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SLOAN RISK MANAGEMENT SERVICES LIMITED

RISK MANAGEMENT AND INSURANCE CONSULTANTS P.O. BOX 10173 WELLINGTON NEW ZEALAND Telephone 64 4 472 6896 Facsimile 64 4 471 1240 E-mail [email protected] Website: www.sloanrisk.co.nz

RISK MANAGEMENT NEWSLETTER NO. 193

Circulate to: · Finance · Property · Insurance · Other

In the early 1990's when EQC pulled out of insuring non-domestic property I asked my son, Damian, to draw the above cartoon which has now become a reality.

BUSINESS INTERRUPTION - INTER-GROUP SALES

The Canterbury earthquakes have also highlighted this exposure which has complicated Business Interruption policies for years. This is where a group consisting of many subsidiaries of associated companies has a large proportion of inter-group selling resulting in aggregated profits for the different parties/companies involved. If the entire parent group's gross profit is fully insured with all of the associated companies and locations identified, then there should be no complications in a future claim for a major fire or earthquake, or other insured damage. What is called the "Department Clause" was designed to recognise this "independence" factor or in a group policy. But problems can arise if different indemnity periods are selected.

PRINCIPAL ­ JOHN SLOAN, A.N.Z.I.F. (FELLOW) A.R.M. OFFICE ­ Floor 5, Room 537, Harbour City Tower, Cnr Brandon Street & Lambton Quay, Wellington, N.Z. TELEPHONE ­ (Mobile) 027 4461 728 / (Private 64 4) 232 4241

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However, if because of, say, spread of risk there is a reduced parent/group company profit insured and reliance on increased costs of working for subsidiary companies then the major difficulties with the dependencies and contingency covers will emerge. To avoid this potentially costly complication the various insurance interests and clients involved should carefully consider the interrelationships of the clients business operations and sources of revenue to adequately and correctly structure the Business Interruption policy before it is issued ­ under insurance or wrong insurance can't be remedied after a claim.

MORE INSURANCE COMPLICATIONS OR LESSONS ARISING FROM ALL 3 CANTERBURY CATASTROPHES

LOSS OF RENTALS INSURANCE CLAIMS ­ WHEN DOES CLAIM TERMINATE?

We recently received a query on when loss of rentals insurance ceases. This related to a Christchurch tenanted building which had been damaged but which is now repaired to the extent that it is tenantable. However, it is not attracting tenants even though the building is habitable and accessible. The query related to the loss of rentals Insurance and the argument was being put that the refusal to tenant the building was due to the earthquake. However, it is far more likely that the insurers will maintain that as soon as the building is repaired and is habitable that the loss of rentals insurance ceases at that date and the policy does not cover what could be termed disinclination to occupy. Also, there was no prevention of access nor closure by the Authorities to preclude occupation.

REINSTATEMENT OF AMOUNT OF INSURANCE CLAUSE

This clause has been included in Property and Business Interruption policies for decades and usually reads: "In the event of loss for which a claim is payable under this Policy, and in the absence of written notice by the Company or the Insured to the contrary, the amount of insurance cancelled by loss will be automatically reinstated from the date of loss. The insured undertakes to pay such pro rata premium at the rate applicable to the item(s) concerned as may be required for the reinstatement." Depending on the type of claim the usual rule with Property and most Business Interruption insurance is that if there is a loss it is deducted from the sum insured. As this can sometimes leave the insured client at risk, the above clause was designed to reinstate the cover. However, the problem which has automatically emerged at Christchurch with the successive earthquakes and with some properties being unable to be accessed the insurers have found that, potentially, the reinstatement of amount of insurance clause compounds problems. The other problem is that of the extra premium implied in the clause which includes the key word "automatically". Consequently the Insurers are looking at amending the clause to specifically exclude known damage or, in some cases, unknown damage. It is also anticipated that insurers may look at limiting their total liability on an annual basis.

3 FLOATING ­ BLANKET COVERS "ANYWHERE IN NEW ZEALAND" MAY GO

There is also a move by insurers to restrict these types of covers as they have found that, in some cases, they had far greater risks in the Canterbury area , than they had known. Consequently specific location limits are being insisted on as these had been sacrificed a number of years ago in the interests of policy simplicity and so-called premium economies. Consequently there will be far greater attention on correctly identifying the values at risk at each location rather than some uninformed and under-insured estimates which have been made in the past.

SAY GOODBYE TO UNSPECIFIED LOCATIONS BEING INSURED TOO

In addition to some coverages on "anywhere in New Zealand" basis, some policies or schemes also included coverage for what were termed "unspecified locations" just in case specific locations were not identified or an organisation suddenly acquired or occupied a location which was not advised to the insurers. But with the increased tightening of underwriting disciplines such external coverages will be either eliminated or very much restricted. It is ironic that the rediscovery of old underwriting disciplines is now claimed to be inspired risk assessment.

DEMOLITION AND REMOVAL OF DEBRIS ­ DEMARCATION ISSUES

Allocation of cost problems are emerging because the demolition clause in building policies invariably includes removal of contents. The difficulty is that some building contents can be owned by tenants whose own contents insurance may include the demolition and removal of debris clause. However, when a building is an absolute total loss and everything is removed, extreme difficulty would be encountered in trying to allocate the demolition and removal of debris costs between different insurers and the building owner's policy could be left with the entire cost. It is now evident that many insurances, had a low provision for demolition and removal of debris costs which in some instances had proved to be very costly, thus reducing the amount available for actual rebuilding.

TWO "CRUCIAL DECLARATORY JUDGMENTS IN THE PIPELINE"

The insurance industry is waiting for declaratory judgments to be declared which may have a costly impact on the business community and insurers. 1. FIRST LOSS POLICIES - FIRE SERVICES LEVIES LEGITIMATELY REDUCED

For at least 20 years it has been possible to arrange property insurance on what is termed a "first loss" basis. This is where the maximum possible loss by fire is established and 3 separate insurance policies established to: Insure that first loss "fire" amount on an indemnity basis (on which levies are paid) Issue a separate Fire policy for the difference between that first loss indemnity value and the total replacement value to give full fire cover (no levies payable) Issue a separate Perils cover (excluding fire) to cover the full replacement value, particularly for earthquake (no levies payable)

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This appears simple but the 3-tier policy wording has to be precise and meet legislative requirements of the Fire Services Act which is the key point of the declaratory judgment to be issued. The various arguments for and against this first loss basis have raged for years and remains a political hot potato due to the multi-million dollar costs involved 2. LIABILITY OF EQC FOR SUCCESSIVE DAMAGE BY SEPARATE EARTHQUAKES

The other case involves the matter of whether EQC's liability (i.e. $100,000 for buildings and $20,000 for contents) is a one-off cover during an insurance year and not each and every loss during an insurance year. The issue also impacts on the liability of "top up" from private insurers.

FROM INSURANCENEWS.COM.AU

S & P MAINTAINS NZ EARTHQUAKE COMMISSION RATINGS Standard & Poor's (S&P) has affirmed the New Zealand Earthquake Commission's (EQC) AAA financial strength and issue credit ratings, with a stable outlook. He says the EQC's credit profile has deteriorated due to Canterbury earthquake claims. It held more than $NZ6 billion ($4.82 billion) before the September 2010 quake and S&P estimates this will fall to around $NZ2.5 billion ($2 billion), with net exposure to all the events of around SNZ3.5 billion ($2.8 billion). the EQC has $NZ2.5 billion reinsurance cover in place. EQC FORCED INTO SHORTER REINSURANCE CONTRACT A reinsurer to the New Zealand Earthquake Commission (EQC) has renewed on an annual instead of a three-year basis following claims from the Christchurch events. The EQC has four reinsurance contracts ­ two now renew annually and the other two are threeyear contracts, which fall due next year and 2013.

NZ NEWS EXTRACTS

1. INFRATIL LIFTS COVERAGE FOR ANY AIRPORT QUAKE LOSSES INFRATIL has upgraded its insurance policy on Wellington Airport in the wake of the Christchurch earthquake, securing cover over loss of profits for up to 18 months after a disaster. Suncorp (Vero in New Zealand) Christchurch losses surpass $2B. Industry insiders told insuranceNEWS.com.au that a hardening in the New Zealand markets could attract some much-need overseas interest. "The New Zealand market has always been too soft and it has not been economic [for foreign companies], but now rates are going up and we are seeing deductibles increasing significantly, they can see the market might be worth a look at," one source said.

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LLOYDS/LONDON

U.K. Lloyds Sony says London warehouse fire may affect UK deliveries - during the recent riots their sole warehouse location in the UK was destroyed which highlights the problems of centralisation of warehouse/distribution facilities. Few small to medium enterprises take up of Business Interruption cover leaves them facing an uncertain future following the rioting across the UK.

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UK Applies Riot Law to Upheavals, Easing Insurers' Burden The U.K. government has heeded the wishes of the insurance industry by announcing that damages from the riots that have engulfed parts of some English cities will be covered by the police compensation structure that dates to 1886. ....effectively means that the police will be responsible for making good on a large portion of the insurance claims that will result from the turmoil. (No such law here it seems) Riots may force retailers to take insurance in-house Lloyd's Leads the Way in Medical Tourism Insurance Lloyd's has launched an insurance product that provides complications insurance for plastic surgeons globally to help protect patients who travel abroad for treatment. Lloyd's Syndicate Forecast Results as at 30 June 2011 Due to the long tail Lloyd's takes 3 years to close off an insurance year. This (17th August) update results: year 2009 profitable year 2010 likely to be unprofitable year 2011 so far doesn't look too good either

EXTRACTS FROM A BERMUDA REINSURANCE SEMINAR

Mixed Emotions

The Bermudan catastrophe reinsurers were a little at odds with some talking about increased premium rates being attractive for them to partake in. Mention of 400 to 500% reinsurers' premium increases were reported. However, one executive who had a direct complaint about brokers "the brokers sometimes like to play chicken with the market and they wait as long as they can, thinking that the reinsurers will cave in and agree to lower prices...... however, in the last days of May with June 1st renewals, the brokers suddenly realised what was happening, and they were left with incomplete placements for clients that still needed capacity". "You have people operating in some of the smaller markets that have been there for 80 to 100 years, charging the same ridiculous prices, year in and year out. Charging one on line for swathes of hundreds of millions of dollars of earthquake coverage is ludicrous. As Michael said, these are foreseeable events and people do not have the odds of loss right." "I think any sector needs a good story. And our story at the moment might turn good after another event" (i.e. he wants another catastrophe.) "For many companies there are no more "cookies in the jar". "I do think we need to differentiate the extent of premium increases. We don't want to just do it across the board."

Bermuda Results

"USA inklings of a hard market".

OUR RISK AUDIT SERVICES

Our Risk Audit is the basis of our involvement for the majority of our risk management consulting assignments and includes a comprehensive review of our client's business(es), the risks involved and the manner in which those risks are treated. A Risk Audit is as non-invasive and collaborative as possible. An audit typically involves: Interviews with senior management and selected personnel; Physical inspections of facilities; Review of property business interruption and liabilities/exposure Examination of past and outstanding claims; Overview of existing broker performance, services and remuneration' In-depth analysis of all insurance policies, premiums paid and savings available Review self insured risks

A Risk Audit provides our clients with a detailed overview of their existing situation, and outlines the strengths and weaknesses of their programme. It concludes with realistic recommendations for programme improvement and savings and a specific plan of implementation. You want an objective, independent review of your insurance programmes; You want to examine the cost of your insurance programmes; You experienced a loss not covered by your insurance; You plan to competitively market your insurance programme or broker's service You want to explore other methods of financing losses; Your business has changed significantly and requires an evaluation for new or additional risks; Your loss history or exposures had made it difficult to purchase insurance; You are dissatisfied with your broker or underwriters; Your want to conduct an RFP.

WHAT YOU CAN EXPECT FROM US Objectivity Independence Experience in today's insurance market Expertise Cost effective fees No conflicts of interest

INDEPENDENT RISK MANAGEMENT AND INSURANCE CONSULTANTS Sloan Risk Management Services P O Box 10173 WELLINGTON Phone: (04) 472-6896 Fax: (04) 471-1240 Cell 027 4461 728 e-mail: [email protected] Website: www.sloanrisk.co.nz (August 2011)

DISCLAIMER The information in this publication is of a general nature as a service to clients and other interested parties. The articles included herein are not intended to provide a complete discussion of each subject. While the information is believe to be correct, no responsibility is accepted for any statements of opinion or any error or omission. MAILING LIST REVIEW If any recipient of this newsletter wants to be removed from the mailing list please email us to action your request.

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