In July Cyprus saw its largest insurance loss caused by man and despite doubts as to its quality the insurance industry stood tall according to Konstantinos Dekatris.
July had an unprecedented and tragic surprise in store for Cypriots. The explosion of 98 containers full of explosives at the Mari Naval Base not only resulted in 13 dead and dozens injured, in just a few minutes, it destroyed the largest part of the island's power generation plant in Vassiliko, immediately reducing by 50% the generation capacity with incalculable consequences on economic activity.
The effects of the largest insurance loss caused by man in the history of the Republic of Cyprus are, however, not only limited to loss of life and material damage. The fact that a large part of society realised that this tragedy was neither unavoidable nor unpredictable, since the risk of explosion of the containers that were exposed to the elements had for long been ascertained, has stirred intense reactions and protests against the authorities.
Challenging the state
These facts led to state institutions being challenged, and to imperative demands that the guilty parties be punished and that state mechanisms be improved as they proved unable to handle the issue of the containers: from the moment they were seized by the Republic of Cyprus in early 2009 until the tragic events of 11 July 2011. The resignations of the Minister of Defence and the Minister of Foreign Affairs, the announcements that several permanent state officials were suspended, and the government's pledge for exemplary punishment of the culprits and for full transparency in the investigation, were not adequate to appease the reactions of a large part of the public.
In this aggravated social and economic setting, with the economy expected to shrink by 2.4% this year, due to the consequences of the resultant energy crisis, the Cypriot insurance industry is faced with one of the most serious challenges in its history. Initial estimates place insured losses to the Vassiliko power plant at €850m.
"The resignations of the Minister of Defence and the Minister of Foreign Affairs ... were not adequate to appease the reactions of a large part of the public."
Regarding other losses in the greater Vassiliko area, 435 claims for compensation had been submitted by mid-August, totalling €5.69m. Of those, 342 concerned damage to property - approx cost €3m, 25 are life-insurance related - approx cost €2.49m, while 68 claims concern damage to vehicles - €208 238.
The insurance industry's reaction to handling these claims has been immediate and concerted. Some negative comments and remarks that were publicly expressed regarding the industry's reliability, responded to immediately by the Insurance Association of Cyprus, were disproved by events. From the very first moment, insurers organised special teams to handle the sudden rise of claims, some of which have already been settled.
Undoubtedly, the greatest material losses and claims are related to the Vassiliko plant. There are two main all risks insurance policies covering the plant's buildings and facilities. The first policy in essence covers part of the buildings and facilities of the Electricity Authority of Cyprus with insured sums of €1.8bn and includes, by choice of the EAC, a liability restriction clause to €600m per loss event. This insurance policy has 100% reinsurance cover with 16 foreign companies, all approved by the EAC.
The second insurance policy provides cover for two air turbines and two steam boilers that were under construction. Although construction of the plant's facilities had almost been completed, the specific project phase - unit five of the plant - was still under the contractor's responsibility. The relevant contractor's all risks insurance policy for unit five covers up to €250m.
"Undoubtedly, the greatest material losses and claims are related to the Vassiliko plant."
It is expected that soon, surveyors already working on site investigating the entire incident and recording all damage, will have a clearer picture of the cost of material damage to the EAC plant. Latest indications from the investigation seem to be placing the cost of damage to the plant significantly lower than the original estimate of €850m, at approx €550m. To date the CAR insurer has already made a €1.5m payment to the project contractor, as interim payment.
Regarding the stance insurers are expected to take after the committee's findings are announced and liabilities are allocated, it is expected they will seek to recover indemnities paid to their clients from the persons responsible for the incident. However, as regards the insurance companies involved in the power plant, until now insurers and reinsurers of the EAC have not yet officially expressed their final position regarding the allocation of liability and their intention to seek recovery.
So in relation to these companies, reinsurers are likely to announce their reaction after the official completion of the surveyors' investigations and the announcement of the investigative committee's findings. It is, however, still possible that they may take legal action, in case there are substantiated indications of gross government negligence, in order to seek recovery of the indemnities paid to their clients. It is also unknown whether their policies include a provision restricting or preventing them from such actions.
With regards to the EAC, one thing is certain: the organisation expects that the financing of the repairs to the station will come from the insurance indemnity, given also that the finances of the semi-state owned organisation have taken a very serious blow and its available liquidity has been greatly reduced and is, therefore, not in a position to incur the repair expenses. However, it is not possible to predict whether the government intends to pay compensation to the EAC, given the extremely aggravated condition of public finances.
"The organisation expects that the financing of the repairs to the station will come from the insurance indemnity."
Beneficial emergency plan
The EAC has been positively evaluated regarding its reaction following the explosion. The implementation of the organisation's emergency action plan and a series of actions that followed the 11 July incident, proved very beneficial in the gigantic effort to address the huge drop in electricity generation, indeed at peek period. The actions taken by EAC met with the approval of consumers, both residential and business. Their responsible response to the calls of EAC for reduced electricity demand exceeded all expectations, as evidenced by the drastic drop in the use of air conditioners and illuminated signs.
Lastly looking at the insurance industry - everyone judging in good faith and objectively cannot but recognise the directness and responsibility with which the industry reacted after the destruction. First of all, the industry proved wrong all those who believed that it was not in a position to adequately respond to catastrophic incidents of this size. It acted professionally, seriously and responsibly to address an insurance event the likes of which had never been experienced before in Cyprus.
Moreover, in terms of its public image, the industry received positive feedback from the public opinion, thus strengthening its public profile. After the industry's reaction to this incident, it would be very difficult for anyone, citizens or the media, to raise question marks, as they have done in the past, regarding the quality, or event necessity of insurance coverage in the Cypriot market. The industry must preserve this indirect recognition of the importance of the insurance institution and use it to found its efforts for upgrading and expanding its presence in the domestic market.
In such extreme moments of human suffering, disasters of biblical proportions and uncertainty for the future, the reliability and usefulness of insurance is decided. It is at times like these that insurance demonstrates its social dimension and earns event the most bad-faith attackers of the institution. In this time of crisis, the Cypriot insurance industry seems to have earned the hearts of the public and to claim a greater role in the financial and social situation.
Konstantinos Dekatris is chief executive officer for Commercial General Insurance and vice chairman of the board of directors of the Insurance Association of Cyprus
This article was first published in Greek Insurance Magazine Asfalistiki Agora, a member of the PIA
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