Water—or the scarcity of it—is not something people give a lot of thought to. But consider these facts:

1. Demand for clean water will rise by 100% between 2007 and 2040.
2. Irrigation for farming uses 60% of all water taken from rivers and aquifers globally.
3. While the world produces twice as much food as it did 25 years ago, it takes three times as much water to do so.
4. To produce 1kg of rice takes 2,000-3,000 litres of water.
5. 1kg of instant coffee takes 20,000 litres (yes, that’s twenty thousand).
6. 1 litre of milk takes 4,000 litres of water.
7. 1 hamburger takes 11,000 litres of water.
8. 1 cotton T-shirt takes 7,000 litres of water.
9. Already, 400 out of China’s 600 biggest cities are short of water.

So we can expect to see taxation on water, increased use of desalination, corresponding developments in agricultural technology, crops designed to rely on smaller amounts of water and an increased political focus on water extraction and use.

Water could be the new oil.

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Alistair Schaff QC gave an illuminating talk on Wasa –v– Lexington at an impromptu BILA session in Lloyd’s Old Library today.

While Schaff represented the winning reinsurers he managed to convey an objective sense that the right decision had been reached. I was in tune with that since I had always found the CA decision oddly artificial and this judgment from the House of Lords strikes me as more commercially sensible.

An interesting point did arise, though. Supposing that the underlying law had always and explicitly been that of Pennsylvania – what then would have happened as regards the period of cover under the (UK law) reinsurance? In other words, how would the Courts reconcile the clash between the unusual yet legally correct (under Pennsylvanian law) finding that Lexington were liable for all loss occurring from 1942 onwards as against the very plain words of the reinsurance contract’s period clause, i.e. that it only responded to losses occurring during the policy period (for 3 years from 1 July 1977)? Schaff admitted that he did not know the answer but said that, while it would be a very close call, it was perhaps marginally more likely that reinsurers would still squeak home. He alluded to their Lordships’ comments that the period clause in the reinsurance wording was very plain, and also to the English reinsurance law position that an LOD clause is not at all far from being an express, specific provision that cover will only be available for losses occurring in that period.

Interesting. The factual matrix in Wasa was unusual and unlikely to be repeated, but that second scenario (a foreign finding at odds with English reinsurance doctrine) is not at all uncommon and one can expect this to be tested before very long, I suspect.

Emphasising that the case was all about construction, Schaff also pointed out why the ‘follow settlements’ clause in Wasa didn’t help the cedent, namely, because the clause only operates if the risk is one to which the insurance and reinsurance respond. Here, the reinsurance did not respond (because of the LOD provisions) and Lexington were thus unable to apply the follow clause.

While it seems obvious, that’s a principle worth bearing in mind. Too often, people see a follow settlements or Full Reinsurance wording and immediately conclude that cover must necessarily apply. Wasa shows quite neatly why that is not always the case.

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At least from Barlows.

Word is that “Barlow Lyde & Gilbert (BLG) insurance heavyweight Colin Croly has left the firm following the merger of its insurance and ­reinsurance practices. Croly was tipped to take the senior ­partner position last year, but was beaten to the post by ­professional ­liability head Simon Konsta. It is not yet known whether Croly is planning to join another firm.”

ReRisk wishes both Mr Croly and Barlows all the best in their mutually exclusive futures.

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Willis offer an assessment of how the reinsurance industry is surviving the credit crunch. Key points:

1. Reinsurers’ balance sheets have stood up pretty well, especially compared to the parlous situation in the capital markets.
2. Access to capital is going to remain tight, so reinsurers are being cautious about risk exposure.
3. So prices are going up, especially in capital intensive lines (like US cat)
4. Primary carriers are looking for more reinsurance, so as to reduce their risk.
5. But those same carriers are still not charging enough on their own inwards business.
6. The lack of trust in credit rating agencies means that carriers appear to be spreading reinsurance purchasing wider, and syndicating more, rather than lobbing everything into 2 or 3 carriers alone. This means more opportunity for the smaller RI carriers (and more work for brokers).

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London Market reinsurers have ended their long-running Commercial Court litigation with Korea National Insurance Corporation (KNIC) by agreeing to pay approximately 95% of KNIC’s reinsurance claim and to retract and withdraw all allegations of fraud and impropriety made against the North Korean insurer.

The litigation, which began in January 2007, involved a claim by KNIC to enforce in the UK a North Korean judgment for more than €44 million. Reinsurers had rejected the claim, which arose from an accident in 2005 when a helicopter crashed and destroyed a Pyongyang warehouse containing emergency relief goods.

Reinsurers’ primary defence was struck out by the Commercial Court in August 2007, a decision upheld by the Court of Appeal in October 2007, but continued to maintain both that the underlying insurance claim was fraudulent and that the Korean judgment was fraudulently obtained, in each case with the knowledge of KNIC.

The trial proper began in the Commercial Court on 12 November 2008. After submissions and evidence, including that of numerous North Korean witnesses of fact challenging the allegations of fraud, reinsurers agreed to settle the case by paying KNIC €40 million, effectively some 95% of the claim. The reinsurers and their lawyers, Clyde & Co, further agreed to retract and withdraw all allegations of fraud and impropriety against KNIC.

According to Reuters, the lawsuit is “one of several which North Korea is pursuing, with claims exceeding $150 million dollar according to some estimates, involving several calamities.”

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The excellently immodestly-named “Reinsurance Guru” (aka “1212″ ??) has rejigged and redesigned his website.

Go see, as it’s a good source of fast-moving news from the industry.

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Citi analyst Joshua Shanker said reinsurers might get rate increases of as much as 10 percent for 1/1 renewals.

Shankar cited the following factors:

* investment losses,
* large storms,
* accumulated casualty loss trends and
* financial difficulties faced by several of the industry’s largest commercial insurers and reinsurers

as explaining the position, to which I would also add the almost complete drop-off in alternate risk transfer products following the financial rout of recent months.

Perhaps this sort of reporting will do something to stabilise the mad swings we’ve been seeing of late in the share prices of even well-run carriers.

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In the recent (24.10.08) case of Markel –v- Gothaer Allgemeine & Kontinentale the Commercial Court considered the nature and role of an agent in a dispute over a Claims Co-operation Clause. It’s an oddly fact-specific case, but there are some wider issues in play.

This was a summary judgment application by reinsurers (Markel) to dismiss a claim by the cedants (Gothaer and Kontinentale) in relation to an underlying claim on a D&O book. Markel’s basic case was that it was a condition precedent to liability that “the Reinsured shall upon knowledge of any circumstance which may give rise to a claim against them, advise the Reinsurers immediately, and in any event no later than 30 days”; that the cedant had known of the claim and had failed to notify the claim timeously; and hence Markel were entitled to decline cover.

The crux for present purposes is that knowledge.

Gothaer and Kontinentale were members of a German pool managed by VOV, a company incorporated by the pool members. This particular risk fell outside the pool guidelines, but Gothaer and Kontinentale agreed to write it if VOV could get them appropriate reinsurance. The contract was placed and the slip defined the “Reinsured” as “Gothaer Versicherungsbank VVaG and Kontinentale Versicherungs-AG as per VOV GmbH” (emphasis added).

That VOV knew of the circumstance was not apparently in issue, nor that technically there had been late notification. The debate was thus

1. “Is the definition of the Reinsured … an agreement between the Claimant [Reinsurers] and the Defendants [Reinsureds] that VOV would act as the Defendants’ agent for all purposes in connection with and relating to the Reinsurance?

2. Alternatively …, did VOV when receiving and giving notice of the…claim have ostensible authority to act as the Defendants’ agent for that and all purposes in connection with and relating to the Reinsurance by reason of the definition of the Reinsured in the Reinsurance?”

Markel argued that the phrase “as per” VOV was a definition of “Reinsured” and applied whenever the term was used in the reinsurance contract; and further that the only natural meaning of the phrase was that the Reinsureds were acting by VOV for all purposes connected with the reinsurance and that VOV was their agent for all such purposes.

Smith J did not agree. Indeed, he went on to say that the argument would have “absurd results”:

it would mean that the condition precedent was not triggered if the Reinsureds themselves knew of a relevant circumstance but VOV did not, and it would mean that the condition precedent would not be satisfied if the Reinsureds, not VOV, advised Markel of relevant circumstances. The Reinsureds would be in an impossible position if VOV ceased to exist or their business relationship with VOV otherwise ended during the currency of the reinsurance contract.

He also scotched a secondary argument by Markel that since the Reinsureds held VOV out as authorised to receive information on their behalf VOV’s knowledge was to be treated as their knowledge because of the ostensible authority thereby conferred on VOV.

The true issue, the judge said, was whether VOV as a matter of fact had knowledge of the claim in its capacity as the Reinsureds’ agent. But that was not before the Court on the summary judgment application, as you’d expect.

The main trial of the action is due to take place next month. I’ll be interested to see what happens.

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Reinsurance assets will more easily be accessible to foreign liquidators in multinational insolvency proceedings following the House of Lords’ decision last week in the long-running HIH saga.

Their Lordships found that English courts should co-operate “as much as possible” to ensure that the assets of bankrupt companies based abroad are distributed among creditors under a single system.

HIH went under in 2001 with estimated debts of up to $5.3 billion.

The court ordered the English assets of several HIH companies–largely reinsurance contracts written in London–to be sent to Australia for distribution by liquidators.

The English courts should, according to their Lordships, cooperate with other jurisdictions unless the transfer of assets would prejudice the rights of international creditors. Accordingly, requests to transfer English assets to foreign liquidators are from now on likely to granted unless there is some good reason not to do so.

KPMG give a short precis of events, the issues and what it means in practical terms for HIH now (basically, not much).

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In his 2008 letter to shareholders, Warren Buffett has a charming little story about the problems of IBNR and the known unknowns (ahem):

We also include a large reserve for losses that occurred before year-end but that we have yet to hear about. Sometimes, the insured itself does not know that a loss has occurred. (Think of an embezzlement that remains undiscovered for years.) We sometimes hear about losses from policies that covered our insured many decades ago.

A story I told you some years back illustrates our problem in accurately estimating our loss liability: A fellow was on an important business trip in Europe when his sister called to tell him that their dad had died. Her brother explained that he couldn’t get back but said to spare nothing on the funeral, whose cost he would cover. When he returned, his sister told him that the service had been beautiful and presented him with bills totaling $8,000. He paid up but a month later received a bill from the mortuary for $10. He paid that, too – and still another $10 charge he received a month later. When a third $10 invoice was sent to him the following month, the perplexed man called his sister to ask what was going on. “Oh,” she replied, “I forgot to tell you. We buried Dad in a rented suit.”

It’s a good story, and I’m reasonably certain that more suits will turn up for Berkshire. Possibly a lot more. In fact…oh better not.

Mr Buffett also goes on to make some scathing (well, insofar as he ever gets that scathing about anything) comments about financial salesmen and their proclamations about the future value of pension investments in particular. Basically, to continue the last century’s performance, the DOW would have to rise to 24m by 2100. Which, as he says, appears a trifle unlikely. See page 19 of the letter in particular.

Finally, returning to the insurance world, Buffett asks us all to note that in 2007:

…our insurance business – the cornerstone of Berkshire – had an excellent year. Part of the reason is that we have the best collection of insurance managers in the business – more about them later. But we also were very lucky in 2007, the second year in a row free of major insured catastrophes.

That party is over. It’s a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008. Prices are down, and exposures inexorably rise. Even if the U.S. has its third consecutive catastrophe-light year, industry profit margins will probably shrink by four percentage points or so. If the winds roar or the earth trembles, results could be far worse. So be prepared for lower insurance earnings during the next few years. [my emphasis]

Sorry, there should be more commentary here, but I just can’t really top what Buffett says.

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