CATEX Bordereau Reporting Newsletter

You will find as you read this month's newsletter that our focus has expanded from "just" delegated authority reporting requirements. This expansion is no accident. We are simply following the reinsurance and insurance industry as it continues to seek to provide more and more transparency to underwriters, managers and investors.

Please contact me if you would like additional information about our data reporting system or CATEX Insurance & Reinsurance Transaction Systems for brokers, MGA's and risk bearers.

Thank you very much.

Stephanie A. Fucetola

Vice President/CATEX

Big Changes coming to Insurance?

A long time ago people of means joined with other wealthy investors and would promise to pay a ship owner for the loss of a crew, ship and cargo in the event his vessel failed to return from a voyage.This promise was supported by the pledge of all of the worldly assets of each investor to provide the ship owner with the security he required before he paid over a premium fee.

The original "names" at Lloyd's started out this way. Some names were passive investors, relying on professional underwriters and syndicate managers to ensure that premiums were adequate and that the risk insured against was manageable. Steady annual profits remitted to many names kept the system running effectively for generations.

Then things changed. Risks had been assumed that led to high unforeseen claims. Not only did "long tail" liability risks never seem to stop piling up but actual reported claim volume didn't reduce over time. Asbestos went from being a miracle fiber to a curse.

Worse, claims from events like the deadly Piper Alpha oil platform fire showed that uncertainty existed even as to which syndicates and names were participating on risks. Some names even learned that they had participated unwittingly on the same risk twice in a deadly claims spiral that caused fortunes to be erased.

New types of "names" were allowed into the marketplace. So called "corporate names" came to replace many of the individual investors. The full extent of the possible claim losses that could be faced meant that only the very wealthy or those who possessed very good underwriting knowledge remained as non-corporate names.

Nice little history lesson? Keep it in mind when looking at today's changes in the reinsurance market. During a trip to Bermuda earlier this month we were reminded again that the reinsurance industry is increasingly attractive to new capital originating from many different sources.

Even though premiums have not seen the sharp increases that many expected after the losses of 2011 new money is flowing into underwriting vehicles through Insurance Linked Securities (ILS), sidecars, SPI's and SPV's. When rates of return on capital invested in traditional market debt instruments such as T-bills and corporate bonds are as low as they are today, capital looks for higher yielding alternatives.

It now appears a winning combination has been found. Some reinsurers are providing their underwriting expertise to pools of new capital by segregating that new capital from other business placed by the reinsurer. The reinsurer is acting as underwriter, "transformer" (allowing the capital the ability to underwrite on its paper) and fund manager, as the exposed risk of loss needs to be fully collateralized.

Aside from the fully collateralized requirement, that didn't exists 400 years ago at Lloyd's, it would seem that in some ways the industry has come full circle. But there is one other big difference. Participants in today's pools comprise a wide spectrum of investors including pension funds, college endowment funds, hedge funds (people with fiduciary responsibility) as well as wealthy investors.

Investors have rightfully perceived that the risk of loss associated with a hurricane or earthquake is not correlated to the risk of loss in the traditional capital markets. Investing in ILS or reinsurance is a way to hedge one's investment against so called "normal" losses in traditional investment markets. In short, investors without underwriting knowledge or expertise are now entering the reinsurance market to a greater extent than ever before, largely attracted by uncorrelated risk and high returns.

Implications for Investors

Michael Butt Neill Currie

Two well known industry figures in Bermuda had some interesting comments last week pertaining to this upcoming shift in dynamics. Obviously, both gentlemen know their history well.

Michael Butt, former CEO and Chairman of Mid-Ocean Ltd and Chairman of Axis Specialty Ltd warned that insurers had to know where their risks were at all times. Mr. Butt said if there is one thing he's learned from nearly 50 years in the industry, it's the importance of knowing exactly "who owns the risk".

Butt continued saying "capitalism breaks down when the ownership of risk becomes opaque and unaccountable. If you look at what happened in the credit crisis of 2007/08 then you can see many similarities". The article appeared in The Royal Gazette.

Then we saw this article in Insurance Day about the CEO of Renaissance Re, Neill Currie. Mr. Currie said that he expects his company, as well as others, to operate more as transformers in the future, taking on basis risk on behalf of a changing client base anxious to take advantage of new alternative risk-transfer products.

Both Michael Butt and Neill Currie are as respected voices in the global reinsurance market as can be found anywhere. Mr. Currie indicates the future could hold more and more pools of capital being joined to the underwriting expertise of reinsurers to provide increased amounts of coverage.

According to Mr. Butt, it is vital for insurers to know who owns the risks and where it is. As Mr. Butt said "My main message is to understand your risk, where it is and who owns it. If you don't, take cover, get out of the way, because somebody's going to screw up."

We wonder if managers who invest in the insurance market on behalf of investors will soon be pressed by those investors for more detailed information about exactly what risks their capital is underwriting and how those risks are performing.

DATA Implications?

We seemingly are on the brink of going "back to the future" now with the supposed acceleration of new capital coming into the industry to underwrite risks. In concept those early practitioners at Lloyd's a hundred years ago would understand today's dynamics instantly.

Wealthy "names" are being replaced by ILS fund managers who manage pools of capital invested by a wide spectrum of institutional investors. Although much of the ILS investment to date has been in only CAT bonds and other parametrically triggered securities who can doubt that investment in reserve and surplus creation to underwrite treaties, quota-shares and facultative coverage is far behind?

A century ago data was hard to come by. That's why Lloyd's had a 36 month underwriting year. It took that long for all the loss information to come into the syndicates. Now though, in this age of instant information, is it not safe to assume that the investors in those risk pools will want to see raw risk performance information as their investments increasingly support traditional underwriting products?

We think so. And we think that our Pivot Point System has the tools to provide the kind of real-time data that could be presented by a fund manager to its investors to reflect claim and loss activity on so called "non-parametric risks"; or indemnity-based structures where claims are triggered by actual losses and not triggered by an external benchmark.

The same tools we use for Bordereau/Program Reporting and Management are employed by the entire Pivot Point System to afford this kind of data. Whether the market will come to demand this kind of transparency is still an unanswered question but we were very interested in the comments of both Michael Butt and Neill Currie.

Quick "Bytes"

Transparency is always a big topic, especially when the CEO of JP Morgan Chase, Jamie Dimon, tells regulators that the bank's executives didn't understand the trades executed by a bank unit in London that so far has cost the bank $2 billion.....Speaking of those JP Morgan losses the Comptroller of the Currency Thomas Curry said "in hindsight, if the reporting were more robust or granular, we believe we may have had an inkling of the size, the potential complexity, the risk of the position."....Insured losses from a giant hailstorm that rolled through Dallas earlier this month could well reach $2 billion....CATEX TV reported this last week; according to a Deloitte study over a third of insurers are planning to change their prices in response to the new Solvency II regulation...Robert Hiscox, the founder and outgoing chairman of Hiscox, has said that insurers are little more than glorified bookmakers in an upcoming interview with Intelligent Insurer magazine. He explains that this is "because insurers bet on a bad event not happening and their clients bet that it will".... The Bermuda Stock Exchange (BSX) continues to see strong interest from the Insurance Linked Security space in using Bermuda and the BSX as a location to incorporate and list insurance linked securities. The listing of ILS on the BSX is at record levels with 33 structures listed with an aggregate market capitalization of over $4.5 bn.

Our next newsletter will come in late July. There will be no newsletter in August. We learned from receiving "out of office" returned e-mails last year that there is this little matter of vacation that could interrupt reading schedules. Enjoy the summer.