I am pleased to send you the January, 2013 edition of CATEX Reports.
We have many new readers for this month so thank everyone for passing along your e-copies of the newsletter. A word of explanation about our company, CATEX, and this newsletter are in order.
CATEX was formed in 1994 and has been building and operating web-based transaction systems for the reinsurance and insurance industry ever since. If you're a broker, insurer, reinsurer, managing agent, syndicate or coverholder then we have products that are reliable, web-based and cutting edge.
The CATEX Reports newsletter is very light on any sales or advertising pitches. Links to our company and product information are always included on the left hand side but the goal of the monthly newsletter is to update you, the reader, on the trends and developments we've seen globally over the past month. We're in alot of places and talk to many people. And as many of you have observed, we seem to read everything.
When we wrote the January newsletter we kept thinking of the children's fable "The Emperor's New Clothes". It seems as if Superstorm Sandy still has some unmasking to do yet. Who will end up wearing what when it's all over is anyone's guess.
This will be the last newsletter announcement for our London reception on January 30th, 2013 featuring Tom Bolt, John Hamblin, a possible free iPod, wine and canapes.
Next month we'll have a link to a video of the complete event so you will be able to see all the fun you will have missed if you have not RSVP'd back to us yet. The reception is at 5:30 pm Wednesday, January 30th, 2013 at 10 Fenchurch Avenue across from Lloyd's and it is necessary, please, to confirm your attendance in advance. See www.catex.com for details.
We hope you enjoy the January newsletter and, as always, if you have any questions about CATEX products, please contact us. I will warn you right now that if you have a 4 legged pet that barks you'll have a bone to pick with Roger Crombie this month!
Stephanie A. Fucetola
Last Call for the January 30th Reception
The motley George Thorogood and the Delaware Destroyers had a hit record in1977 that included a remake of an old tune named "One Bourbon, One Scotch, One Beer". One of the refrains in the song was "last call for alcohol" (Thorogood's other big hits included the song "I Drink Alone") and, yes, as you may have guessed he did have a slight tippling problem. He has been off the drink for years now, and is still making money selling records.
The "Last Call" anthem got to us in regards to our litany of reminders about our London reception on January 30th. (It only seems as if they are endless but since we were forced by Superstorm Sandy to postpone you indeed have been hearing about it since October!)
Tom Bolt John Hamblin
It's indeed unprecedented to mention either Tom Bolt, John Hamblin, or heaven forbid, both of them in such close narrative proximity to George Thorogood but we do so only to emphasize the last chance nature of this event's timing.
We will host a reception at 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, will both make brief remarks. 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 contact email@example.com as soon as possible.
Sandy Losses Delay "Reckoning" for Industry
Boat lies on New Jersey Transit RR tracks after Sandy
Whenever a big event like Sandy strikes it takes a while for the dust to settle. For insurers and reinsurers in particular the Business Interruption claims picture is still forming. But, remember, before Sandy struck everyone was talking about what a light year it had been for large claims. Yes, the US drought losses and Costa Concordia were spikes but 2012 was nothing at all like the 2011 natural disaster hits of the Japanese earthquake/tsunami, the Thai floods, the Joplin tornado and New Zealand Christchurch earthquake.
You may remember that, prior to Sandy, most people were predicting flat premium growth, at best, for the January 1 renewals. Concerns expressed from markets were that low investment returns compounded with flat premiums meant serious trouble ahead.
If you looked closely you could see warnings about abundant capacity. The new collateralized ILS reinsurers were joining the market at a time of both low premium rates and low interest rates. Their arrival has prompted worries about "stupid capital" and fears that the new reinsurers' underwriters would price coverage cheaply just to intake premium.
The nature of the new collateralized insurers has evolved. Initially, vehicles were short term plays with well-defined exit dates. Investors were usually hedge funds and private equity funds. But now, since stocks and bonds are only generating marginal returns the likes of pension, endowment and sovereign wealth funds have become interested in risk not correlated to economic events. These newer types of investors are generally not demanding the level of ROI that hedge and private equity funds do and their time horizon, for a liquidity event, may be longer.
The rate increases at the January 1 renewals, in lines of business affected by Sandy, may have provided just enough relief in reinsurance rates to traditional reinsurers at a time when interest and investment returns remain low. Meanwhile the steady stream of new collateralized sidecars will continue with Aon Benfield predicting that within 5 years 50% of reinsurers will be managing insurance-linked funds for third party investors.
Red Hook section of Brooklyn flooded by surge
It seems that evolution has accomplished what decades of effort couldn't. That age old problem, oft repeated by reinsurance sages, about the "trillions of dollars in insurable interest in the world but only a few hundred billion dollars of insurer capital to insure them", has possibly been solved. The solution might turn out to be ingenious.
By inviting interested investors in on their own terms the reinsurers can obtain the necessary capital, get paid for underwriting the risk and participate in the profits it chooses to invest. The SPV does not require an increase in the reinsurer's surplus as the collateralized sum is escrowed under a separate corporation thus eliminating a debate point in the return on capital argument.
What does this mean for so-called "traditional reinsurance
"? We've seen headlines lately saying that there will always be a role for "traditional reinsurance" but who's answering that question unless it's been asked? The real answer won't be known until either a
major event wipes out a large part of a collateralized pot of capital, or, if stocks and bonds take off on an upward trajectory and the new capital goes back to more familiar climes.
Watch this space. There are savvy people out there who figured this out and are intent on making this happen. CATEX's Pivot Point Risk Bearer System can offer information to side car investors to better value their investment by factoring in claims, premiums paid and interest earned. In the event a secondary market for SPV equity shares does develop we will be ready.
P&C Net doubles but still a Negative outlook
A.M. Best stated that even with the losses from Sandy factored in (when they are fully known) "Sandy is not expected to create a substantial capital challenge to the industry, and even after a record catastrophe year in 2011, the overall position of the P&C insurance industry's balance sheet is strong. A.M Best anticipates that the industry will absorb these losses without a significant impact to its overall strength".
On January 8th we saw another statement from A.M. Best. This one saw A.M. Best, citing market conditions and less-favorable loss reserve developments, reiterating its negative outlook for the commercial P&C industry. Best noted depressed investment yields and overall sluggish economic growth as challenges. Best noted that they had instituted the "negative" rating in 2011 and it had remained in place since then.
A.M. Best is the gold standard as far as insurer ratings are concerned. They are known for a very methodical and conservative approach and their reputation is deservedly impeccable. Given the known quality of the source of these two observations we had difficulty reconciling them.
There was one tantalizing clue in the January 8th A.M. Best report. Best said "The current loss reserve position and the potential for continued (our italics) underfunding remains a critical issue for A.M. Best".
So, even though for the first nine months of 2012 the P&C industry had doubled its net income from 2011 (which admittedly did set the record for natural catastrophes), and losses from Sandy were anticipated to be absorbed without a significant impact A.M. Best is maintaining its "negative" outlook on the industry and classifies continued underfunding as a critical issue for the future.
Underfunding can only occur in three ways that we can think of. Either the premium is set too low, or a completely out of the blue claim develops (think asbestos), or markets are getting negligible returns on investments. Let's eliminate the unforeseen claim and look at the premium adequacy and the investment returns.
Remember that underfunding is not applicable to a fully collateralized SPV or a sidecar. The total maximum amount of claim payouts that could ever be made on an insured or reinsured SPV policy are collected in advance and placed in an escrow account. It's pretty hard to have "underfunding concerns" when the money is sitting there.
An insurer need keep a reserve in place at all times against a possible claim on a written policy. Based on actuarial and modelling data the size of the reserve depends on the likelihood of a claim and its likely size but once claims notices begin to arrive the risk bearer has some latitude in setting a new reserve.
Some insurers set high reserves knowing that if loss development does not meet worst case scenarios the reserve can be released in later reporting periods. It's like a rainy day fund. But in a time when premiums are already flat, and 2011 was a record natural catastrophe claim year, and investment returns are very low, setting up high claim reserves could become a problem. Everyone is being squeezed and Best has picked up the underfunding.
Better Data Sought Say Reinsurers
Carl Hedde Cameron McKenna Gregory Butler
Munich Re's Carl Hedde, head of risk accumulation, said this month that more information needs to be captured on flood coverage and exposure.
The law firm CMS Cameron McKenna warned that higher business interruption (BI) losses than expected resulting from Sandy are likely to lead to a wide-scale modeling revision of the risk concentrated in coastal areas of the US northeast.
Gregory Butler, Icat president and active underwriter for Syndicate 4242 said insurers were "surprised by Sandy and by some of the things they were writing that they didn't think they were".
NJ Turnpike view of Manhattan Main road from Dushanbe to Penjikent
These are interesting observations considering they pertain to the stretch of territory between Washington, DC and Boston. We're not talking about the suburbs of Dushanbe in Tajikistan. How could there be any surprises in terms of modeling in the most populated and industrialized corridor in the United States?
The first answer has to do with the flood data. The storm surge was unprecedented and exceeded any modeling based on flood data maintained by the Federal Emergency Management Administration (FEMA) the US agency that administers the National Flood Insurance Program available for homeowners flood coverage in the US. Because FEMA historically collected and maintained this data nationwide for residential flood coverage purposes many commercial policies simply tracked the FEMA flood models when setting commercial flood rates.
In short there was no good way for insurers to track flood loss potential based on the FEMA data. Some would say that the risk is essentially un-modeled risk. When large parts of lower Manhattan were underwater for several days this gap really became apparent. Next, and less defined, is an element of Business Interruption (BI) coverage called Contingent Time Element (CTE).
It's one thing to have a business owner experience his office or factory being shut down and have his business interrupted. If he has a BI endorsement on his general insurance policy he can file claims for appropriate losses and restoration costs. There is a deadline associated as to when the claim losses must be incurred. Sometimes it's for a defined period post-event and sometimes it's less defined such as "the time required repairing the damaged property in the exercise of due diligence and dispatch".
Periods of time calculated by appropriate exercises of "due diligence" and "dispatch" are a nightmare for insurers. When, exactly, does the period really end so we can close the books on this one? If the loss pertains to physical restoration costs to a factory or office it is easier to quantify but it's no longer so simple.
Businesses around the world that have BI policies also have the Contingent Time Element as part of their claim arsenal to use as they seek to be made whole against losses to their own firms based on lost deliveries, lost profits, lost payments, etc.,as a result of companies in the US affected by Sandy.
Think of this. The NY-NJ-CT area affected by Sandy is arguably the most important American economic hub engaged with global commerce. Any losses sustained directly by affected companies in the US can be claimed but so can losses incurred by any other company as a result of the interruptions affecting them related to problems caused to US companies by Sandy.
This is a big "other shoe" that hasn't dropped yet. This second circle of companies representing potential claims has the Contingent Time Element working for them too. It's only been 77 days since Sandy (as of this article) and time periods measured by the appropriate exercise of "due diligence" and "dispatch" as applied to a partner in a global supply chain haven't come close to ending yet. More claims will come -maybe many more.
Roger Crombie writing for CATEX Reports takes an off-beat view of the world of insurance
PUTTING ON THE DOG
Dogs are gnashing their way through Insurance Company profits
Just before Christmas, my brother Jon was attacked by a flash mob of senior citizens.
Nothing in that sentence would appear to make any sense. My brother is a most pacific and thoughtful gentleman. He was in Taunton, the administrative centre of the county of Somerset, in the West of England, as dull a burg as one could ever hope to visit. Taunton is populated disproportionately by older people, and it was indeed a mob of 'pensioneers' (William Shatner's inadvertent but dashing updating of the more mundane term 'pensioners') who had at my brother.
It went like this: walking to his car after a day's work, Jon passed by a dog tethered to a post outside a shop. Without warning or apparent cause, the dog raced at my brother and bit him, severely, on the hand. A fair amount of the Crombie blood was spilled. Without thinking, Jon kicked out at the dog - without making contact - to ensure that no further attacks ensued.
Thereupon, Jon was set about by a large group of seniors who informed him that kicking dogs is not on. When he showed them the blood spurting from his hand, not a single one of his human assailants had any sympathy. "Doesn't matter what they do, you can't blame a dog," said one old coot.
(A short but tiresome disclosure. I find dogs to be the most pointless of creatures. Handy, I suppose, as burglar alarms, and handier still if another dog's behind needs sniffing, dogs are, in my opinion, a dangerous waste of space.)
Insurance claims resulting from dog bites are on the rise, and accounted for more than one-third of all homeowners' insurance liability claim dollars in 2011, according to The Hanover Insurance Group. The cost of dog bite claims rose by 53.4 percent from 2003 to 2011, the Insurance Information Institute (III) has reported. Dogs, it seems, are putting the bite on insurance companies too.
Prosecutions for dog bite incidents are relatively few and far between. In Britain, especially, the populace harbors a deep love of dumb animals, probably because most of the populace itself clearly falls into that category.
Like many insurers, the Hanover will not underwrite certain breeds of dog. What a service insurers could provide humanity by not covering any breed of dog. Imagine how quickly dogs would stop biting people if their owners had to foot the bills directly.
"We believe that policyholders will benefit from having an independent agent review their insurance coverages to ensure they have adequate protection against the alarming increase in lawsuits over bites by family dogs," said Mark Desrochers, president of The Hanover's personal lines business.
The III has issued a helpful list of recommendations for dog owners. As a public service, here is the list, for those to whom common sense is an alien concept:
* Consult with a professional to learn about suitable breeds of dogs for your household and neighborhood.
* Use caution when bringing a dog into a home with an infant or toddler. A dog with a history of aggression is inappropriate in a household with children. (The Institute is hedging its bets here. Such an animal is inappropriate in any home. Be fair.)
* Be sensitive to cues that a child is fearful of or apprehensive about a dog. Never leave infants or young children alone with any dog.
* Have your dog spayed or neutered. Studies show that dogs are three times more likely to bite if they are not neutered.
* Socialize your dog so it knows how to act with other people and animals.
* Teach children to refrain from disturbing a dog that is eating or sleeping.
* Play non-aggressive games with your dog, such as "go fetch" (or "go run under a train").
* Avoid exposing your dog to new situations in which you are unsure of its response.
* Never approach a strange dog and always avoid eye contact with a dog that appears threatening.
* Immediately seek professional advice from veterinarians, animal behaviorists, or responsible breeders if your dog develops aggressive or undesirable behaviors.
* * *
I too have been bitten by a dog, a Portuguese Water Dog, the property of friends. It bit me deeply on the thigh and then the ankle when I popped round for dinner one evening. My friends, whom I never saw again, thought this was very amusing behaviour on the part of the dog. My reaction, they felt, was over the top, although they couldn't tell me that until I'd returned from hospital. A recent survey in the UK reported that more than five percent of those surveyed had lost friends because of their dogs' behavior.
Dogs have their uses, I suppose. Just last summer, The Royal Gazette, the newspaper in Bermuda for which I worked for 28 years, ran as its front-page lead a story headlined "Dog Bites Tree". It made me realise that I had utterly wasted my most productive years.
* * *
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 firstname.lastname@example.org.
Copyright CATEX Reports
January 21, 2013
Verified not to be Roger Crombie's finger
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