Lessons in insurance

In September 2006 the first questions about North Korean reinsurance contracts hit the media (Joong Ang Daily, Sept. 20).  North Korea’s Minjok Insurance General Company filed claims in London and Moscow for two railway crashes, a ferry sinking, and a helicopter crash.  The Joong Ang Daily reported that that the accident sites were examined by industry representatives—though the checks had not been cut.  At the time the filings were interpreted in the west as a sign of tough financial times in the DPRK. Others suggested Pyongyang was learning how to manipulate global financial systems.

By December 2006, many underwriters began to (publicly) suspect fraud in these cases.  

North Korea Suspected of Collecting Millions in Reinsurance Fraud
Monday , December 04, 2006
By George Russell

[Excerpt] The central focus of concern is the absolute control of ownership and information in North Korea by Kim Jong-Il and his regime. All North Korean insurance is controlled by one state-owned firm, the Korea National Insurance Corporation (KNIC), formerly known as the Korea Foreign Insurance Company, which in turn purchases reinsurance coverage abroad for risks that it has assumed in its domestic market.

The alleged fraud involves a wide variety of North Korean industrial and personal calamities where insurers have been presented with perfect government-controlled documentation of accidents, including deaths, along with carefully gathered photographic evidence, all compiled in a startlingly brief time.

That paperwork is coupled with a resistance to letting foreign insurance adjusters examine some of the most crucial physical evidence, except after long delays and under a watchful eye, if at all.

The growing concern in the reinsurance industry is that the property damage being claimed is vastly overstated, and the circumstances of some alleged accidents may have been altered, or that deaths for which insurance payment is claimed may have had nothing to do with the accidents.

The number of apparently ordinary people in the dictatorship who have suddenly been found to have foreign-backed life insurance is raising insurers’ eyebrows.  The chief concern is that only the Kim Jong-Il regime controls the information required to trigger the payments.

So what specifically looked suspicious?

Suspicions in London began to gel in July 2005, when North Korea reported that a medical rescue helicopter had crashed into a government-owned warehouse that authorities said was crammed with disaster relief supplies.

The entire contents of the warehouse, which ran to hundreds of thousands of items, were destroyed, KNIC said, submitting within 10 days a list compiled by the relief center of every single commodity that it said had been lost.

Along with the lengthy list came a reinsurance claim for more than 40 million euros, or almost $50 million at then-current rates, for 95 percent of the damages. The reinsurance was placed through London, but the risk was spread among reinsurers worldwide.

“They provided details including tens of thousands of children’s gloves, handkerchiefs, leather gloves, toilet soap and washing soap, within 10 days,” Payton said. “In the chaos which follows an accident of this kind, that is unheard of.

“A similar loss report in Britain might take months to compile.”

The North Koreans also supplied photos of the devastation, which insurers turned over to leading experts at photographic estimates of fire damage. The experts concluded that the volume of debris remaining within the warehouse, as assessed from the photographs, did not support the high volumes of relief supplies that were claimed to be there before the fire.

“The North Korean claims are supported by meticulous paperwork, something at which the North Koreans excel,” Payton (senior partner in the London-based international law firm of Clyde & Co.) said.

“For example, where death certificates and hospital reports are required, the regime’s attitude is ‘tell us what you want, we’ll give it to you.’”

In the case of a ferry accident that allegedly took place last April, near the coastal city of Wonsan, North Korean authorities declared that 129 people had died aboard the vessel after it struck a rock about 1,000 yards off the Korean coast, and only about 100 yards from an island. All of them, the Koreans claim, had been automatically covered with life insurance when they bought their ferry ticket, and that insurance risk had been passed on to the London market through a common reinsurance product known as “excess loss personal accident reinsurance.” Here the claims from reinsurers totaled about 5 million euros, or roughly $6 million.

The North Koreans claimed that most of the victims had died of hypothermia in the freezing water. Industry sources say that when insurance investigators discovered that weather conditions were warmer than claimed at that time, the North Koreans responded that severe winds were blowing from Siberia in the spring, making the water unusually frigid.

When insurers asked for permission to send an independent diver to inspect the ferry wreck, they were refused.

Britain’s Foreign Office says the lack of firm proof of fraud is why it hasn’t taken action on the reinsurance issue, although British diplomats say they are aware of it.

Apparently, these circumstances led the insurers to refuse payment, and the North Koreans took them to court in London. Quoting from the Times of London (January 2007): 

The state-owned Korea National Insurance Corporation (KNIC) is demanding €44 million in a London court from a group of reinsurers, including Lloyd’s syndicates, for damage caused in a catastrophic helicopter crash in 2005.

The North Koreans have supplied exhaustive documentation and their claims have been authenticated by independent loss adjusters and upheld in a North Korean court. But the reinsurers argue that the nature of the regime makes it impossible to trust and that the claim is a fraudulent one intended to bring in desperately needed foreign exchange.

The accident took place in April 2005 when, it is claimed, a helicopter owned by Air Koryo, the North Korean state airline, was dispatched from Pyongyang, the capital, to collect a woman who was in labour with triplets from a remote island. On the return flight it crashed into a warehouse on the outskirts of the city, causing a fire that destroyed a large amount of humanitarian relief goods.

The KNIC settled an insurance claim by the airline, which had compensated the owner of the warehouse, and claimed this back from its London reinsurers. According to the contract, disputes were to be settled under North Korean law and last month a court in Pyongyang ordered the reinsurers to pay the North Korean company the €44 million. They refuse to do so.

Lawyers for the KNIC say that, having pocketed premiums for the previous nine years without any claims, the reinsurers are simply reluctant to pay out such a large sum.

“There is no evidence at all to suggest that the helicopter claim is fraudulent,” says Tim Akeroyd, of the law firm Elborne Mitchell, which is acting for the KNIC. “All the evidence available, including the reports of loss adjusters appointed by Mr Payton’s clients, clearly established that this was a bona fide claim.”

The contract also states that claims in North Korean won will be converted at a rate of 160 won to the euro, close to the Government’s exchange rate. But the black market rate, which is used for all practical purposes in North Korea, is closer to 2,000 won to the euro. If this were applied it would reduce the reinsurers’ bill from €44 million to €3.5 million.

This month the European reinsurers settled the case–delivering the DPRK’s KNIC nearly totoal victory in the suit pertaining to the helicopter crash. Quoting from the Financial Times:

Court proceedings in London have ended after a group of re­insurers, including Allianz of Germany, Generali of Italy, [Misr Insurance of Egypt], and three Lloyd’s of London syndicates, agreed to pay 95 per cent of the reinsurance claim, or €39.2m ($58.2m).

[One member of the reinsurance consortium, Aviabel of Belgium, has refused to accept the settlement and legal proceedings are continuing.]

The reinsurers also agreed to retract and withdraw all allegations of fraud and impropriety made against the Korea National Insurance Company.

It is not unusual for reinsurers robustly to contest claims. But it is thought this is the first victory of its kind in an overseas court for [North Korea’s monopoly insurance provider].

Apparently the other cases (particularly the ferry sinking) are still pending. Quoting from Reuters:

The lawsuit is one of several which North Korea is pursuing, with claims exceeding $150 million dollar according to some estimates, involving several calamities.

Why did the European insurers settle the case?

[L]awyers representing the North Koreans argued that the insurance claim was a legitimate commercial debt owed to KNIC by reinsurers who were fully aware of the nature of the contract when they signed it, and had even agreed to let a North Korean tribunal adjudicate the claim.

English judges evidently agreed. The reinsurer’s position was first rejected in England’s High Court of Justice in August, 2007, and again on appeal two months later. Another trial began on November 12, 2008 before the Commercial Court in London before the two sides came to their agreement.

The settlement amounts to roughly 95 percent of what KNIC had originally demanded. It includes a specific confirmation that the reinsurers “have retracted and withdrawn all allegations of fraud and impropriety against KNIC.”

Settlement here (via Fox News): dprk_settlement_agreement.pdf

UPDATE: Aidan Foster-Carter issued a personal comment on the case.  You can read a PDF of it here.

Read articles here:
North finds reinsurance a source of hard cash
Joong Ang Daily
Lee Young-jong, Shin Eun-jin, Sohn Hae-yong

North Korea Suspected of Collecting Millions in Reinsurance Fraud
Fox News
By George Russell

North Korea ‘trying £30m insurance scam’
Times of London
Richard Lloyd Parry

N Korea state insurance group wins case
Financial Times
Sundeep Tucker

Reinsurers pay North Korea claim, drop fraud case
Nadine Jakobs


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