THE EARTHQUAKE EQUATION: SPECIAL REPORT p10SPACE INSURANCE – THE NEW FRONTIER p18THE UK, THE EU AND THE LLOYD’S ADVANTAGE p20UAVs: RISE OF THE MACHINES p28

INSIDE: ART THEFT – THE FULL PICTURE p24

SPRING 2014 WWW.lloyds.com

Fewer than half of stolen works are insured. But art crime costs up to $4bn a year, says the FBI

01_LMM6_Cover_des4.indd 1 24/03/2014 18:51

Care has been taken to ensure accuracy of information, but neither Lloyd’s nor the publishers can accept responsibility for omissions or errors. Lloyd’s is regulated by the Financial Conduct Authority and the Prudential Regulation Authroity. © Lloyd’s 2014.

SPRING 2014 www.lloyds.com

Published on behalf of Lloyd’s (www.lloyds.com) by Sunday (www.sundaypublishing.com)

If you would like to contribute to the next issue, please email marketmagazine@lloyds.com

COVER ILLUSTRATION BY SCOTT WOTHERSPOON

Some of the most interesting risks, and potentially the most catastrophic, are out of this world

SPACE INSURANCE: NEW FRONTIERS p18

02_LMM6_Opener_des2.indd 1 10/03/2014 12:57

03

20 INTERVIEW: SEAN McGOVERN

We talk to Lloyd’s Director of Risk

Management and General Counsel

about why it makes market sense for

the UK to remain part of the EU.

23 LIQUID ASSETS

By 2050, water stress is predicted to reach

unprecedented levels. And insurers can play

a part in promoting greater responsibility.

COVER STORY: ART THEFT

They sound like the stuff of Hollywood heist movies. But thefts of masterpieces by so-called master criminals are all too real, costing up to $4bn each year…

28 THE RISE OF THE MACHINES Until recently, they were used only for

weaponised strikes on military targets,

or public safety and law enforcement.

But now the market for the commercial

deployment of unmanned aerial vehicles

(UAVs) is opening up – with applications

that could be worth billions of dollars.

33 THE INTERNET OF THINGS

By 2020, 26 billion objects will be

connected to the internet, delivering

real-time information on every aspect

of our lives. And this big data has the

potential to revolutionise the way

insurance models work.

EARTHQUAKES: SPECIAL REPORTNew ways architects are designing for disaster; whether fracking causes temblor troubles; how emotion colours our attitudes to risk; cutting-edge prediction technology; plus forecasting the future.

Features

05 INTRODUCTION

We welcome you to Market magazine

and tee up this issue’s top stories.

06

FORESIGHT News from the market, including: the challenges of providing cover for HS2; why body art is big business Down Under; Lloyd’s new partnership with China’s Nankai University; and the opportunity to write more supply chain insurance in Asia-Pacific.

18 SPACE RISK

From satellites and meteors to solar

storms and commercial space flight.

34 THE GREAT EXHIBITION OF LYON

How a grand event in 1914, insured for

3mFF, turned into a catalogue of disasters.

35 MARKET UPDATE

Upcoming events and international

contacts at Lloyd’s.

RegularsSPRING 2014 www.lloyds.com

24

03_LMM6_Contents_des9.indd 3 25/03/2014 10:03

Order a copy of the 2014 edition of this unique guide, containing key facts and figures about the Lloyd’s market, published in May 2014.

The guide includes a summary of financial statements and the historical performance of all active syndicates, plus detailed statistics on capacity, premium income, claims, loss ratios, and much more. Pre-order your copy today or find out more at www.lloyds.com/stats

Statistics Relating to Lloyd’s2014 edition – order now

04_LMM3_StatsAd_des1.indd 1 10/03/2014 16:50

Between 2000 and 2012, there were 813,856 earthquake fatalities worldwide. In the US there were just two – despite the fact that, during this timeframe, it experienced more than 80 temblors with a magnitude of six or more.

Better buildings, infrastructure and emergency responses all played a key role in the lower death toll. Clearly then, there is much that can be done to mitigate earthquake risk. And in this issue (page 10), we explore the latest advancements – from developing a better understanding of the emotional factors that drive inaction in the face of disaster, to new, quake-proof construction methods.

Our cover story (page 24), meanwhile, delves into the murky world of art theft, where losses are estimated at up to $4bn annually. It’s not all the stuff of blockbuster movies though – the biggest threat to valuable works is often damage.

We also talk to Sean McGovern, Lloyd’s Director of Risk Management and General Counsel (page 20), about why it’s in the market’s interests to remain within the EU.

And finally, we examine a burgeoning sector with massive potential for growth: the commercial deployment of drones. It’s possible that, in the future, our skies will be crowded with unmanned aerial vehicles, so we get to grips with the unique risks and regulatory challenges (page 28).

We hope you find this issue interesting. If you haven’t already done so, sign up to receive Market magazine or enewsletter at lloyds.com/marketmagazine

05

facebook.com/lloydslloyds.com

“In Turkey we found that, because people

do not trust their buildings

to withstand any shaking,

then why do anything to prepare”HELENE JOFFE,

UNIVERSITY COLLEGE LONDON

@LloydsofLondon lloyds.com/linkedin

05_LMM6_Intro_des4.indd 1 25/03/2014 09:40

ForesightINSIGHTS FROM THE WORLD OF LLOYD’S. BY THE MARKET, FOR THE MARKET

CONSTRUCTION UNDERWRITERS READY

THEIR CAPACITY FOR THE UK’S £40BN

HIGH-SPEED RAIL NETWORK

Last year’s approval of the £42.6bn HS2 infrastructure project promises to inject yet more energy into a sector already buoyed by Crossrail, the Forth Replacement Crossing and the Thames/Lea Tunnel – projects that together represent over £22bn of investment.

HS1, Britain’s only other high-speed railway, is the stretch of line between the Channel Tunnel up through Kent and into St Pancras. It was completed in two phases over 16 years – with flooding on section one in Kent and tunnelling difficulties on section two, through London, among the insurance claims. There were also ten deaths during construction, although that was lower

than the 24 forecast by the government when it announced the project in 1990.

CONFIDENCE IN UK CONSTRUCTIONThis improving safety record is a key attraction of the UK construction market for insurers. The 2012 London Olympics were the first delivered without a single fatality on any of the building projects. Besides being a human tragedy, accidents can mean delays, which are often costly for insurers.

The Crossrail and Olympics projects also tested the UK construction sector’s mettle for ambitious, long-running programmes, as have projects abroad. “There’s so much big infrastructure being built at the moment,” says Paul Knowles, Construction Broker at JLT. “In Asia, for example, you’ve got extensions to the

Hong Kong metro, and metros being built in Kuala Lumpur and Jakarta.”

In China, high-speed rail construction was temporarily halted following the Wenzhou train tragedy in July 2011. Two high-speed trains collided on a viaduct in the suburbs of Wenzhou, Zhejiang province, killing 40 people and injuring 192 as the trains derailed and four cars fell off the viaduct.

Elsewhere in Asia, it is natural catastrophes that concern underwriters and risk managers, according to an Allianz Risk Barometer, published in January. “A natural catastrophe can result in business interruption, systems failure, power blackouts and a host of other perils,” commented Axel Theis, CEO, Allianz Global Corporate Specialty, at the report’s launch.

HS2: FULL SPEED AHEADEMERGING RISKS

06_LMM6_Foresight_des13.indd 4 25/03/2014 10:05

07WORDS BY HELEN YATES

ILLUSTRATIONS BY JAMIE PORTCH

CONSIDER THE CAVEATSBig UK projects are attractive because they do not bring these problems. Due to get underway in 2017, the insurance programme for the first phase of HS2 will soon enter the market. While there is plenty of capacity and appetite for this megaproject, there are challenges to overcome in placing the insurance.

“Duration is a caveat,” thinks Patrick Bravery, Construction Underwriter at Talbot. “The project period, which will be more than five years, will restrict some people’s capacity and appetite.”

The £15.9bn Crossrail project, the largest currently in progress in Europe, broke new ground in terms of insurance contract duration, according to Arthur J Gallagher International. The broker put together the first nine-year policy without a break clause in the UK – all placed in the London market.

Another risk, Bravery adds, is tunnelling. “There will be a significant

HS2: Vital statistics

250mph Maximum speeds of HS2.

£42.6bnCost of project.

40,000Number of jobs the government claims the London-West Midlands section will generate.

70Number of groups opposing HS2.

330 milesTotal length of track for phases one and two.

140 milesLength of London to Birmingham line.

56.5 milesSection of phase one track that will be partially or totally hidden.

400 metres (1,300ft)Average train length.

1,100Number of seats per train.

49 minutesLength of journey between London and Birmingham on HS2. Currently, journey time is 1hr 21 minutes.

1 hr 08 minsFuture length of journey between London and Manchester on HS2. Currently, journey time is 2hrs 8 minutes.

amount of tunnelling, some of it through heavily built up parts of London and Birmingham, and later Manchester and Leeds. Tunnelling has a rather chequered history, less so in the last five to ten years. But it does still leave people more cautious and will focus attention.”

The financing of the project could also prove tricky. Says Knowles: “If private finance is involved – particularly project finance – that will have a strong influence on how the insurances will need to be structured to protect the interests of the financiers as they focus on the revenue stream associated with the underlying assets, depending upon contractual and government indemnities.”

Equally, interested parties will need to be satisfied too – regional authorities, Network Rail and Transport for London, as the route will cut across road and rail intersections. “There will be many opinions on what the insurance should or shouldn’t look like,” says Knowles.

HS2: FULL SPEED AHEAD

06_LMM6_Foresight_des13.indd 5 25/03/2014 10:05

Foresight

PARTNERSHIPS

NEW UNIVERSITY PARTNERSHIP WILL

IMPROVE LOCAL MARKET INTELLIGENCE

One of the biggest challenges for insurers in China is data transparency – particularly access to historic claims and granular hazard information.

Lloyd’s established its reinsurance operation in Shanghai in 2007 and the licence was extended to cover direct insurance by the regulator CIRC in 2010. Now, Lloyd’s is partnering with one of the country’s leading institutions, Nankai University, to build on its market intelligence.

Working with Professor Wei Liu, Vice Director of the university’s International Insurance Research Institute and a member of its Department of Risk Management and Insurance, Lloyd’s will support tailored research to provide more in-depth understanding about crucial aspects of the market.

“The partnership was initiated to provide access to quality Chinese insurance market information and analysis, under the circumstance of a challenging data transparency environment,” says Eric Gao, Lloyd’s China CEO. “The tailored research programmes can also bring added value to managing agents and the Lloyd’s market for future product development and strategic plans.”

UNLOCKING THE CHINESE MARKET

NEW PRODUCTS

TATTOOS AS A FORM OF PERSONAL ADORNMENT ARE ALL THE

RAGE DOWN UNDER. AND TWO NEW LLOYD’S-BACKED INSURANCE

PRODUCTS ARE TAPPING THE MARKET’S POTENTIAL

In Australia, where one in seven Aussies are currently sporting a tattoo, body art is big business. The industry grew at a rate of 4.7% annually over the past five years to reach $93.3m in revenue in 2013-2014, according to IBISWorld research. There are more than 300 tattoo studios in Australia, providing employment to more than 2,000 people.

Demand for tattoos has in part been driven by rapid advancements in technologies related to their removal, particularly lasers. An increase in legislation around tattoos and body piercing studies has also made consumers more confident about safety and hygiene in the industry.

Nevertheless, many insurers are reluctant to provide cover for the industry. To help fill the gap, Australian broker Parmia Insurance has developed two policies for the sector, underwritten by Lloyd’s. Its industrial special risks policy provides property cover for tattoo studios, as well as property owners with tattoo studio occupancies. It also provides public and products liability, and medical malpractice cover for the sector.

Cover is subject to strict criteria, with unacceptable risks including criminal conviction and businesses established less than 18 months.

“We have entered into this market knowing full well the risks and negative connotations,” says Parmia Founder and Director, Danny Gumm. “Obviously, while we want to help businesses in the tattoo and body piercing industry gain cover, we also need to ensure each applicant meets the criteria prior to evaluating their application for insurance.”

BODY ART COVER CATCHES ON IN OZ

06_LMM6_Foresight_des13.indd 6 25/03/2014 10:06

09

MARKET OPPORTUNITIES

SINGAPORE REGIONAL HUB URGES MORE

SUPPLY CHAIN COVER IN WAKE OF NAT CATS

Major catastrophes in Asia-Pacific have highlighted vulnerabilities in supply chains and stepped up demand for business interruption (BI) cover. In particular, these events – including last year’s Typhoon Haiyan and the Tohoku Earthquake and Thai floods in 2011 – have focused corporates’ attention on the potential for non-damage BI. The challenge for the local insurance market is meeting that demand.

“Prior to the devastating floods of 2011, Thailand had not been viewed as catastrophe-prone,” noted Ravi Menon, Managing Director of the Monetary Authority of Singapore, in a recent speech. “The scale of the floods and the knock-on effects of natural catastrophes on global supply chains came as a rude surprise. The floods damaged more than 7,000 industrial and manufacturing plants in 40 separate provinces. This affected countries with significant

manufacturing capabilities in Thailand, most notably Japan.”

The majority of losses came not from property damage, but BI claims arising from disruption to manufacturing and supply chains. “It is therefore important that insurers have senior experts in the region who understand Asia’s multi-faceted and inter-connected risks. This will enable the industry to better price and underwrite regional risks, and achieve sustained growth.”

In Singapore, traditional BI is readily available as part of a property damage/business interruption package. The challenge, says Iris Teo, CEO, Marsh Singapore, is securing contingent BI cover on behalf of clients in light of the losses associated with large-scale natural catastrophes. “We expect to see increased interest and demand for contingent business interruption and supply chain protection, as the interdependence between a company and its suppliers becomes more widely understood.”

BUSINESS, INTERRUPTED

GET TO KNOW LLOYD’S FROM THE PEOPLE WHO LOVE IT

Realise the Extraordinary was launched in January 2014 on Lloyds.com and showcases diverse career stories from across the market and the Corporation – told by the people who work there. The visually engaging digital hub has been created to promote the dynamic, vibrant, challenging and exciting Lloyd’s workplace – as well as raise the profile of the insurance sector as an extraordinary place to work. Find out more about this campaign at lloyds.com/careerstories

INSIGHT AND ANALYSIS YOU CAN TRUST

Market Intelligence provides analysis of the world’s insurance industry from a geographic perspective to help Lloyd’s managing agents, brokers and coverholders grow their business internationally. Compare Countries offers high level statistics for the economy, insurance market and Lloyd’s business, with regional heat maps illustrating key indicators for quick strategic overviews. Country Profiles provide individual summaries for Lloyd’s key territories, while Market Presentations contain local insights from Lloyd’s Country Managers on opportunities and challenges in their markets. Class Review, meanwhile, compares Lloyd’s business with its competitors in key territories, broken down by specialty class of business. And Country Roundup enables market participants to stay up to date with Market Intelligence news and events that regional offices want to highlight. For more information visitlloyds.com/marketintelligence

06_LMM6_Foresight_des13.indd 7 25/03/2014 10:06

10_LMM6_Earthquakes_des10.indd 10 12/03/2014 12:41

Earthquake Special Report: We explore new ways architects are designing for disaster and whether fracking leads to temblor troubles. And we look at how emotion can colour our attitudes to risk, plus cutting-edge earthquake prediction technology. We also cast our eyes to the future, with forecasts for serious seismic activity

WORDS BY EDWARD MURRAY

10_LMM6_Earthquakes_des10.indd 11 12/03/2014 12:41

Statistics show the deadliest ten earthquakes between 1980 and 2012 killed more than three quarters of a million people, while the ten costliest over this period generated losses of $557bn. Less than 15% of this was insured. What is perhaps most concerning about these figures, is the difference between where the biggest fatalities and the highest costs arise.

Although three of the costliest temblors happened in New Zealand, they resulted in relatively few fatalities. In one of the earthquakes no one died, in the second one person died, and in the third 185 people lost their lives. The 2004 earthquake in Haiti, however, saw 222,570 fatalities – but did not feature in the top ten costliest earthquakes. Not only do the least developed countries

bear the heaviest human toll – they also have the least cover in place to get them back on their feet. Swiss Re estimates the insurance contribution to the Haiti quake was 1% of the total loss, while the industry covered 81% of the losses in the 2010 earthquake in New Zealand.

It is clear big improvements could be made – both in terms of the physical protection in place, as well as the insurance safety net that exists to fund rebuilding in the aftermath of disaster.

From the way we design and construct buildings to the way we seek to predict major seismic events, there is much to do. And it has already begun. In 2000, the Turkish Government created the Turkish Catastrophe Insurance Pool and insisted on mandatory cover for residential buildings in urban areas.

But, the cover extends only to physical property damage and not contents, personal injury or commercial loss.

Similarly, advances have been made in the fields of architecture and engineering. But getting the latest technology implemented into construction processes in the poorest parts of the world is a difficult task.

Data from the US Geological Survey National Earthquake Information Centre shows that between 2000 and 2012, there were two earthquake deaths in the US, while globally there were 813,856. The lower fatality record was delivered on the back of better buildings, infrastructure and emergency responses. It is this level of resilience that every country in the world should be aiming for.

12 / EARTHQUAKES

LIVING ON THE EDGE: Landslides in Redcliffs

near Christchurch in February 2011 leave

homes teetering on the brink of disaster after a

6.3 magnitude earthquake devastates the region

Earthquakes: nature’s most destructive forceTHEY’RE A DAILY OCCURRENCE, AND WHILE THE MILDEST TREMORS GO UNNOTICED, THE MOST VIOLENT TEAR THE COUNTRYSIDE APART, REDUCE CITIES TO RUBBLE AND GENERATE TERRIBLE PERSONAL AND ECONOMIC LOSSES

10_LMM6_Earthquakes_des10.indd 12 12/03/2014 12:41

13

MARKET: Why do you think people in highly seismic areas do little to protect themselves against a potential earthquake? HELENE JOFFE: “With more regular threats like monsoons, you do fi nd that people prepare. But when it comes to earthquakes, those in affected areas have a much more complex response. The fact that earthquakes have a very long return period, coupled with an inability to accurately predict them, means people tend to live with them as a fact of life. They refuse to let the ongoing, but non-time specifi c threat inhibit them. The potential scale of an earthquake also makes people feel impotent. There is a fascinating factor that, if you feel something is out of your control, you think, ‘why bother?’”

MARKET: How different were the responses from the people you spoke to in Japan, Turkey and the US? HJ: “In all three countries there is a sense of the potential loss following an earthquake, and the panic and anxiety that would be elicited if one strikes. But the interesting thing is that in the US there is

an extra emotion of awe and excitement about potentially witnessing an earthquake. It is a minority position, but it does not exist in the other two places.

Trust issues are also central. We found, particularly in Turkey, that because people do not trust their buildings to withstand any shaking, and feel they will simply crumble around them, then why do anything to prepare? Residents in Turkey feel a corrupt construction sector means the materials and techniques used often undermine the strength of their buildings, and they question the point of trying to strengthen a building weakened by poor practice.” MARKET: Many of the preparations that people make are non-earthquake specifi c. What can the insurance industry do to encourage people to better prepare? HJ: “Partly, it’s people having a sense they can survive – that earthquakes are not necessarily death events. If you’ve retrofi tted buildings, or built to code, and you take additional measures, your survival chances are quite high. So, what encourages preparedness is a sense of self-effi cacy – that there is something I personally can do to mitigate the impact and survive.”

feeling the riskRECENT RESEARCH BY PROFESSOR HELENE JOFFE, OF UNIVERSITY COLLEGE LONDON, EXAMINES THE EMOTIONAL RESPONSES PEOPLE HAVE TO THE THREAT OF AN EARTHQUAKE.SHE TALKS TO MARKET ABOUT HER FINDINGS, WHICH WON THE 2013 LLOYD’S SCIENCE OF RISK PRIZE

EARTHQUAKE PREPAREDNESS

Of the people questioned in each site in Helene Joffe’s survey, what percentage adopted adjustment measures?

“� e potential scale of an earthquake also makes people feel impotent. � ere is a fascinating factor that, if you feel something is out of your control, you think, ‘why bother’”

USA TURKEY JAPAN

HAVE EARTHQUAKE PLAN

75

3827

HAVE EARTHQUAKE INSURANCE

3123 19

ARRANGED EMERGENCY COMMUNICATION

54

31

13

HOUSE CONSTRUCTED TO BE RESISTANT

1915 13

HAVE RETROFITTED HOME

17 15

0

feeling the risk

10_LMM6_Earthquakes_des10.indd 13 12/03/2014 12:41

14 / EARTHQUAKES

Minutes after the 2008 Sichuan earthquake struck China, the world’s tallest building at the time, the Taipei 101 in Taiwan, started swaying. As it moved, a 728-ton pendulum, suspended between the 87th and 92nd floors, rocked back and forth to counteract the shockwaves and protect the building.

This counterbalancing technique is just one of the approaches that architects and engineers are evolving to enable buildings to maintain their integrity during quakes.

“Another technique is to actually isolate the building from the foundation system so that the superstructure rolls with the earthquake,”

explains Michael Gustafson, Industry Strategy Manager for Structural Engineering at software design specialist Autodesk.

“Imagine being on top of a table with roller skates on. As somebody shifts the table back and forth, you actually stay in the same place because the skates allow the table to move underneath you. In the same way, the building does not feel all of the forces because it is moving and not subject to the full forces from the quake.”

Turkey’s Sabiha Gökçen International Airport, completed in 2009, is the biggest building in the world to employ seismic isolation technology, and increasingly the technique is being used in buildings across the world.

The technique has proved so successful that Kubilây Hiçyilmaz, a seismic engineer with ARUP, recently blogged: “Base isolation is seismic engineering’s equivalent of seatbelts in cars – and maybe more: it’s a lifesaver

designing for disasterARCHITECTURAL AND ENGINEERING INNOVATIONS, COUPLED WITH WELL-REGULATED BUILDING CODES, COULD SAVE COUNTLESS LIVES – AND PROPERTIES

BASE ISOLATION, A TECHNIQUE THAT PREVENTS OR MINIMISES DAMAGE TO BUILDINGS DURING AN EARTHQUAKE, HAS BEEN USED IN NEW ZEALAND, INDIA, JAPAN, ITALY AND THE USA

ROLLERSWhen a building is isolated from the ground, resting on flexible rollers (or bearings), it will only move a little or not at all during an earthquake.

ROLLERS

FIXED BASESSuperstructures that are coupled directly with the ground are more likely to experience lateral movement induced by an earthquake – and therefore to suffer extensive damage.

FIXED BASE

LARGE MOVEMENT OF BUILDING

RUBBER PADSSimilarly, flexible rubber pads that work like a car suspension system allow the building to adapt to tremors and ground shifts, with reduced shaking.

FLEXIBLE PADS

SMALL MOVEMENT

OF BUILDING

LARGE MOVEMENT OF ISOLATORS

10_LMM6_Earthquakes_des10.indd 14 12/03/2014 13:19

15

“The definitive research is that fracking can cause earthquakes that are felt. But the longer answer – which is important – is that if you compare fracking to other processes like mining, filling dams with water and, ironically, conventional oil and gas extraction, fracking does not make it into the premier league. When I talk about fracking, I am talking about pumping fluid underground to get hydrocarbons out.”

“Research suggests fracking has the potential to generate seismic activity. In the event the latter does occur, however, it can be difficult to establish a direct link between an energy company’s fracking activity and subsequent earth tremors. It is essential, therefore, that fracking companies have robust monitoring procedures to ensure they know immediately of any adverse effect from their operations. This will help them establish greater clarity on individual liabilities.”

As the scale of fracking activity increases, there may be a greater number of claims made against the industry – and whether this relates to induced seismic activity or other issues such as environmental pollution or personal injury, insurers need to ready themselves.

and possibly a property saver. That’s why I believe base isolation needs to be made a legal requirement for most new non-high-rise buildings in areas at risk from earthquakes.”

A third technique is to incorporate ‘seismic fuses’ into a building. This allows some of the building to dissipate the earthquake’s energy and crumple, without the integral parts of the structure being damaged.

A wide-scale adoption of these innovations would quickly drive down costs and help engineers to further develop their effectiveness. But it is unlikely wholesale take-up will be made mandatory.

Instead, engineers, architects, builders and insurers must push for building codes in every location around the world to be continually and gradually improved.

Says John McAslan, Chairman of John McAslan + Partners, the architectural practice that restored the Iron Market in Port-au-Prince, Haiti, following the devastating earthquake of 2010: “I cannot stress enough the need for well-defined building codes when it comes to improving the global benchmark for earthquake resilience in construction. And the importance of ensuring that, while there are codes in place, people follow them.”

CHRIS JONES, UNDERWRITER, KILN

PROFESSOR RICHARD DAVIES, DURHAM ENERGY INSTITUTE

A HEADS UP FOR INSURERS:

does fracking cause earthquakes?SEISMIC ACTIVITY IN TEXAS AT THE TAIL END OF LAST YEAR HAS REIGNITED THE DEBATE. OUR EXPERTS FROM THE WORLDS OF GEOLOGY AND INSURANCE WEIGH IN…

10_LMM6_Earthquakes_des10.indd 15 12/03/2014 12:42

16 / EARTHQUAKES

new prediction technology

forecast: Shaky

CALIFORNIAGlobal Weather Oscillations Inc. (GWO) has said California is most at risk of a major earthquake in a three-year period that began in July 2012. GWO generates its predictions by combining Meteorology, Oceanography, Climatology, Geology, Seismology, Astronomy and Astrophysics to create a framework through which it observes and forecasts.

GREECE, ITALY AND TURKEYFifty scientists working as part of the Seismic Hazard Harmonization in Europe programme have suggested countries including Greece, Italy and Turkey could bear the brunt of a major earthquake with a magnitude in the region of 9.0. Although the group of scientists gave no timeframe for this earthquake, they have produced maps detailing the most at risk areas. The research was released in September last year, but Greek scientists have questioned whether the tectonic plate structure in Greece could produce an earthquake of such intensity.

JAPANRussian scientist Alexei Ryubushin, of the Schmidt Institute of the Physics of the Earth, put Japan on high alert when he presented research at the European Geosciences Union Convention in Vienna in April last year that suggested the country could face an earthquake with a magnitude of 9.0 between 2013 and 2014.

FROM THE US AND EUROPE TO THE FAR EAST, EXPERTS ARE PREDICTING TEMBLOR TROUBLES IN THE NEAR FUTURE. HERE ARE THREE THAT GRABBED OUR ATTENTION

TO DATE, SCIENCE HAS BEEN UNABLE TO ANTICIPATE WHERE AND WHEN THE NEXT EARTHQUAKE WILL STRIKE. THIS MAY BE ABOUT TO CHANGE

Scientists can identify earthquake signatures from electromagnetic and thermal activity prior to a major event. And they are now working to develop that understanding into a predictive capability. The UK and Russia, for example, are partnering on a joint initiative that will send satellites into orbit to monitor changes in electromagnetic activity – and hopefully enable scientists to pinpoint the location and time of a strike.

Dhiren Kataria, Head of In-situ Detection Systems at UCL’s Mullard Space Science Laboratory, explains the technology behind the TwinSat Project: “During the earthquake preparation phase, there are a number of things happening on the surface of the earth that propel

electromagnetic signals into the environment. You can catch these signals using plasma sensors and electromagnetic field sensors from space with the advantage that satellites provide global coverage as opposed to ground-based sensors.”

The challenge is then to isolate this data from similar signatures created by solar storms and human activity, and develop a communications network that can issue effective warnings to areas at risk throughout the world. The goal is to predict an earthquake with a magnitude upwards of six, hours and even days before it happens. However, says Kataria: “In order to build that capability and not make false predictions, there is a considerable amount of work to be done.”

10_LMM6_Earthquakes_des10.indd 16 12/03/2014 12:42

This high-profile networking event for the International Maritime Insurance Sector is a chance for London-based brokers and underwriters to hear from local experts on the current market conditions in Hong Kong and the wider region, and to discuss challenges and opportunities with industry colleagues. The Chief Executive and President of the Executive Council of the Hong Kong Special Administrative Region, CY Leung, will be the keynote speaker.

Find out more at www.iumi2014hk.com or register interest at www.iumi2014hk.com/register_interest.html

The Lloyd’s Hong Kong office can help with facilitating introductions to the local market. Contact: +852-2918-9911

IUMI is proudly sponsored by Lloyd’s Agency Department.

IUMI 2014 Hong Kong ConferenceInterContinental Hong Kong Hotel21-24 September 2014

17_LMM6_IUMIAd_des3.indd 1 12/03/2014 10:39

18 / INFOGRAPHICILLUSTRATIONS BY SI MACLENNAN

Space insurance: the new frontierLloyd’s has been a pioneer in the space market since the 1960s. Here, we explore the insurance opportunities and risks…

After two rogue satellites, insured for £133m, were launched into the wrong orbit, Lloyd’s contributed £4.5m toward the cost of their successful recovery. It paid a further £3.9m for the development of the ‘Stinger’, a tool which stopped the satellites spinning and allowed them to be grabbed by the shuttle’s recovery arm.

1984

The average value of a satellite in Geostationary Earth Orbit (GEO). There are approximately

370 active communication, broadcasting and meteorological satellites in GEO, with a lifespan of

15 years each – around 167 are insured.

$200,000,000

The peak value for insured dual-launch satellites (two GPS

devices economically launched on one booster)

in 2013. Around 35 satellites are launched every year, of which 25

will be insured.

$700,000,000

SOURCE: LLOYD’S

SOURCE: ALLIANZ WHITE PAPER, 2012, SPACE RISKS: A NEW GENERATION OF CHALLENGES

SOURCE: LLOYDS.COM

18_LMM6_Space_des_4.indd 18 10/03/2014 13:31

19

The premium range covering cancellation of a Virgin Galactic suborbital spacefl ight trip. Tickets for fl ights, scheduled to commence in 2014, cost $250,000.

$700 TO $10,000

$2,000,000,000,000

The biggest insured loss in space market history. In February 2013, the US-made Intelsat-27 took off from a platform run by Sea Launch, using Russian Zenit launch systems. The 3SL rocket booster was

destroyed when the satellite fell into the Pacifi c.

$400,000,000

The number of objects above ten centimetres in size orbiting the earth. 500,000 items between one and ten centimetres are too. And there are tens of millions of other particles smaller than a centimetre circulating the planet. All of it is travelling at several kilometres a second – suffi cient velocity to cause signifi cant damage to operational satellites.

20,000

The weight of the asteroid Apophis, which will cross Earth’s orbit in about 2030. The

probability it will strike us, however, is one in 250,000. On a smaller scale, several thousand meteorites, each weighing at least 1kg, fall to

earth every year – mostly over oceans.

27,000,000 TONS

The Carrington Event of 1859 is regarded as the most intense geomagnetic disturbance on record. If a comparable solar storm struck North America today, estimates suggest up to 40 million people

could be without power for up to two years. And the economic cost would be between $600bn and $2tn.

SOURCE: ALLIANZ WHITE PAPER, 2012, SPACE RISKS: A NEW GENERATION OF CHALLENGES

SOURCE: POST ONLINE

SOURCE: US STRATEGIC COMMAND’S SPACE SURVEILLANCE NETWORK

SOURCE: UNIVERSITY OF NEBRASKA-LINCOLN PRESENTATION, 2012, SPACE INSURANCE: THE NEW FRONTIER

SOURCE: 2013 LLOYD’S SPACE WEATHER REPORT, LLOYDS.COM/RISKINSIGHT

18_LMM6_Space_des_4.indd 19 10/03/2014 13:35

“

20_LMM6_Sean McGovern_des4.indd 8 12/03/2014 10:40

He may be adamant it is in the market’s interests the UK should remain within the European Union, but Sean McGovern is no passionate or uncritical Europhile. Indeed, he has spent the past 17 years working in London at Lloyd’s, including a stint as North America Director, and he is more likely to be found sailing off the coast of his hometown of Brighton than holidaying in the South of France.

The European question could hardly be more pressing following Prime Minister David Cameron’s promise to hold a referendum on Britain’s membership of the EU by the end of 2017, if his Conservative party wins the next election.

McGovern, a lawyer by background, believes the current political and public debate around the issue is far too heated. “Opponents are often divided on emotional, not factual grounds and the discussion is frequently ill-informed.”

His calculation that it is in Lloyd’s interests for the UK to stick with Europe is based on cold, rational analysis. In reality, he warns, business decisions taken as a consequence of the UK exiting the EU would be made on “hard-headed, economic grounds alone”. A recent case in point is a major US investment bank’s intention, in case of the so-called “Brexit”, to relocate its London team to the Continent.

So what does McGovern, who oversees legal, government and regulatory affairs and risk management for Lloyd’s, see as

the consequences for the market if the UK leaves the EU? First, he emphasises how important European business is to Lloyd’s. Some 15% of its premium income is from the EU, excluding the UK. Thus, “any change to the way we access that income will have to be looked at carefully”.

The ease of doing business with these countries that Lloyd’s currently enjoys as a result of being based in an EU member state is uniquely valuable, says McGovern. “We access EU countries using the fundamental freedoms of the Single Market, including the freedom to provide services cross-border and the freedom to establish in member states.”

This means Lloyd’s can sell both direct and reinsurance business cross-border into other EU countries, and open offices there, without having to comply with additional local prudential regulations. “We simply have to comply with the regulations of our Home State regulator in the UK.”

AN AUTOMATIC RIGHT TO DO BUSINESS IS INVALUABLEIf Britain were to leave the EU and be outside the Single Market, it would become a ‘third country’. This would result in the loss of Lloyd’s current automatic right to do business throughout the Union based on an EU passport. Instead it would have to negotiate new license arrangements with individual EU members, and “it is unlikely there would be any centralised process for this”, says McGovern.

He adds: “You normally can’t do business in a country without being established there, including holding some level of capital and reserves locally, and reporting and filing with the local regulator.” So, setting all this up in other EU

The EU debate is often too emotionalStaying within the EU is a rational economic decision based on where the market’s advantage lies, says Sean McGovern, Lloyd’s Director of Risk Management and General Counsel

21

WORDS BY ROXANE MCMEEKEN PHOTOGRAPHS BY JOE MCGORTY

“

”

20_LMM6_Sean McGovern_des4.indd 9 12/03/2014 10:40

22 / INTERVIEW

Member States would mean a significant and costly upheaval for Lloyd’s and a fundamental change in the distribution of its business. How long this process might take is unclear, but there would be a period of uncertainty and disruption, says McGovern. “One can surmise that brokers, and clients of brokers, may find other carriers during that time, and there is a risk that, even if we could secure licenses, they may not return.”

McGovern points out that such relationships already exist: “A number of businesses within Lloyd’s do have insurance companies outside the market and they may well choose to write insurance through another part of their group.”

THE PRINCIPLES OF SOLVENCY II ARE SOUNDWould one benefit of the Brexit not be to deliver us from the perceived perils of Solvency II? “Solvency II gets a lot of negative press because of the uncertainty around when it will be implemented and the cost,” McGovern admits. “And it’s true the UK has spent around £2bn preparing for the new regime, while Lloyd’s itself has spent in the region of £300m.”

However, he argues, “Regulations are not always a bad thing. I believe the principles of Solvency II are sound. The better management of risk and capital that companies have introduced in order to prepare to comply with the directive

have left us with much better-run businesses.” McGovern notes that Solvency II is built on the UK’s own Individual Capital Adequacy Standards (ICAS) – introduced in 2005 by the Financial Services Authority as extra ‘gold plating’ on the EU’s Solvency I regime. “ICAS is more sophisticated than Solvency I as it requires you to model how much capital you need to cover your risks. It did increase the regulatory burden, but was mostly welcomed by the industry.”

McGovern also questions the notion that the UK would escape EU regulations if it left the Single Market. “Regulations are increasingly determined at global level, not just coming out of the EU,” he says. If Britain exited the EU, the UK would still wish to comply with European insurance rules that require ‘third countries’ to show their regulations are equivalent to those of the Single Market. “The idea that regulation in the UK would be easier

and less burdensome if we left the EU is fanciful,” he adds.So the UK would have to follow the same rules in practice,

even if it were not a member state – the difference being it would not be able to influence changes to EU regulations. That particularly matters to Lloyd’s as, over the years, and as a result of intensive lobbying, EU rules have taken legislative account of Lloyd’s unique legal and economic structure and business model, to the market’s clear benefit.

Finally, McGovern points out, leaving the EU would mean we would no longer be able to shape the trade liberalisation talks and insurance regulatory dialogues with non-EU countries, conducted by the European Commission on behalf of all Member States. To date, the EU has shown itself willing to take up issues raised by Lloyd’s. There is no reason to suppose that it would be willing to do so in the future if the UK was no longer part of the EU. “Who are major economies pursuing trade deals with?” McGovern asks. “Not the UK, but the EU – the economic prize is simply not the same.”

The logic of his argument is hard to deny: Lloyd’s benefits from the UK’s membership of the EU as it has a passport to do business in a region that delivers 15% of the market’s premium income, the ability to shape regulations the market will be subject to, and the opportunity to gain from the trade deals and dialogues with third countries concluded by the EU.

“ The idea that regulation in the UK would be easier and less burdensome if we left the EU is fanciful”

20_LMM6_Sean McGovern_des4.indd 10 12/03/2014 11:26

23WATER STRESSWORDS BY ANTONY IRELAND

By 2050, the UN predicts the world population will grow to 9.6bn, while agricultural production will need to increase by 60% over 2005 levels to meet food security needs. Energy demand from hydropower and other renewable energy sources will also rise by 60%. Factor in anticipated spikes in extreme rainfall and droughts, the hardening of ground through urbanisation, and the decreasing resilience of wetland, river and lake ecosystems, and water scarcity is expected to reach unprecedented levels.

Increasing competition for water will affect all business sectors, from water-reliant industries such as agriculture, beverages or mining, to retail (whose supply chain could be disrupted) or financial services (whose performance depends on the success of the companies it invests in or pays out to).

Water stress is also a global problem. Climate change is creating scarcity and quality issues in California, Northern Europe, the Middle East, Southern Amazon and Australia. And demographics and economic growth are putting massive pressure on water supply in Northern India, China and sub-Saharan Africa.

“Governments are becoming aware that their long-term economic future may be linked to how well they manage their resources, rather than whether or not they have them,” says Guy Pegram, Managing Director of management consultancy Pegasys, Water Advisor to the WWF and author of Global Water Scarcity, a 2010 briefing on the issue from Lloyd’s.

According to Dominic Waughray, Head of Environmental Initiatives for the World Economic Forum, some of the world’s fastest-growing countries are facing a water shortfall that could stunt their economic growth. “To deliver the growth projected under business-as-usual water management practices, most water-scarce countries are going to need more water than is safely available. Ergo, they will need to be much more efficient with the water they use.” He notes that India

faces a gap between supply and usage of 57%, Mexico more than 20% and South Africa 17%.

Ultimately, government-led initiatives will shape future efficiencies. With help from development organisations and the private sector, solutions range from social projects and water-sharing initiatives between industry and residential municipalities, to technological advances. Las Vegas, for example, will soon no longer rely on a drought-affected floodplain, thanks to a 263-mile pipeline project; UK scientists have developed ‘drought resistant’ crop seeds that can survive on less water; and micro-biologists in the US say they can use genetically modified bacteria to generate electricity from sewage, while also cleaning water for re-use.

Insurers can play a part. Says Waughray: “Each country has to face some strategic risk management choices: do they invest in water-efficient technologies so that every farm can have maximum production with minimum water usage. Or will it be cheaper to invest in an insurance scheme that pays out when the one in 20-year drought eventually becomes a

one in four-year event?” While insurers do provide some

coverage against water scarcity, they have yet to fully address the complexities of the risk in their products. They could also do more to improve risk management and practices among clients, adds Waughray. “It’s the right time to register the link between damage caused by climate change and the more systemic challenges of water scarcity and its impact on economic growth, food production and prices. Insurers can potentially influence governments and corporates to be more responsible.”

liquid assetsClimate change, demographics and economic growth are bringing pressure to bear on the world’s water resources. And now is the time for insurers to recognise this systemic threat

“ The insurance industry can potentially influence governments and corporates to be more responsible”DOMINIC WAUGHRAY, HEAD OF ENVIRONMENTAL INITIATIVES, WORLD ECONOMIC FORUM

WATER STRESS: IN NUMBERS

40%Gap between

safe freshwater

demand and

supply by 2030

if there is no

change to water

management

approaches.

40%Proportion

of people living

in water scarce

regions by 2025.

894mPeople without

access to safe

freshwater for

drinking, cooking

and cleaning.

49%Projected

increase in

global energy

consumption

(2007 to 2035).

$109bn Global annual

GDP loss due

to droughts.

80%Chinese water

basins suffering

water shortages

by 2030.

SOURCE: WEF

SOURCE: WEF

SOURCE: EIA

SOURCE: WEF

SOURCE: GEMI

SOURCE: WEF

23_LMM6_Water_des4.indd 11 10/03/2014 13:43

In the run-up to Christmas, national news broadcast CCTV footage of a man in a hooded sweatshirt breaking in to the Exhibitionist Gallery in Notting Hill and making off with two artworks, Pyronin Y and Oleoylsarcosine, by Damien Hirst. Together they were said to be worth £33,000.

Robert Read, Global Head of Fine Art at Hiscox, says that on rare occasions such thefts are to order, because someone wants these specific works in their personal collections. But, he adds, the thief often has a different motive altogether.

“It’s like a calling card to the criminal underworld. It does give you some credibility to turn up to a gangland meeting with the Mona Lisa under your arm.” Read says criminals might also use stolen art as collateral for a loan to fund a different crime altogether.

Charlotte Wilson, UK Specie Underwriter at Catlin, says high profile, brazen art thefts are unusual. “Often art is stolen by mistake. It might be in transit in the same container as a load of perfume the gang is targeting. The criminal then cannot sell the artwork and the art happens to be in the way.” Sometimes the art just gets dumped, or hidden, occasionally finding its way back to the insurers when rewards are offered.

“The art industry is pretty scrupulous about not paying ransom. We will offer rewards based on a conviction,” says Read. Looser rewards are offered for information leading to the return of the stolen art, providing the police and insurers are certain the money is not going to criminals

who stole the art in the first place. The value of those rewards is tiny compared with the value of the art itself. “If you steal a big and valuable work it is very hard to turn that into cash,” says Read.

THE ART OF RECOVERYMichael Burle, Class Underwriter at Liberty Specialty Markets, says recovery is the insurer’s problem, not the client’s. “The priority is the payment of the valid claim. Because there is an abandonment, any recovery is in the interest of the insurer.”

That means bringing in specialist loss adjusters, such as Mark Dalrymple of Tyler & Co. He has 35 years’ experience settling multimillion-pound claims, and recovered prized works of art through a network of ‘contacts’ within international crime fighting organisations and elsewhere. He’s the man who – after piecing together snippets of information from unconnected sources handed into police forces that had not spotted the significance of their tip-off – might hand over a reward.

Dalrymple insists it is much less cloak and dagger than it sounds. “The person claiming the reward is not criminally involved. Checking that is where the police come in. There is no question of us ever meeting under a railway arch with a brown envelope.”

His most famous case – few are talked about and Dalrymple never claims credit – was the Tate’s missing Turners. Stolen in 1994, insurers led by Hiscox paid out £24m. Fast forward to 1998 and the Tate offered to buy back its interest in the paintings and a deal was struck for £8m, including Hiscox approving the secondment of Dalrymple as an adviser to the Tate’s Trustees.

By the following year, 1999, the three thieves and their getaway driver had been convicted. In 2000, the first of the paintings, Shade and Darkness, was recovered in utmost secrecy. The second Turner, Light and Colour, was recovered in December 2002 when the Tate finally made the announcement public.

The FBI puts the worldwide cost of crimes linked to art at nearly $4bn a year – eclipsed only by the drugs and arms trades. And yet fewer than half of stolen works are insured

24 / ART THEFT

Masterpieces, master criminals

WORDS BY CHRIS WHEAL ILLUSTRATIONS BY MIGUEL MONTANER

24_LMM6_Art Theft_des8.indd 12 12/03/2014 10:41

25

24_LMM6_Art Theft_des8.indd 13 12/03/2014 10:41

Dalrymple says crossing the necessary palms with silver had to be approved at the highest level. “A payment that facilitated the return of the painting was made to third parties – not the criminals. This payment was first approved by a judge in chambers in the UK, the federal prosecutor in Germany, and by the Charities Commission in the UK,” he says.

Dalrymple gets paid for his claims settlement work as any loss adjuster would, but works on recovery of stolen artworks on a contingency basis. “If we get a success, it depends what input I have had. But within about five minutes, I have usually agreed a fee with the insurer that

I think is acceptable,” he says. There are sometimes private detectives and ex-police officers involved, as well as the official law enforcement services.

THE WAR AGAINST THEFTAnother player in the war against art theft is the Art Loss Register, established in 1991. Its Chairman, Julian Radcliffe, takes a pragmatic approach, arguing that paying nothing to recover art “would only be effective if the criminals could not sell the items or use them for any other purpose and the policy was enforceable internationally”. Given that is not the case, he says, “it is necessary to develop a more sophisticated approach”.

There are rules, Radcliffe explains. “The first element is to prevent the sale of the stolen items for anything like their true value. To convince the criminal holders that they will not be able to sell requires a worldwide searching capability and credibility. This can only be achieved by a team of 25 or so art historian specialist searchers. There have been a number of cases where criminals have not believed the reach of the searching, tried to sell, and the item has been seized – an ideal outcome – or the sale prevented.”

To stop criminals simply hoarding or destroying unsellable artworks takes incentives. “It is necessary to have the permission of the police, who are responsible for the original crime investigation, and ideally the police who have authority over the intermediary or criminals if their location is known,” Radcliffe says. Crimes may be beyond statutes of limitations or hard to prove, so the police can often agree.

“Usually the criminals, with good legal advice, will be

The priority is the payment of the valid claim. Because there is an abandonment, any recovery is in the interest of the insurer

26 / ART THEFT

DAMAGE IS THE BIGGEST THREAT TO WORKS OF ART, NOT TOTAL LOSS

“Theft always remains sexy, but it’s

not the biggest risk that concerns

underwriters,” says Catlin’s Charlotte

Wilson. The bread and butter claims

come from water damage, fires and

flood, and natural catastrophes.

Insurers want to see wind rooms in

hurricane zones, secure dry buildings

in potential flood zones and proper

plans to get artworks to these safety

zones promptly. They like water sensors

built into walls and artworks raised

off the ground. Most will exclude

subterranean galleries.

A big concern now is the aggregate

risk from the many free ports around

the world housing extensive ranges of

art so it can be bought and sold without

tax. Switzerland claims to be a leader,

with heavy concentrations of art in

Chiasso, Zurich, Basel and Geneva.

But there are others too, such as the

self-styled ‘art fortress’ in Singapore.

Insurers are less convinced.

And insurers have insisted on changes

to how artworks are transported and

stored when not on display, as this is

where many damage claims occur.

“Damage is a big risk, not total loss.

Our loss adjusters know how to

stabilise an artwork and where in the

world to take it to get it restored,” says

Wilson. “That is why customers should

work with fine art insurers and not

property insurers.”

Michael Burle, Class Underwriter

at Liberty Specialty Markets, agrees.

“It can cost £50,000 to repair a rip in

the corner of a painting, yet that tear

might reduce its value. We would pay

for that repair cost and any resulting

depreciation in value.”

MICHAEL BURLE, CLASS UNDERWRITER, LIBERTY SPECIALTY MARKETS

24_LMM6_Art Theft_des8.indd 14 12/03/2014 10:41

27

able to develop an approach that is low in risk to them and channelled through innocent go-betweens who may not know the identity of the current holders, and certainly not the original thieves,” Radcliffe says.

He adds that, “in certain areas of failed states, or states that are not recognised – such as Taiwan, Northern Cyprus, or war zones – there may be no effective extradition, no police, or the police may be corrupt. Criminals are adept at using these locations.”

THE PREMIUM STEALRecovering stolen art is a big business in itself. FBI estimates of the value of art theft worldwide have hit highs of $4bn, putting it behind only the drugs and arms trades. But this figure is now thought of as exaggerated. According to the Art Loss Register it is impossible to truly know. Not all police forces worldwide keep records and those that do have different definitions of what is and is not art. Thefts from private houses have declined significantly over the past 25 years in the UK, but not so much on the Continent.

The reasons for the drop are better security, locks, safes and alarms – all driven by insurers – and the reduction in value of other items that can be stolen at the same time. Electronic goods aren’t that lucrative, and those that can be sold are usually carried in pockets and bags, not left at home. Europe’s an easier target because of ownership rules – someone buying a stolen item in good faith can keep it, whereas in the UK the buyer loses out and the original owner has the stolen item returned.

What is clear is that only about half of the works that are stolen are insured. Putting a value on the total premium on art insurance is tricky. Estimates for the pure fine art cover range as high as $600m, with $550m more widely quoted.

There are as many as 35 syndicates at Lloyd’s writing it and new entrants coming in. “You don’t necessarily see

anybody pull out of the market, but you have seen two or three new entrants a year in 2012 and 2013,” says Liberty’s Burle. “There is a bit of loyalty from some clients but it still comes down to price. There’s not a huge differential in wordings.”

Catlin’s Wilsons adds: “There is so much capacity, and loss rates are such that there are low rates and no deductibles.”

There are some galleries and owners who simply will not buy – public museums may have state backing or be prevented from buying. There are private owners who have had valuable works uninsured for years, and see no reason to buy now – they may be asset rich, but too cash poor to afford it. Some dealers that do have fine art policies are suspected of buying too little cover for their collections. New buyers are coming into the market, seeing art as a financial investment. All need to be targeted by insurers.

The major fine art insurers are on a constant round of conferences and speaking engagements, marketing to brokers to get across the point that many high net worth clients ought to have specific fine art policies because of the more comprehensive cover and claims expertise. Theft is just part of the picture (see box, left). When it comes to claims, the fine art premium is a steal.

24_LMM6_Art Theft_des8.indd 15 12/03/2014 10:41

28 / UAVs

WORDS BY DAVID WORSFOLDILLUSTRATION BY HALF PAST TWELVE

28_LMM6_UAVs_des10.indd 2 10/03/2014 14:03

If you take the more excitable headlines too literally, it won’t be long before we have a queue of drones outside our front doors waiting to deliver our shopping, Christmas presents, takeaway meals and urgent medicines. You name it and one day an unmanned aerial vehicle (UAV) will be on its way to you – although that day remains a few years away.

In the hands of the military, especially the US and Israeli armies, UAVs have been used extensively for more than 20 years – mostly over hostile territory where it would be too risky to send manned planes or helicopters. Initially, their prime purpose was detailed reconnaissance, but recent years have seen highly publicised armed attacks deep into the notorious North West Frontier region of Pakistan and the neighbouring tribal areas of Afghanistan. Controlled from bases hundreds of miles away they have been used to assassinate some of the most wanted terrorist leaders – not without some public disquiet, including in the US.

A CAUTIONARY TALE That level of sophistication and potential for long-distance control might be throwing up all manner of potential civil and commercial uses, but so far aviation regulators remain extremely cautious.

In the UK, fewer than 300 licences have been granted by the Civil

UAVs: rise

of the

machinesFrom mapping and monitoring

to wildlife preservation and search and rescue, the market for the commercial use of unmanned

aerial vehicles is opening up – and throwing up new risks

and regulatory challengesWORDS BY DAVID WORSFOLD

ILLUSTRATION BY HALF PAST TWELVE

28_LMM6_UAVs_des10.indd 3 10/03/2014 14:03

30 / UAVs

Estimates of the value of the UAV market to the US of between US$80m and $100m may excite some, but others remain sceptical, if not outright hostile. There are widespread fears about the threat to privacy, as leading US insurance and aviation lawyer, Ray Mariani, explained at a panel discussion in New York: “Our society still values privacy, despite the exponential growth of social media over the past decade or more … Will [UAV] use become just one more means of eroding this

precious commodity? No one contests that a small [UAV] equipped with a very high resolution camera can easily capture our actions while driving, typing on a laptop on the back patio, or in our bedroom. Is that presently lawful, or do we wish to make it unlawful and therefore need to consider legislation to forbid such practices?”

While the FAA looks to open up the opportunities for UAVs, other parts of the US are heading in the opposite direction, permitting residents to shoot them out of the sky. In Deer Trail, Colorado, they are even holding a referendum on whether to allow people to claim a US$100 bounty for every government-owned UAV taken down.

The UK’s CAA occupies a middle ground. It does not permit UAVs to be flown beyond ‘line of sight’ of the ground-based operator and has strict rules about the heights at which they are permitted to be flown. Its standard restriction is no higher than 400 feet

Aviation Authority (CAA) to operate UAVs commercially, although the rate of issue doubled last year and should do so again in 2014. A key reason for the low numbers is the restrictions imposed by aviation regulators on how and where they can be used.

Around the world the picture varies enormously. The US Federal Aviation Authority currently only authorises UAVs for use by public authorities and emergency services, although it has been running a small test zone in a remote corner of Alaska looking at civilian uses. At the end of December, the FAA announced five further test sites as it rushes to comply with Congressional demands to produce comprehensive regulations for licensing the commercial use of UAVs by the end of September 2015.

the friendly, flexible face of drones…

THEY’RE HANDY FOR IRRIGATION MONITORING IN AGRICULTURE AND SURVEYING OIL AND GAS RIGS. AND THEY’RE BEING USED TO INSPECT POWER LINES, PATROL AIRPORT PERIMETERS, AND CAPTURE AERIAL SHOTS FOR FILM AND TV. THEY’VE ALSO BEEN FITTED WITH THERMAL AND VISUAL CAMERAS AND DEPLOYED TO LOCATE SURVIVORS IN THE AFTERMATH OF NATURAL DISASTERS. THE INDIAN GOVERNMENT IS EVEN USING THEM TO TRACK HERDS OF ELEPHANTS AND WARN RAILWAY OPERATORS WHEN THEY’RE NEAR LINES. BUT THAT’S JUST SCRATCHING THE SURFACE. THERE ARE PLENTY MORE INNOVATIVE APPLICATIONS, LIKE THESE…

VOLCANO DIVINGIn early 2013, NASA Earth scientists flew Dragon Eye UAVs – transferred from the United States Marine Corps and equipped with thermal cameras and sensors – into the sulfur dioxide plume of Turrialba Volcano, near San José in Costa Rica. The project’s objective? To improve the remote-sensing capability of satellites and computer models of volcanic activity.

CROWD CONTROLSky Sapience has developed the HoverMast – a tethered hovering platform that can be mounted on any vehicle. At the click of a button it autonomously deploys, rising up to 50 metres in 15 seconds. Capable of transferring critical data in real time, it is designed for rapid mobile intelligence gathering. The Israeli Defence Force recently took delivery of the system for surveillance and other missions.

REMOTE RESCUEIn an alleged first, the Royal Canadian Mounted Police in Saskatchewan province last year used the small Draganflyer X4-ES helicopter UAV to locate and treat an injured man whose car had flipped over in a remote, wooded area in near-freezing temperatures. The drone managed to pinpoint the accident victim’s position after a regular, manned helicopter equipped with night vision had failed.

IMA

GES

: JES

S C

AM

PE

28_LMM6_UAVs_des10.indd 4 10/03/2014 14:03

31

and no further than 500m from the operator for UAVs weighing up to 20kg, with limited permissions granted for variations from this.

This imposes a huge limitation on uses, but that isn’t stopping a wide range of industries looking at their potential, ready for the day when the rules are relaxed. As Gerry Corbett, Unmanned Aerial Systems Programme Lead at the CAA explains: “We are being invited to a lot of meetings and get many enquiries from companies with bright ideas, but most of them are still very tentative.”

THE MARKET OPPORTUNITYAccording to David Sales, Senior Vice-President – Aviation, at brokers Lockton, this tentative approach is mirrored by clients in the insurance market: “We’re being asked to quote on quite a few risks, but not many of those enquiries are coming to fruition. They see the prices, then it goes very quiet.”

Sales thinks the London aviation market would look at UAVs, not just from the UK, but around the world: “The capacity is still tight, especially on the hull side. On the liability side there is more interest from underwriters.”

This reflects the level of risk in terms of loss and damage to the UAVs themselves, says Martin Cox, Underwriting Executive at Global Aerospace: “The hull losses have been significant, partially because a lot of the uses are very experimental. But we haven’t seen any significant claims for damage to third-party property or injury to people.”

Global Aerospace insures UAVs weighing up to 150kg outside the UK. Above that weight, they are subject to even greater restrictions and controls – with hull values ranging from US$250,000 to more than US$100m. UAVs of this size and sophistication tend to be used by public authorities, especially the emergency services.

They have been deployed for the purposes of border control, search and rescue, and tracking suspects. On average, they carry third-party liability cover up to around US$10m, says Cox, although this rises to US$50m for some of the larger risks. In some countries – France and Germany for instance – public services are indemnified for their UAV use by national governments.

Kiln offers UAV and hull liability insurance for all types of UAVs, but sees the biggest growth coming from the small-to-medium end of the market – where hull values range from €30,000 to €100,000 – due to the regulation currently in place. Says Jay Wigmore, Aviation Underwriter: “It’s the sub-50kg market – sub-20kg in the UK – which is seeing the most growth. People are looking to develop uses within the current CAA regulations, where the vehicle has to be kept within line of sight of the ground-based operator.”

Wigmore says Kiln is working closely with manufacturers to understand the potential uses, and that it has teamed up with Resource UAS, one of two firms approved to train operators of UAVs by the CAA. The rates it offers on combined or standalone hull and liability coverage are based on whether operators are holders of a CAA-approved certificate from Resource UAS.

The CAA effectively licences the operators of smaller UAVs and makes them responsible for safety, rather than concern itself directly with the airworthiness of individual units.

Adrian Leatherland, Divisional Director at Resource UAS, says that one of the biggest challenges for

operators is to professionalise the image of the market: “We’re keen to ensure this whole business grows out of its model aircraft hobbyist image to become part of the professional aviation market.” He says the people currently coming forward for operator training aren’t professional aviators, but photographers, surveyors and other professionals “who see an opportunity to gather data in a cheaper, faster and safer way”.

This approach sits well alongside the CAA, explains Corbett: “The regulations we have were developed over one hundred years. We are not going to radically change them or our approach. UAVs are still aircraft and are still piloted.” The CAA wants to strike a balance between allowing UAVs to develop, without taking risks with safety: “Operators largely get

“Even a lightweight UAV is equivalent to the weight of a small vacuum cleaner. Imagine that falling on someone’s head from 400 feet”GERRY CORBETT, UAS PROGRAMME LEAD, CAA

28_LMM6_UAVs_des10.indd 5 10/03/2014 14:33

32 / UAVs

what they ask for. The more freedom they want, the more information they have to give us. We ask: where is the risk? It is a trade off between risk and benefit,” says Corbett.

There are boundaries to what the CAA will approve, however. It remains reticent in granting permission for any use near built-up areas unless it is controlled by the emergency services. “Even a very lightweight UAV of 5kg to 7kg carrying a camera is equivalent in weight to a small vacuum cleaner,” says Corbett. “Imagine that, combined with fast-moving rotor blades, falling on someone’s head from 400ft.”

Death and injury is not uncommon among model plane and helicopter enthusiasts: a 19-year-old operator of a model helicopter died in a Brooklyn Park last September when his model struck him. And in July, a Swiss man was found dead near his model plane, with severe cuts to his arms and legs.

As well as worrying the CAA, the physical risks also concern many insurers and risk managers, says Mark Butterworth of Condie Risk Management: “UAVs are clearly a good use of technology, especially when they are in remote areas, well out of the way of people. But if you’re a major brand –

like Amazon – looking to break new ground in their use, I would be cautious. I would question the good sense of such schemes unless the publicity value is overwhelming. There is a huge reputational risk here if one of these goes wrong – especially where people are killed or injured.”

These dangers are amplified when you consider that the commercial market for UAVs is still in an incubatory phase. As with any emerging technologies, there will be questions around the reliability of UAV systems – which will be influenced by everything from the integrity of the data links connecting them to operators, to the efficacy of in-built ‘sense and avoid’ protocols in the event that operator control is lost.

In the future, the possibility of UAVs being operated autonomously without human intervention, together with the potential for hacking or malicious hijacking, could further compound the threat of ground impacts or mid-air collisions resulting in death, hull loss or third-party property damage.

A REGULATORY ROADMAPMuch of the future development in commercial use of UAVs lies in the hands of aviation regulators

and they are working closely to create a roadmap for harmonising the rules, led by the EU and the Joint Authority for Rule-Making for Unmanned Systems.

The current roadmap is looking at harmonisation for the under-20kg UAVs flying in line of sight by 2018, with certain ‘beyond line of sight’ operations allowed in sparsely populated areas. This is already permitted in the UK around Aberporth Airport in Wales and over parts of Salisbury Plain. This will be followed between 2019 and 2023 with agreement on rules allowing larger UAVs to operate in some types of airspace and limited beyond line of sight operations in populated areas. That is when we might see UAVs flying down streets, checking on the elderly, delivering medicines to pre-determined collection points, monitoring traffic or anti-social behaviour.

Beyond that, there are more ambitious plans for unmanned cargo planes using general airspace and airports, with the rules allowing that to happen coming in the latter part of the next decade.

The London market is braced for the expansion in demand for insurance this will bring, says Cox, of Global Aerospace: “We are already seeing strong growth, but we expect the smaller end of the market to really open up in the next five years.”

“We are already seeing strong growth, but we expect the smaller end of the market to really open up in the next five years”MARTIN COX, UNDERWRITER, GLOBAL AEROSPACE

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33INTERNET OF THINGSWORDS BY HELEN YATES

� e Internet of � ings (IoT), uniquely identi able objects that have their own Internet Protocol (IP) address, will grow to an installed base of 26 billion units by 2020 – a 30-fold increase from the 0.9 billion in 2009, according to analysts at Gartner. And while the obvious application for insurance is in telematics – monitoring how cars are driven, with policies determined by that data – there are many other uses.

� rough a subsidiary, agribusiness giant Monsanto uses internet-connected sensors to capture everything from meteorological information and the size of crop yields to the water-holding capacity of soil. It can then draw on this big data to o� er farmers targeted insurance policies – and to determine whether they’re likely to have experienced a

loss and settle a claim. In fact, the Kenyan microinsurance scheme, Kilimo Salama, is turning your typical claims process on its head by embracing ‘connected’ agriculture. Really, there is no ‘claims’ process. Automated, IP-based weather sensors record if, for example, rainfall is 15% below the average, a payout is calculated, and the amount owed to farmers is then sent to their mobile phones.

PREVENTION, NOT CUREAnd with sensors becoming ever cheaper and more sophisticated, the ability to capture and use the data derived from the IoT is getting easier – making a shift from a reactive to a proactive approach to claims possible, particularly in personal

lines, where risk management is not as prevalent as it is in commercial insurance.

“� ere is a Chinese saying that a very good doctor is someone whose patients never get sick in the rst place,” says Craig Beattie, an analyst in Celent’s insurance practice. “� at’s the opportunity for the IoT. It allows us to monitor data in real time, such that we can prepare for a loss and in some cases prevent it as well.”

In January, Google revealed it was testing a smart contact lens that can help measure glucose levels in tears. Devices that can read your vital signs and raise a red � ag early on o� er compelling opportunities for life insurers.

“� ere is a lot of speculation the future will include sensors that will tell life insurance companies how healthy people are,” says Alex Plenty, Executive Partner at IBM Global. “� at could either be used to change premiums, or life insurers will become more benevolent in terms of o� ering a lifestyle improvement product.”

Around the home and o� ce, meanwhile, there are plenty of ways the IoT might help to avoid loss. In 2012, Philips launched the Hue internet light bulb. It follows that, if lights are being switched on and o� in a property that is supposed to be vacant, suspicious activity could be taking place. By linking this information to a security rm, more burglaries could be prevented.

Fred Cripe, PwC Senior Advisor and former Senior VP at Allstate, o� ers a further example: “An increasing number of seasonal homes have temperature and electrical power monitors. If the power goes out or the temperature falls below a certain level and your pipes are in danger of freezing, it will trigger an alert and the loss prevention folks can go out and do what’s necessary to protect the home.”

As the insurance industry continues to explore the opportunities the IoT presents, the ability to own and exploit big data will deliver a real competitive advantage for pioneers in the space.

Smart devices, real time data… meet the futureSoon, billions of objects will have their own IP address. And this connected world could turn insurance models on their heads

“ � at’s the opportunity for the IoT. It allows us to monitor data in real time, such that we can prepare for a loss, and in some cases prevent it as well”CRAIG BEATTIE, INSURANCE ANALYST, CELENT

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The Great Exhibition of lyonIn 1913, a future prime minister of France pushed ahead with plans for a grand exhibition that would put Lyon on the map, and insured it with Lloyd’s against a budget deficit. Just in case…

34 / HERITAGE WORDS BY GLYN BROWN

The year was 1913, and Europe stood poised on the brink of war. In the French city of Lyon, the ambitious and charismatic young mayor, 32-year-old Edouard Herriot, was overseeing enthusiastic preparation for the Exposition Internationale, or Great Exhibition – to be held from May to November 1914.

Lyon had not had a happy exhibition record. Hasty organisation, delays in construction and torrential rains made its first venture, in 1872, a commercial failure. In 1894, a shadow was cast over the second when, leaving a banquet held in his honour, President Sadi Carnot was assassinated by Italian anarchist Cesare Santo, leading to riots throughout the city.

Herriot, however, was filled with idealism and hope. His plan for the 1914 exhibition was to demonstrate the modernity of Lyon with a glittering new development where, over 75 hectares, the city promoted itself as a centre for excellence, prosperity and urban ability. And, at first, it seemed Herriot had broken his city’s exhibition curse. But as writer Henri Beraud later recollected: “It is a fact that every 20 years in our country, a World Expo is a signal of the most disastrous events.”

Perhaps with the bumpy past in mind, Herriot had already taken the precaution of insuring the exhibition against a budget

deficit. Over the New Year holiday of 1913-1914, he had travelled to Lloyd’s in London, where he was introduced to legendary underwriter Cuthbert Heath.

Heath’s reaction seems to have been amusement; every time anyone asked him to insure an exhibition, he told Herriot, they promised a brilliant success and exceptional profits, but in the event, he always had to face a deficit. “However, that’s of no importance,” he said. “Here’s a pencil and a slip of paper. Write down the amount for which you wish to be guaranteed. I will deduct the premium, and the deal will be closed.”

Herriot asked for a guarantee of 3mFF, and promised to pay a premium of 250,000FF. To his astonishment, “the whole thing was drawn up in a single sentence, and written with that lead pencil”. Such informality was baffling. Where, asked Herriot, would they find a lawyer to ratify their agreement? Heath laughed. “Will a lawyer be more honest than we are? Put the paper in your pocket… And sleep well.”

Despite his efforts, Herriot’s exhibition opened late – and within weeks had encountered every sort of hazard. “A tempest soaked the buildings; a sudden rising of the Rhône carried away the bridge that lead to the fairgrounds; strikes raged.” There was also the little matter of war, declared on 3 August.

Herriot was in despair: “What was to become of me? Full of anxiety, I wrote in the autumn to the good Mr Heath.”

Heath replied at once, and a few days later his loss adjuster, a Mr Price, arrived in Lyon. He rapidly verified Herriot’s accounts, “then, in the elegant flourish with which one offers flowers to a lady, he handed me the cheque which freed me”.

Next morning, Price left for London – just before the city treasurer of Lyon found that, in reckoning the exchange rate, Price had miscalculated, overpaying Herriot by 25,000FF. Herriot cabled Heath, whose response was typical: “Give the money to a French war charity.” Said Herriot, “Now I knew what an English signature meant.”

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AUSTRALIAAdrian HumphreysGeneral Representative, Australia+61 (0)2 9223 1433adrian.humphreys@lloyds.com  BRAZILMarco CastroManaging Director & General Representative, Brazil+ 55 (21) 3266 1900marco.castro@lloyds.com CANADASean Murphy President & Attorney in Fact, Canada+1 416 360 1512sean.murphy@lloyds.com CHINAEric GaoGeneral Representative, China+86 21 6162 8200eric.gao@lloyds.com HONG KONG Kim SwanGeneral Representative, Hong Kong+852 2918 9911 kim.swan@lloyds.com  JAPANIain FergusonRepresentative & Chief Operating Officer, Japan+81 (0)3 5656 6926 iain.ferguson@lloyds.com MEXICOGabriel AnguianoManager, Mexico+44 (0)207 327 6137gabriel.anguiano@lloyds.com  EUROPEBenno ReischelHead of Europe+44 (0)207 327 5327benno.reischel@lloyds.com  SINGAPOREKent ChaplinHead of Asia Pacific, Lloyd’s Asia+65 64999 330 kent.chaplin@lloyds.com  UK, IRELAND, MIDDLE EAST, AFRICACameron MurrayHead of UK, Ireland, Middle East and Africa+44 (0)207 327 6854cameron.murray@lloyds.com  USAHank WatkinsPresident of Lloyd’s America +1 212 382 4060hank.watkins@lloyds.com WWW.LLOYDS.COM/LLOYDS/OFFICES

SPORTS AND FINANCE, CLASS OF BUSINESS EVENT4 JUNE, FRANKFURT, GERMANY

Lloyd’s will host a full-day seminar for brokers and underwriters from the market and interested parties from Germany and Austria working in professional and amateur sports – including associations, club managers and advisors.Contact: events@lloyds.com

AIRMIC16-18 JUNE, BIRMINGHAM, UK

Lloyd’s will host stand 67/68 at the 2014 Annual Airmic conference at the ICC in Birmingham. Representatives will be on hand to provide further information on how to access the Lloyd’s market.Contact: events@lloyds.com

LMA CLAIMS MATTERS FORUM (CTP UPDATE)

Provides managing agents with an update on the progress of the CTP project and how this affects your work. LMA Claims Matters Forum is run by the LMA. For details on how to attend please email:margaret.fawke@lmalloyds.com

OLD LIBRARY 9 MARCH, 9.00 AMOLD LIBRARY 4 MAY, 9.00 AMOLD LIBRARY 16 JULY, 9.00 AMOLD LIBRARY 10 SEPTEMBER, 9.00 AMOLD LIBRARY 12 NOVEMBER, 9.00 AM

MARKET PRESENTATIONS

BENELUX 4 MARCH, 9.30AMPR1 and PR2, Lloyd’s, LondonCANADA 23 APRIL, 9.30AMOld Library, Lloyd’s, LondonPOLAND 24 APRIL, 9.30AMPR 1 and 2, Lloyd’s, LondonNORDIC 22 MAY, 9.30AMOld Library, Lloyd’s, LondonUS 26 JUNE, 9.30AMOld Library, Lloyd’s, LondonITALY 3 JULY, 9.30AMPR1 and 2, Lloyd’s, London

HOW TO PLACE BUSINESS AT LLOYD’S WORKSHOP26 MARCH, KRAKOW, POLAND

Lloyd’s Poland will host an event where Lloyd’s brokers and underwriters can meet Polish brokers – giving them the opportunity to discuss practical and technical matters on how to place Polish clients’ risks at Lloyd’s.Contact: ewa.zylak@lloyds.com

RIMS ANNUAL CONFERENCE27-30 APRIL, DENVER, US

RIMS represents more than 3,500 mostly North American industrial and service companies. The Lloyd’s market will be well represented by a contingent of around 80 underwriters and brokers ready to meet with delegates on the market’s exhibit.Contact: events@lloyds.com

LLOYD’S AMERICA: MEET THE MARKET1 MAY, BOSTON, USA

An opportunity for US brokers to spend a day with Lloyd’s underwriters, London brokers and Lloyd’s coverholders. There will be opening remarks from Inga Beale, Lloyd’s CEO, and Vincent Vandendael, Lloyd’s Director of International Markets.Contact: kiran.bhovan@lloyds.com

LLOYD’S IRELAND: MEET THE MARKET1 MAY, DUBLIN, IRELAND

Lloyd’s Ireland will host the third biennial Meet the Market Day in the Convention Centre, Dublin. The Irish broking community are invited to come and meet with a range of Lloyd’s stakeholders from the local and London market in the replicaLloyd’s underwriting room.Contact: sarah.hannon@lloyds.com

BIBA14-16 MAY, MANCHESTER, UK

Keith Stern, Lloyd’s Regional Manager, UK and Ireland – together with representatives from the Lloyd’s market – will host stand C70 at the 2014 BIBA Exhibition and Conference at Manchester Central. Contact: events@lloyds.com

GLOBAL CONTACTSEVENTS

35

35_LMM6_IBC_des3.indd 1 12/03/2014 10:43

Lloyd’s One Lime Street, London EC3M 7HA Telephone +44 (0)20 7327 1000 Fax +44 (0)20 7626 2389 www.lloyds.com

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