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Insuring High Risk Horse Flesh
13th April 2003
This Article written by Bob Logan appeared in The Australian Newspaper on Monday April 14 2003
Insuring high-risk horse flesh
Unfortunately many horse owners see insurance as a necessary evil. They just sign an annual cheque without understanding the cover and hope for the best when a claim occurs. They rely entirely on the expertise of their agent to keep them out of trouble. Bloodstock insurance is however a very complex business. It is what happens behind the scenes, which makes a fascinating and interesting story of scandal, fraud and very high financial stakes.
The most often asked questions about Livestock Insurance are firstly, when or why is it worth insuring and secondly are there any fraudulent claims.
The short answer to the first question is that the Thoroughbred horse is the most accident prone animal on earth. They are also the animal least resistant to stomach problems, viruses and diseases. In fact, during the Australian botulism episode a few years ago, a prominent vet made the comment that the common farmyard chook is more resistant to viruses and diseases than the average horse. This high risk factor makes bloodstock insurance more of a necessity than motor vehicle insurance to protect your investment. The risks are greater and horses come with no guarantees.
In regards to the question of fraud, the answer is not so simple and just where does fraud start and finish? Insurance companies admit that fraud occurs but are reluctant to provide any examples. Just what is fraud? Under criminal law fraud may be committed by any party – the insured, broker, underwriter or other insurance intermediary at any stage before, during or after the formation of an insurance contract.
In 1990 the U.S.A House of Representatives published a paper on failed insurance companies which said in part “… the business of insurance is uniquely suited to abuse by management and fraud. When an insurance company fails to honour its promise to pay, the whole concept of insurance fails!” In Australia you only have to read author Mark Westfield’s current book on the inside story of the HIH collapse to see how correct the U.S.A senate was in their report.
In the Thoroughbred industry the death of the great stallion Alydar triggered off a series of events which led to substantial suspicion surrounding the circumstances which led to his death in 1990. Alydar was found in his 16’ x 18’ stall at Calument Farm with his right hind leg shattered. Loss adjuster Tom Dixon said that Alydar’s temperament was always very unpredictable and this fact probably contributed to his leg injury. I spoke to him a few years later and he confirmed what he had said at the time, that there appeared to be no suspicious circumstances surrounding the death of this great stallion. It was at the time the largest insurance claim in the history of Bloodstock insurance, amounting to US$36.5 million. It was paid within 30 Days by Lloyds of London.
Subsequent events however, have left a lingering doubt as to the truth behind the accident which led to his death. Former Wall Street Journal reporter Ann Aueback in her book titled ‘Wild Ride’ paints an absorbing account of how Kentucky’s famous Calument Farm came a cropper in the mid 1990’s. Calument strode the sport of kings like a colossus, until the last remaining members of its founding family – the Wrights of Chicago – died, and the control of the farm passed to son in law J.T Lundy who managed to bankrupt a prospering institution in less than a decade after gaining control.
Supported by international bankers, Wall Street money men and mobsters, Lundy managed to borrow substantial funds using Alydar as security. Lundy also sold twenty or so life time breeding rights in Alydar for as much as U.S$2.5 million each. Alydar had been reported to be annually earning as much as US$20 million alone for Calument Farm. However after the sale of the life time breeding rights, this earning power was rapidly diminished. Alydar was aged 15 when he died. As author Auerback states (and which was later proved in court), Alydar and Lundy where caught up in a self destructive cycle. At the time of his death, Alydar was most likely the most highly leveraged horse in history. Fraud has never been proven on the question of insurance although Lundy has been sentenced to a prison term for other matters relating to Calument.
A celebrated proven case of fraud concerned 30-year-old Tommy (The Sandman) Burns from Florida, who made a living from destroying expensive show jumpers. His preferred method of destruction was to kill horses by electrocution. In 1982 he was said to kill a brilliant show jumper named ‘Henry the Hawk’, insured for $150,000. Electrocuted horses were assumed to have died of colic. However Burns came unstuck when he was paid to destroy this horse which had a history of colic and therefore the insurance policy excluded colic. So one rainy night when they were loading ‘Henry the Hawk’ onto a van, it was reported that he slipped and fell breaking his leg in the process. In fact what had really happened was that Burns had broken the horse’s leg with a crowbar. Burns was caught by FBI Agents and later unravelled the sordid tale to a Chicago grand jury who were looking into the killing of horses for insurance money.
In Australia veterinarians and loss adjusters say that the number of suspicious claims varies with the economic climate. But overall there are very few suspicious deaths.
Bloodstock insurance began when the owners of expensive horses sought insurance cover for transporting their horses from the U.K to the U.S.A. It developed from a marine transit cover to the highly specialised and technical cover it is today. The first bloodstock policies were written to cover only mortality. However, with the syndication of expensive stallions the cover was extended to include fertility. The first such policy was arranged for the great Thoroughbred racehorse Secretariat. The cover was negotiated by London broker Roger Barklam who cleverly arranged with Lloyds underwriters for a policy which would include not only the death of the stallion but also a cover to provide indemnity if the stallion was infertile or became infertile. There was an immediate scare when veterinary tests indicated that the stallion was infertile. However veterinary tests and the actual impregnation of mares are two different events and Secretariat proved to be a very fertile stallion, impregnating a very high percentage of his mares. Veterinary tests for fertility have never been a requirement for fertility cover since.
Premium rating as in most types of insurance has proven difficult. Underwriters write insurance on the basis that they will make a small underwriting profit. Investment income from the premiums they collect make up the bulk of their income.
Various factors cause premiums to widely fluctuate, such as high and low returns on the investment of the premium pool, competition, also over supply of insurance capacity and ample reinsurance all create an environment in which premium rates move up and down.
Over the years premium rates for horses have varied between 2% and 6.5%. In Australia the figures currently available suggest that the underwriter’s require the rate of over 4% to have any chance of breaking even or making a small profit on underwriting. Australian rates are currently in the vicinity of 4.5% for mortality cover on a racehorse. The most one sided bet in history occurred when rates fell below 2%. Underwriters did not stand a chance as most large studs agreed that the best investment they made each year was for the insurance cover they arranged on their horses. For over 10 years underwriter’s paid out without question on the deaths of hundreds of Australian horses. Often the payout was a lot more than the owner could have hoped to obtain if they sold the animal at public auction. Its bad luck if you missed out on this bonanza as it is most unlikely that it will ever occur again.
The insurance industry had to change and with the advent of September 11th, HIH and many other natural disasters, several insurance companies had to merge or receive an injection of substantial capital to remain viable. The rating agency Standard & Poors say losses have led to a nett industry reduction of capital amounting to an amazing U.S$170 billion. A solution had to be found if the industry was to remain solvent. Insurance companies found it hard to replenish capital through the equity and debt markets. However Standard & Poors recently said that the lack of confidence in the insurance industry is nearly over and capital is again flowing in. Market profitability is expected to be very strong in 2003 and 2004.
The famous New York Insurance Information Institute provided a special report for 2003. Each year they invite a panel of Wall Street stock analysis and industry professionals to review the prospects for the industry in the current and coming years. This survey reviewed the industries underwriting and profit woes, and whilst these problems eased substantially in 2003 they say are far from over.
The average forecast called for an increase in most written premiums of 12.3% in 2003. Whilst this increase seems high by recent historical standards, it represents a marginal deceleration from 13.6%, average gain estimated for 2002. It is the best such deceleration since 1998. The report says rising prices and tougher underwriting are essential elements of the insurance industry’s recovery. The report states that full recovery is proving to be a slow and difficult process as insurance continues to be battered by unrestrained jury awards, surging claims, soaring medical inflation, high catastrophe losses and crisis in corporate management, not to forget the extreme risk of terrorist attacks. Truth to be told, bloodstock insurance almost by any measures has become more affordable than it was in the 1980’s. Even with the premium increases of the past two years, horse owners are still paying an estimated 10% less than they were in the 1980-1985. This actual decline is made greater still because the terms of coverage were substantially widened during the 1990’s.
In the insurance industry bloodstock insurance is not a large producer of income. Published figures from Lloyds of London indicate that their total gross nett income for 2002 was in the vicinity of £7,920,608,841, of which livestock & bloodstock combined provided only £35,729,059. As a percentage of the total this is 0.45%. Once there was about 30 Lloyds syndicates willing to write bloodstock insurance, today there are only five.
In 2001, the Australian insurance industry began a major period of change which has had a dramatic effect on the public’s ability to obtain high risk liability insurance for anything to do with horses. Business such as riding schools and trail riding operations have closed down because of their failure to obtain appropriate liability cover. As a result of this a joint working party between the Federal and State governments and the horse industry was resourced in 2002 to develop guidelines on group buying and risk management for liability within the horse industry.
The working party is currently obtaining submissions from the industry for the establishment of a Code of Practice for particular sectors and existing horse associations. It is hoped by the end of this year, this project will be finished and the industry will again have the opportunity to obtain suitable public liability cover.