Economy and Climate Change Top New Year Agenda

For the moment the economic recession is driving the global stagecoach, while climate change is riding shotgun, but it’s not as bad as it could be.

Reports from Europe point to the fact that the P/C industry’s exposure to the economic crisis is mainly secondary. Analysts expect a rise in fraudulent claims, and more lawsuits targeting financial advisors, banks, investment firms, directors and officers, as well as misrepresentations from policyholders trying to reduce premiums. Direct economic losses have mainly hit company investments, life insurers and those firms like American International Group that set up units to deal in dubious financial products.

Marsh’s London office issued a bulletin indicating that it “expects a sharp rise in the number of UK companies buying fraud insurance protection next year, as the world economy continues to deteriorate.” It also expects the number of insurance “claims notifications relating to fraud to grow in 2009.”

Dean White, a managing director in Marsh’s Financial and Professional Practice, explained: “Historically, when times are hard fraud increases; individuals come under increasing pressure to make ends meet and many businesses are struggling to stay afloat. In such circumstances, unlawful practices which otherwise would have been viewed as unacceptable, such as the manipulation of accounts, false revenue booking, insider fraud and the selling of information to organized crime, may appear a lucrative option.

“Insurance claims notifications will continue to grow through 2009. Financial institutions will likely lead the league table of victims in terms of overall monetary value, but the scale and frequency of corporate, non-financial institution fraud and theft will show the sharpest increase.”

Lloyd’s analyzed the probable effects Bernard Madoff’s Ponzi scheme will have on the professional liability sector. His firm used the hoary technique of paying off old investors with the money coming into the fund from new ones. “The total amount that may have gone to what one banker called ‘money heaven’ is put at $50 billion,” Lloyd’s noted, “and the losers range from the world’s biggest banks to private individuals.”

The insurance industry’s exposure is based on the fact that much of the money Madoff lost wasn’t directly invested with him. A number of financial institutions, investment funds and money managers, who were in charge of their client’s portfolios, subsequently placed those funds with Madoff. These “feeder funds” are now prime targets for investors (and their lawyers) seeking to recoup some of their losses.

Paul Towler, head of the financial and professional practice at Lloyd’s broker Jardine Lloyd Thompson, explained that the alleged fraud committed by Madoff highlights the need for financial institutions and, in particular, hedge funds, to purchase appropriate professional liability limits.

He also indicated that the fraud could have a huge impact on the financial institutions insurance market. “The litigious environment that prevails means that it’s inevitable that financial institutions who invested clients’ assets in Madoff’s funds will face actions from disgruntled clients seeking to recover lost monies. Investors will be seeking redress from fund managers on the basis that they failed in their duty of care and failed to carry out adequate due diligence. People have lost so much money; the lawyers will have a field day. Not only are fund management firms exposed but so potentially are their directors.”

As a result, Towler believes that the sheer scale of the fallout from Madoff could seriously affect the financial institutions insurance market’s dynamics, notably the availability and cost of both professional indemnity and D&O coverage.

The Association of British Insurers (www.abi.org.uk) issued a warning that; “people are increasingly putting their insurance cover at risk by cheating to get a better deal.” The ABI said its members, which include most of the UK’s P/C insurers, “are uncovering a growing number of cases of ‘front end fraud,’ where the customer has lied or failed to disclose material information to get cheaper insurance.”

The ABI selected four of the most common deceptions, as follows: Fronting – where parents add their son or daughter to their motor insurance policy as an occasional named driver, when in fact they are the main driver. Not disclosing motoring convictions, ranging from a speeding conviction to drunk driving. Forgetting about previous claims. Under-estimating alcohol and tobacco consumption when applying for life and health insurance.

As far as dealing with climate change, the insurance industry continues to take the lead in supporting efforts to study the phenomenon and to try and find solutions to moderate its effects. According to Munich Re’s report on natural catastrophes for 2008, which it described as “one of the most devastating years on record,” global warming played a significant role in producing the devastation wrought by major weather events.

Cyclone Nargis caused the greatest loss of human life – more than 135,000 people in Myanmar (Burma). In terms of insured losses, Hurricane Ike, one of the six hurricanes that reached the U.S. in 2008, was the most expensive with an estimated $15 billion in insured losses out of a total of $30 billion.

Torsten Jeworrek, a member of Munich Re’s Board of Management, cited the role played by climate change as an important element in rising catastrophe losses. “This continues the long-term trend we have been observing,” he stated. “Climate change has already started and is very probably contributing to increasingly frequent weather extremes and ensuing natural catastrophes.”

An article from Lloyd’s said: “This year’s climate change agenda has, if nothing else, highlighted that next year will be hard going for those wishing to set global agreement for action against climate change.”

The article pointed out that, even though the global economic downturn weighs heavily across the globe, “nearly 200 countries have underlined their determination to agree a target for a new treaty to combat global warming by the end of 2009.” At the Climate Change conference, held in Poznan, Poland, in early December, 192 countries involved in the United Nations climate talks confirmed their commitment to reductions in global greenhouse gas emissions. According to Lloyd’s, the cuts should be between 25 and 40 percent by 2020 (from 1990 levels).

The stagecoach is in for a rough ride.