Kaliningrad Fried Chicken

Here's a short story on Russia's largest insured loss this year. Again, to be published in the upcoming issue of The Insurer. Those of you who speak Russian, please don't miss an excellent account of the event by my ex-colleague Yuri Nekhaichuk, now working for Prime Tass news agency.

Fire at the Kaliningrad-based meat plant Konkordia is likely to become the largest loss event in the Russian insurance industry this year – but this is not why major Western reinsurance groups regret accepting the risk.

Meat plant Konkordia, which supplied chicken nuggets and burgers to a well-known fast food chain, was constructed in end-2008 and, according to the website of its owner, Miratorg Group, boasted “state-of-the-art technological processes, exceptional sanitation and hygiene standards and technologies”.

According to the official version, the fire was ignited by a lightning bolt – yet reports from the Kaliningrad department of supervision of fire protection indicate that natural causes may be just one part of the picture. As Oleg Umnov, head of the supervisory office, told the local publication Guriyevski Vestnik, in 2009 his unit had revealed 26 violations of fire protection measures at Konkordia and given its owner one year to rectify them. Now that the fire has destroyed most of the plant, it’s rather difficult to say if Miratorg indeed followed the order.

While neglecting fire protection measures, Miratorg demonstrated a high level of insurance awareness: all its propety risks are insured. According to Prime Tass news agency, the coverage for the year 2010 is provided by Russia-based VSK group. A VSK representative confirmed this information to The Insurer. Under Miratorg estimations, its Konkordia losses reached around RUR3 billion, or approximately EUR71.5 million. Head of the Russian subsidiary of Scor, Dimitry Blagoutine, gave a figure of EUR80-90 million, “which represents around 60% of the total Russian treaty reinsurance premium in the industrial risk segment”. No matter, which figure is correct, VSK pays only a small part of it, with the rest of the loss born by the Western market.

As Prime Tass reported, for the year 2010 VSK purchased a proportional treaty with the liability limit of USD110 million. Net retention under the contract reached USD2 million. The first layer of USD3 million was placed in the Russian reinsurance market, the news agency informed, the remaining limit of USD105 million was ceded abroad. Swiss Re led the treaty covering 37% of the risk, with the rest spread between Hannover Re, Lloyd’s, Partner Re, Polish Re, Sava Re, Scor, and Sirius.

It seems that not every reinsurer will readily pay the Konkordia claim. According to a source in one of the Western groups, VSK withheld important technical information about the risk: walls in the Konkordia building were covered with piceous sandwich panels. Now that the violation of the contract has been revealed, reinsurers have a ground to refuse paying the claim, the source added.

A VSK representative confirmed to The Insurer that the Russian group indeed had not informed their reinsurance partners about this little sandwich detail. Their explanation? They won the right to insure the risk in a tender, and were “too much in a rush” to provide proper coverage. The truth may be, to win the tender VSK quoted the risk as low as possible. Had the reinsurers been aware of the piceous panels, the reinsurance premium paid by VSK could have been higher than the premium the insurer received from Miratorg.

Swiss Re has informally confirmed to The Insurer they were not aware of the sandwish panels when they were signing the treaty, yet are inclined to pay the loss. “The risk was reinsured on a treaty basis, and we did not look deeply into it,” representative of the Swiss reinsurer stated, and added quite moodily: “The more we work with Russian risks, the more we learn about how business is done in the country”.

After the multi-billion accident at the Siberia-based Sayano-Shushenskaya power plant, Munich Re, the reinsurer of the loss, is reported to have stopped writing Russian energy business. The Konkordia risk may become the Sayano-Shushenskaya for the local industrial segment.