Insurance Post

The flat season?

After years of growth the market for high value bloodstock is softening. Veronica Cowan reports on what the impact of this has been on the insurance market, and which diseases and other factors are currently putting breeders and underwriters through their paces

You couldn't make it up if you tried. A horse named after a chart-topping seventies rock band, Cockney Rebel; ridden by a top French jockey; trained by a man with 'form' for excise duty fraud; and owned by an Essex-based insurance agent, galloped to the finishing line at the Curragh and Newmarket classics last month - only the sixth horse to win the English-Irish 2000 Guineas double.

The effect on the three-year-old colt's value has been phenomenal. Its owner Phil Cunningham, managing director of Gibraltar-based Carraig Insurance, whose motor fleet policies are serviced by Direct Commercial in Chelmsford, recalls that he was unemployed only a few years ago, but is now the proud owner of a valuable racehorse: "I paid only 30,000 guineas (£31,500) for him two years ago, and his value increases each time he wins a race." In fact, immediately after Cockney Rebel won The 2000 Guineas at Newmarket, Mr Cunningham had to increase the existing cover of £500,000: "It was a Saturday afternoon, but luckily the trainer knew an agent in Newmarket and we got him 'held covered' over the weekend," he explains. Cockney Rebel's meteoric rise in value in the course of a few hours inevitably led to higher premiums: "At 3% of the horse's value, insurance is my largest expense" says Mr Cunningham.

One of the problems with bloodstock insurance, according to Mr Cunningham, is its 'all or nothing' quality. "It is insurance against mortality or injuries that are so severe that the horse has to be destroyed." He laments the lack of a policy for 'loss of asset' insurance - a kind of diminution in value, resulting from injury, and wonders whether there could be some sort of structure towards valuation based on a book value - a bit like a classic car. "It would be simpler," he observes. It might also mean fewer racehorses being destroyed when they fall, although the decision to do this is made by a veterinarian appointed by the racecourse - not the owner's vet - explains David Ashby, bloodstock director of Amlin Plus.

While Cockney Rebel's own value might be rising, this does not reflect what is happening in the market overall, notes Mr Ashby, who reports that the price of horses generally is in decline, because big sales are not taking place. This could have an impact on premium income and the 'moral risk' can increase when the value of bloodstock drops. While other commentators agree that 2007 has got off to a slow start in terms of values, they see them as flat, rather than in terminal decline. Julian Bowen-Rees, head of the bloodstock unit at XL Insurance, comments: "While bloodstock values are flat this year, the market has become more global, with races around the world all through the calendar year." This makes them less weather-dependant, and he reports on major developments in Dubai. Charles Hamilton, managing director of Lycetts Hamilton, adds that although he does not think values will keep going up, and agrees that sales are currently flat, this comes after five years of vigorous growth, and is linked to economic factors, such as interest rates going up, rather than any equine-related factors.

Race against time

This time last year, bloodstock insurers were in a flutter about avian flu, when feverish activity ensued to avoid widespread market infection (Post, 25 May 2006, pp 19-20). And insurers are still hedging their bets: "The market still sees it as a risk," reports Mr Hamilton, "because it is difficult to quantify and calculate its potential in terms of where horses would be." While most underwriters are excluding losses due to avian flu, lest it kill off the small bloodstock market, they are taking a flyer on specific risks for an additional premium: "So while an individual risk could be excluded by a policy it can be bought back, depending on where the horse is," explains Mr Bowen-Rees. He comments that the Lloyd's Franchise Board keeps a tight hold on pandemic issues, because there can be ramifications beyond bloodstock. "It is a hot topic," he says.

Meanwhile, the binoculars are trained on Africa where fly-borne horse disease is endemic. The fear is that this highly infectious and fatal disease, caused by an orbivirus of which there are nine strains, will spread north to Europe. It is not directly contagious between horses, but it has reached as far north as Morocco and the Middle East. Recent outbreaks in Spain are thought to have been related to imports of infected zebra from Africa, according to the Department for Environment, Food and Rural Affairs's website, which notes that the spread is influenced by climatic conditions, which favour the carrier insects: "We cover it as long as the horse is vaccinated, but there is a general worry that if it spreads to mainland Europe, quarantine protocols are less rigid than in the UK," explains Mr Bowen-Rees.

Another issue has been the outbreak in Ireland of equine infectious anaemia, which is wildly contagious, but the market has reacted and cover has been reinstated provided the Coggin's test is done at the outset and the horse is clear, says Mr Hamilton. This test is to ensure an animal is not harbouring the virus (also known as swamp fever) and detects antibodies in the horse's blood. It is spread by flies, and there is no vaccine and no cure for this viral infection. Defra issued guidance to the UK horse industry last year following the outbreak in Ireland, but it and the British Equine Veterinary Association stressed that there had been no cases in the UK. Earlier this year, it issued a European Commission proposal concerned with protection measures that would apply if any member state has one or more cases of this condition. This was triggered by the recent EU accession of Romania, where the condition is endemic, and consultation on the draft proposals was extremely short - from 16 to 25 January 2007 - so that the measures could be implemented quickly.

A difficult hurdle

While the going was generally good in 2004 and 2005 in terms of claims, 2006 was less healthy, says Mr Ashby. The high values often involved with bloodstock insurance can mean one big loss - such as the famous racehorse Barbaro, who was kept alive after a leg fracture, but had to be destroyed earlier this year - can be huge. While Barbaro was insured in the US, some reinsurance is understood to have been placed in London. A top stallion could have a stud fee of £200,000 for each mare covered, so loss of fees by mortality, or by stallions proving to be sub-fertile or congenitally infertile, can be very large, observes Mr Ashby, whose company provides a special fertility policy.

The odds are that premium rates over the next 12 months will come down, although most commentators perceive them as having been fairly steady for the last 10 years. As Mr Hamilton comments: "Rates trade in a very narrow range and at the top end are constrained by self-insurance. They didn't harden due to avian flu fears because that risk was excluded."

Not all owners buy insurance, according to a spokeswoman for the Thoroughbred Breeders' Association, choosing to self insure as they might own several horses involving high premiums. She adds that top breeders tend to stay loyal to certain brokers. "Client loyalty is the most important thing," observes Jim Wordsworth, managing director of Anglo Hibernian Bloodstock Insurance Services in Newmarket, who adds: "It is a team game, and insurers tailor a rate to help their best clients." As to what kind of people own valuable horses, clients range from small personal owners to multi-millionaires: "There is no such thing as a standard client, and more horses are now owned by syndicates, some with hundreds of members", observes Mr Wordsworth.

The betting is that the traditionally small market for bloodstock will become more competitive, because of new entrants. Lloyd's underwriter Talbot has marked its card, by expanding into bloodstock and livestock in December, with two recruits from Wellington. One is underwriter Alex Colquhoun, who explains: "Talbot had been looking at bloodstock but also wanted to become a multi-line syndicate, and while it is a bit early to say how it will go, we have hit 50% of our target. It would have been difficult without my clients, but it has been possible to keep them, albeit less than we had hoped."

As to how the performance of UK business compares with that of the US, the stakes are also high in Kentucky - the Newmarket of the US. The effect on the London market of some underwriters setting up there to cover the local bloodstock sector, a huge producer of income to the London market, is not yet clear. The rumoured defection of a couple of underwriters from XL's Kentucky office to Catlin, which has set up an office there, does not seem to have stopped XL in its tracks. It has the bit between its teeth, and is looking to extend its bloodstock offering by expanding the Kentucky office, according to a spokesman.

The bloodstock insurance market has also had to get to grips with contract certainty requirements in the last 12 months, to avoid misunderstandings about cover. One of the issues is that clients require immediate cover, as delay would mean a horse being uninsured, so there is pressure to get documentation out quickly, explains Mr Hamilton, adding that the insured has to prove the health of the horse at the outset, which can prove problematic if a vet often does not deliver a certificate for three days. "This means terms can be altered, but bloodstock insurers are talking to the Financial Services Authority about it."

A nagging fear

Uncertainty was also caused by the House of Lord's decision in Mirvahedy v Henley (2003), which widened the scope of the Animals Act 1971, placing strict liability on the keeper of animals that have caused harm. Three horses broke out of a properly fenced field, having probably been startled. They ran a mile up the road, strayed onto the highway and collided with a car, resulting in serious injuries to the driver. Dr and Mrs Henley, the owners of the horses, did nothing wrong, but were judged to be strictly liable under the Animals Act 1971 and their insurers were required to pay substantial damages to the driver. The probable cause of the bolting horses was the tendency of horses when sufficiently scared to smash through any barrier and keep running.

Various attempts have been made to get the law changed. The latest is by the Country Land and Business Association, which has backed a private members' bill to amend the Animals Act so a strict liability regime should be restricted to animals that are fundamentally dangerous. This would limit liability to negligence or breach of health and safety legislation. The association is seeking support for this bill from those in the equine and rural affairs sectors and recently met Barry Gardiner MP, the rural affairs minister on 1 May. According to a spokeswoman for the organisation, Mr Gardiner has voiced his support and the association has given the bill to Steve Crabb MP, who has agreed to table it when a slot is available, hopefully on 27 June.

Another date in June is the St James's Palace Stakes at Royal Ascot on the 19th, when Cockney Rebel will again be running. And Mr Cunningham is sure to have more than a Lady Godiva on him - a 'fiver' for those unfamiliar with rhyming slang.

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