Thread by @ojessen

Amazing that it took so long for them to go into administration, considering their year end financials

https://twitter.com/intelligentins/status/1316446268282023936

One would think that insurance run-off is a boring industry, especially for a portfolio that has ceased underwriting in 2012. What was the issue? In 2018, EWIC acquired a portfolio of UK Building Guarantee Insurance, with an exposure to 55,000 contracts #insurance #runoff

These were completely in the final stage of this kind of insurance (Structural Indemnity Period), 10 years in which the insurance will cover damages which originated in the construction period. Now, 2018 appareantly was a bad time to take over such a portfolio

But Grenfell already happened in 2017, so these implications should have been priced in. Judging from the change in assets, EWIC was compensated with about 83 mil USD for accepting liabilities valued at about 41 Mil USD. A markup of 100% - well done.

Using the standard measure of insurance companies, the Solvency Ratio, the company was well capitalised - it had 185% of the required capital. The solvency capital requirement is supposed to equate a 1 in 200 years event. Any outsider would expect this to be a healthy company.

So, what went wrong? Fine print the the policy clauses went wrong. One insured claimed for damages under the policy. The insurance policy had a maximum liability cap, which where "poorly drafted" in the words of the judge.

mondaq.com/uk/real-estate…

In this case, the insurer expected that its maximum liability would be around 3.6mil instead of the higher actual damage. But the appeals court found that the actual maximum liability in this case is more than 10 mil.

Now, on first glance one would think that even if this higher cap was operational, and the total damage would be 7.4 mil higher than initially thought, East West should have plenty of reserves to pay these 7.4 mil. After all, they collected 41 mil more in assets than liabilities

The problem is that this was just one case. Applying this case to all similar claims lead to a "strengthening of reserves", and 41 mil liabilities turned into 93 mil liabilities at year end 2019. And so what seemed to be a great deal in 2018 became an insolvency in 2020.

.@threadreaderapp unroll