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Topics
Risk Solutions
Insurance solutions for industry
Issue 4/2014
A winter’s tale
Come snow or shine, you can ­protect your
business profits with sophisticated weather
hedging instruments. Page 4
Construction
Project costs
can be controlled
Valuables
Insuring a banknote’s
journey
Climate change
Wanted: More
energy efficiency
EDITORIAL
Dear Reader,
When major natural catastrophes such as hurricanes
or extensive flooding occur, the impact they have
on economies and individual companies can be clearly
seen in the figures. But even minor fluctuations in
seasonal weather, although not ruinous, can significantly reduce corporate earnings.
Weather derivatives are a young but finely tuned
instrument which makes it possible to effectively
smooth fluctuations in earnings. Since early 2014,
our expanded unit, Munich Weather & Commodities
Risk Advisors LLC, has offered intelligent weather
hedging instruments worldwide.
I hope you enjoy reading this issue of Topics Risk
Solutions.
Yours sincerely,
Torsten Jeworrek
Member of the Munich Re Board of Management and
Chairman of the Reinsurance Committee
NOT IF, BUT HOW
Contents
Springtime in winter
January is traditionally peak
­season at European ski resorts
like Kitzbühel. However, if it
is too warm even for artificial
snow, then financial losses are
inevitable.
Page 4
News2
iTWO Project Cost Insurance
3
risk management
More than a fair-weather friend
Hedging non-catastrophic weather-related
risks with sophisticated instruments
valuables
Insuring a banknote’s journey An experienced underwriting team
offers better solutions for cash in
transit companies
interview
Money drives everything in energy
Investing in renewable energy is the low-cost
option, says Nobel Prize winner Steven Chu
Imprint and preview
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16
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Munich Re Topics Risk Solutions 4/2014
1
news
MARINE
Engineering
cyber risks
Costly wreck removals
New floating bridge
in Seattle
Cybercoverage for small
businesses
The cruise vessel Costa Concordia,
with a hull loss of some US$ 500m
and a liability loss totalling at least
US$ 1.5bn, proved to be the largest
single marine loss in history.
The world’s longest floating bridge is
under construction in Seattle – and it
is a masterpiece of engineering and
logistics.
In 2012, 29% of US small businesses
suffered a cyber attack. Some 72% of
them were subsequently unable to
fully restore their computer data.
The new bridge will not only be higher
and substantially wider than the
existing, over 50-year-old bridge. It
will also have six lanes, cycle and
pedestrian paths and, more importantly, it will be safer. It is to be a
prestige project that pushes bridge
construction to the limits of what is
technically possible.
HSB CyberOne™ coverage is a cyber
risk insurance solution designed by
Hartford Steam Boiler to help small
businesses recover from damage
to data and systems caused by a
computer attack. This cyber threat
protection also provides defence and
liability coverage for third-party
law­­suits alleging damage due to the
insured inadequately securing its
computer system.
The escalating costs of wreck removal
have been on Munich Re’s radar
for some time as a distinct risk of
change.
In 2013, we passed on to the marine
markets specific proposals concerning future insurability, both as re­­gards
the structure of reinsurance and with
regard to the P&I insurers’ approach
towards coastal states.
>> M
ore information at:
www.munichre.com/en/schadenspiegel
Munich Re, with its wealth of
­expertise, is involved in insuring
the project.
>> More information at:
www.munichre.com/engineering
>> M
ore information at:
www.munichre.com/HSB
News in brief
Follow us on social media
For some time now, readers have
been able to comment on Topics
Online articles on our website. But
you can also contact Munich Re on
different social media platforms: we
are on Twitter, Facebook, Google+,
YouTube, LinkedIn and Xing.
Why not follow us – and at the same
time keep up with the topics that are
being talked about in the insurance
industry. Check out our extensive
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Munich Re Topics Risk Solutions 4/2014
range of interesting articles and
­fascinating videos. Or stay fully up to
date with live tweets from company
and industry events.
>> twitter.com/munichre
>> facebook.com/munichre
>> youtube.com/user/munichrevideo
>> linkedin.com/company/munich-re
>> xing.com/companies/munichre
>> plus.google.
com/115897201513788995727
New cover for construction projects
Keeping major construction projects on a time and
cost schedule is one of the greatest challenges that
owners, developers and investors must deal with.
Major cost overruns from the past show that they do
not always succeed. Each construction project is
unique. There is no trial run. Many problems are only
identified on the construction site, and solving them
can be both costly and time-consuming. Until now,
these unplanned cost increases in the construction
phase of a project have been difficult to estimate and
therefore uninsurable.
Now, Munich Re, in collaboration with RIB Software,
one of the leading technology providers of BIM 5D
(building information modelling) and ERP solutions,
has developed the world’s first IT-based insurance
product for construction projects: iTWO Project Cost
Insurance. The solution is based on the iTWO 5D
technology developed by RIB, offering the facilities for
computer-aided, model-oriented planning and building with integrated cost and time controls. This virtual planning, simulation and monitoring of a construction project makes it possible, for the first time
ever, to provide insurance cover for additional cost in
construction projects.
Joint data pool gives planning security
To simulate a construction project, the project members prepare all relevant project data and enter these
into iTWO 5D in the planning phase. Material requirements, specifications, requests for quotes, schedules
and costs are collected by the system and compared.
The database-supported approach of ITWO 5D has
eliminated interface problems. Using iTWO 5D, the
project members immediately identify planning errors
or gaps in information, and can already rectify these
during the planning phase.
Once data collection is complete, the construction
process is simulated. If the simulation runs smoothly
under the established preconditions, insurance cover
is offered for the residual risk relating to the physical
construction. Cover extends to the difference between
the costs planned in the iTWO 5D simulation and
the costs actually incurred by the owner for physical
implementation of the construction project.
>> M
ore information at:
www. http://www.munichre.com/en/media-relations/
publications/company-news/2014/2014-05-26-company-news/index.html rib-software.com
Munich Re Topics Risk Solutions 4/2014
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risk management
Make profits
weather-proof
In a long list of industries, the business climate
reflects the weather – even anticipated fluctuations
can hit balance sheets hard. Munich Re has now
expanded its weather risk management portfolio to
include sophisticated hedging instruments.
Weather has a substantial impact on business in
wealthy industrialised economies. A recent study by
the US National Center for Atmospheric Research
(NCAR) estimated the effect of routine weather on the
US economy at 3.4% of GDP – or US$ 485bn (in
2008). Industries affected include not only those that
come first to mind like energy and agriculture, but
also sectors like travel, entertainment, construction
and many more. While companies have long used
insurance to manage the risk of catastrophic weather
events, only recently has it become possible to hedge
against weather fluctuations. Since weather derivatives were introduced in the 1990s, they have grown
to become an important hedging instrument.
Hedging non-catastrophic weather-related risks
In contrast to insurance covers, financial hedging
instruments are used to manage high-frequency,
low-impact occurrences. A 10% deviation from average weather patterns in a winter season, for example,
is not unusual. But its effects, though generally not
ruinous, can still significantly affect a company’s
financial well-being.
The challenge of handling these fluctuations is especially apparent in the case of utilities: during an unexpectedly mild winter, consumers use less heating
energy, causing a drop in the utility’s revenues; a particularly cold winter, on the other hand, can lead to a
surge in demand, forcing the utility to purchase additional fuel at peak prices. In some contracts, settlement goes beyond purely financial hedging to include
physical provision of a commodity such as natural gas.
Weather derivatives: A new concept with trusted
benefits
One important aspect of weather derivatives is the
use of volumetric weather hedging instruments to
enhance attractiveness to investors: in the case of
regulated gas distribution companies or utilities in
general, for example, shareholders want to see stable
cash flows. Since weather is a huge source of volatility in the energy business, a utility that can smooth
its results is in a position to present itself as a solid
investment, which consequently reduces its cost of
capital.
But the sound economic advantages are not limited
to the energy sector. Free of the strain that cost and
revenue fluctuations place on their balance sheets,
companies in various industries not only enhance their
appeal to shareholders and customers, but can afford
to take a more entrepreneurial approach and invest
resources efficiently.
Weather derivatives keep
profitability from melting away.
Munich Re Topics Risk Solutions 4/2014
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risk management
“We have been working with the team at Munich
Weather & Commodity Risk Advisors LLC on
our weather hedging structures since 2007.
They have been very supportive in helping us
understand the weather market. We have a good
professional and collaborative relationship.”
Laurie A. Rutherford, Director, Enterprise Risk Management, CenterPoint Energy
CenterPoint Energy, Inc., headquartered in Houston, Texas, is a domestic energy delivery company
that includes electric transmission and distribution, natural gas distribution and energy services
operations. The company serves more than five million metered customers primarily in Arkansas,
Louisiana, Minnesota, Mississippi, Oklahoma and Texas. CenterPoint Energy and its predecessor
companies have been in business for more than 140 years.
Also worthy of mention is the fact that even noncatastrophic weather risks can be existence-threatening in some cases. Relatively small organisations
operating on a thin capital base like school districts
and municipalities – but also snow removal companies – rely on snowfall hedging solutions. By serving
both sides of the market, the Weather & Commodity
unit places cities and schools in a position to manage
the otherwise very challenging expense of clearing
snow during a severe winter. At the same time, snow
removal companies are given a cushion to ensure
business continuity if a mild winter causes a severe
drop in their revenues.
Transatlantic cooperation
The customer value of cooperation between Houston
and Munich goes beyond general matters of weather
and climate knowledge. A current agreement with a
utility in Houston, an area affected by the El Niño
weather cycle, is a case in point: the pricing is updated
on a bimonthly basis, and consulting with the experts
in Munich gives the Texas team a know­ledge lead.
Current and informed views on the strengthening or
weakening of El Niño enable them to serve the utility
with transparent and evidence-based calculations.
The Weather & Commodity unit also utilises direct
access to the knowledge needed for longer-term
transactions, whether in terms of climate change or
normal weather cycles. These could include special
hedges for climate change risks: if weather fluctuations no longer revert to mean over a ten-year period,
for example, but rather oscillate around a warming
trend, companies will need assurances to make longterm investments. A longer-term hedge could be an
attractive solution.
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The fact that the Weather & Commodity unit can
transact from legal entities domiciled on both sides of
the Atlantic is a further advantage for clients who
may want to interact only with companies within their
own regulatory environment.
Non-cash hedging
Physical commodity business is a relatively small yet
significant part of the Weather & Commodity unit’s
portfolio. It offers a number of key benefits: companies that are unfamiliar with purely financial hedging
instruments are often more comfortable with a transaction that guarantees their supply of an essential
commodity such as fuel rather than financial means
to purchase it on the commodities market. At the
same time, actual physical transactions have a different regulatory status under the US Dodd-Frank Act,
which has led many utilities to favour them over
financial hedging. The capacity to provide a physically
settled risk management solution, i.e. natural gas, has
enabled the Texas team to retain clients.
To fulfil its supply guarantees, the Weather & Commodity unit maintains natural gas reserves in leased
storage facilities. When a settlement is triggered, the
gas is delivered to the client via leased pipelines or
other transport modes.
The attractiveness of physical supply guarantees to
various industries in both Europe and North America
has led the weather hedging specialists to consider
expanding the commodity portfolio.
risk management
Waiting for the rain to stop: a familiar
sight at tennis tournaments like the
US Open in New York.
Our product overview
Dual-trigger derivatives (quantos)
The purpose of a volumetric risk management instrument is to even out the company’s results, providing
relief for shortfalls in sales or spikes in commodity
prices. The solutions can be divided into three main
categories:
In this case, the client is compensated if both realised
weather and the price of a related commodity fall
­outside an established range.
Single-trigger weather-indexed derivatives
These pay the counterparty if realised weather falls
outside an established range. The operative weather
index can be based on temperatures, precipitation or
wind and can relate to averages, minimums, maximums or some combination.
While regulated utilities typically have guaranteed
margins on each unit sold, shareholders are not protected from a lack of demand resulting from unseasonably mild winters (gas utilities) or cool summers
(electric utilities) – i.e. volumetric risk.
−−Options (put and calls), swaps, caps, floors,
and collars
−−Contracts are indexed to publicly available
weather data
−−Contracts are typically “seasonal” with terms
of less than 12 months, but can be multi-year
A typical client is a natural gas utility seeking to
ensure that its cost of gas will not exceed a given level
if it is forced into the market due to an unexpected
demand surge driven by colder weather.
−−Options (put and calls), swaps, caps, floors,
and collars
−−Crude oil, heating oil, or electricity trades are
financially settled only
−−Natural gas products can be physically or
financially settled
Commodity price hedging instruments
This type of solution helps the client protect margins
against unanticipated price moves. Munich Re
provides these for natural gas, crude oil, heating oil,
gasoline and electricity. A retail electricity supplier
desiring to “fix” its per-unit sales margin for a given
period will seek to “lock in” its wholesale cost of power
via a fixed-for-floating swap on wholesale power prices.
−−Options (put and calls), swaps, caps, floors,
and collars
−−Crude oil, heating oil, or electricity trades are
financially settled only
−−Natural gas products can be physically or
financially settled
Munich Re Topics Risk Solutions 4/2014
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risk management
Up-to-date data
Whether physical or financial, the quality of volumetric
risk management instruments depends on the underlying data. For this reason, the Weather & Commodity
unit places great importance on data engineering and
operates highly advanced internal and client-facing IT
platforms. These are equipped with industry-leading
decision-making tools with clear graphics for visualisation.
The IT solutions draw on highly scalable databases
that capture information from external and internal
sources and process more than 750,000 datasets.
These include daily historical weather captured at
more than 6,000 stations worldwide and forecasts
from over 1,500 stations as well as daily updates on
all active futures markets (e.g. CME, CBOT, COMEX,
NYMEX), physical natural gas and currency markets.
In addition, all US energy statistics from the Energy
Information Administration (EIA) are embedded and
updated on a daily basis.
eWeatherRisk’s platform allows users
to choose different weather risk perils
at over 5,000 National Weather Service
weather stations and build, price and
purchase contracts in real time. Users
can analyse historical weather data
and resulting payout profiles. Contracts
can be conveniently saved and referenced for future use.
Portals offered to customers include the proprietary
Custom Quotes and the weather risk management
platform provided by eWeatherRisk, a company based
in Billings, Montana. Aimed at the agriculture industry, eWeatherRisk provides access to solutions to
supplement traditional crop insurance and support
producers, storage operators, transporters and
­processors. The platform helps find the most costeffective ways to dynamically manage exposures to
the economic impacts of extreme temperatures,
excess or insufficient precipitation and other adverse
weather conditions.
The online quoting platform Custom Quotes enables
clients to independently explore and price any number
of risk management products, which they can then
purchase. It allows customers who are familiar with
volumetric risk management products to run through
literally hundreds of different scenarios conveniently
and save the structures and quotes for future reference.
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A heating oil costless collar, structured
and priced in Custom Quotes.
risk management
We are ready for
new products
Mark Tawney offers insights into the
weather derivatives business and what
it means to be part of Munich Re.
Mark Tawney, President of
Munich Re Weather &
Commodity Risk Advisors LLC
Topics: Weather derivatives are
hedging solutions aimed at managing high-probability, low-impact
risks. Can’t companies simply take
potential fluctuations into account
and manage their own risks?
Mark Tawney: The first thing to consider is that utilities generally operate in a small geographic area, so
they have no weather diversification.
By turning to Munich Re, a utility can
access capital at costs based not
only on a globally diversified weather
portfolio but also on an extremely
large and highly diversified overall
reinsurance portfolio. In other words,
the cost of capital provided by our
hedging solutions is likely to be significantly less than the utility’s own
cost of capital.
Our clients rely on us because it
makes perfect economic sense: they
can hold the capital they require to
manage their risks at lower cost and
deploy their own resources more
effectively, say, by investing in business growth.
Munich Re has a long history of
weather and climate research, which
makes the Weather & Commodity
unit a very good fit. Could you
describe some of the synergies?
Munich Re is a much-respected
name that reflects positively on us as
a small group. Another point is that
there is some indication that we’re
currently headed into an El Niño
weather pattern, which has significant impact on temperature and
­precipitation around the globe. When
we’re writing temperature and precipitation hedges for clients in areas
that are especially impacted by El Niño,
we work closely with our colleagues
in Munich to gain the know­ledge we
need, for example, about what to
expect this coming winter.
visits. I’d also like to mention that a
couple of our former employees have
even been placed in other units within
the organisation.
We’re an innovative team. As we continue to get to know the research
and expertise Munich Re has to offer,
I think a lot of new product ideas will
emerge out of the collaboration. One
aspect I’m very interested in is risk
management in the face of climate
change. I expect that it will generate
an interest for new specific covers
with extended durations. With
Munich Re’s understanding of climate
trends, we’re in a strong position to
create efficient products responding
to clients’ needs.
Well, the unit outage cover I mentioned
is an excellent example. We developed it jointly with the Munich Re
specialty insurer Hartford Steam
Boiler, which has vast experience in
managing equipment breakdown
risk. In essence, it provides business
interruption insurance for power
plants but with an additional price
trigger and the option of eliminating
the usual 90-day waiting period for
claims. If there’s a mechanical breakdown and the cost of electricity goes
beyond a certain threshold, the client
is compensated.
How have clients and staff reacted to
your acquisition by Munich Re?
In general, the broader footprint it
gives us has opened doors. We can
talk with clients about, say, unit outage insurance and at the same time
update them on the weather derivatives market. European utilities are
much bigger than those in the US,
with accordingly large exposures,
and the Munich Re name gives them
the confidence to fully place their
hedging needs with us.
Could you give an example of a
deal you cooperated on with internal
Munich Re colleagues?
By leveraging HSB’s detailed engineering expertise and our knowledge
of the energy market, we’ve created
a very intelligent solution that offers
real value to power plant operators.
It’s an outstanding combination of
skill sets.
From a staff point of view, the co­­
operation with Munich is great.
Some of our people are now located
in Munich and there are frequent
Munich Re Topics Risk Solutions 4/2014
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risk management
Traditionally, your focus has been on
the energy sector, but the business
model could be applied to create
solutions for any industry affected by
weather. What new market segments
are you entering?
One is construction, an area where
we can gain from cooperating with
Corporate Insurance Partner.
Pipeline construction, which is very
sensitive to precipitation, is a focal
point. When there’s heavy rainfall,
pipeline projects either have to stop
work or lay out huge mats to keep the
construction equipment from sinking
into the mud. Either way, costs can
be tremendous.
What role do renewable energies play?
We’re very interested in renewables –
it’s a growing market and a natural
extension of our core competencies
in energy. We underwrite lack of wind
covers for wind farms, for example.
As governments withdraw subsidies
in the wake of the financial crisis, I
anticipate a growing need for renewable energy operators to manage
their risks.
ing, the hedge would compensate for
incurred costs. Here again, we’re
working with Corporate Insurance
Partner.
But conventional fossil-fuel power
plants also turn to us for wind covers:
when winds are strong and sustained,
they dispatch less power because so
much wind energy is available.
The construction phase is also relevant: we’re talking with energy companies about a cover for offshore
wind farm projects with a wave-height
trigger. When the sea is too rough for
the construction boats to keep work-
Two real-life examples of
weather hedging solutions
Precipitation contingent crude oil quanto
Weather contingent gas quanto
Client: An electricity producer in Chile, generating
power partly from hydro plants and partly from fossilfuel plants. In a dry year, the reduced hydroelectric
capacity cannot meet demand, and thermal generation
is required. High fuel oil prices for thermal plants
increase overall generation costs.
Client: A large energy service provider in the UK risks
losing revenue in warm winters and could face higher
expenses in cold winters.
Protection needed: The client wants to protect profitability, which is sensitive to the annual precipitation in
Chile and to the price of diesel fuel.
Product structuring: Extensive analysis of historical
relationships
−−Precipitation vs. profitability
−−Precipitation and crude oil prices vs. profitability
−−Precipitation vs. crude oil prices
−−Recent and current weather patterns
−−Crude oil price trends
Multiple structures are analysed with different combinations of attachment points and limits for discussion
with the client.
Solution: The client receives a payment when pre­
cipitation is low AND when the diesel fuel price is
high. Crude oil is used as an alternative commodity
for diesel fuel, as there is a very high correlation.
Technically, the product is a double trigger cover
(quanto) with a precipitation put and a crude oil call.
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Munich Re Topics Risk Solutions 4/2014
−−During a warm winter, the client will not sell enough
gas and will eventually have to sell excess gas in a
falling price environment.
−−During a cold winter, the client faces higher
expenses, if additional high-priced natural gas has
to be purchased.
Protection needed: The client wants to protect profitability, which is sensitive to the winter temperature in
the UK and to the natural gas price.
Product structuring: To address the uncertainty in
both volume and price, the client buys a weather/­
natural gas quanto. The client receives payments
when the temperature is warm and the gas price is
low AND when the temperature is cold and the gas
price is high.
Solution: The protection is a swap, meaning that the
client pays Munich Re in opposite situations. As the
client is more likely to receive under the contract, an
upfront premium is negotiated.
risk management
Munich Re Weather & Commodity Risk
Advisors LLC
Since the beginning of 2014, together with colleagues
in Munich, the US-based experts form an international
and interdisciplinary weather risk management team
serving industries whose balance sheets are
impacted by weather.
We design volumetric hedging instruments that help
reduce the risks of adverse or unexpected weather
conditions. The financial and physical commodity
solutions are customised for individual companies in
industries as diverse as energy, agriculture, food manufacturing, transportation, retail and entertainment.
The team of around 35 includes energy experts as well
as meteorologists and climatologists who can help
identify a company’s weather-related risk exposure.
With expertise in dual-trigger weather risk management products (termed quantos – quantity adjusting
options), which combine volumetric and pricing
dimensions and are triggered on actual demand, we
enable our clients to minimise and mitigate risks on
both sides of the balance sheet.
Typical solutions include futures contracts, forward
contracts, options on futures contracts, swaps and
other derivative products. Quanto triggers are usually
indices like temperature, rainfall, snowfall, streamflow and wind speed as measured at objective, thirdparty weather stations, as well as indices based on
commodity price movements.
OUR Experts
Bill Windle
Weather & Commodities, USA
info-weather@munichre.com
Claudio Ribeiro
Weather & Commodities, USA
info-weather@munichre.com
Daniel Kopf
Weather & Commodities, Germany
info-weather@munichre.com
René Mück
Weather & Commodities, Germany
info-weather@munichre.com
Munich Re Topics Risk Solutions 4/2014
11
valuables
From print to pocket –
Insuring the banknote
Banknotes are a worldwide currency, the total number of which would
cover 180,000 football pitches if put together. Their very nature also
makes them hot property. It is inevitable therefore that cash in transit
companies are a niche, highly risk-aware industry and seek comprehensive insurance.
Easy come, easy go? Always keep your
banknotes safe from pickpockets.
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Munich Re Topics Risk Solutions 4/2014
valuables
Banknotes are
printed
Delivered to banks –
used for over-thecounter and ATM
withdrawals by
­customers
Used by customers
in shops, restaurants,
etc. for transactions
One of the largest marine insurers at Lloyd’s of London,
Watkins Syndicate has a dedicated Specie Team who
insure fine art, jewellers‘ block and cash in transit (CIT).
In addition to insuring the physical movement of the
cash itself, they also cover the money whilst it is in
storage in bank vaults and the like.
With around 357 billion banknotes in circulation in
the world at any one time, global economies rely on
cash in transit companies to successfully distribute
their funds. And despite the rise in the use of plastic
in our everyday transactions, the recent economic
downturn has resulted in more people reverting to the
use of cash as a preventative measure against falling
into debt. Cash in transit companies therefore still
have a vital role to play in keeping cash flowing, and
with the risks they face, comprehensive and insightful
underwriting is a must.
The journey of a banknote …
The initial production of banknotes is fully controlled
by central or reserve banks (Bank of England, European Central Bank, US Federal Reserve), which retain
responsibility for the monetary policy of their country
or groups of countries. The banknotes are made from
special, toughened starch paper, designed to be resilient to the human handling they will endure during
their average two-year lifespan. Security measures
are also introduced during the printing stage, such as
mould-made watermarks and security threads to
minimise counterfeits.
Returned to the
bank: counted,
sorted, inspected,
authenticated
Withdrawal and
destruction
Once the banknote has been produced, the cash in
transit companies will collect the cash and deliver
it to the branch banks. Here it will be used for either
over-the-counter or ATM withdrawal by the bank
­customers. At this point, the banknotes will go into
circulation and be used anywhere from shops to restaurants and garages in order to purchase goods.
However, the notes will often find themselves once
again in the hands of the cash in transit firms when
they are transported back to the bank for depositing
by the restaurant or shop. Back at the bank, they will
be sorted and checked, and those deemed to be at the
end of their lives and no longer of an adequate quality
will be destroyed. For the rest, the process will start
afresh.
Getting the cover right
Such a specialised industry requires specialised
­coverage. Over the years, the Lloyd’s market has
developed wordings which aim to respond to the
­client’s needs.
Coverage tends to be on the basis of ARPLOD (all
risks of physical loss or damage) for both premises
and transit risks, and includes the insured’s liability
for carrying and storing third-party property. Other
specific covers include infidelity, mysterious disappearance and electronic transfers.
Infidelity is a key cover for many companies, particularly as they are becoming larger through consolidation of entities. This, explains Simon Parnell, Specie
Underwriter, is a noticeable change in the CIT industry in recent years: “Due to the increase in regulation
and increased pressure on profit margins, it is more
difficult for the smaller, family-run business to survive.
As a result, there have been many mergers and buyouts, especially in the previously fragmented markets
of the US and parts of Europe. The larger entities are
deciding to take over their rivals as a way of maintaining or increasing their market share.”
Munich Re Topics Risk Solutions 4/2014
13
valuables
Madeleine Bradnam
Senior Fine Art and Specie
Underwriter
Simon Parnell
Senior Fine Art and Specie
Underwriting Manager
Abigail Collins
Underwriting Assistant
Louis Robertson
Senior Fine Art and Specie
Underwriter
Of course, as with any good underwriter, Watkins look
for signs of a good client when making their risk selection. Louis Robertson, Senior Underwriter, explains:
“Moral hazard is an important underwriting factor for
CIT business. We look for clients who are careful of
employees’ welfare and willing to spend time on training and also ensure that procedures are carried out.
We like to see evidence that clients are willing to spend
money on security and have good contacts with police,
security services and market associations. Willingness to update and change the business and listen to
underwriter and surveyor suggestions also demonstrates a sound client.”
Big losses … lessons learned
Inevitably, the market has been hit with some sizeable
losses over the years – some of which have been covered in the media. Madeleine Bradnam describes how
lessons are learned from such losses: “Robbers are
becoming increasingly innovative, and security measures need to keep up. For example, recently in Brazil,
robbers tunnelled underground to access a vault from
below; the resulting BRL 5.3m loss demonstrated the
need for a six-sided vault.”
One of the best-known losses of recent times is the
Securitas depot robbery in Kent, UK, in 2006. The
manager of the depot and his family were kidnapped
and the robbers demanded access to the vault; around
GBP 53m was stolen. This loss prompted a change
in security and, today, it is rare for a single person to
have full access.
14
Munich Re Topics Risk Solutions 4/2014
An experienced and successful team …
Watkins Syndicate are market leaders for cash in
transit insurance business. They service a number of
high-profile clients, covering some of the world’s leading organisations. The team are highly experienced
and well-regarded underwriters in the Lloyd’s market.
Simon Parnell is Class Underwriter and has 37 years’
experience in the Lloyd’s and company markets, 15 of
which have been with Watkins Syndicate. Madeleine
Bradnam is Senior Underwriter and has 13 years of
experience, whilst Louis Robertson, Senior Underwriter,
has been working in the market for ten years. Abigail
Collins is the team’s most recent junior recruit and
has been with the syndicate for a year.
But what else makes the Watkins team so successful?
There is a definite willingness to look at the new and
unusual risks, coupled with a sound understanding
of market wordings and their clients’ needs. This is
achieved by regular contact and visits to their clients
in order to keep up with the challenges they face and
the solutions they propose, both pre- and post-loss.
With today’s economic uncertainty, clients are looking
for good, solid security behind their insurers, something Watkins, backed by Munich Re, can boast.
valuables
… in the Lloyd’s market
Not only are the Watkins team highly skilled, they
operate in the Lloyd’s market, which attracts most CIT
business, mainly due to its speciality and capacity.
Other markets can and do write CIT business, but due
to their lack of understanding of the business, they
will often write it on cargo conditions, and therefore
will not be providing clients with the cover they need.
In addition, the Lloyd’s market provides the capacity
needed for large-vault risks, which may sometimes
require extraordinarily high limits. As Lloyd’s writes
on a subscription basis, risks up to US$ 2bn in limit
can be placed here.
Contact:
Simon Parnell
Senior Fine Art and Specie
Underwriting Manager
simon.parnell@mrunderwriting.com
Munich Re Topics Risk Solutions 4/2014
15
Interview
Climate change
Money drives everything in energy
In July, Steven Chu visited Munich Re
and talked with Peter Höppe, Head
of Geo Risks Research/Cor­porate
Climate Centre.
Peter Höppe: Mr. Chu, we are happy
to have you as a guest here today.
Where are the connections between
your work and ours?
Steven Chu: As a data-driven scientist, I wanted to shift the dialogue on
changes in weather away from single
events. In the last few years, I have
been studying and using your data to
help educate the public that weather
patterns are changing. What I like
about your data is that you have to be
objective and dispassionate, since
you are ultimately driven by business
decisions.
The wind in the US policy on climate
change has turned recently. What are
the main reasons for this new attitude?
I think the main reasons are changing weather patterns and the high
costs that just a few major storms
caused in the last ten years. Several
former EPA Administrators and Secretaries of Treasury, both Democrat
and Republican, are now saying we
have to pay attention to mounting
­climate change risks that entail significant economic losses.
What can be done if the climate
change negotiations in Paris 2015
fail again?
We should remain hopeful. These
negotiations are important but even
more crucial is that we are beginning
to see movement in the US and China.
Ultimately, those two countries are
responsible for nearly half the carbon
emissions in the world. The Chinese
government is very committed: they
accept that climate change is real
and is threatening their people and
16
their long-term prosperity. They are
also working hard to diversify their
energy supply. Many states in the US
are also taking aggressive action.
Above all, the US has the technological and innovative capacities to
invent things and to invest in new
technologies. Advances in technologies are rapidly bringing down
the price of renewable energy and
energy storage. When we also
­consider the large economic losses
due to the accelerating changes
in weather, the cost of renewable
energy is the low-cost option. Finally,
money drives everything in energy,
and we absolutely need a price on
carbon and other GHG gases to reflect
the real cost of these emissions.
Many countries are trying to reduce
their dependency on fossil energy. In
your opinion, what is the ideal energy
mix of the future?
We have to start with much-improved
energy efficiency in all ­sectors. With
regard to the energy mix, it depends
on where you are geographically:
North America as a whole, Europe in
combination with North Africa, and
China have good resources in wind,
solar and hydropower. Renewable
energy becomes especially attractive
if these regions have integrated grids
and generate renewable energy where
it is most cost-effective.
What has to be done to support the
new technologies?
One major challenge is full system
engineering of generation, storage,
transmission and distribution of electrical energy. As renewable energy
becomes the majority supplier of
total electricity generated, the system engineering needed to guarantee
the stability and security of the grid
becomes more demanding.
Munich Re Topics Risk Solutions 4/2014
Steven Chu won the Nobel Prize in Physics
in 1997 and was US Secretary of Energy
from 2009 to 2013. He has long been an
advocate of greater research into renew­
able energies.
I would favour converting electrical
energy into a form of liquid chemical
storage that we can pipe, transport,
and store. We need more research in
this area!
How can the insurance industry
­support this process?
You are helping citizens and policymakers realise the risks of climate
change by accurately assessing the
insured and uninsured losses due to
our changing climate. The industry
can help the financial community
invest in new clean energy by insuring project risk. Experience has shown
that once technologies are proven at
large scale, the cost of capital declines
significantly. In this way, clean energy,
which is dominated by up-front capital costs, becomes a safe, long-term
investment.
Preview 1/2015
Energy waste
With municipal waste generation expected
to grow faster than urbanisation rates in the
coming decades, governments are increasingly discouraging landfill use and focusing
instead on waste as a viable energy source.
The related demand for insurance of recycling and waste transfer stations together
with the high frequency of fire damage presents challenges for insurers. Engineering
insurance specialist HSB examines the risks.
>> T
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© 2014
Münchener RückversicherungsGesellschaft
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Tel.: +49 89 38 91-0
Fax: +49 89 39 90 56
www.munichre.com
Münchener RückversicherungsGesellschaft (Munich Reinsurance
Company) is a reinsurance company
organised under the laws of ­Germany.
In some countries, including in the
United States, Munich Reinsurance
Company holds the status of an
unauthorised reinsurer. Policies are
underwritten by Munich Reinsurance
Company or its affiliated insurance
and reinsurance subsidiaries. Not all
coverages are available in all
jurisdictions.
Any description in this document is
for general information purposes only
and does not constitute an offer to sell
or a solicitation of an offer to buy any
product.
Responsible for content
Group Communications
Editor
Regine Kaiser
Group Communications
(address as above)
Tel.: +49 89 38 91-27 70
Fax: +49 89 38 91-7 27 70
rkaiser@munichre.com
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Hartford Steam Boiler
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