Reinsurance: Competitors such as hedge funds have eroded prices so much that a typical year of claims could move the industry into losses.

Hedge fund inroads weaken reinsurers’ catastrophe defenses



Aug 23, 2016 | By Oliver Suess, Jan-Henrik Förster
  Prices for reinsurance, which primary insurers buy to help them shoulder risks, have fallen in eight of the past 10 years, according to a property-catastrophe index compiled by Guy Carpenter.

(Bloomberg) -- It won’t take another Hurricane Katrina for reinsurers to face losses from covering the cost of storms and earthquakes. Competitors such as hedge funds have eroded prices so much that a typical year of claims could move the industry into losses.

Property & casualty reinsurance is “getting very close to combined ratios of 100 percent,” Manfred Seitz, managing director of international reinsurance at Warren Buffett’s Berkshire Hathaway Inc., said at a roundtable of industry executives on Monday. “Even if we see normal catastrophe claims in 2016, you could see a number of companies” reach the threshold. A ratio above 100 percent means claims and expenses exceed premium income.

Prices for reinsurance, which primary insurers buy to help them shoulder risks, have fallen in eight of the past 10 years, according to a property-catastrophe index compiled by Guy Carpenter. The industry has been releasing reserves for past claims, which has helped cushion against both the impact of the price declines and falling investment income from ultra-low yields.

“What we’ve experienced is kind of the opposite of a perfect storm,” Matthias Weber, chief underwriting officer at Zurich-based Swiss Re, said, referring to the industry in general. “Everybody enjoyed reserve releases. However, if we adjust results for this and the ‘good luck’ due to the absence of large natural catastrophe losses, they are not that fantastic anymore.”

 
Global natural disaster losses during the first half of 2016 from both an economic and insured loss perspective were each...

The combined ratio for property and casualty at Swiss Re AG, the world’s biggest reinsurer, worsened to 101 percent in the second quarter from 92.9 percent a year ago after catastrophe claims including earthquakes in Japan and wildfires in Canada. It would have been 5.5 percentage points higher without prior-year releases. Munich Re’s ratio in the same segment rose to 99.8 percent from 93.3 percent, even after releases improved the measure by 5.1 percentage points. 

‘Underlying deterioration’


“If you look at the combined ratios before reserve releases, then you can clearly see an impact every year from the softening in the market,” Ludger Arnoldussen, a Munich Re management board member, said at the roundtable organized by Bloomberg News. “The underlying deterioration is there.”

The ratios are rising despite losses from natural disasters for the first six months of the year only being in line with the 10-year average, according to Munich Re estimates. Reinsurers are also running out of claims reserves that they can release as profits fall, Allianz Re Chief Executive Officer Amer Ahmed said in February.

Competition is rising as central banks’ quantitative easing programs pushed down yields for traditional investments, luring new participants to the market. Investors from hedge funds to pension managers hope to boost their returns by putting up capital to back risks through insurance-linked securities such as catastrophe bonds.

Alternative capacity from capital-market offerings such as catastrophe bonds and collateralized reinsurance rose to a record $73 billion in the first quarter, according to Aon Plc. Reinsurers had a further $580 billion available to back risk in the first quarter, matching the high reached a year earlier, the broker said.
Price falls


That meant continued price falls when contracts were renewed in July, albeit at a slower pace than previously, both Munich Re and Swiss Re said when reporting figures for the second quarter. Munich Re saw a 0.4 percent decline in prices in July compared with a 2.1 percent drop a year ago, the firm said.

“We clearly have a situation of oversupply,” said Juan Beer, who buys coverage as head of group reinsurance at Zurich Insurance Group AG. “It takes a lot to reverse the cycle such as a financial-market shock or a massive natural catastrophe.”

The industry is gathering in Monte Carlo next month for its annual meeting to discuss prices for next year with customers. Negotiations there will be more difficult than in the last two years and rates are unlikely to fall materially in 2017, said Dirk Lohmann, chief executive officer at Secquaero Advisors AG which advises reinsurers on risk management.

Markets are already punishing the industry for the rising ratios and falling profits. Swiss Re, Munich Re and Hannover Re, three of the world’s four biggest reinsurers, reported a decline in quarterly earnings in the second quarter. Munich Re shares have fallen 13 percent this year, with Swiss Re down 17 percent and Hannover Re losing 14 percent.

“On the surface, reinsurer results may still look good, but if you look at the underlying health they don’t,” Ahmed at Allianz Re, the reinsurance arm of Europe’s biggest insurer Allianz SE, said on Monday. “The benign catastrophe environment of the last few years led to good results.”
Hurricane season


The favorable level of claims in recent years may be threatened by the U.S. hurricane season. The Atlantic basin will see the most named storms since the 2012 season, the year Sandy caused as much as $50 billion in property damage in the U.S., with as many as four of those strengthening into major hurricanes by Nov. 30, the National Oceanic and Atmospheric Administration said Aug. 11.

“Analysts and investors absolutely know that good luck will not be the new normal” when it comes to claims, Swiss Re’s Weber said. “It is just a matter of time until the big hammer comes down and then, resilience, size and capital on the balance sheet will make the difference.”


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Metal and Nonmetal Mine Safety Alert: Drill Entanglement Accidents

MSHA Issues Safety Alert for Drill Operators 

By Nickole C. Winnett on August 17, 2016

On August 10, 2016, MSHA issued a drill safety alert for operators regarding the dangers posed by rotating machinery that can entangle clothing and body parts and result in serious injuries and death. The safety alert was spurred by seven fatalities since 2002 involving drills and the risk of entanglement in rotating machinery. In press coverage regarding the release of the safety alert, Joseph Main, the Assistant Secretary for Mine Safety and Health, stated that:


“Paying attention to safe job procedures, staying clear of rotating drill and augers, complying with drilling safety standards and following best practices will reduce the risk of death or injury.”

MSHA’s safety alert identifies 12 best practices that drill operators could implement to reduce their risk. Some of the practices identified include establishing written policies for the type of clothing and methods to secure clothing when working around drills, not allowing drill operators to wear loose-fitting or bulky clothing when working around drilling machinery, stopping the drill rotation when performing tasks near the rotating steel, assuring that machine controls and safety devices operate effectively and are in easily accessible locations, and communicating regularly and frequently with drillers to assure that they are safe and well.

If you have a suggestion for a future safety alert, MSHA encourages you to submit it to: MNMAccidentPrevention@dol.gov.

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Metal and Nonmetal Mine Safety Alert
Drill Entanglement Accidents

Drillers are exposed to rotating machinery that can entangle clothing and body parts and result in fatal or seriously disabling injuries.  Drillers working alone or in remote areas must be able to communicate with others and be heard or seen.  Focus on safe job procedures, comply with drilling safety standards and follow best practices to reduce the risk of death or injury.

•    A 22-year old rock drill operator with one year of experience was fatally injured when his clothing became entangled in a rotating drill steel while spot drilling at a dimension stone quarry.
•    A 30-year old contract driller with six years of experience died at a shale quarry trying to manually thread a new drill steel while the drill head rotated.
•    A 53-year old miner with thirty-two years of experience died in an underground metal mine when his clothing became entangled in the drill steel while operating a jackleg drill.

Best Practices
✓ Examine the drill and the surrounding work area before beginning drill operations. Assure that the area is free from tripping hazards and that drilling materials are safely arranged and well-organized to prevent accidents.
✓ Establish written policies for the type of clothing and methods to secure clothing when working around drills and assure the policies are followed.  Do not wear loose-fitting or bulky clothing when working around drilling machinery.
✓ Avoid using objects that could become entangled with or thrown from moving or rotating parts.
✓ Stay clear of augers and drill stems that are in motion. Stop the drill rotation when performing tasks near the rotating steel.  Never pass under or step over a moving drill stem or auger.
✓ Drill from a position with good footing and access to the controls.
✓ Never manually thread the drill steel while the drill head is rotating.
✓ Do not hold the drill steel when collaring holes, or rest your hands
on the chuck or centralizer.                                                                   

✓ Assure that machine controls and safety devices such as emergency shutdowns operate effectively. Never nullify or bypass machine control safety equipment.
✓ Place emergency shut-down devices, such as panic bars, slap bars, rope switches, two-handed controls, etc. in easily accessible locations.
✓ Safely position hoses and cables on and around drilling equipment.  Design proper hangers, guides, stand - offs and entrances to eliminate the necessity of handling hoses or cables in close proximity to rotating or moving equipment.
✓ Communicate regularly and frequently with drillers to assure they are safe and well.


The topic for this Safety Alert was suggested by the Illinois Association of Aggregate Producers’ Safety Committee.
If you have a suggestion for a future Alert, please submit it to MNMAccidentPrevention@dol.gov
 

After massive crude oil spill from abandoned pipeline, PHMSA Clarifies Regulatory Requirements on how to change the status of a pipeline facility from active to abandoned.

PHMSA 20-16
Tuesday, August 16, 2016
Contact: Artealia Gilliard
Tel.: 202-366-4831
PHMSA Clarifies Regulatory Requirements Regarding Abandoned Pipelines



WASHINGTON - Today, the U.S. Department of Transportation's (DOT) Pipeline and Hazardous Materials Safety Administration (PHMSA) issued an advisory bulletin to clarify the regulatory requirements for classifying pipelines based on their operational status. The bulletin highlights procedures for changing the status of a pipeline facility from "active" to "abandoned" for owners and operators of gas and hazardous liquid pipeline facilities and federal and state pipeline safety personnel.

A 2014 pipeline failure that allowed 1,200 gallons of crude oil to seep into a residential neighborhood near Los Angeles raised concerns about the need to remind pipeline operators about the proper way to purge and clean inactive pipelines. This action makes it clear that federal regulations consider pipelines to be either active and fully subject to all parts of the safety regulations or abandoned.

PHMSA is aggressively working to implement the Protecting our Infrastructure of Pipelines and Enhancing Safety (PIPES) Act of 2016, which was enacted in June of this year. Today's notice fulfills a requirement from Section 23 of the PIPES Act that mandates DOT issue an advisory bulletin to the pipeline industry regarding procedures to change the status of a pipeline facility from active to abandoned.

To view the Federal Register notice, click here.

For more information on the U.S. DOT's efforts to improve pipeline and hazardous materials safety and awareness, including details about the advisory bulletin, visit the PHMSA website at www.phmsa.dot.gov.



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Pipe Subject to Safety Regulations Until Formally Abandoned: PHMSA Advisory 
By Hunton & Williams LLP on August 23, 2016 

PHMSA issued an advisory to operators regarding the applicability of its safety regulations to idled, inactive and abandoned pipe. Congress directed PHMSA to issue such an advisory in the recent PIPES Act of 2016, in response to several high profile incidents involving idled pipe. While operators frequently refer to idled, decommissioned, mothballed and/or inactive pipe, PHMSA does not recognize those terms. 

 In its advisory, the Agency explains that it considers pipelines to be either active and subject to all relevant safety regulations or abandoned (i.e. permanently removed from service). With respect to a pipeline that is “purged” of all combustibles but not yet formally abandoned, PHMSA confirms its current practice of accepting deferral of certain activities, including inline inspection, as long as deferred activities are completed prior to or as part of returning a pipeline to service. This is consistent with prior PHMSA guidance.

In addition, PHMSA reminds operators of the requirements for formally abandoning pipe (at Part 192.727 for gas pipelines and 195.402(c)(10) for oil pipelines), including affirmative notice to PHMSA for offshore facilities and onshore facilities that cross waterways. Notably, the Agency recognizes that some pipelines may have been abandoned prior to the effective date of the abandonment regulations and owners may not have records relating to the location of those pipelines or whether they were properly purged of combustibles and sealed. 

PHMSA adds, however, that owners and operators have a “responsibility to assure facilities for which they are responsible or last owned do not present a hazard to people, property or the environment,” later adding “to the extent feasible.” Further, PHMSA notes that owners and operators are “fully responsible for the safety of their pipelines at all times and during all operational statuses.” The Agency also signals that it is considering proposing procedures in a future rulemaking for notifying regulators of purged but active pipelines.

In addition to regulatory obligations, the owner of an abandoned pipeline may have potential liability under common law for any nuisance or hazard that may be created by leaving pipe in the ground. These issues vary by state and each fact situation, and become more acute when water crossings are included.

In light of the above, owners and operators should ensure that they are aware of all potential issues and liabilities associated with proposals to abandon, purge or idle certain facilities and the possible acquisition of abandoned, purged, or idled pipeline facilities. Owners and operators should be prepared to demonstrate compliance with applicable laws and regulations for assets which they own or operate. In addition, the industry should anticipate future rulemakings that could require affirmative notice obligations for all abandoned pipelines as well as purged but active pipelines.

Top 14 Most Common Scheduling Mistakes by Construction Contractors that some courts and boards of contract appeals have noted

Top 14 Most Common Scheduling Mistakes by Contractors 
By Matthew DeVries on August 17, 2016 

Many delay, disruption, and loss of productivity claims are lost or substantially reduced in value because mistakes, errors and carelessness are reflected in the original schedule and plan of operations. The original schedule is often the first piece of documentation that the owner receives demonstrating the contractor’s professionalism in planning and management.



Contractors should pay great attention to the scheduling process and avoid many of the common mistakes that can lead to a loss of credibility on the project. 

It is impossible to list all of the possible initial scheduling mistakes, but the following is a list of the Top 14 mistakes in the initial construction schedule that some courts and boards of contract appeals have noted:

1. No proof of the information used to prepare schedule
2. Errors in technical logic
3. Incomplete schedules
4. Overlooking procurement of critical materials
5. Failure to consider physical restraints
6. Failure to consider weather restraints
7. Failure to consider resources
8. Failure to consider the economics of the sequencing
9. Failure to consider uncertainty and risk in establishing durations
10. Schedule does not “tie in” to the anticipated means and methods and/or estimate
11. Logic intentionally deviates from the manner in which the contractor intends to build
12. Elimination of float by increasing durations
13. Unrealistic productivity or durations
14. The schedule submitted to the owner was not used to build the project

 

Again, the schedule can often set the tone for the job. In court, it is the document that establishes the benchmark of all time related claims. 

As such, it has a tremendous impact on the judge and jury and influences the credibility they will attach to the evidence that follows. 

Louisiana's Federal Declaration of Disaster Does Not Suspend Payment of Mortgage, Rent, Car Payments, Student Loans, and Open Accounts

By Steven Boutwell on August 19, 2016

By Alan J. Berteau
President Obama has declared 20 parishes in Louisiana to be Major Disaster Areas.  The presidential declaration recognizes the obvious, grim reality of the tragedy in Louisiana, but more importantly enables flood victims in these parishes to apply for federal disaster assistance from the Federal Emergency Management Authority.  A previous article on the Kean Miller Louisiana Law Blog addressed this issue.


While you may obtain financial assistance from FEMA, a federal declaration of disaster does not suspend the payment of your mortgage note, rent, car payments, student loan payments, credit card payments, or payments on open accounts. Many lenders and creditors are offering assistance to victims of the flood but there are five important general rules to bear in mind:

1. The assistance is not automatic; you must apply for it. If you ignore and fail to pay a debt, you will probably not be able to avoid the consequences of the non-payment later by claiming inability to pay due to flooding.
2. You should work directly with the lender or creditor on the debt in question. Avoid third-party intermediaries. You and your creditor share an interest in avoiding default on your obligation. Third parties do not share that interest. You need to be sure you know exactly what information the creditor gets from you, and exactly what the creditor is offering to you.
3. Save all records associated with your request for assistance, including all correspondence, e-mails, forms and, if possible, a log of telephone conversations.
4. Once you have applied for assistance, do not hesitate to follow up with the creditor on a recurring basis.
5. You should be sure that you completely understand what your future obligation will be on the debt in question. For example, at the expiration of a grace period, will you owe a balloon payment to cover payments deferred? Will your payments increase in the future to cover temporary reductions? Will your deferred obligation include interest or fees incurred during the grace period? You should get, in writing, from your creditor a clear explanation of what you will owe, and when you have to pay what you owe, after the expiration of the relief period.

Both Freddie Mac and Fannie Mae have implemented disaster relief guidelines.[1]  You can determine if your loan is a FHLMC or FNMA loan by visiting the “look-up” pages on the Freddie Mac and Fannie Mae websites.  To apply for relief, however, you must contact your loan servicer (the bank or other entity to which you make your mortgage payments).  FHLMC and FNMA essentially direct the loan servicer to help you; the servicer will follow that directive. 

The specific assistance rendered will be decided by the loan servicer. The assistance may include forbearance (i.e., giving you additional time to catch up on late payments), reduction in your payments, and waiver or reduction of late fees, penalties. If the modification to your loan obligation is temporary, you must be sure you understand what your obligation will be upon the completion of that time (probably 12 months, or less).  The loan servicer is obligated to tell you what you need to know.  Your loan servicer is not required to provide you any specific relief; just because a neighbor received help of a certain kind does not mean you will receive the same help.  Freddie Mac and Fannie Mae websites offer an overview of the types of assistance available.

The Federal Housing Administration (FHA) is a government agency which insures millions of home loans.  On August 18, 2016, FHA directed the lenders who hold mortgage notes insured by FHA to help flood victims in the disaster areas:

HUD (U.S. Department of Housing & Urban Development) has instructed FHA lenders to use reasonable judgment in determining who is an “affected borrower.” Lenders are required to reevaluate each delinquent loan until reinstatement or foreclosure and to identify the cause of default. Contact your lender to let them know about your situation. Some of the actions that your lender may take are:

• During the term of a moratorium, your loan may not be referred to foreclosure if you were affected by a disaster.
• Your lender will evaluate you for any available loss mitigation assistance to help you retain your home.
• Your lender may enter into a forbearance plan, or execute a loan modification or a partial claim, if these actions will help retain and pay for your home.
• If saving your home is not feasible, lenders have some flexibility in using the pre-foreclosure sales program or may offer to accept a deed-in-lieu of foreclosure.

HUD Disaster Resources

Even if your home loan is not owned by Freddie Mac or Fannie Mae, or insured by FHA, you should contact your lender to see if it offers disaster assistance. Regions Bank, for example, has announced its intention to assist its customers who were victims of the flood. You can check Regions’ Disaster Resource Center for details. JP Morgan Chase announced that it is “automatically waiving late fees for mortgage, credit card, business banking and auto loans as well as overdraft, ATM and monthly service fees on deposit accounts through August.”  Other banks offering assistance include Whitney Bank and Iberia Bank.

You should assume that your lender or other creditor will offer you some type of assistance if you reside in the disaster area IF you contact the lender and qualify for the assistance. Lenders and other creditors may also offer assistance to individuals who work in the disaster area, even if they don’t live there.  You will only find out the assistance available to you by contacting your lender.
Farmers may be entitled to targeted financial assistance through various disaster relief programs administered by the Farm Service Agency of the U.S. Department of Agriculture.


Vehicle lenders are stepping up to offer relief as well.  Toyota Financial Services announced on August 16, 2016, that it is offering payment relief options to flood victims, including extensions and lease deferred payments.  Although we have not found specific announcements from other major vehicle lenders, it is reasonable to assume that others offer disaster relief.

We  have also found no specific announcements of assistance of credit card issuers, but if you anticipate difficulty in staying current on credit card obligations, contact the issuer and ask for disaster assistance.

The LSU College of Agriculture’s website offers an excellent compendium of disaster-related resources and links useful for any victim of flooding.
The Louisiana Office of Financial Institutions Website contains, among other resources, a list of agencies to contact for assistance.  Any third party entity listed on the LOFI webpage can be trusted (notwithstanding my general warning against reliance upon third parties in obtaining disaster assistance).

Your lenders and creditors are generally not required by law to offer disaster assistance. But lenders and creditors want to help flood victims manage their obligations while they cope with the more immediate challenges of safety, food, shelter, electricity, and medical needs. There is no guarantee that you will receive assistance from a given creditor, but you may rest assured you will not receive assistance if you don’t apply for it.
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[1] The Federal Home Loan Mortgage Corporation (“Freddie Mac”) and the Federal National Mortgage Association (“Fannie Mae”) are government-sponsored entities which together own or guarantee payment on approximately 60% of the home mortgage loans in the United States. There is a very good chance that your home mortgage note is owned by one of these “government-sponsored enterprises.” The entity to whom you actually pay your note is servicing the loan; it no longer owns the loan, if it ever did.




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Limited Sales Tax Relief Available To Louisiana Flood Victims Without Flood Insurance


By Steven Boutwell on August 18, 2016





By Jason R. Brown

If you are one of the many South Louisiana residents directly affected by recent flooding but did not have flood insurance protection for your home and/or assets, be aware that the law provides some limited relief in the form of sales tax refunds. Under Louisiana law (La. R.S. 47:315.1), residents living in an area determined by the president of the United States to warrant federal assistance can seek a refund of state sales taxes paid on destroyed household items such as furniture, appliances, electronic equipment, etc. Refunds are not limited to homeowners. Apartment and other homestead renters are equally eligible. Eligibility is limited, however, to the actual owner of the property who paid the state sales tax and no refunds are allowed on property for which the purchaser received reimbursement (whether through insurance or other means, including, potentially, assistance from FEMA).

The Louisiana Department of Revenue has issued standard forms for making natural disaster refund claims. The forms – R-1362 (Claim for Refund); R-1362D (Schedule of Tangible Personal Property Destroyed by a Natural Disaster); and R-1362S (Calculation of States Sales Tax Refund) – must be submitted on or before December 31, 2019. Form R-1362 must be notarized and form R-1362i should be referenced for instructions on how to complete the three required forms and what documentation must be attached to verify a claim.

Purchases of automobiles/trucks, boats/boat trailers, water/snow skis or similar recreational items generally used away from home are not eligible. Nor are items that were installed or became component parts of the residence (i.e., lighting and bathroom fixtures, water heaters, hot tubs/spas and wall-to-wall carpeting). Finally, be aware that eligibility is limited to taxes paid on the destroyed property’s original purchase, not its replacement.

As of today, the President of the United States has declared Acadia, Ascension, East Baton Rouge, East Feliciana, Evangeline, Iberia, Iberville, Jefferson Davis, Lafayette, Livingston, Pointe Coupee, St. Helena, St. Landry, St. Martin, St. Tammany, Tangipahoa, Vermillion, Washington and West Feliciana Parishes federal disaster areas. More are expected in the coming days. Residents who live in one of these parishes, but did not have flood insurance should consider seeking natural disaster refunds on their destroyed household items purchases.