Political and credit risk news

Latin American energy industry not insulated from global risks Risk managers with international risks have been warned that the booming Latin American energy industry is not insulated from the threat of a eurozone collapse or hostilities in the Middle East. Martin Sullivan, Willis Deputy Chairman, speaking to a gathering of energy companies in Foz Do Iguacu, Brazil, cautioned that, while global demand for energy resources is buoyant and Latin American economies largely resilient, there are several clouds on the economic horizon. These threats include political tension, rising oil prices, natural catastrophes, supply chain disruption and cyber risk, he said. "We now all live, to a much greater extent, in one global village and these clouds have the potential to pose many additional risks to the energy industry in Latin America," explained Mr Sullivan.hideHighlighting the knock-on impact the eurozone crisis could have on the Latin American energy sector, which relies on European insurers for over 60% of its insurance capacity, Mr Sullivan referred to recent estimates from Swiss Re that a restructuring resulting in a 50% haircut of Greek, Irish, Portuguese, Spanish and Italian sovereign debt could wipe 24.3% from European insurers' capital base. "There is certainly the potential for a disconnect between supply and demand for energy business in the future and you don't need me to tell you that without adequate insurance, these projects simply won't be able to go ahead," he warned. He also cautioned that a serious outbreak of hostilities in the Middle East would have a devastating impact on the global economy, particularly the energy industry. Mr Sullivan estimated that a conflict in the Middle East and the closure of the Strait of Hormuz would disrupt 20% of the world's oil production, leading to supply chain failures and an oil spike of up to $300 a barrel. "But perhaps the worst effects of another war in the Middle East would be a breakdown of the ties of interdependency between the nations of the world brought together by globalisation - just at the time when regions such as Latin America need to cultivate markets in the developed world for their products," he said. Looking back to the oil price spike in 2007-2008, Mr Sullivan observed that the pressure to meet global demand led to a dramatic increase in new projects and new risks as the industry moved into more hostile geophysical environments. "All these developments necessitated the deployment of new, untried and untested technologies at a time when the pressure to maximise production levels was greater than ever. As many of you here will know, the correlation between the deployment of new technology and increased losses and insurance claims is well documented," said Sullivan. The former CEO of AIG called on the energy and insurance industries to work together to understand and prepare for threats as the search for energy moves into riskier, more remote regions. "The energy industry is developing fresh technology - moving into deeper water, exploring more remote regions, deploying newer, untried and tested technology," he said. "We have to ask ourselves some key questions: Do we yet have the data to identify, quantify and assess the risk properly? Will there be sufficient capacity and/or appetite for an appropriate risk transfer solution to be developed? And can such a solution be offered at a premium that an energy company is willing to pay?" Terrorism risks on the rise in Colombia The risk of kidnap, shooting and improvised explosive device (IED) attacks is on the increase in Colombia, Exclusive Analysis Ltd has warned. Director of Latin America Division, Carlos Caicedo, said that the oil and mining industries are the sectors at highest risk of kidnap, shooting and IED attacks, while the areas with the highest risk are the provinces of Arauca, Norta de Santander, Nariño and Chocó. "President Juan Manuel Santos has agreed to start peace negotiations with FARC guerrillas," said Mr Caicedo. "The smaller National Liberation Army (ELN) rebels have been left out of the peace process and are currently demanding to be included. Their inclusion would be likely to complicate the negotiations and we do not expect the government to invite them," he added. As a result, Mr Caicedo said the ELN is likely to increase its attacks against commercial assets to show the government that it is still a force to be reckoned with and that they deserve a place in negotiations. Such attacks are likely to remain confined to the ELN strongholds of Arauca, Norte de Santander, Nariño and Chocó provinces. The ELN has carried out over 150 attacks so far this year, most of them targeted on the oil industry. The $4bn Bicentennial pipeline project is a prime target, and in February 2012, ELN kidnapped 11 Bicentennial pipeline contractors in Tame, Arauca. In addition to oil facilities, ELN's other target sets include mining and telecom and electricity towers, he said. Terrorism risks are unlikely to completely disappear, even if a peace agreement is eventually signed, said Mr Caicedo. "ELN rebels primarily rely on kidnapping as their main source of income but are becoming increasingly involved in the drug trade. Such criminal and drug trafficking gangs are still likely to engage in kidnapping and extortion and will remain a threat to firms operating in current rebel strongholds," he explained. Cooper Gay offers global security risk crisis management London-based broker Cooper Gay & Co., is offering a free crisis management and business continuity consultation to its Terrorism & Political Risks policyholders on a worldwide basis. The service is being made available through a joint initiative with Security Exchange Ltd, a specialist risk management consultancy specialising in crisis management and business continuity. The service provides access to an online information and advice service, which will enable them to review global security risks, download crisis management guides, and book an appointment with a specialist consultant, free of charge. Cooper Gay said the service is intended to provide clients with a framework for formulating effective crisis management and business continuity plans, as well as affording them instant access to expert help in the event of an incident. Rupert Reid, Managing Director of Security Exchange said: "Although most companies will have plans on the shelf, many are outdated and unrehearsed, mainly because of the perceived complexity and cost of the exercise. Security Exchange will help companies to strip down and re-construct these plans, putting simple and straightforward measures in place which are clear and workable." Moody's highlights credit quality link between sovereigns and insurers Insurers' credit quality is linked to that of the sovereigns in which they are domiciled and conduct business, and further deterioration in the credit quality of European sovereigns would negatively affect European insurers, Moody's Investors Service has warned. As major fixed income investors, European insurers have direct exposure to government debt and banks in the euro area, with greater exposure in countries where they have a sizable business footprint. Insurers are also indirectly affected by the continued weakening of euro area sovereigns because the economic dislocation associated with declines in sovereign creditworthiness affects demand for insurers' products, business costs and policyholders' behaviour, said the rating agency. The report outlines the potential impact of three sovereign-related stress events on European insurers' credit quality and ratings. If Greece defaults again and exits from the euro area, then the negative direct effect on rated insurers' creditworthiness would be limited because of their modest financial and operational exposures to this country. If the credit quality of Spain and Italy further deteriorates, this would negatively affect the creditworthiness of rated insurers domiciled in these countries, said the rating agency. In addition, the ratings of non-domestic insurers with meaningful exposures to Spain or Italy could also face negative pressure if Italian and Spanish sovereign credit quality falls below investment-grade. And finally, a modest deterioration in the creditworthiness of large Aaa-rated EU sovereigns would not, in itself, directly affect insurers' credit profiles. However, if the strongest European sovereigns' credit strength weakened to levels commensurate with single A ratings, then a broader range of Aa-rated European insurance groups could face downward ratings pressure, said Moodys. Moody's negative outlook on Argentinian insurers Moody's decision to change the outlook to negative, from stable, of the Argentine local-currency and foreign-currency B3 sovereign bond ratings, has resulted in Moody's Latin America taking negative rating actions on the outlooks of the global local currency (GLC) and national scale (NS) insurance financial strength (IFS) ratings for most of the 27 rated Argentine insurance companies and reciprocal guarantors. The insurers' ratings were also impacted by the recent outlook change to negative, from stable, of the local-currency deposit ratings of 24 Argentine financial institutions (mostly banks). The rating actions on the insurers and reciprocal guarantors reflect Moody's assessment of the correlation between their credit profiles and that of the Argentine sovereign. The negative outlook indicates that these insurer ratings could be downgraded in the event of a downgrade of the Argentine sovereign and bank ratings, whereas their outlook could revert back to stable if the Argentine sovereign and bank rating outlooks return to stable, explained Moody's. European non-life insurance ratings from Fitch Fitch Ratings has issued ratings for the non-life insurance sector in a number of European territories, The credit rating agency has maintained a stable outlook for France, UK and Germany, but a negative outlook for Italy. Fitch Ratings maintained the French non-life insurance sector's outlook at stable and indicated that a majority of French non-life insurer ratings are likely to be affirmed over the next 12-24 months. Pricing conditions and claims experience have continued to show signs of improvement, as French non-life insurers experienced recovery in their technical results in 2011-2012, according to Fitch. Nevertheless, the agency added that volume growth continued to be weak in 2011-2012 and it said it believes the French insurance industry is facing a number of challenges, which have been amplified by the financial crisis. Fitch said it considers the main risks to French non-life insurers' ratings in the next 12-24 months to be a return of aggressive pricing policies, which would have a negative effect on the sector's profitability, and a prolonged period of low financial returns. Should these trends materialise, this could exert negative pressure on French non-life insurers' ratings and prompt a revision of the rating outlook to negative. Fitch said it has maintained its Stable Outlook on the UK non-life insurance sector, even as fundamental indicators in the sector remain weak. The Stable Outlook indicates that the vast majority of UK non-life insurers' ratings are likely to be affirmed over the next 12-24 months. "Key UK non-life insurance market indicators such as investment returns, current-year technical results and levels of reserve surplus remain weak," said Bjorn Norrman, Associate Director in Fitch's EMEA Insurance rating group. Fitch said it expects earnings to remain under pressure for the next 12-24 months, while investment returns are likely to remain depressed. Reserve surpluses built up over previous years of higher pricing will soon be exhausted, in Fitch's view, while pricing remains inadequate for many products. Fitch does not expect an imminent turn in the pricing cycle, and said that 2013 should see modest price increases, but competition and the possible entry of naive capacity could delay higher price increases. Capitalisation in the UK non-life sector remains strong, despite the current challenge of earnings generation, and this is a key factor that underpins the majority of Fitch's ratings. Fitch's rating outlook for the German non-life insurance sector remains stable. The agency considers German non-life companies to be well prepared to meet the sector's current challenges, and does not foresee a significant number of rating changes over the next 12-24 months. Fitch said it expects German non-life insurers' underwriting profitability to improve in 2012 and 2013 and the sector to report a net combined ratio of 98% and 97% respectively. This compares favourably to 2010 and 2011 when the sector recorded its weakest net combined ratio since 2002, at 99%. Fitch estimates that the sector achieved a small underwriting profit of €25m in 2011, and expects it to achieve an underwriting profit of €500m and €1bn in 2012 and 2013 respectively. In common with previous underwriting cycles, the soft phase of the current underwriting cycle has not eroded German non-life insurers' capital (other than through the reduction of equalisation reserves). Fitch said that the Italian insurance sector's rating outlook remains negative, indicating that most Italian life insurer ratings could be downgraded over the next 12-24 months. Fitch's outlook factors in the expectation that the eurozone debt crisis, despite showing signs of stabilisation, will continue to exert negative pressure on Italian insurers' ratings in the short to medium term. However, Fitch said that trading conditions in the non-life segment have improved significantly since the insurance market recorded underwriting losses in 2009 and 2010. The recovery in profitability has been largely driven by better risk selection and strong pricing actions, in particular in the dominant motor business. The insurance market now underwrites profitable business on an accident-year basis, although some legacy issues related to prior years' reserves in liability lines persist for some insurers. Nonetheless, Fitch said it believes that growth will continue to be sluggish in 2012 and 2013. S&P warning over German insurers Standard & Poor's Ratings Services has warned that the financial strength of German insurers could be affected by low yields from investment income as a result of long term low interest rates. "Although insurance companies in Germany are still proving fairly resilient to adverse financial market conditions and we are maintaining an average rating of 'A' on the sector, our outlook for the life-insurance segment is negative," said S&P in a recent report. "Our outlook for non-life insurers is stable because we believe they are generally better capitalised, better able to generate earnings, and less reliant on investment returns," added the credit rating agency. Nevertheless, in 2011, underwriting profitability stagnated, reflected in a virtually unchanged reported gross combined ratio of 98% for the industry, said S&P. "Prospectively, we think that non-life insurers' ability to implement adequate pricing will be the most effective way to improve their operating performance, helped by sound claims' management and cost efficiencies," said S&P credit analyst Christian Badorff. He added that German insurers' financial strength will also very much depend on financial market developments. "An intensification of the eurozone sovereign crisis could affect both profit-and-loss statements and balance sheets in the short term. A return to more stable financial market conditions, on the other hand, could support the financial strength of the industry, especially if bond yields do not recover too quickly," he said. GCC insurance markets report strong growth The latest GCC Reinsurance Barometer has reported that insurance markets in the GCC mirror the macroeconomic dynamics of the region and the business is looking healthy and increasingly able to support cross border risks. For 2011, total non-life and life premium volume in the GCC is estimated at $14.9bn and projected to reach $18bn by 2013. Life business is growing faster than the non-life segment but continues to be of marginal importance with a share of less than 15%. Between 2006 and 2010, GCC insurance premiums expanded almost five times as fast as the global average, with Qatar registering 12% nominal growth per annum. Infrastructure and construction spending on a massive scale continues to be the single biggest specific driver of insurance demand in the region. In Qatar alone, more than $70bn was allocated to infrastructure projects between 2005 and 2011. As of January 2012, $63bn worth of projects were underway in the country, with a further $108bn in the pipeline for the next three years. Infrastructure and construction projects dominate projects in the pipeline, with a combined share of 59%. Hydrocarbon and power projects contribute another 31%. According to the report, retention levels in the region remain extraordinarily low compared with other markets - on average domestic insurers cede 40% of their premium income to reinsurers. "However, for the first time since the 'GCC Reinsurance Barometer' was launched, a majority (52%) of respondents expect aggregate cession rates to increase over the next 12-24 months as pressure from reinsurers and regulators grows and a new generation of more 'risk savvy' insurance executives take the reins," said the report that is compiled and published by the Qatar Financial Centre (QFC). In the GCC, 40% of non-life premiums are ceded to reinsurance companies, reflecting the dominance of a direct insurance business model based on commission and investment income. The total estimated reinsurance market volume for 2011, accordingly, amounts to about $5.1bn. Even though cession rates have been declining recently they remain high compared with other countries of similar wealth and the global average of about 10%. Over the next 12-24 months, medical and health insurance is expected to be the fastest growing line of business, fuelled by compulsory insurance requirements that are reshaping some of the region's non-life markets. Other fast-growing lines include motor, which is benefiting from strong population growth, liability, although from very low levels, and life insurance. Property and marine business showed little growth, with most interviewees citing fierce competition dampening premium volume growth and a relatively slow recovery of commercial and trading activities, respectively, as the main reasons. Liability and personal accident insurance continue to be held back by a very low level of awareness. AIG unit licensed as reinsurer in Argentina The Argentinian insurance superintendency (SSN) has granted American Home Assurance Company, a unit of AIG, authorisation to operate as a local reinsurer in the country. In addition, AIG will invest over $10m to make the unit one of the largest reinsurers in the local market. The move follows a similar authorisation for Liberty Mutual Insurance Group to operate in Argentina as Liberty Re in June 2012. (Source: BNamericas) S&P foresees growing significance for Takaful sector The growing need for insurance that complies with Sharia law means that the global Takaful sector is becoming an increasingly significant niche within the wider insurance industry, according to Standard & Poor's Ratings Services (S&P). "We expect to see generally strong growth in contributions, which act as premium income, and greater use of insurance in Islamic states," said S&P. It added that Takaful has developed most in the Gulf Cooperation Council (GCC) region and southeast Asia, but individual countries in each region have taken different routes to develop the sector. Thus, the business lines that predominate in these two regions are distinctly different, as are the sources of growth and the investment models. "We remain concerned by widespread use of high-risk investment strategies by Takaful providers, and by the sector's lack of global standards in areas such as accounting standards and Sharia compliance," said S&P. "In our view, it is unclear how many of the companies involved will sustain their profitability over the longer term, particularly in the GCC region. However, developments in Malaysia, the largest Takaful market in Southeast Asia, appear much more healthy and sustainable. They are supported by more-sophisticated regulatory oversight and the stronger investment profile of the industry," continued the rating agency. MENA competition remains strong says AM Best Competition in the insurance, reinsurance, Takaful and cooperative markets within the Middle East and North Africa (MENA) continues to be strong according to a new report from A.M. Best Co. Over the past decade, the insurance industry in the MENA region has experienced strong growth in terms of premiums, and the main drivers of this growth have been the significant economic developments in most countries in the region, combined with the introduction of compulsory insurance covers in many markets. A.M. Best explained that the number of insurance companies operating in these markets has dramatically increased as investors have come to view insurance as a growth market that delivers good returns to their investments. "Many of the new investors were attracted by the introduction of Takaful, which provided the opportunity to bring insurance to parts of the population that either had not perceived the need for insurance or were unable to purchase it. Overly optimistic projections for increases in insurance penetration resulted in high expectations on profitability and company valuations. Consequently, new shareholders entered the market with high expectations of returns on their capital and little appreciation for the riskiness of the insurance business," said the Best report. "Coupled with the significant emphasis that many companies traditionally have placed on investment returns, this has resulted in many insurers becoming akin to high-risk investment funds," it added. The pace of growth has slowed in 2011 and 2012, with most markets expected to achieve increases in total gross premiums written of less than 5% this year. Movements in gross premiums written have been more pronounced in countries affected by the Arab Spring where growth has either declined or stagnated in 2011, with difficult trading conditions in 2012. Mahesh Mistry, associate director, analytics, said: "Competition in the MENA markets remains fierce, as a number of companies seek top-line growth, and increasing market share is a priority. This has been exacerbated in recent years by the increasing number of new entrants into the market." According to the report, "leading insurers have attempted to restructure their operations and achieve a profile more commensurate to their international peers. A number of companies have adopted a more prudent investment policy-de-risking from volatile asset classes such as equities and real estate, with a shift toward a more liquid investment portfolio-which should generate a steady income stream to supplement underwriting activities. In addition, regulators' actions to introduce stricter guidelines should expedite requirements for a more prudent allocation of investments."

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