CATEX Reports
Issue 16 September 2012
In This Issue
Reinsurer Capital: Is it enough?
Change at Lloyd's
Secondary trading as result of "convergance"?
Roger Crombie Intro Column




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Dear Colleague,

Perhaps you will read this newsletter while attending the 2012 Reinsurance Rendez-vous in Monte Carlo. If so, you will note that we are abreast of the developments as they've been reported from there.

We also want to announce the first appearance of our guest columnist Roger Crombie in this issue of CATEX Reports. Roger is a well known commentator on insurance and reinsurance issues and comes to us from a long run at "Risk & Insurance Magazine". What Roger writes is what Roger writes --we don't edit the piece so if you have a comment for him please email him at

We hope you enjoy the September newsletter and as always if you have any questions about CATEX products please contact us.


Stephanie A. Fucetola

Vice President/CATEX



Reinsurer capital: Is it enough?


You have propably noticed the stories about reinsurers and the amount of capital that they've accumulated as a result of 2012 benign claim activity.  In fact Aon Benfield recently announced that the $480 billion of reinsurer capitalization represented a new all-time high for the industry.


Articles such as an August 22 Insurance Day titled  "Insurers look for a long-term solution to industry's surplus capital position" would have had you thinking that the Asian premium increases, combined with the low claim activity, had almost led to an embarassment of riches.


Not so says two of the industry's most respected voices.


ohalleran lies
                                            O'Halleran                                 Lies


Mike O'Halleran is Chairman of Aon Benfield and Michel Lies is the CEO of Swiss Re. When either of these two start talking about reinsurance people stop to listen. If both of them start talking about reinsurance that means it's pretty noteworthy.


During a briefing over the weekend O"Halleran said that even with the $480 billion in capital there was not enough there to cover "the big event". This is indeed an ominous observation as for example the insured loss of September 11, 2001 is generally accepted as around $35 billion. If Mike is concerned about the effect of a "big event" larger than 9/11 it's a heart-stopping thought.


Next, on September 10, Lies spoke in Monte Carlo at an event hosted by Pricewaterhouse-Coopers. Lies said capitalisation levels in the reinsurance sector are over-stated and the low interest rate environment coupled with new regulation and rating agency models could actually threaten the solvency of some players. Lies warned the industry faces a period of reserve deficiency as the effect of soft prices and past releases works its way through businesses.


What's going on? In the span of a few short weeks observers went from reading about the creativeness of reinsurers to better deploy record capital to warnings from two of the industry's most respected men saying that there's not enough capital?


In fact, there are a few things going on. O"Halleran termed investment return rates to be "pathetic" right now. That's bad if you're a regular person with a 401k or a modest portfolio.  Imaging the effect of these "pathetic" interest rates if you had $480 billion to invest?  Not good.


Next, as Lies noted, reinsurers need to be ready for new regulation and rating agency models.  We've talked often in this space about Solvency II and Lies is alluding to what the inevitable responseof the ratings agencies will be when new solvency models are finally, officially, in place.  Once Solvency II is official the agencies will re-rate insurers premised on the requirements of the new solvency scheme.  If you wonder why it would be remotely possible that the financial status of a carrier could change under S2 you haven't been following the years of vigorous arguments on this issue.


Finally, with the poor investment returns available to reinsurers, and the need to be ready for the new regulation and rating models, O'Halleran's point about the "big event" comes into sharper focus.  The point is that a massive loss wouldn't even need to be quite that massive if the two strikes of poor interest rates and expected agency action are already in place.


Stay tuned.  In every article about the Rendez-Vous de Septembre meeting in Monte Carlo usually the first paragraph mentions that international reinsurance pricing is agreed to there.  What Lies and O'Halleran say will carry some weight in those discussions.




Change at Lloyd's   


langley savage
                  Langley                                             Savage


It was announced in late August that one of Lloyd's high profile people will be moving on.  Sue Langley, Director of Market Operations, announced she will  leave Lloyd's.


Effective Monday, September 10, Luke Savage, Director of Finance, Risk Management & Operations, has been handed the responsibiluty of delivering the market modernization efforts currently underway at Lloyd's.  Project Darwin and the Lloyd's Exchange, both projects closely idenitified with Langley, will come under Savage's responsibility.


"Convergence" is here?



We talk about the so called "convergence" of the capital and reinsurance markets frequently in this space. Everyone is aware of CAT bonds which are funded by capital, typically originating from non-reinsurance sources, that is used to underwrite risk.
CAT bonds are always fully escrowed up front and are generally always based on some type of parametric trigger like a binary event or the breach of a treaty layer of traditional reinsurance sitting below it.
Recently new reinsurers have been formed that are basing business plans on the premise that they would create numerous "special purpose vehicles" (SPVs) that would underwrite reinsurance risks in a traditional manner and not just based on a trigger.
These SPV's are funded typically from non-reinsurance sources and are fully collateralized in advance. The SPVs are set up essentially as fully collateralized reinsurance companies and, because of that collateral posted against the PML, are highly rated by the agencies.
Some of the new reinsurers have been founded by hedge funds as this article from the New York Times notes. The hedge funds have a keen interest in managing the fully collateralized funds that have resulted from the sale of stakes in the SPVs.  Fully collateralized funds need to be invested in very safe securities to obtain and maintain the high agency counterparty ratings required by cedents purchasing coverage. This last point seems not to have been appreciated in the article.
One interesting point is that while we are aware of a small secondary trading market in the CAT bond arena we note that thus far there seems to be an inability or reluctance to secondarily trade shares in an SPV. In theory we understand the distinction. Because the CAT bond trigger is quite transparent the trigger is clear. An SPV, set up to operate in this new model, is essentially a reinsurer underwriting a treaty cover or other traditional reinsurance coverage.
You might say, well, what's the problem? Shares of publicly traded reinsurers are bought and sold everyday. Why can't shares of SPV's be traded in the same manner?  The answer is that the reinsurer which is managing the SPV is the sole possessor of the data which would be used by the secondary buyer of an SPV stake to set a value on the stock.
The record of premiums paid by the reinsured; claim experience, IBNRs, claim reserves and loss ratios are what would be of interest to a secondary buyer. Right now even the first level buyers of those SPV shares don't have that information to disseminate to an interested secondary buyer.
Systems like the CATEX Pivot Point Insurance & Reinsurance Transaction System can provide that level of specific data to a secondary buyer.  Watch this space carefully. We believe that as more and more capital flows into these new reinsurers that it's likely that pressure could grow to provide better data to enable secondary trading of SPV shares over the life of the original SPV contractual commitment. Remember, the money has been collected and is in escrow. Presumably the reinsurance buyer is indifferent as to who owns the SPV share if his PML payment is secure.

Our new columnist, writing exclusively for CATEX Reports, promises an off-beat look at the world of insurance.


Greetings, CATEX readers. My name is Roger and I'll be your columnist today.


Some of you might know me from previous experience in the wide worlds of insurance and publishing, most recently in Risk & Insurance. For those who haven't run across me, I thought I'd take the time to introduce myself and explain the raison d'tre for this column. Apparently, I'm an acquired taste; here's your chance to acquire it. I'll be appearing monthly in this space until no more cats need exchanging or the earth spins off its axis.


That's me up top and this is my story. Well, it's a story.


I write insurance humour, on a good day, and bilious rants when something gets on my nerves. The appeal of the column is akin to that of a train wreck: you have to check it out, in case there's blood and guts on the tracks. I am pre-eminent in the field of insurance humour, perhaps in part because no one else operates in that field.


This column offers a guarantee unique in all of the history of the written word. If I can't make you laugh out loud sooner or later, I guarantee there's something wrong with you.


What qualifications do I have for the job? I got buckets of 'em. I'm more qualified than the audit report of the European Union. I have qualifications up the ying-yang, which is a bad place to have 'em.


I'm English. Do you need to know anything more? I'm a Fellow of the Institute of Chartered Accountants in England and Wales. I'm a Member of the Chartered Institute of Management. And I'm a Fellow of the Institute of Financial Accountants. The eagle-eyed will have noticed that it must be my birthday, for I'm two jolly good fellows.


So much for the book-larnin'. Insurance is in my blood. Or in my refrigerator. Or somewhere. I was the CFO of a life insurance company at 23 years old, and the managing director of a shipping and commodity trading company based in Bermuda by the time I hit 35.


Looking in the mirror one day, I decided that I hadn't set out to be a middle-aged businessman, and couldn't think of a single reason why I should be one. So I stopped being one. For a few years, a Swiss girlfriend and I lived in a Volkswagen van in North America and friends' houses throughout Europe. Best years of my life.


Near the end of this idyll, I wrote a novel, Oliver's Travels. It was declared "the worst piece of fiction ever written" by all my literate pals in Bermuda. One of them, a newspaper editor, said that, since I could write, but couldn't make it up, I would make a good newspaper reporter. Did I want to be one? Did I!


Soon after I started work as a middle-aged cub reporter, the first of the giant Bermuda property cats arrived on the Island, in 1993. Despite my best efforts to steer clear of the business world, I was corralled into accepting what became, in the succeeding 20 years, a front row seat and a backstage pass to the creation in Bermuda of a global insurance industry.


Pretty much ever since, I have made a living working both sides of the street. Newspapers and magazines buy my work, as do insurance companies, banks and professional firms. I've written about 25,000 published articles; more annual reports than there are years in my age; menus; political speeches; videoscripts; corporate histories and humour books. I've worked online, offline, out of line and on radio and TV; and inspired a fan following numbering into double figures (just). I tell you this humbly so that you will know how grate I am.


In my time, I've met them all. Hank Greenberg gave me half an hour a couple of times; Joe Plumeri half a day once. I really liked both of them, even though they were softies. In Bermuda, the US, UK and the Caribbean, I offered financial insight to the public in the newspapers and in person. All the while, I followed Damon Runyan's sage advice: "Always try to rub up against money, for if you rub up against money long enough, some of it may rub off on you". (Runyon also wrote that he "long ago came to the conclusion that all life is six to five against".)


The rule of law in Bermuda is intermittent. Near the end of 2001, I was deported to London in a most gentlemanly manner, and a year later denied re-entry. My reporting of the truth had apparently upset a corrupt member of what was then a deeply corrupt government. I thus became the very first official enemy of the state of Bermuda, an honour I wear proudly to this day, especially because I am honest Bermuda's greatest friend. I continue to derive a small living from the Bermuda market that I have always served.


I'm referred to as 'sideways', 'off-the-wall' and 'Roger who?' In this hallowed space, I'll try to make you laugh about some of the foibles that attend the insurance industry. If nothing else, it'll take your mind off exchanging all those cats. I think we all know there's nothing worse than having a couple of tabbies on your hands when what you really want is a Siamese Blue.


 * * * * *

Roger Crombie is an American Society of Business Publication Editors national award winner. An English chartered accountant who lives in London, he writes and broadcasts news and opinion in the US, UK, Bermuda and the Caribbean, in print and online. His main beat is insurance and financial services, with 30-year sidelines in music and humour. Contact Roger at


Copyright CATEX Reports

September 11, 2012

Quick "Bytes"

One of the effects of Hurricane Isaac were the 16 tons of dead nutria, a large rat like animal that lives in the Louisiana swampland, that were sucked out to sea by the hurricane and then deposited on the beaches of Mississippi. The rodents drowned during the storm and beach goers weren't thrilled. (We'll spare you the photo)....Cuba was hit by a massive power failure on September 9th plunging Havana and other cities into darkeness. The power was off for 5 hours....Ongoing labor strife at a Lonmin mine in South Africa by miners who were at first protesting inadequate pay, and then became outraged when police opened fire killing 34 of them, threatens to cut off a large part of the world's platinum supply....Scor Re's Denis Kessler observed that the insurance industry suffered "collateral damage" when governments and central banks rescued banks by lowering interest rates. He said "it's well known that when policymakers have a choice between saving a bank or insurance company they will always choose a bank...



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