If you understand the film industry, which I do now, you very often get outside investors. I have a colleague who likes to invest in Bollywood films. When he invests, what he wants is a Completion Bond to make sure the film is going to come out. Insurers provide that. We guarantee a film will be finished. What happens if the lead actor is injured? Can we get a replacement? Maybe. Will there be a delay? Yes. Will that cost money? Of course.
To get a Completion Bond, you need to insure the cast, crew, stuntmen and stunt animals. Believe me, there aren’t many well trained tigers in the world! You need personal accident insurance during the shooting of the film. In order to insure the cast, you need people that aren’t accident prone and don’t have recurring injuries.
The classic example of high-risk insurance is Nicole Kidman. During the Can Can dance routine in Moulin Rouge she broke a rib when she collided with her co-star, and that caused a delay which cost the production $3 million. Her next film was supposed to be Panic Room but after aggravating a previous injury, the risk was too great, and the costs could have been as high as $54 million. As we all know, they proceeded with Jodie Foster in the lead role, but not before they lost $7 million during the delay as they replaced Kidman.
Following delays in two consecutive films, Kidman became uninsurable. Lloyds wanted 20% of the production cost on her next film as a premium! So she came up with a great idea, along with her advisers. She set up an escrow account and put some of her salary in, which created a huge deductible. The insurance suddenly became affordable and that meant the film could get a Completion Bond. That’s a great example of an uninsurable and the way the issue was resolved.
We’ve recently celebrated the 50th anniversary of the Apollo 11 moon landing. Neil Armstrong himself said there was only a 50/50 chance of the landing being successful, let alone the moon walk. He couldn’t get insurance at all. The few that offered it were life insurance companies that wanted to do it for publicity. Nobody associated with Armstrong thought that was a good thing for his estate or family.
They came up with a great idea, which I love. They issued First Day Covers (covers with stamps to celebrate an event), which Armstrong autographed, and were countersigned by NASA. During the period of the voyage, they stamped the covers at critical times such as the day of the landing. They gave these limited edition covers to the families of the astronauts. These stamped covers were a way of providing financial cover and were used during following space voyages up until Apollo 16. Following Apollo 16, they went back to insurance policies.
How will private space voyages be insured? Well, those people won’t be classed as passengers. They’ll sign waivers that are known as Hold Harmless agreements, which state that no party will be held liable. All those people paying for flights to space will have to get their own insurance. Is that possible? Yes. It’s not a moon landing, it’s just space travel, and the market has the capacity to insure it.
War on land is also uninsurable. We insure it on sea or in the air, but not on land. The reason for that? Well, it’s the sheer scale. I mean, another world war would destroy the planet. There isn’t enough capacity in the insurance market. Even the conflicts that have been with us for decades, they can’t get war insurance, although in the middle east some countries have created a pool of money to cover limited damage.
During my time in Indonesia, we experienced a worrying case of an uninsurable. There’s an earthquake zone in North Sumatra, and an LNG plant was sitting on top of a fault line – the same one that produced the tsunami. Let’s remember that one thing you don’t want to mess with is liquid nitrogen gas. An LNG plant is a time-bomb.
Even though that plant is built to resist an earthquake up to a scale of 10 on the Richter Scale, there was a year when there wasn’t enough earthquake insurance capacity in the market to insure it for full value. The buyers of the gas, who were in Japan, insisted on earthquake insurance. For that year, we had to cover it using First Loss Insurance, so in the event of an accident, the plant would only be covered up to a certain amount.
To look for more obvious reasons why something can be uninsurable, start with the first principle of insurance: insurable interest. An insurance company will not give you a policy unless you have a financial interest in the thing or person. That excludes a lot. Another automatic case of being uninsurable is if there is an illegal act. If a person breaks into my home and injures themselves while stealing from me, they are uninsurable during the crime. The insurance company is never going to pay because it can’t condone crime.
Certain professions are very dangerous. For liability insurance, lawyers and doctors have RRGs (risk retention groups). They form a pool in order to create a huge deductible, which allows them to get cover above that amount. These pools or funds are happening all around the world. For example, earthquakes in Japan or oil in Bermuda. Now it looks like Australia will need a pool to cover losses from bush fires.
If you’re wondering who will pay for the increases in insured losses around the world, the answer is you. Lloyds suffered billions of dollars in losses during 2017 and 2018, and no company can afford to continue that, so the costs eventually must be passed on to insurance companies, and then clients. The industry spreads the losses across the entire market.