CATEX Reports
Issue 19 December 2012
In This Issue
Sandy claim totals keep rising
BI and Supply Chain cover come into focus
CATEX London Reception January 30, 2013
Mayans beware: Roger plans for next year anyway
Alex Rodriguez: a claim unto himself




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Dear Colleague,

I am pleased to send you the December, 2012 edition of CATEX Reports.

There are a number of threads we've tied together in this month's newsletter. We've noted continued uncertainties about the scope of insured Sandy losses. We've seen complaints about the data fed into CAT models connected with the storm. We've also observed a marked increase in offloading insured CAT risk into separate vehicles. We've read the articles about the underinsurance of CAT perils in emerging economies. And the recently released global assessment report from the US Intelligence Council unequivocally indicates that today's "emerging economies" will be major players in twenty years.

In light of the effects Sandy had in the US northeast we think that there are obvious parallels with data and insurance requirements for regions that will be just as industrialized and as heavily insured in the near future.

Please also remember, too,  that our London reception is scheduled 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 agreed to be part of it and we will raffle off four IPods too. See for details.

Also, and we're still digesting this one,  Roger Crombie may be appearing in both a television series and a feature film sometime soon!  We'll leave it to him to describe these possibilities to you.

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

All of us at CATEX wish you the happiest of holidays.


Stephanie A. Fucetola

Vice President/CATEX



The "Perfect Storm" actually came



Tuckerton, New Jersey


In the last edition we had a photo  Mark Wahlberg and George Clooney from the movie, "The Perfect Storm" in the lead story.  We were talking about trends in the insurance industry that seem to be gathering.  In fact, it turned out that Superstorm Sandy really was the "perfect storm" and it just happened to strike the NY-NJ area where many of us live!


First things first. As of this writing here are the Sandy losses as currently reported in Insurance Day--all with the usual caveat that they are not final and could change considerably. AIG: $2 billion; Swiss Re: $900 million; Munich Re: $650 million; QBE: $363 million; Chubb: $880 million; The Hartford: $350 million; Travelers: $650 million; Ace: $380 million; New Jersey Manufacturers: $300 million; Selective Insurance: $110 million; Progressive: $55 million; Kemper: $45 million; Cincinnati Financial $40 million; XL: $350 million; Platinum: $30 millionand Montpelier Re: $95 million.


The standout single-risk loss will probably come from the New York Metropolitan Transit Authority (MTA) which has revealed total Sandy losses of about $5 billion meaning that its own $1.075 billion insurance program will likely be exhausted.


               south ferry 

                               South Ferry NYC Subway station before ticket gates at right


One reason for the continued uncertainty in tallying the claims numbers has to do with the lack of knowledge about the exact size of the "business interruption" (BI) claims that could still come in. We noticed a comment from Standard & Poors (S&P) making the point that the re/insurance industry was too reliant on CAT models and needed to take greater responsibility for judging its own risks,  especially because the nature of catastrophe risks are changing. We assume that some of the changing CAT risks noted by S&P have to do with the extent of BI.


Shortly after the S&P comment,  we culled these thoughts from Swiss Re group chief underwriting officer Matthias Weber. He noted that the CAT models in relation to projecting Sandy's losses worked just fine but that models are only as good as the data that's fed into them. Weber said that the complexities surrounding Swiss Re's insured Sandy losses were exacerbated by above average contributions from business interruption as well as storm surge. 


                                                              Swiss Re's Weber


The models might do fine analyzing storm surge, wind damage, BI potential, flood damage, building collapse, etc., but aggregating all such possibilities in one geographic region, stemming from one event might not have been properly factored into the models.


Weber said that using multiple models only diversified away a limited amount of uncertainty because the strengths and weaknesses of the models are correlated to some extent. "A fool with a tool is still a fool", he said.  



Sandy strikes highest coastal concentration of insured value in US 


sandy clark 

                                            Manhattan Entrance to Queens-Midtown Tunnel



The NY-NJ Metropolitan Area is one of the most densley populated parts of the world. One would assume that CAT models against particular perils are relatively complete for this region.  It appears, though, that what might have been a problem was the unusual occurrence of high winds, power losses, storm surge, flooding, fire, building collapse and BI all stemming from the same event. This is the so called "risk aggregation" that some claim was overlooked by traditional CAT models.


The flooding last year in Thailand led to a renewed appreciation of both BI insurance and "supply chain insurance". The two coverages have common elements in that supply chain insurers generally provide payment in the event of a failure by a supplier to an insured to fulfill contracted delivery for any reason including inability to perform due to catastrophic conditions. The crucial difference for supply chain coverage is that it allows the insured the ability to collect if any of his suppliers can't perform while BI cover compensates the insured only for losses related to interruption of his own business.


With the expanding global economy the importance of supply chain insurance is becoming more pronounced. If companies are beginning to become aware of this why aren't they buying more of it?


The underwriting information needed to offer a rate is voluminous. Think about the complications involved for a manufacturer to enumerate all of its suppliers and then take it a step further to identify all of the suppliers to those suppliers. These complexities are hard enough to estimate in the US or the UK. Imagine trying to do so in an emerging economy where the models and information are poor.


Surprisingly, over 60% of members of the British organization the Association of Insurance and Risk Managers have had no discussions about supply chain insurance with their brokers or markets. In many cases, the underwriting information required for supply chain insurance was too onerous for buyers. "The biggest issue is insurers want complete information, while we want cover for the unknown," one AIRMIC member said.


                          supply chain 


The scope of gathering the underwriting information required for BI coverage is difficult in the industrialized world. The complexities involved in gathering data for supply chain insurance in an emerging economy are far greater. This is one of the factors leading to a recent calculation of an annualized "insurance deficit" of $168 billion in 17 high growth countries.


These high growth countries are precisely the target for the so called "next billion insurance consumers". Making sure that adequate data exists to provide business interruption insurance and supply chain coverage will be critical if the global manufacturing economy is going to safely extend to these areas in the future. 


Sandy was a wakeup call --not only for the US northeast but also for the rest of the world.

Bermuda Re-Insurance Conference 
                                     Jeremy Cox, second from left, and Frank Majors, third from left
Investors in insurers and reinsurers often complain about the supposed low rates of return earned by markets.  At least some of those "low rates" are due to the fact that insurers typically have to insure against catastrophic perils. If you are insuring against an event that could lead to a huge claim payout you need to hold on to a large amount of capital to be ready to pay it out if the catatastrophe occurs and the claim needs to be paid.
At the annual Bermuda Re-Insurance Conference last month sponsored by PwC a consensus seemed to emerge that so-called "alternative capital", which has been much in the news this year, seems to have achieved a workable blending of insurance and reinsurance expertise with the capital markets and is now a major tool for the industry. Jeremy Cox CEO Bermuda Monetary Authority, and Frank Majors, managing partner of Nephila Capital, were among the participants.
The idea is really very simple.  If risk bearers can "outsource" the pure catastrophe risk then they can hold less capital.  By offloading the cat risk to a CAT bond or special purpose vehicle (SPV) the insurer no longer needs to reserve against those possible CAT losses. The insurer or reinsurer will end up possessing less capital but its capital will be exposed to only lower scaled losses which presumably would positively affect their stock prices by allowing trading at higher earnings multiples.
The insurer can obtain remuneration for providing the underwriting analysis on the CAT risk to be offloaded but will not receive the premium for the covered risk that is transferred to either the CAT bond or SPV.  In most instances the covered CAT risk would have been transferred upstream to reinsurers soon enough anyway, with a large part of the premium travelling along with it to pay the reinsurers.  But if the insurer or reinsurer can avoid the CAT risk, and receive a fee for underwriting it, the balance sheet of the insurer will be smaller than it otherwise would have been but, and here one of the classic drivers of securitization comes into play, the return on its own capital will be greater.
We see two trends confirming this development.  First, A.M. Best observed that the waves of new reinsurer start-ups that were triggered in Bermuda after Hurricanes Andrew and Katrina and the 9/11 terror attacks are probably a thing of the past. 
bob derose  
Bob DeRose, Vice President and analyst at AM Best, said that the formation of any meaningful sized traditional reinsurance companies in Bermuda for the longer term isn't likely thanks to the advent of sidecars and other alternative reinsurance vehicles which are much more preferable to investors because of the flexibility of the capital structure.
Then, we noted that Munich Re thinks that  individual CAT bond issues may dip below $100 million making them accessible and affordable for smaller insurance companies looking for alternative ways to cover themselves against natural catastrophes.  If Munich Re is correct, the future may see more mid-sized and smaller insurers and reinsurers off-load their pure CAT exposure into ILS products.
At Lloyd's, the specialized underwriting teams that manage and underwrite for syndicates essentially have been renting out their expertise for generations by providing underwriting that would (usually) make profits for Names (syndicate investors) willing to provide the capital to pay claims in exchange for premiums.  In a funny way we seem to be coming around again to that model for global CAT risks. 
Several of the new Bermuda reinsurers seem to have adopted this "underwriting as a service" approach too. They plan to drive higher investment returns for those investors who put up the financial commitments against the risks that were insured.
So by de-constructing the risk process one of these new entities can: obtain remuneration for providing the underwriting for risk; provide the set-up of the ILS ( an SPV, sidecar, cell, CAT bond, etc); manage any claims; and perhaps even share in the investment arbitrage on the pre-paid proceeds from the ILS that are escrowed as collateral supporting the vehicle's performance.
It's a very interesting model and ultimately would seem to provide more value to investors while maintaining secure coverage for insurance and reinsurance buyers.  More of these to come we think.....


January 30, 2013 CATEX Reception


Hamblin & Bolt

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 ( as soon as possible.



Roger Crombie writing for CATEX Reports takes an off-beat view of the world of insurance
                                             Roger Crombie
                               And, in the end...

As the end of the world, or the year, approaches,

Roger Crombie acts up.



As the end of the year approaches - or perhaps the end of the universe 10 days earlier, if the Mayans had it right - I'm finding it hard to focus. A round-up therefore seems in order. I don't suppose you'll mind; you're already closed for Christmas anyway.


* * *


            Not of my own volition, I have recently semi-retired. Except for this corner of the ether and an occasional piece elsewhere, my time is my own. I fill it by walking, reading and watching filmed entertainment. Like Robert Benchley, asked by Dorothy Parker what they would do if their proposed shared editorial business failed, I yearn a living.


            With time on my hands, I have been thinking about risk. A friend said last week, of his wife: "She's the chief risk officer. And, as you know, today everything is about risk."


            Risk became fashionable in the sense my friend referred to it only less than 20 years ago. The insurance industry has always managed risk for others, but began only relatively recently to consider better ways of managing its own risks. The remainder of the financial services sector caught on next, then governments snapped it up. The term 'risk' then entered the vernacular - as something to be feared, which is the wrong approach. Risk primarily represents opportunity, and only secondarily danger.


            It was a short jump in my thinking process from there to enterprise risk management. Lord, the conferences I attended listening to self-appointed experts bloviate about how ERM would solve all the insurance industry's problems. Panels drawn from the great and the good, and the rating agencies, sat around, explaining how ERM - the checklist approach to fighting risk - would prove the maxim that knowledge is power.


            That reminded me of the monthly risk meetings I attended when working in internal audit at a public company in Chicago back in the early 1980s. The closing item of the meetings was always a listing of every outstanding risk the company faced, quantified, measured and weighted. The numbers could be scary, particularly since we developed new chemical processes and made drugs.


            That management went through this process 20 years before ERM was even thought of was impressive. The difficulty the company had with the process was that it overlooked what turned out to be the gravest risk of all: that the company would be so successful that it would be acquired by a giant competitor and cost most of us our jobs.


            And there's the problem with ERM: the so-called black swan. Elisabeth Pate-Cornell, a Stanford professor of management science and engineering, said a couple of weeks ago that people in government and industry are using these terms too liberally in the aftermath of a disaster as an excuse for poor planning. She's darn tootin', but when was it ever different?


* * *


            Kweku Adoboli, a UBS synthetic equities trader, was recently sentenced to seven years for committing Britain's largest fraud. It cost the bank $3 billion and change. How charming to see that the Police officer who booked Adoboli had to be told how many zeros there were in a billion. The officer's plight neatly illustrates the relative brainpower of the financial sector and those who enforce the law.


            To be fair, the officer could have had legitimate reasons for doubt. Until quite recently, a British billion was what Americans (and therefore the rest of us) now call a trillion. The British economy only reached the billions stage a few years ago, by which time the Americans had moved on to trillions, leaving as a legacy a much-reduced billion dollars (one-thousandth of the English version) - and making prescient Bunker Hunt's comment a while back, that a billion dollars wasn't what it used to be.


* * *


            On a personal note, good news and bad. The good news first.


            Chap magazine reports that a duelling scar obtained in Heidelberg, and the talent to step into a play when an actor pulls out at the last minute and steal the show, are just two qualities a chap should possess.


            My duelling scars are emotional and therefore on the inside. Talk about your black swans, though: I have been cast to play a small role in a forthcoming major motion picture. It's a work of slapstick in the vaudeville tradition. I have also landed a recurring part in a television series. It should be remarked that I have never acted before, and believe that an elaborate hoax is being mounted to make me the laughing-stock of London. As things stand, however, I shall soon begin an acting career. I'll keep you posted.


            Oh, the definition of a gentleman, as you may know, is: a man who can play the accordion, and doesn't.


* * *


            Christmas has expanded from a day or two near the end of December. It now embraces the period between Thanksgiving and the second week of January, a period known in Britain as the Winterval. Trying to get anything done in that window is usually a fruitless exercise. "Nah, mate," the natives sing. "Can't do nuffin 'til after the Winterval." A few poor fools still call it Christmas, but they are being rooted out by the political correctness Stalinists who rule Britain today.


            Er, Merry Winterval.


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

Copyright CATEX Reports

December 12, 2012


Quick "Bytes"

If you follow baseball you know that Alex Rodriguez is the highest paid player in the game earning $27.5 million a year playing for the New York Yankees. The team announced last week that he is likely to miss half the 2013 season because he needs surgery on his hip. Sources say the contract is insured but that "A-Rod" would likely need to be disabled for the full 2013 season before the Yankees could file a claim.....Here's a big number.Karen Clark & Co. says that total insured building values in the US now exceed $40 trillion, with the value rising to $80 trillion when contents and time element exposures are factored in. Does anyone care to do the math to see if the "aggregation of risk" warnings have been heeded yet in the amount carriers have reserved against that number?.....The  

Geneva Association just released a study indicating that not one of the 28 largest insurers in the world should be rated as globally systematically important. Under-whelming news you may think but not so says John Fitzpatrick of the association. The study shows that banks are far more systemically risky than insurers and Fitzpatrick says this is more evidence that insurers should not be held to the same regulatory standards as banks....Finally, the US National Transportation Safety Board requires cargo airline fire detection systems to alert pilots within 1 minute of a fire but the NTSB says that current systems detected fire and smoke anywhere from 2.5 minutes to 18 minutes after the fire started. The NTSB recommends improvements. There are nearly 900 commercial cargo jets in the US ....

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