sumatra, develop but at the moment it’s not losses of some $25bn. the number of people who died in cities so the potential for it to become an that developed as it’s still not really Transport structures are especially was vastly disproportionate to the economic powerhouse is there. and in people’s minds. It’s a cultural issue: vulnerable here: according to reports, population as a whole – despite the there are some exciting projects which it’s very much part of the mind-set in the earthquake forced the suspension greater availabilit y of healthcare will help facilitate this, such as the Indonesia not to buy casualty products.” of trains in the Tohoku and Tokyo services in urban areas.

10_LMM4_MEGA_des12.indd 5 20/06/2013 17:18 10_LMM4_MEGA_des12.indd 6 20/06/2013 17:18 16 / Megacities 17

district of India k illed up to 20,0 0 0 people. A settlement of $470m was “Jakarta, agreed, $20 0m of which was insured like Bangkok, – but the consequences could have been is sinking every higher had Bhopal been a megacity. year and becoming A lso in 1984, a fire ripped through a propane and butane storage facility more and more within the municipal area of Mexico prone to flooding. City. Since the early 1960s, 40,000 It is being people had moved into the originally modelled as a uninhabited area surrounding the major potential plant – with the consequence that catastrophe risk” more than 500 died. A decade later, bernd kohn, ceo, Mexico would again grab headlines munich re southeast asia after explosive substances spread through the sewers of Guadalajara, eventually destroying entire streets. Cairo, Egypt: Political violence potential The cit y’s large and complex public utility network is believed to have Other weather-related risks exacerbated the risk significantly. santiago, chile: construction opportunities include hurricanes and high-intensity the capital of egypt and a cultural centre dissatisfaction, with political uncertainty storms, which, even when mild, the final analysis of the arab world, cairo is the largest city reducing the government’s revenues. can lead to severe losses. Thus, when Despite substantial premium grow th in the middle east and africa, and host tourism, manufacturing and construction Typhoon Nari passed over Taipei in expectations across various classes of to several key companies. these include have been among the hardest-hit sectors Founded in 1541, santiago has been architecture. the city also boasts some September 20 01, albeit with relatively business, emerging markets megacities engineering multinational orascom and of the egyptian economy. the capital city of chile since colonial of latin america’s most spectacular low wind speeds, it caused insured are likely to be underinsured – especially the talaat moustafa Group, one of the yet even here – a megacity in stasis – times, and is also its industrial and infrastructure, such as the santiago damage of around $50 0m. Heav y when it comes to natural catastrophes. largest conglomerates in the region. the (re)insurance market, and lloyd’s in financial centre, generating 45% Metro and the new costanera norte, rains left the cit y’s underground But there are plenty more risks for yet cairo remains one of the greatest particular, has been able to help mitigate of the country’s GdP. santiago is a highway system that passes below railway stations flooded after the which to deliver bespoke products. A examples of untapped potential among risk. as civil unrest has increased in considered a mature megacity given downtown and connects the eastern pumping system failed, paralysing its cautionary word, though, because the the world’s megacities. that said, if it recent years, there has been an increase that migration from rural areas has and western extremes of the city. most important traffic artery for weeks. hazards that go hand in hand with these manages to negotiate its recent political in demand for insurance against damage slowed, the birth rate is sinking and Yet there is more to come, according The Port Authority of New York and drivers of future economic growth aren’t and economic stagnation, the possibilities to property, and business interruption life expectancy has increased. to Mike Hughes, ceO of aon Benfield New Jersey, meanwhile, said 25% of ordinary risks – they’re megarisks. And for growth in one of the powerhouses of from social perils such as riots, strikes, currently under construction is the latin america: “You’ve got a lot going trucks servicing its ports, and as many their complexities pose a challenge – not the region are impressive. insurrections and coups détat. costanera center, a huge infrastructure on in santiago, especially after the as 2,0 0 0 containers, were damaged by only for insurers, but aid agencies too. an indication of what could be michael burle, liberty syndicates’ class project in the financial district which [2010] quake, with building codes being Superstorm Sandy when, in 2012, 14 ft Most humanitarians are not trained achieved was the surge in industrial and Underwriter for war and terrorism, fine includes a 3,000,000 sq ft mall, two changed. there are lots of construction storm surges and 90 mph winds toppled to respond efficiently to disasters in commercial activity from 2004 to 2008, art and specie, comments on this uptick in office towers and a hotel. projects. then there’s the airport stacks onto each other. Rail tracks were built-up, densely populated areas, when the country adopted an aggressive political violence enquiries in the past two While its latin american neighbours development and other really huge also washed out, and cranes and cargo- explains international disaster relief policy of economic reform intended to years: “the loss occurrences for clients may have experienced a greater programmes. there’s no doubt about it, handling equipment broken. Insured charit y, RedR. W hich is why Lloyd ’s attract foreign investment and facilitate that didn’t necessarily have the cover degree of volatility, two decades of santiago will be massive, with plenty to losses from Sandy stand at $22bn. Charities Trust is supporting RedR’s Gdp growth. despite such economic from their property all risks [insurance] uninterrupted economic growth have write for. the economy is stable and it’s three-year project that aims to fill the acceleration, cairo’s recent history has forced them down the line of buying a transformed santiago into one of a safe place to live and work. and a industrial accidents gaps in specialist knowledge, sk ills and been more troubled, however. after comprehensive political violence policy. latin america’s most sophisticated lot of the lloyd’s market already has Conurbations in emerging markets systems required by aid agencies to deal unrest erupted in January 2011 as the first and that’s from individual clients, such as metropolitan areas, with extensive strong relationships with chile, so a lot are prone to industrial hazards too. with large-scale urban emergencies. wave of the ‘arab spring’, the egyptian a single hotel owner in cairo, to the major suburban development, dozens of of the mega-risks will flow from chile The biggest civil industrial tragedy ever Government drastically increased manufacturers with worldwide assets. shopping malls, and impressive high-rise into the london brokers.” occured in 1984, when a toxic gas leak find more on this collaboration at social spending to address public it’s across the whole spectrum.” from a pesticide plant in the Bhopal www.lloyds.com/readytorespond

10_LMM4_MEGA_des12.indd 7 20/06/2013 17:19 10_LMM4_MEGA_des12.indd 8 20/06/2013 17:19 18 / meteor strikes 19 / interview words by roxane McMeeken interview by roxane mcmeeken photographs by joe mcgorty

been no real demand for modelling. Ironically, we know more about the bigger ones that could wipe us out.” Making an impact However, R MS has done a study of It sounds like science fiction, but after a meteor exploded in what would happen if a Tunguska-sized incident occured over New York City. the sky over central Russia earlier this year, should insurers Robert Muir-Wood, Chief Risk Officer, be considering how to mitigate their exposure to such risks? says: “ There are no particular reasons why any one location is more or less likely than another to have an impact. So the modelling is fairly straightforward in terms of probabilit y and size of impacts.” On 15 February, a meteor exploded over the Russian city R MS has found that a Tunguska-sized event probably of Chelyabinsk. The resulting shockwave injured more had a 500-year or 1,000-year return period worldwide. than 1,000 people and reports suggest losses will top $30m. Chelyabinsk, meanwhile, may have a 10 0-year return period. However, according to Lloyd’s managing agent QBE, this As for losses, Muir-Wood says: “A Chelyabinsk-size impact event was ‘relatively small’. So how concerned about meteors might have a 1% chance of causing $1bn of economic loss should the insurance world be? worldwide and the Tunguska-size impact might have a Simon Webber, Head of Exposure and Catastrophe 10% chance of causing $1bn, and 5% chance of $100bn.” Management at QBE, says that there are three categories of That would be a 5,0 0 0-year return period loss of “ regulators are meteor strike. One is the micro category, where space debris $1bn and 20,0 0 0-year return period loss of $10 0bn enters the atmosphere and either burns up or hits the ground worldwide. He adds that these are economic losses, of obsessed with with minimal impact. The second is the mid-range category. which about 20% might be insured. Chelyabinsk is at the small end of this. At the larger end is Dorian Blake, Head of Underwriting Review at QBE, taking the risk the Tunguska incident of 1908, when the air burst of a large concludes that while severe meteor strikes are extremely meteor over central Siberia created a blast equivalent to 1,000 rare, their potential severity means we can’t ignore them. out of insurance, times that of the nuclear bomb dropped on Hiroshima in “They should form part of any insurer’s general risk 1945. A third-category event would be comparable to the management strateg y,” he says. “Insurers must be aware one that wiped out the dinosaurs 65 million years ago. the risk exists, assess and quantif y it, and then think which is a risk- With the first level being too small to cause serious damage about whether it is tolerable.” and what Webber describes as the ‘dinosaurs killer’ too big Blake adds that insurers can mitigate exposure through taking business ” for the planet to survive, insurance can only concern itself reinsurance or other forms of cover. However, he admits that, outspoken industry legend robert Hiscox with the mid-range level. Despite this, there has been little “ if we are talk ing about a single insurer facing an $80bn loss, talks candidly about wHy tHe market risk modelling of mid-level meteors – or meteorites as they it almost certainly would not survive.” Then again, “if that’s sHould be allowed to regulate itself… are known – if they contact the Earth ’s surface. only going to happen once every few thousand years, is it and His brusH witH deatH in africa Hélène Galy, Head of Proprietary Modelling at Willis, worth preparing for? The truth is that insurance is generally says: “These incidents are considered so rare that there has not geared up or capitalised for 1,000-year plus events.”

18_LMM4_Impact_des6.indd 1 19/06/2013 13:32 19_LMM4_Hiscox_des7.indd 1 20/06/2013 17:21 20 / interview 21

Robert Hiscox’s relaxed demeanor contrasts starkly with industr y will be equally challenging four things “ In the old you didn’t the news he delivers as soon as we meet in the atrium of the days, we were for the sector in the years ahead. Lloyd’s building. He has been in Accident & Emergency all “At Hiscox we’ve spent our lives know about weekend following a hunting injur y sustained by a relative. creative and assessing risk. But then the [former] robert hiscox: Thankfully, it emerges, the accident was a minor one. wrote policies Financial Services Authority (FSA) Even so, his cheery take on a terrifying episode says on the spot. told us we should have a risk officer. much about his attitude to risk: he’s all for it. Which might I felt like a They said: ‘If your business is risk, explain how he managed to build the family firm from a buccaneer and why don’t you have a risk structure?’ he’s happy Lloyd ’s syndicate with ten employees writing £2m in Our whole life is risk; we know to be standing I could insure down because… premium in 1970, to the £1.7 bn premium, 1, 250-strong anything, what we’re doing.” underwriting force it is today. Indeed, Hiscox’s decision to “I’ve always been a It certainly took resolve and a willingness to break the thanks to choose an insider – former Chief slave to the business mould when, as Deputy Chairman of Lloyd’s from 1993 being backed Underwriting Officer Robert in a terribly middle- to 1995, he helped shepherd the organisation through a up by Lloyd’s” Childs – as his successor was class way. Now I have challenging reconstruction and renewal period – thought by some to run counter to a delicious lack of championing the introduction of corporate capital that the FSA’s preference for firms to responsibility!” continues to reinforce the market’s strong financial footing. bring in fresh talent. “ The FSA liked Clearly, Hiscox is a man who knows how to grow a business you to appoint outsiders,” he says. in tough conditions. W hich is why – in risk-averse and “But it’s not true to say I defied economically depressed times – we asked the sprightly them.” The ver y fact that Childs the most surprising 70-year-old former Chairman of the eponymous insurer has been with the firm for more item in his art what the biggest issue for the sector will be in coming years. than 20 years, Hiscox says, makes collection is… And he is t y pically unequivocal: regulation, and in particular him ideal to take the helm. “The 90-tonne regulation that prevents insurers from taking risks. His antipathy towards regulatory millennium arch by bodies doesn’t mean Hiscox is Andy Goldsworthy. regulation stifles risk-taking against regulation per se. “ We must People can’t believe “Regulators are obsessed with taking the risk out of have regulation. I’m in favour of it.” However, he believes the how big it is.” insurance, which is a risk-tak ing business,” says Hiscox. sector can best face the challenges ahead if it regulates itself. “In the old days, if there was trouble somewhere in the world “ W hy can’t we regulate ourselves? Ever ybody has an interest – say a war or terrorism – we were there. We were creative and in stopping banditry from within.” wrote policies on the spot. I felt like a buccaneer and I could He refutes the idea that “no one is prepared to opine on their if he hadn’t insure anything, thanks to being backed up by Lloyd’s.” peers”. He cites the case of the failed insurer Quinn in 2011: gone into the In today’s more tightly regulated environment, he says, “We all told the regulator Quinn was going bust.” family business the London market is different: “What I love about Lloyd’s Hiscox would like to see the UK’s various organisations, he would have… is its braver y in under writing. But now, due to regulation, such as the Association of British Insurers and the Chartered “Run a construction I question whether there is that scope for creativity.” Insurance Institute, come together to form a self-regulatory company. I’m happy The main regulatory offenders for Hiscox all emanate body. But with little hope of this anytime soon, insurers in on a building site – from the European Union: the Solvency II directive, the West face a growing challenge from the developing making beauty out EU employment regulations and the proposed financial world. “One of the biggest threats is competition from of chaos.” transactions ta x. In fact, Hiscox says he wants the UK to China,” says Hiscox. “They can underwrite, free of the sort leave the EU and has added his name to a list of 50 0 business of regulation we have, with strong government support.” leaders behind the Business for Britain campaign. The group How best to respond, then? “Lloyd ’s must maintain its is urging the government to repatriate powers from Brussels. distinctiveness,” he says. “Its uniqueness is what keeps the closest he’s Hiscox’s main gripe with the UK’s membership of the EU people coming here.” It is also essential for Lloyd’s to have come to dying is… is what he sees as the countr y’s resulting lack of control over its hubs in different timezones to compete with burgeoning “Being charged by own destiny. “I believe you should never get into a situation competitors. To tackle the regulatory burden, he advises a buffalo in Africa. where you can be brought down by others. If you’re a business more lobbying at government level. It was the most doing well, why tie yourself to other companies that aren’t?” Hiscox, meanwhile, will remain with his firm as honorary exciting moment In the UK, Hiscox believes supervision of the insurance President – championing the right to take risks. of my life.”

19_LMM4_Hiscox_des7.indd 2 20/06/2013 17:21 19_LMM4_Hiscox_des7.indd 3 20/06/2013 17:21

22 / infographic 23 illustrations by romualdo faura

17,047,014

Wreck The average number of The amount of pollutants tonnes serious incidents every year removal salved by International Salvage LLoyd’s List inteLLigence, 2012 Union Members from casualty vessels in the past 17 years in the 21st international salvage union Century The total cost of the 20 most expensive wreck removals of the past decade internationaL group of p&i cLubs

There have been a number of high-profile marine wrecks in recent years: the Napoli in the English Channel; the Rena, run aground off New Zealand; Typical fuel recovery costs in 2012, versus $1m-$4m in 2000 and the Costa Concordia, international group of p&i Clubs which foundered off the coast of Italy in 2012. The cost of removing these wrecks is 458 metres spiraling – in part due to The gross weight of the Oasis of The length of the largest ship ever built, Knock Nevis. increasing vessel sizes and the Seas, the largest passenger The Empire State Building stands at 438 metres growing cargo volumes, but ship currently in service shippingdatabase.com also because of the inevitable press centre: royaLcaribbean.co.uk global media coverage and environmental lobbying that accompanies them. 138

To find ouT more, download lloyd’s reporT, The Challenges The number of cruise liners The amount of and impliCaTions of removing The number of bulkers in service 51 weighing more than 100,000 reinsurance capital in The number of wrecks in the shipwreCks in The 21sT CenTury, with a deadweight of more than tonnes in 2013. This compares the maritime sector in last ten years that have cost aT www.lloyds.Com/riskinsighT 250,000 tonnes with 40 in 2007 2012 – a new record more than $100m to remove lloyd’s list intelligenCe, 2012 lLloyd’sLoyd’s Listlist intelligennteLLigence,Ce, 2012 aon benfieLd internationaL group of p&i cLubs

(TEU: 20-foot equivalent units) The capacity of the largest container ship in service, the Marco Polo 16,000 Cma Cgm

22_LMM4_Infographic_des9.indd 1 19/06/2013 14:40 22_LMM4_Infographic_des9.indd 2 19/06/2013 14:40 24 / hurricanes 25 words by david crichton illustrations by sawdust

Warmer oceans, stormier conditions Sea surface temperatures in the North Atlantic are also on the rise. Research published in Nature Geoscience in 2012 by Professor Rowan Sutton, Director of Climate Research at the UK’s National Centre for Atmospheric Science, suggests that the UK’s recent run of record As the Atlantic warms and the world rainfall is influenced by a major warming of the North sees accelerated, high-value, high-density Atlantic Ocean, which started in around 1996. It may development in potentially vulnerable urban be significant that the TSR forecast for 2013 is for increased Atlantic cyclone activity but near-normal centres, Market explores the makings of the Northwest Pacific typhoon activity. perfect storm, the risk factors at play and A warmer ocean is well known to contribute to stormier what insurers can do to mitigate the impact conditions. The last time the Atlantic was this warm of extreme hurricane events (1931-1960), it produced a run of wet summers and severe storms, in particular the 1953 storm, which caused nearly 500 deaths in the UK and over 1,800 in Holland. The question is whether the current spell will also last 30 years. Many reports suggest the climate is changing, with the Professor Mark Saunders and Dr Adam Lea of Tropical most detailed findings for the second half of the 21st Storm Risk.com (TSR) at University College London century emerging out of the PRUDENCE Project, have an enviable reputation for forecasting tropical storms. completed in 2004 and involving universities from across In April 2005, their predictions for the coming hurricane Europe and Scandinavia. The main predictions, all of season were sent to a contact in the British Consulate in which have since occurred, include: Houston, Texas. The Consulate later earned praise for its • Increases in winter rainfall in Central and Northern preparedness to help British citizens during Hurricane Europe and decreases in the South. Katrina, one of the strongest storms to impact the coast • Major increases in summer rainfall in North-East of the United States during the last 100 years, and which Europe and decreases in the South. caused devastation along the central Gulf Coast states. • Longer summer droughts in Mediterranean countries. This April, TSR said: “Based on climate signals, Atlantic • Winter storms: extreme wind speed increases between basin tropical cyclone activity is forecast to be about 30% 45°N and 55°N. above the 1950-2012 long-term norm.” Their announcements have since been followed by alerts risk factors from Weather Services International, which predicts One thing all researchers seem to agree on is that “16 named storms, nine hurricanes and five intense windstorm hazard is likely to become more severe. So, hurricanes” for 2013, consistent with TSR predictions. what about the risk of damage? When assessing any type of physical risk, it’s crucial to remember that hazard is just one component. The others – exposure and vulnerability – are as important. The Crichton Risk Triangle ©( Crichton, 1999) has been used by insurance catastrophe modellers for many years and suggests that the amount of risk

24_LMM4_Hurricanes_des7.indd 1 20/06/2013 17:23 24_LMM4_Hurricanes_des7.indd 2 20/06/2013 17:23 26 / HUrriCANes 27

Katrina, much of the damage was due to flooding in the If more low-lying coastal zones. storms track The Braer storm, by contrast, struck unpopulated areas in Scotland, so exposure was low. Compare Shetland with south of 55°, Shanghai in China. The construction of the Three Gorges as predicted, Dam has meant a reduction in silt flowing down the this could mean Yangtze River, which had previously been deposited at its big increases in mouth. The silt had helped to protect Shanghai from storm damage because surges, but is now gradually disappearing. Also, the area to of the exposure the north of the city, which is ultra-exposed to hurricane of vulnerable damage and was previously undeveloped, has now been built on with high-density, high-value properties – so property in exposure has grown massively in just 20 years. continental After Hurricane Hazel in 1954, major reductions in Europe exposure were introduced in Ontario, Canada. Properties in flood hazard areas were bought by the government and demolished, with the land returned to its natural state. CloCkwise from bottom: The flood defence on one bank of the Thames River in the with sustained winds during landfall of 125mph, katrina caused widespread centre of London, Ontario, is no longer needed while the devastation along the central Gulf Coast opposite bank is now an attractive city-centre park. for Business & Home Safety. It has guidance for retrofitting states of the Us. in its day, Hurricane Flooding is often a major factor in the damage resulting existing residential structures, including the modification of Andrew was the costliest storm ever, from hurricanes. Swiss Re estimates that only half of the v ulnerable areas such as roofs and gable walls. causing more than $26bn in losses at 2012 damage caused by Superstorm Sandy was wind damage. In Australia, the insurance and banking industries have prices. the record surge from superstorm Huge storm surges can occur too – for example, Hurricane gone further. When government ignored their pleas for sandy affected expensive real estate in manhattan, New Jersey and long island Gilbert in 1988 produced 100mph winds and a 5.8 metre more resilient building standards, the finance sector simply storm surge. It killed 318 people and devastated Jamaica. developed its own – known as ‘blue book’ standards. Banks Flooding caused by typhoons is a problem in countries stopped giving mortgages on residential properties that such as Japan, where government figures show that, after didn’t meet these standards and insurers would not insure the Naka River and Kokubu River floods of 1998 and the them. Despite the government’s continued updates of its Fukuoka floods of 1999, half of the cost of the floods own unsatisfactory standards, these were universally consisted of repairing the flood defences themselves. disregarded by the construction industry. There is much to Even where exposure remains high, risk can be reduced be said for a similar approach being taken elsewhere. by reducing v ulnerabilit y. Human vulnerability can be reduced by effective early depends on the interaction of all three factors. If any one Rover, fully laden, was blown over a cliff. We don’t know warning systems. However these are very dependent on factor can be reduced, then risk can be reduced. how fast the wind was because both the harbourmaster’s Vulnerability a good communications infrastructure and this is not and the coastguard’s anemometers were blown away. Hurricane Andrew in 1992 generated a sea change in always available in less developed countries. For example, Hazard However, it can be deduced that it was more than 170mph – attitudes to v ulnerabilit y in the US. In its day, it was the Hurricane Mitch struck Honduras in 1998 with very little The power of windstorms is impressive. The University of the most powerful storm previously recorded in Shetland. costliest storm ever, but it is now ranked fourth. Thanks to warning to the people living there. Conservative estimates the Highlands and Islands (UHI) in Stornoway, Western Losses were trivial, though. Even though it may have been an effective warning system, the death rate was low at 43 suggest that 20,000 people died, and a further two million Isles, has been operating wave measurement buoys for two far more severe than Sandy or Katrina, the Braer storm people, but so many houses lay in its path that a sustained were left homeless. Yet the hurricane is estimated to have years off the west coast of Scotland. During a storm this caused little damage. The answer lies in the other sides wind speed of 145mph and a 5-metre storm surge caused cost only around $2bn at 1998 prices. February, record wave heights of 23m were achieved. of the risk triangle: exposure and v ulnerabilit y. more than $26bn of damage at 2012 prices. More than It has also been suggested that underwriters should If wave power machines had been installed at the time, 200,000 homes and businesses were damaged or destroyed. beware a ‘black swan’ event, defined by Nancy Green, UHI calculates the electricity generated that day could ExposurE Even so, Dr Mark Maslin of the AON Benfield Hazard Executive Vice President of AON Risk solutions, as have exceeded that of 120 modern nuclear power stations Both Sandy and Katrina affected areas with high exposure Research Centre at UCL points out in his book, Stormy “a highly improbable occurrence w ith three characteristics: the size of Torness. Under normal conditions, they claim in terms of population density and property value. Sandy Weather, that if the hurricane had struck just 20 miles • It is impossible to predict. that wave power machines there could generate an average affected nearly 1,000 miles of coastline, a bigger area than further north, in Miami, the costs might have doubled. • It carries a massive impact. output equivalent to 12 nuclear power stations. any previously recorded hurricane in the US. Not only After Andrew, steps were taken to make Florida’s • Its shock value is stunning because people could never Windstorm severity is best measured by the atmospheric that, but it produced a record storm surge of 4.2 metres in buildings more resilient to windstorm by raising standards conceive of such an event occurring.” pressure. In general, the lower the pressure, the more severe central Manhattan. The surge also affected expensive real and giving better training to building inspectors. These Green’s examples include the September 11 attacks, the windstorm. The wind was so fierce during the Braer estate in New Jersey and Long Island – not to mention the measures have now been extended nationally under the the 2008 credit crisis, the BP Gulf oil spill in 2010 and storm of January 1993 that the Lerwick coastguard’s Land disruption caused by the closure of a major airport. As with Fortified programme, managed by the Insurance Institute the 2011 Japan earthquake.

24_LMM4_Hurricanes_des7.indd 3 20/06/2013 17:23 24_LMM4_Hurricanes_des7.indd 4 20/06/2013 17:23 28 / hurricanes blackouts 29 words by Helen yates

the Costs To predict the cost of a hurricane scenario, it is necessary to What Can insurers do? obtain data on mean loss ratios for different severities and locations. In the UK, for example, the author set up such a database at Aberdeen University in 1998 using claims data from the leading UK insurers (Loss Prevention Council help build more resilient communities report LPR 8). This database shows that in the UK, by working with policymakers to windstorm mean loss ratios depend almost entirely on the encourage customers to adopt risk- power grid in Quebec failed in 92 seconds during a huge relevant building standards, which vary by location and mitigating measures such as ‘code plus’ When the magnetic storm, it notes. It took nine hours to restore normal date of construction. Thus, the most vulnerable homes in standards for new building and retrofits. operations, during which time five million people had no the UK are in the south of England and built after 1971. lights go out electricity, and businesses across Quebec were disrupted. A storm in October 1987 in England was not nearly as Cyprus, meanwhile, experienced rolling blackouts in 2011 severe as some of those experienced in Scotland. But because Electricity shortfalls, solar storms, earthquakes… after an explosion tore through the Vassilikos power station, it tracked across the south of the country where exposure and incentivise policyholders to take risk which provided close to half of the island’s electricity. vulnerability are high, it was the most damaging since 1953. mitigation measures through reduced business interruption from blackouts can wreak The blast was caused by containers of nitroglycerine and The Building Research Establishment (Report 138) found premiums – for example, lower premiums havoc through the supply chain gunpowder detonating after resting in the sun at a naval base. that most of the damage was to gable walls caused by failure could be offered to home owners who Forced to import energy, the island’s economy suffered. of prefabricated roof trusses. As more houses are built with install fire-resistant, non-wood shingles prefabricated trusses, the costs of successive storms in in fire-prone areas. insurers could also Britain faces a looming electricity beware the dark side England could increase. encourage policyholders to share a shortage and could be hit by 1970s-style If blackouts are to become a feature in the future, they will greater proportion of risk by offering blackouts if nothing is done to increase have a profound impact on business. The Tohoku earthquake outlook policies with higher deductibles. this will supply. Around a fifth of Britain’s and tsunami in March 2011 showed how businesses and Despite the Fortified programme, the US remains provide a financial reason to implement power plants are set to close by supply chains can be disrupted by power cuts. Several the region most vulnerable to hurricane damage. Of the risk mitigation measures in order to keep 2020 as European environmental Japanese prefectures were hit by rolling blackouts in the 40 biggest insurance losses recorded since 1970, 20 were losses as low as possible. legislation curbs electricity supplies aftermath of the disaster and Level 7 meltdowns at the from hurricanes or tornadoes that struck the US. from polluting coal and oil plants. Fukushima nuclear reactor. Aon’s Global R isk Management Sur vey currently ranks UK energ y watchdog Ofgem and A proportion of this disruption was not insured. This was weather and natural disasters at 16 on its list of risk concerns utility company SSE have voiced because contingent business interruption (CBI) policies were facing companies, but projects this will jump to ninth place explain to customers the advantage concern over future electricit y not triggered if physical damage had not taken place. “ There in the next three years. In the sur vey, Gail McGovern, of retrofits in hazard-prone areas and shortfalls. With fewer power plants, were instances where there actually wasn’t propert y damage President and CEO of the American Red Cross, points out consider offering home inspections / spare capacit y could tighten to as low as at the supply side, but because the utility company was down, that more than half of Americans live on or near the coast, retrofit recommendations. 4%, compared to 14% at the moment. there was no power coming in,” says Tom Teixeira, a partner where they are vulnerable to hurricanes, storm surges and “ The government is significantly in the global solutions consulting group at Willis. “Or there other weather-related disasters – and that this figure is underestimating the scale of the capacit y was disruption because there was logistical interference. So, expected to increase to 75% by 2025. crunch facing the UK in the next three for instance, they couldn’t ship workers in or out of the site. In the Far East, an increasing population density, share findings on weather-related years and there is a ver y real risk of the “A lot of companies would have had [insurance] protection especially near the coast, is likely to be vulnerable to storm catastrophe risks more widely lights going out as a result,” said SSE if there had been a lack of power to their own operations, but surges. Flash floods will remain a major problem in Japan with government researchers, and Chief Executive, Ian Marchant. they hadn’t really considered the scenario of the supplier not due to the topography and population densities. Japan has advocate additional data collection being able to produce because they weren’t getting the power.” now changed its policies to promote sustainable flood and development of tools that will solar storms Only 20% to 25% of business interruptions, such as supply management, which should reduce the problem over time. benefit underwriting, risk mitigation Electricity networks are also vulnerable chain disruptions, are related to physical loss, points out a In Europe, if more storms track south of 55°, as predicted, and adaptation planning. to solar storms. Swiss Re has considered Chief Risk Officer Emerging Risks Initiative paper,Power this could mean big increases in damage because of the a scenario of a geomagnetic storm over Blackout Risks. Therefore organisations should be aware they exposure of vulnerable property in continental Europe. North America, with the potential to may be exposed to significant uninsured losses, triggering Indeed, a 2013 disaster scenario used by Lloyd’s predicts a affect 130 million people and cost the demand for new risk-transfer solutions related to power potential loss of €23bn should such a storm hit England, Work with policymakers to improve economy $1trn. blackout risks in the future. France and Germany. Interestingly, seven European hazard mapping and data quality. There are plenty of historical examples Since the Japanese earthquake some supply chain insurance windstorms appeared in the top 40 most costly insurance of disruption to electrical transformers products have been developed, triggered by non-physical losses since 1970 – all of them south of 55° latitude. doWnload the report, hurriCanes and grids from solar flares, according to damage business interruption, and the market is growing. David is a Fellow of the Chartered Insurance Institute. He and long-term Climate variability, a Lloyd’s report on the impacts of space Limits of $25m to $100m are already available for standalone has advised the UN, NATO, the OECD and governments and at WWW.lloyds.Com/hurriCanes weather on earth. The issue came to CBI covers and pricing is based on the scope of coverage insurers on four continents on flooding and natural disasters prominence in March 1989, when the (such as the number of first-tier suppliers covered).

24_LMM4_Hurricanes_des7.indd 5 20/06/2013 17:23 29_LMM4_Blackouts_des8.indd 1 21/06/2013 09:37 30 / food security 31 words by chris wheal illustration by angus grieg

than the aisles of pre-cut cellophane- wrapped cuts and bags of mince.

supply chain contamination Elliott points out that the k ind of contamination seen with Horsegate has been around for years. “Wherever there’s an opportunity to make a quick buck, the human race will take it.” In this case, meat suppliers and food manufacturers were blamed, but it was also supermarkets squeezing prices that led to the contamination. It became impossible to provide pure beef at the prices the supermarkets had set. The recent horsemeat scandal put food security Even so, Tesco has said that the result of Horsegate will likely be that people towards the top of the news agenda. But with pay a higher price for their food. the world population forecast to hit nine In Germany, meanwhile, billion by 2050, this is just one facet of a huge competition from a new buyer caused global risk issue. And insurers have a role to significant accidental contamination in play – in helping to manage the risks facing the arable sector – specifically wheat. the food-growing, processing and distribution Biodiesel producers were prepared to industries through the supply chain pay more for Bavarian wheat than the traditional food producers. With virtually all the local wheat sold at a higher price outside the food chain, dair y and livestock farmers turned instead to wheat from Serbia. However, a warmer, drier summer – Horsegate is the name given to Elliott believes firms face two choices: possibly the result of climate change – the horsemeat-in-beef scandal that simplify the supply chain for their meat meant a fungi not normally found as galloped through Europe’s food products – often with 12 or more links far north as Serbia grew in the wheat, production and distribution sectors for a single product – or introduce new releasing a poison called aflatoxin. during the past 12 months. And checks and testing at each and ever y Untested, the contaminated wheat it looks set to whip up the biggest stage. Both are expensive options. was mi xed into animal feed and fed shake up in food security since the But the consumer preference for to cattle on 4,0 0 0 farms. They mad cow disease outbreak in 1984. locally sourced food means the safe supplied milk to 35 dairies. All the Horsegate exposed the lack of money is on supermarkets shortening farms and dairies had to be closed controls in supermarkets and food their supply chains. Says Elliott: and quarantined, with thousands processing firms. “It started in “For the first time in living memory, of litres of milk recalled. That recall Ireland and then the UK, and then consumers are starting to ask, extended to the products to which we pointed the finger at Polish and ‘did this come from a local farm?’. the contaminated milk was added. Romanian suppliers,” says Professor I would expect to see a blossoming There is little doubt insurers can help Chris Elliott, Director of the Institute of artisan food producers.” companies manage these growing risks for Global Food Security at Queen’s Supermarkets are already rethinking by developing risk management and Universit y Belfast. “But actually it how they sell meat. One possibility is risk transfer solutions along the food was someone in the middle of the to employ old-fashioned butchers supply chain. The winners will be those supply chain in Holland doing it.” supplying locally sourced meat, rather prepared to innovate and adapt.

30_LMM4_Food Security_des10.indd 1 21/06/2013 09:37 30_LMM4_Food Security_des10.indd 2 21/06/2013 09:37 32 / food security 33

produCt innovation importance of the shrimp industry in recall can be covered. W hat you Food security risks Aquaculture provides an example the Far East, plus farms for mussels see with developing markets is, the Top ten food risk countries of how insurers can make a splash. and oysters. “Farming shrimps is more regulation grows, the more Paddy Secretan is Managing Director analogous to farming corn,” he says. insurance follows,” he says. eritrea of Aquaculture Under writing “ You put a lot of small things in and a Climate Change Management Ser vices (AU MS). He few months later either you have a lot or setting the agenda In Somalia and the DR Congo, already- first wrote an aquaculture insurance you have none. You can’t count them Regulators worldwide are already at vulnerable food security has been product in Lloyd ’s back in 1973. He like you can count salmon or trout.” the starting barrier. International afghanistan worsened by drought and the ensuing says insurance in the sector is about to Secretan explains that traditional organisations, such as the World food crisis. In 2010, Russia banned go through a sea change, from insuring insurance in the sector has covered Economic Forum, are discussing world grain exports after severe drought and a species you can count – the number of fish farms, where you can quantif y food security. In 2011, the World Bank haiti chad wildfires ruined 10m hectares of grain. fish in a lake – to something more akin the damage after an incident – water Group introduced the Agricultural south sudan ethiopia to crop insurance, looking at yield. This temperature change, pollution, Price R isk Management (APR M) somalia will open up the massive international plankton contamination and so on. The product to enable farmers and food comoros aquacultural market for shellfish insurer can count the number of dead producers in emerging economies to Food riots production, for example. fish and compensate accordingly. They access financial derivatives to hedge During the 2007-2008 food crisis, “ The role insurance is going to play can also exclude certain risks. The new risks posed by price volatilit y. Burundi food riots broke out in more than 30 is going to change in the next year or markets need a new way of thinking. The U N and the EU have food dr congo countries,from India and Morocco two,” says Secretan. He flags up the “ We want to make crop-t y pe securit y issues on their agendas. to Mexico and Argentina. insurance available to aquaculture – Governments worldwide are stepping Source: Maplecroft food Security riSk index 2012 not counting, but insuring the output in. There have been agricultural or yield,” says Secretan, who reckons insurance schemes introduced for basic this issue will dominate next year’s crops such as rice in Vietnam and China. Food priCe volatility conference on aquaculture insurance in In other countries, microinsurance and political drivers, among other In 2009, the Philippines Government rising demand “ Innovative Istanbul. He mentions that in Turkey for small producers is developing and insurance factors, influence food security.” panic bought 1.5m tonnes of rice, equal Between 2000 and 2050, global an agreement bet ween the insurance expanding. And in developed countries, The report says: “Risks can be to 5% of annual international grain trade. cereal demand is set to rise by a industr y, brokers, farmers and the regulation is veering the other way to solutions, categorised as physical, operational, Coupled with export restrictions, this projected 75%, while demand for meat government means the government tack le waste and obesit y. Expect the in both the financial, reputational, geopolitical, hoarding forced up world food prices. is expected to double. Developing pays half the aquaculture insurance pace of regulation to pick up. developed and regulatory, and societal.” But it countries are expected to account for premiums for Turkish producers. It’s a Not ever y risk can be covered, developing suggests that insurers have an more than 75% of this growth. model other countries are looking at. however, and not every problem has world, have the increasing role to play: “Innovative Yet, Secretan says: “ The aquaculture insurance as its solution. But bet ween insurance solutions, in both the market speCulation potential to play insurance market is highly specialised, 20 05 and 2011, agricultural insurance a larger role in developed and developing world, Unregulated speculation on world with few people in it, and the insurance premiums have almost tripled to have the potential to play a larger role commodities markets can add to price BioFuels market is not growing with the $23.5bn, according to a recent Swiss Re progress towards in progress towards food security.” volatility in agricultural commodities, The substantial growth of non-feed aquaculture industr y. It either report. With food production needing food security” According to Neil Smith, Lloyd’s with ruinous consequences for the lives uses of agro-commodities since continues in its current vein, providing to grow by 60% to meet world demand Manager of Emerging R isks and of smallholder farmers and purchasing the 1990s is largely attributable to specialised products for salmon and by 2050, and with new markets Research: “The report is not intended power of those in developing countries. increasing biofuel production that trout farmers, or it has to change.” opening up to insurance, the potential to be a compendium of all food- often receives government subsidies. One Lloyd ’s under writer confirms is huge. Food production risks also related issues, but it is flagging up that insurers already cover a whole include perils associated with propert y, next ten years, warning that there where insurance has a role to play. range of food industr y perils across employment, transport and global is a perfect storm of risks: “On There is an increasing world population supply risks the supply chain, from raw material trade, including political risk. the demand side, global population and something has to change to meet Brazil, Argentina and the US produce 90% ConFliCt producers to high-tech food processing The potential has prompted growth, demographic change, the growing demand for food.” of global corn and soybean exports. While Causing displacement, disruption of firms, distributors and retailers. Lloyd’s to publish a report entitled increasing affluence and migration only 3.6% of global rice exports come trade and high transport costs, conflict “We cover events – a spillage, an Feast or Famine: Business and to urban centres are leading to download lloyd’s report, from China, fluctuations in its exports impedes efforts to deliver humanitarian explosion – for bodily injury from Insurance Implications of Food Safety growth in demand for food and Feast or Famine: Business could have a significant impact due to the (including food) assistance, and products or operations. There is and Security. It highlights how food changing patterns of consumption. and insurance implications oF thinning world rice export market. negatively impacts on agriculture. cover for gradual pollution and securit y will be one of the largest On the supply side, climate change, Food saFety and security, at environmental liability. Product threats to global society over the water scarcit y, resource competition www.lloyds.com/FeastorFamine

30_LMM4_Food Security_des10.indd 3 21/06/2013 09:37 30_LMM4_Food Security_des10.indd 4 21/06/2013 09:37 34 / HERITAGE 35 words by glyn brown illustration by james benn

Chief Inspector Alfred Ward. Along with Mayer, several police officers and Mr Price – one of the two Lloyd’s underwriting assessors who originally valued the necklace mArKet movers events gloBAl ContACts The Great – Ward met Mayer’s French representative, Henri Salamons, who had travelled to London from France. A special Pearl Robbery AustrAliA committee of Lloyd’s underwriters, headed by Montague Jim McCann monte CArlo rendezvous Evans, was set up to handle the affair. After discussions that Non-executive Chairman, Willis 6-12 September, monACo Adrian Humphreys It was one of the most audacious thefts of its General Representative, Australia lasted all night, it was announced that Lloyd’s would pay a Jim succeeds Joe Plumeri when the latter An annua l gathering of more than 2,50 0 +61 (0)2 9223 1433 time, its resonance eclipsed only by oncoming £10,000 reward for the necklace’s return. [email protected] retires from his post this July. Jim has reinsurance professiona ls, mark ing the BrAzil war – and it concerned a breathtaking string Chief Inspector Ward then began his investigation – and served on the board since 2004 and been beginning of the annua l negotiation process Marco Castro of pearls, insured by Lloyd’s for £150,000 at its centre was Joseph Grizzard, a debonair man who posed an independent director since 2012. “I am ahead of renewa ls. Lloyd ’s w ill be hosting a Managing Director & General as a legitimate Hatton Garden jewel trader, but who was also delighted to welcome Jim McCann as the net work ing reception on beha lf of the Representative, Brazil known as the ‘King of Fences’ . new chairman of Willis,” says CEO Lloyd ’s market on Monday 9 September. + 55 (21) 3266 1900 Dominic Casserly. “I am confident [we] [email protected] In the summer of 1913, Hatton Garden Ward’s first lead was a Paris dealer called Brandstatter, who fermA CAnAdA will take Willis to the next level in the diamond merchant Max Mayer sent a claimed that during a recent visit to Antwerp he had been 29 September-2 OctOber, Sean Murphy stunning necklace with 61 flawless pale approached and asked if he would be interested in a necklace years ahead by providing our clients mAAstriCht, netherlAnds President & Attorney in Fact, Canada with an outstanding service.” +1 416 360 1512 pink pearls to a potential buyer in Paris. that looked very much like Mayer’s. Brandstatter and two Lloyd’s will be participating in the annual [email protected] The necklace, known as ‘The Mona Lisa other dealers arranged to meet the thieves at a hotel in conference by hosting a booth (47-48) for the ChinA of Pearls’, was insured by Lloyd’s for Holborn, but while the assignation went ahead, there was no Lee Meyrick Chief Under w riting Officer, X L duration of the event. Please come and v isit Eric Gao £150,000, and was coveted by jewellers sign of Grizzard or the necklace. A second meeting, at us to find out more about Lloyd’s, and to General Representative, China and criminals worldwide. Chancery Lane tube station, was arranged at which time the The former Zurich CEO of Marine has meet market representatives. +86 21 6162 8200 joined XL as Chief Underwriting Officer [email protected] After choosing not to buy the pearls, the necklace was to be exchanged for 100,000 French francs. This hong Kong for Global Marine and Offshore Energy. CiAB prospective buyer returned the necklace by time, though Grizzard was arrested, the necklace remained Kim Swan 29 September-2 OctOber, He began his career at AIG before joining General Representative, Hong Kong registered post. But when Mayer broke the elusive. However, it wasn’t to remain so for very much longer. ColorAdo springs, us Zurich in 2009 as Global Marine Practice +852 2918 9911 intact seals and opened the box, the necklace Just two weeks after Grizzard’s arrest, piano-maker Leader. Says Neil Robertson, Chief Lloyd ’s w ill host a dinner and net work ing [email protected] JApAn was gone, replaced with sugar lumps. Augustus Horne was walking to work in Highbury when Executive of Specialty at XL: “Lee will reception at one of the largest gatherings of Devastated, Mayer contacted his Paris he saw a man drop something in a gutter. When he play a critical role in continuing to drive Chairmen and CEOs from all the major Iain Ferguson agent, then Scotland Yard, who sent one investigated, Horne discovered a broken string of pearls. Representative & Chief Operating Officer, Japan our presence in a range of mature and insurance operations in the US and overseas. +81 (0)3 5656 6926 of their most highly regarded officers, Assuming them to be imitation, he gave one to a street emerging markets.” [email protected] urchin to use as a marble, and the rest to mArKet presentAtions northern europe the police, where he was astonished to be Ron Carlier singApore/hong Kong 10 September Benno Reischel CEO, Cooper Gay Re Lloyd’s, London Head of Nor thern Europe offered the reward for the missing pearls. +4 4 (0)207 327 5327 switzerlAnd 24 September It’s thought the final suspect felt the The well-known broker has returned to the [email protected] police closing in, and disposed of them. market – this time at the Cooper Gay Lloyd’s, London singApore frAnCe 1 OctOber When the gang came to trial, the Swett & Crawford (CGSC) reinsurance Kent Chaplin broking subsidiary. Ron will be based in Lloyd’s, London Head of Asia Pacific, Lloyd ’s Asia facts about the pearls’ disappearance itAly 8 OctOber +65 6538 7088 New York and report to Shaun Hooper, [email protected] became a little clearer. Mayer’s Lloyd’s, London President and CEO of Swett & Crawford southern & eAstern europe, & AfriCA necklace, it seems, had been returned isrAel 8 OctOber from Paris. But on the way to Mayer’s, North America. He is responsible for the Enrico Bertagna firm’s reinsurance strategy and tasked with Lloyd’s, London Head of Southern, Eastern Europe & A frica the postman had called at the shop iBeriA 22 OctOber expanding its capabilities in the US. The +39 026 378 8820 [email protected] of dealer Simon Silverman – another former CEO of RK Carvill has spent eight Lloyd’s, London of Grizzard’s gang. Silverman, who germAny/AustriA 31 OctOber uK/irelAnd years out of a frontline position, after Keith Stern had access to forged seals, bribed stepping down from his post in 20 05. Lloyd’s, London meXiCo 8 NOvember UK & Ireland Regiona l Manager the postman to let him examine the +4 4 (0)207 327 5933 Lloyd’s, London package before exchanging the pearls [email protected] usA for sugar, resealing the parcel, and FOr Further iNFOrmatiON ON aNy OF Hank Watkins sending it on its way. President of Lloyd’s America theSe eveNtS, pleaSe viSit: +1 212 382 4060 find out more about our amazing lloyds.com/events [email protected] past at www.lloyds.com/history alterNatively, email uS at: www.lloyds.Com/lloyds/offiCes [email protected]

34_LMM4_Pearl_des3.indd 1 19/06/2013 13:47 35_LMM4_IBC_des4.indd 1 21/06/2013 09:38 Lloyd’s One Lime Street, London EC3M 7HA Telephone +44 (0)20 7327 1000 Fax +44 (0)20 7626 2389 www.lloyds.com

36_LMM4_OBC_des1.indd 1 19/06/2013 13:49