|
Contact CATEX
Princeton, NJ
+1 (609) 683-0888
| |
|
London
+44 (0)20-7663-5656
| |
|
|
|
|
|
Dear Colleague,
I am pleased to send you the November, 2012 edition of CATEX Reports.
Please note that due to the effects of superstorm "Sandy" our London event that was scheduled for November 13th has been rescheduled for 5:30 pm Wednesday, January 30th, 2013 at 10 Fenchurch Avenue across from Lloyd's.
Tom Bolt, Director, Performance Management at Lloyd's and John Hamblin, Active Underwriter for Cathedral Syndicate 2010, have both generously agreed to the schedule change. We look forward to seeing you on January 30th.
You will see that our November newsletter has taken note of the twin factors of "globalization" in insurance and the increasing severity of natural catastrophes --a not unatural topic when one has been without electricity and heat for 12 days!
Also Roger Crombie is scratching his head about the prison sentences handed out to the Italian scientists who "failed" to predict the L'Aquila earthquake in 2009.
We hope you enjoy the November newsletter and, as always, if you have any questions about CATEX products, please contact us.
Sincerely,
Stephanie A. Fucetola
Vice President/CATEX
--------------------------------------------------------------------------------------------------------------------------- |
A "Perfect Storm" approaching?
Yes, the photo above, of Mark Wahlberg and George Clooney, is from the 2000 Warner Brothers movie, "The Perfect Storm", directed by Wolfgang Petersen. We were reminded of the film not only because of Tropical Storm Sandy but also because there seems to be a confluence of trends beginning to come together that could be storm clouds for the insurance industry.
There are several data points we've been watching. When you add them all up they could lead to trouble. Let's see what you think.
First, the insurance and reinsurance industry is determined to maintain its relevancy in terms of providing adequate coverage for businesses and people around the world exposed to risk. In the US alone, in 1985, the percentage of paid insured losses in the private sector relative to US GDP was 3.15%. By 2011, that percentage had declined to 2.2%.
We've tracked this story in earlier editions. XL's Mike McGavick, for example, has been warning that the industry needs to create products that can meet the current needs of today's buyers and not simply duck the challenges by increasing deductibles or excluding coverages. Frank Nutter, President of the Reinsurance Association of America is aware of it as well.
Lies
Second, we noticed comments made by Swiss Re's CEO Michel Lies last month who said that insurance and reinsurance stocks are suffering because investors do not believe that underwriters are adequately pricing risks. Lies noted that "one of the elements that makes this more complicated is that in mature markets the economy is not growing."
Third, we read the comments by AIG's Property Casualty's Global Property Division president George Stratts who said that in a typical year two-thirds of catastrophe losses come from the US but that in 2011 that number reversed itself with two-thirds of the CAT losses originating outside the US.
Stratts
Stratts said that "the globalization of industry and the interdependency you see around the world has changed the footprint of insurer's exposure basis." He cited the unexpected BI claims that stemmed from the flooding in Thailand as a good example. Stratts went on to say that emerging markets may not have the same quality of data or modeling available as for risks in the US or Europe.
Stratts concluded, "If we've learned anything from 2011, it's that there needs to be a standard of data that we would expect regardless of location. Just because an asset is in a developing country that is seen as emerging, and, economic activity is growing at a much faster pace than the US or Europe, doesn't mean you forgive the data or discount the need to understand the risk."
Fourth, last month in Baden-Baden Validus Re's CEO Kean Driscoll warned that the reinsurance industry's over-reliance on third party vendor models to price catastrophe risks could create similar problems as those suffered by the asset-backed securities market during the 2008 financial crisis.
Nelson
Fifth, we noted the comments from Lloyd's Chairman John Nelson, expounding on Lloyd's "Vision 2025" plan. We've noted the goals of the "Vision 2025" plan in prior newsletters but Nelson's comments were even more succinct. He said that, "If you look at the demand for specialist general insurance worldwide in the next 15 to 20 years, as other parts of the world industrialize, it's creating a vast 'gob' of new business opportunities for general insurers and people like Lloyd's."
Sixth, the latest assessment of disasters in the Asia-Pacific region published by the UN Office for Disaster Risk Reduction (UNISDR) said that "exposure to disaster risk is growing faster than our ability to build resilience and Asia's rapid economic growth is partly responsible for it". The challenge, said the study, is not to stop development but to slow the growing rate of exposure and rising vulnerability to CATS such as floods, earthquakes and tsunamis.
Seventh, and finally, we saw the comments from Marc Beckers, head of Aon Benfield Analytics for Europe, the Middle East and Africa, who said that one of the benefits of Solvency II (if it ever is implemented --our comments--not Beckers') is that it would rid the market of mispriced capacity.
Beckers
Beckers said "if we can get the stupid capacity out of the market --people who are willing to provide insurance policies at below what they should be because of either embedded options on the life side or because of frequency and severity risks on the non-life side --that would really help out those players that understand the risk they are taking."
A "perfect storm?" It's possible.
Let's work last to first: knowledgeable observers are concerned about naive capacity; such capacity which by definition is going to need to address increasingly disaster prone areas; which in turn are targeted for market expansion by big global players; some of whom may be relying too much already on CAT models; with the models themselves not being up to speed in quantifying risks in these developing economies; then, add in the observation that Wall Street thinks that underwriters already underprice risks and combine it with the industry's determination to cede no more ground in so far as percentage of global GDP and blinking red, warning lights should be going on in everybody's minds right now.
Industry veterans with whom we've spoken say that the impending opportunities are indeed huge but that it's essential that underwriters are able to and do charge satisfactory premium rates. This means so called "rate acceptance" on the parts of the buyers and the primary companies and --as Mr. Beckers notes-- avoiding the temptation to match poorly priced premium quotes offered by "stupid" capacity providers.
-------------------------------------------------------------------------------------------------------------
|
|
Sandy strikes highest concentration of insured value in US
 
At the end of October, Sandy, a tropical storm which had assumed the characteristics of a classic "Nor'easter," came ashore just south of Atlantic City, New Jersey. The storm came with a 14 foot storm surge that rendered much of southern Manhattan island, Long Island, the Jersey shore and parts of Hoboken and Jersey City uninhabitable for days. Equally as damaging was the interruption in electicity service for over 8 million customers. Hundreds of thousands of people in NJ and NY were forced to go without power and heat for nine or ten days or even longer.
The scale of the disaster was such that it was hard to believe in the most densely populated and urban area of the United States that basic essential services were not only interrupted but completely down. Curfews were ordered by local police departments as residents shivered in their unheated, unlit homes as outside tempratures dropped to 30 degrees Fahrenheit.
Of course disasters far worse have occurred elsewhere but the extent of the effect of Sandy and the seemingly interminable length of the storm's effects seemed to have caught everyone by surprise.
Economic damage is estimated as high as $50 billion (US) and insured losses are estimated by some to be as high as $30 billion (US). If it wasn't for the fact that most claims associated with the storm surge will be covered by the US government's NFIP program then Sandy would be a very, very costly event for the industry.
But the question remains; if the northeastern United States can be brought to its knees by a storm that hadn't even reached hurricane force winds when it made landfall does that mean that the "interdependencies" and "interconnectedness" that we're intent on understanding in emerging economies need to be reevaluated in more mature economies as well?
The range of "interconnectedness" was dramatically displayed at times in the aftermath of Sandy. Several major international reinsurers indicated that they had not received any claim information yet because their offices in New York remained closed as a result of the storm. Thousands of companies, including CATEX, had to invoke disaster precautions and clients of those firms around the world came to understand the fragility of the northeastern US power grid.
We who had been used to dealing with Asian clients suffering from the effects of earthquakes and tsunamis, or clients in the Middle East enduring politicially related turmoil, were forced to acknowledge our own dependence on the lights being on, the Internet being up and having heat in our homes. It was an unthinkable turn of events for many of us.
------------------------------------------------------------------------------------------------------------------------- |
|
------------------------------------------------------------------------------------------------------------------------- |
|
January 30, 2012 CATEX Reception
Hamblin Bolt
Please note that due to the effects of superstorm "Sandy" our London event that was scheduled for November 13th has been rescheduled for 5:30 pm Wednesday, January 30th, 2013 at 10 Fenchurch Avenue across from Lloyd's.
Tom Bolt, Director, Performance Management at Lloyd's and John Hamblin, Active Underwriter for Cathedral Syndicate 2010, have both generously agreed to the schedule change. We look forward to seeing you on January 30th.
Tom will be discussing, among other things, the current state of the London Market. John will be discussing his lifelong interest in the stories of World War I British servicemen.
We will be raffling off four iPods to the attendees as well as providing wine and canapes. Space is limited so please confirm your attendance to Stephanie Fucetola ([email protected]) as soon as possible.
------------------------------------------------------------------------------------------------------------------------- |
|
Silly Billi
Roger Crombie writing for CATEX Reports takes an off-beat view of the world of insurance
Judge Marco Billi sentences seven men to six years apiece for failing predict an earthquake.
Neither of the two great American catastrophes this past month - Hurricane Sandy and Obama's re-election - is a source of much amusement. Our attention turns instead to Italy, where a grand tradition was renewed in recent weeks. Six-year jail sentences and fines exceeding $10 million were handed down to six scientists and a former government official for failing to correctly predict the L'Aquila earthquake in April, 2009 that killed 309 people and left thousands homeless.
Europe has been persecuting scientists since science was first thought of. Among the earliest was Rhazes (860-932), a surgeon fired and arrested for his "western" teachings. His punishment was to be hit on the head with his own books until he was blind.
Guido Lanfranchi (1252-1315), a physician and surgeon, was persecuted
for political reasons and driven out of Italy. He became known as the founder of French surgery.
Giordano Bruno (1548-1600), another Italian, proposed that the universe was widely populated and was burned at the stake. Galileo Galilei (1564-1642), mathematician and astronomer, was hauled before the Spanish Inquisition.
Some other highlights of a very long list: Spanish physician Michael Servetus (1511-1553), burned at the stake; Bavarian physician Johann G. Wirsung (1600-1643), shot to death by an assistant; Marcello Malpighi of Bologna (1628-1694), a founding father of anatomic pathology, assaulted by enemies who burned down his house and destroyed his library; Henry Oldenburg (1615-1677), a founder and the first secretary of the Royal Society, jailed in the Tower of London for several months.
Antoine-Laurent Lavoisier (1743-1794), a pioneer French respiratory physiologist was found guilty of trumped-up financial misbehaviour and guillotined, his body buried in an unmarked grave. Gerhard Domagk (1895-1964), awarded the Nobel Prize in Medicine in 1939, promptly arrested by the Gestapo and forced to refuse the prize. Proving that the United States, a late entry in these stakes, was no slouch: another Nobel laureate, James Watson, the co-discoverer of the structure of DNA, forced to resign for saying that Africans had lower intelligence than others.
In the footsteps of such giants now come the Aquila Seven.
After record first-half catastrophe losses had been incurred in 2011, a reinsurer friend, Hugh, mentioned that the earthquake season still lay ahead. I paused to formulate a response. There is no earthquake season. It's impossible to predict with accuracy when, where or how bad, although we do know something of why. And yet, an ounce of doubt remained in the back of my mind. I'm more a wind man than an earth-shaking man, but I went with my gut. "There is no earthquake season," I said quietly. "Of course there isn't," Hugh replied. "Apparently, you're not a complete idiot."
Judge Marco Billi did not rule on whether earthquakes can be predicted, but he clearly is a complete idiot, notwithstanding that justice in Italy is at best a vague concept, as Silvio Berlusconi has so amply demonstrated.
Judge Billi
One of the lawyers representing the relatives of some of the victims argued that the sentences showed that it is possible to have a culture of prevention. A culture of prevention! One can no more prevent an earthquake than one can hold back the waves. One can prevent, say, Charles Manson from murdering more innocents by keeping him in jail, but one cannot prevent a flash flood, an earthquake or even, it seems, a continent such as Europe from gleefully carrying out its own economic destruction.
Judge Billi's sentences will produce the exact opposite of what he may have hoped for. What expert in any field would dare to prognosticate if the penalty for getting it wrong were incarceration and bankruptcy?
The 25th anniversary of Britain's most celebrated forecasting blunder took place a few weeks ago. TV weatherman Michael Fish was telephoned by a Dutch woman who asked if a hurricane were on its way to Britain. Mr. Fish laughed it off, on air. A hurricane duly struck a couple of hours later and raged all night. I happened to be visiting London at the time. The trees in my friend's back garden were bent at 45-degree angles by the wind. Had Mr. Fish been Signor Pesce, he'd have languished in jail, according to Judge Billi's lights. Instead, he is a national laughing stock, a much more fitting punishment.
The prosecution asked Billi for four-year sentences. The Judge gave each man six years. He said would reveal his logic for this punitive action at a later date. The charitable explanation is that by making a deliberate judicial error, he has given the scientists grounds for a successful appeal.
The smart money, however, says that we fear men of science, who see more than we do, dash our illusions, and continually prove the relative insignificance of man and his powerlessness in the face of the universe - so we punish them disproportionately to demonstrate their own lack of power.
* * * * *
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. All views expressed in Roger's columns are exclusively his own. Contact Roger at [email protected].
Copyright CATEX Reports
November 13, 2012 ----------------------------------------------------------------------------------------------------------------- |
|
Quick "Bytes"
 The Costa Concordia is making news again. Although publicly quotes loss estimates for the capsized liner have come in at $1.03 billion the collateralized retro underwriter Catco has agreed to pay on a retro marine contract that triggered at industry losses of $1.25 billion signaling that the industry expects the UNL to continue to escalate.....British insurers continue to press for inclusion of senior industry figures in the two new UK financial units, the Financial Conduct Authority and the Prudential Regulation Authority. Complaints have centered on the regulator's seemingly overwhelming preoccupation with the banking sector. "The naughty child is getting all the attention", said Bronek Masojada, CEO of Hiscox, continuing "The bankers got it so wrong that it is all anyone can think of at the moment".....There was that little matter of the US election last week and the insurance industry and others are looking to mend policy fences with the Obama Administration as they will now be around until January 19, 2017...
-------------------------------------------------------------------------------------------------------------------- |
|
|
|
|
