CATEX Reports
Issue 21 February 2013
In This Issue
Cautious embrace of the competition: there is precedent
Will the "Hot Money" weaken underwriting?
Bolt says more CAT model querying is needed
S2 update: More delays ahead and that's the "rosy" view
5 New Jersey women head to Kenya
Roger Crombie offers an alternative history of insurance
Exploding cheese shuts Norwegian tunnel


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Dear Colleague,

I am pleased to send you the February, 2013 edition of CATEX Reports.

Thanks to all of you who attended the January 30th CATEX event in London. We especially want to thank Tom Bolt and John Hamblin for their presentations. If you missed it here is a link to a 30 minute video of the presentations.

Tom Bolt made some news during his remarks as you will see and then also made more news the following week when Nephila Capital's application to back Syndicate 2357 was approved. The move started us thinking about methods of dealing with people who may have been seen as your historical competitors. Once we headed in that direction there was very fertile ground as you will see!

Roger Crombie was spotted at the January 30th event and Tom Bolt's comments got him thinking about the origins of insurance as you will read. To be sure, this is an unofficial version and one you won't read about in the history books or find on the Lloyd's website.

There is also a story about Kenya and a trip planned next month by a group of New Jersey women to visit to the Igwamati primary school in Nyahururu, Kenya. There has been much talk about "micro-insurance" and the need to expand coverage parameters in Africa so we thought the story might interest some of you.

As always if you have any questions or comments about the newsletter please let me know. Of course, if you are interested in learning more about CATEX or our products we would be pleased to respond to you as well.

Thank you very much.


Stephanie A. Fucetola

Senior Vice President/CATEX



A Method of Dealing With Competitors...


Global Security .org  

Hapsburg  Empire 

(Copyright: Global Security.Org)


You might have heard of a little enterprise that operated in Europe for nearly 400 years only to wrap up (against its will) in 1918. It was a collection of hundreds of different ethnic and racial groups and at one time boasted 9 official languages with a half dozen more regularly spoken within its borders.  Everything about it was a little odd. For a while it had two capitals, little centralized authority and when it went to war it was a miracle if its own troops could understand each other because they usually spoke different languages. All or parts of 12 countries today were included in the Hapsburg Empire which ruled from Vienna (and for a while Budapest too) from 1526-1918


Why the history lesson? Easy.  The Hapsburgs had an interesting method of dealing with many of their enemies. They absorbed them. They made them part of a greater whole, utilizing the competitor's strengths as their own, and melding their individual talents for the greater good of the empire.


There was certainly some precedent for this approach --all war all the time is hardly an ideal state no matter what Alexander the Great might have thought. Hapsburg administrators as well as those in the Ottoman Empire (1299-1923 yes, 624 years in duration) usually were selected from the cream of the crop of the empire's youth discovered by talent scouts combing the far reaches of the emperor's domains. The Romans had taken this a bit further actually, some centuries earlier, and many Emperors of Rome hailed from places far distant from the Seven Hills on the Tiber.


Smart people, and it seems long lasting empires, bet on good ideas and good people by embracing them, not fighting them.  That embrace usually comes with some conditions but it's generally a better rule to keep potential rivals closer than further away.


We think that Lloyd's and Tom Bolt may have just accomplished this same nifty trick with the announcement that Nephila Capital's backing of Lloyd's Syndicate 2537 has been approved. There is a reason that Lloyd's has been nicknamed "The Great Survivor" over its own 325 year history  and when Tom Bolt approved the Nephila Capital backing of Syndicate 2537 and went a step further and said that Lloyd's is now open to other new convergance applicants we saw why.



The Godfather: Part II  "My father taught me many things in this room. He taught me to keep your friends close and your enemies even closer".



We're not suggesting that Michael Corleone's policies are influencing decision making on the 12th floor at One Lime Street (where the Executive Offices are) but we couldn't help think of the less than amicable history between the traditional reinsurance markets and the capital markets over the past 20 years. Yes, mutual interest has been noted on ILWs and CAT bonds, but who'd have envisoned the day when the official Lloyd's view was one of welcome (albeit with caution) toward collateralized ILS insurers?


Let's go even one step further, the CEO of AmlinCharles Philipps is warning that Lloyd's needs to do a better job of attracting private pension fund money to back syndicate underwriting. Pension funds have learned the "uncorrelated risk" nature of reinsurance and insurance in comparison to traditional investments and have significantly increased investments in collateralized sidecars and ILS vehicles. Of course traditional investment returns are very low but to hear a leading Lloyd's figure like Philipps say that the London market needs to go out of its way to attract more pension fund money is nearly an "if you live long enough you'll see everything" moment.


phillips amlin 

        Charles Philipps


Phillips noted that Amlin had formed Leadenhall Capital, an ILS investment management firm four years ago in recognition of what he called "the threat" to traditional reinsurers posed by the growing relevance of capital markets and other alternative forms of capital in providing risk solutions. 


Phillips went on to note that "We have seen that threat materialize as pension funds and others have sought non-correlated assets to their traditional asset classes and, in the present economic situation, a better yield than is provided by ordinary bonds. We must recognize the long-term sustainability of London's superior position is entirely dependent on how the market is able to adapt to changing needs and changing competition".


Note that two days prior to Phillips' remarks Tom Bolt approved the Nephila Capital investment and signaled that Lloyd's would welcome similar convergence applicants.


The Hapsburgs couldn't have done it any better. What Michael Corleone would have done we cannot say.


Charman Warns on "Hot Money"



                                 John Charman  

                                             John Charman (Copyright Royal Gazette)


Not everyone is enamored of the new flood of money and capacity coming into the international (re)insurance market. John Charman, in particular, expressed strong concerns about it at an event hosted by Insurance Insider earlier this month.


Charman is the kind of person people listen to when he talks. He is the former CEO of Ace Global Underwriting and later founded Axis Capital in Bermuda Last month he warned that there was a great danger in the industry that "the seduction of hot money" would deflect and weaken underwriting standards because there is simply too much capital in the reinsurance market.


The so called "hot money" of course is the influx of capital noted above by Amlin's Phillips and to which Lloyd's has responded by approving Nephila's backing of Syndicate 2357. Charman's concerns seem to be that the potentially unlimited pool of global capital seeking better investment returns could increasingly end up backing reinsurance thus leading to an underwriting disaster.


Charman points out that it should be the case that there be an actual profit on underwriting year on year without reference to other income flows such as fee income and profit and ceding commissions --hallmarks of ILS insurers.


His point is that this "short term" money (presumably it will evaporate once interest rates rebound) is taking away the industry's ability to manage its own pricing based on underwriting profitability. The new cash means new capacity which means that the traditional cycle of hiking rates after major catastrophic events is no longer set in stone.


Which means, we believe Charman is saying, that the "hot money" will lead to weaker underwriting, increasing underwriting losses, and ultimately weakening or collapse of traditional reinsurers. Unspoken, of course, is his concern that if investment yields in the capital markets increase, the "hot money" will evaporate and there will be a gaping capacity shortage as the hot money flees the space and the remaining "traditional" underwriting sector is even more distant from knowing how to underwrite profitably.


Charman reasons that with the influx of new cash coming into the market it is inevitable that premiums would not be as high as they should be to support an underwriting profit. Even "traditional reinsurers" would find themselves undercut on pricing by new competitors eager to underwrite risks at lower prices and in the end might have to decide to forsake any possibility of making an underwriting profit and lower their own rates to be able to compete.


In a "normal market" ( a market without "hot money") , when investment returns are very low, the need to produce something like an actual profit on underwriting would be a requirement. Charman apparently thinks that the new cash influx is having precisely the opposite effect.  Charman said it was disappointing to see fewer underwriters at the top level of management in the sector noting "There is a lack of deep underwriting bench strength".



Frank Majors second from right (Copyright: Royal Gazette)


Charman's track record alone means that his words need to be taken seriously. He may well have a very good point. Nephila is tasking its co-founder Frank Majors to be the Active Underwriter at Syndicate 2537 --the theory being, we suspect, that since Frank was instrumental in attracting the capital Nephila is using to underwrite the risks, he will be equally as vigorous in ensuring that premiums are high enough to produce an underwriting profit.


Charman made another interesting comment too. This one was very interesting to us at CATEX. He said that the lack of a global clearing house to serve the industry's back-office needs was a distraction. "Our resources are best used at the front end," he said. "We're being too diverted by the cost of infrastructure we're having to replicate around the world".


Despite technological advances around the world in financial services Charman noted that the (re)insurance industry still has no global clearing house and is still looking at local solutions.


We have heard this same complaint from other industry leaders, people in fact, who we've written about in these newsletters. This is one of the reasons we have designed our Pivot Point Systems to be capable of serving as a web-based back-office system for either an individual (re)insurer or broker or dozens of each.


We hope John Charman keeps talking.





Bolt   Steve McGill 
                                                                 Tom Bolt                                       Steve McGill
  Better Use of Data Sought to Query Models
Speaking at the CATEX London reception on January 30th, Tom Bolt, Director of Performance Management at Lloyd's said that be believed Lloyd's underwriters don't use CAT models to their full potential.
Bolt said that underwriters need to use their own data to challenge the data they receive from models and not simply blindly follow the model. He said that there remains room for underwriters to do a better job by thoroughly understanding their own data and the model outputs. Bolt added, "Where am I particularly worried? I'm particularly worried about what we get in binder data. I'm not saying everyone's bad; I'm saying it's pretty uneven". 
(CATEX has developed it own Bordereau Managament & Reporting System to better allow underwriters to understand their delegated authority data).
He noted that many Lloyd's underwriters are very good at incorporating their own expertise and experience to question whether a model output is too liberal or conservative. As Lloyd's has tentatively opened the door to an infux of vast pools of new capital one of the Performance Management Directorate's tasks will no doubt be to ensure that underwriters writing risks for these new entrants not simply base pricing on the model result but use data available to them to query those results.
Bolt noted that Lloyd's has made great strides in the past years and now has "an incredibly valuable mine of data and it's in a form where we can begin to slice and dice it in a way you'd expect given what you'd expect us to have access to". (New applicants take note).
The week after Tom Bolt spoke, Steve McGill, Aon Group President, spoke at the same Insurance Insider event (kudos to The Insider on its success) as did Charman and Phillips. Aon is believed to be responsible for bringing 23% of all premiums seen in the London market. A warning from Tom Bolt that he wants Lloyd's underwriters to better interrogate model results with their own data would hardly go unnoticed by the largest intermediary placing business to those same underwriters.
McGill noted the rapid expansion of "big data" and said that Aon has invested heavily to make big data part of the firm's DNA. McGill said for the London market to "maintain its position as the insurance capital of the world, we as an industry must continue to work together to address the challenge of how we use data and analytics as a competitive advantage".
Aon is very, very savvy on data matters. You may recall an earlier story we ran about the Aon Global Risk Insight Platform (GRIP) which is a real-time electronic platform that tracks all of Aon's placements globally, from submission to quotes and binding that was launched in 2008. The database holds information from nearly a million trades worth tens of billions of dollars of premium.
Aon claims that no one insurance company worldwide has the depth and breadth of risk information and analysis that GRIP holds which is no doubt true given the sheer volume of all Aon transactions. GRIP is presumably extraordinarily valuable which is why Aon licenses access to its data output to its own clients for a fee.
To be fair some of those clients have complained that the GRIP output is actually their own data, resulting from transactions to which they were a party to, and that Aon is now selling back to them. Aon's response to this is that the GRIP data spans the entire Aon universe and would be much more valuable to an insurer than its own narrow band of transaction related data. It makes sense it would seem.
It would not be a surprise if GRIP cannot, or will not soon be comported to, provide the exact type of "query data", including claim losses, that Bolt is asking be used to interrogate models with.  Given that it's apparent that McGill already sees the issue we suspect it will be soon.


                     Solvency II Update


We hate writing about this. Solvency II has become so contaminated with intra-EU, and London-Brussels politics that  sometimes it seems that its actual implementation may never happen.


We have no doubt that its implementation would produce a snarl of issues that could only be resolved by third party accountants and consultants (we lived through Sarbanes-Oxley) but no reasonable person can dispute the merit and logic of the regulation's intent.  Read the two following quick story threads and make your own decision as to when or if it will ever be implemented.



                                                                    BaFin's Konig


The head of the German BaFin (the federal financial regulator) said S2 is likely to be implemented even later than anticipated. The EU wants the already delayed regulation to come into force by 2016 at the latest but Elke Konig believes a later date is more likely. She said "The implementation schedule must remain realistic above all else" and now believes that 2017 is more realistic than 2016.


Bad enough cold water from Berlin but then Andrew Bailey of the Prudential Business Unit --part of the UK's FSA --condemned the EU for creating "such a vast cost for an industry for the implementation of a directive which has not even yet been finally agreed, and for which I cannot give you a date".


andrew bailey 

                                                     Andrew Bailey  Copyright: Bank of England


Bailey said the cost to insurers is "indefensible and ever rising". Per Mr. Bailey the cost to implement S2 in Europe (presumably he still includes the UK in that group!) is expected to total billions of pounds.


We often wonder what Jean Monnet and Robert Schuman would think of this but what do we know? We have no fewer than 52 insurance departments in the US that regulate our industry.


New Jersey to Kenya: Group of NJ Women Taking Vision 2025 to Heart
                        ttn map                    
 New Jersey to Kenya 7,419miles
This is an unusual story. We decided to include it based on three things.  First are the significant increase in inquiries CATEX has received of late from reinsurers and brokers in Africa asking for demonstrations of our Pivot Point Reinsurance Transaction System. (We've been in business for 19 years and can spot a trend when it occurs!)  Next, we did read the Lloyd's Vision 2025 document in which Lloyd's lays out its goals for the corporation through the first quarter of the 21st century. Africa is prominently mentioned as an emerging opportunity for the London market. Finally, we actually are personally involved with a group of five American women who are traveling to the Igwamati Primary School in Nyahururu, Kenya.
Adding up all three factors we determined to include a mention of a trip that begins on March 28th for 11 days when Ann Osborne and Deanne McBeath leave New Jersey (with three other women) and head for Kenya. (Ms. McBeath is a teacher at the Village Charter School in Trenton and the wife of our editor Frank Fortunato)
                                               Students at Igwamati School (the lizards are along for the ride)
The airfare, lodging and the hundreds of pounds of supplies that the women are bringing to Igwamati, are all being funded personally by the 5 travelers and donations from family members. See this website for more information about the trip, the school and the organizers. If you're interested in helping or getting more information the website has the answers.  The travelers may post a blog of their daily goings on from Kenya so we can see what they're doing.
A special thank you goes to our reinsurance friends in Kenya who have already stepped up to provide logistical backup support in case it's needed.
Roger Crombie writing for CATEX Reports takes an off-beat view of the world of insurance
Roger Crombie
The Untold History of Insurance 

What You Did Not Hear at the CATEX London Reception on January 30th


At the Catex London market bash at the end of January, Tom Bolt began his comments by encapsulating in a few sentences the traditional history of the London market. There is a non-traditional version of the entire history of insurance. This is it.
Insurance began when an unnamed caveman stuffed a lump of dead behemoth into his loincloth for later consumption. Reinsurance was introduced quite soon after this, when the leader of a cave clan told everyone to produce the 'insurance policies' they had been carrying around in their loincloths, for the office Christmas party. The leader of the clan had the largest club, and today reinsurance remains just that, a club.


Early hunter-gatherers needed life and travel insurance, but lacked airports in which to buy the policies. Life was brutish and short. If you made it to 20, you got a telegram from God. The largest risk was being eaten by dinosaurs, but cover was limited and the terms ridiculous.


The industry then lay dormant for millennia as insurers missed endless opportunities for diversification. There were no consequential loss policies for Adam and Eve to consider before biting into the apple. The exclusion for acts of God was introduced right after the Red Sea business, when the Egyptians found they had neither flood coverage nor auto insurance on the chariots. Moses bought a rudimentary fire policy and noted in a codex that the burning bush fell under special risks.


The Philistines lacked building insurance. The premium Noah had to pay for marine and hull cover was an outrage and, worse, the company was washed away and so effectively denied his claim for the lost unicorns. Jonah's dinosaur policy carried a standard sea-monster exclusion clause.


About 3000 BC, once the Y-3K scare had been seen off, the Chinese began sending cargoes by several vessels simultaneously, the better to guarantee the arrival of at least some of them, due to tidal waves and whirlpools. Not so much a risk pool, then, as a risk of pools.


While the Chinese were taking acceptable losses on their sea trade, the Babylonians evolved marine loans, which allowed borrowers not to repay capital or interest if certain accidents befell vessels or their cargo. The loans became what we call bottomry bonds; you may make your own joke at this point.


In the ninth century BC, the Law of Rhodes proposed that traffic drive on the left and horns not be sounded after 6:30pm on Saturdays. No, wait, that's wrong. The Law of Rhodes established the idea of general average. The Romans are believed to have had written insurance contracts: Nero, plainly, had fire coverage in place.


The industry kept missing opportunities. There were no forms available when Icarus applied for flight insurance. Ingestion cover more or less died out completely when Rome Re announced the lion exclusion. The computers were down when King Alfred burned the cakes.


The concept of insurance in its modern form is credited to the merchants of the city states of northern Italy. The idea spread to England via the Low Countries, which for most of the Dark Ages hosted the RIMS conferences. In 1310 AD, the Duke of Flanders granted papers to a Chamber of Assurance at Bruges, which underwrote marine risks. It's all true; you can't make this stuff up.


Major lines in the Middle Ages included P&L (pillage and looting) and dragon cover, with niche markets in rust coverage for chain mail owners. Beheading coverage was offered only on a partial loss basis. Early insurance traders packaged these four lines as "Some Risks". OK, you can make this stuff up.


Where business is done, government is never far behind, with its hand out. In 1601, the Parliament in London passed legislation relating to the burgeoning marine market. Premiums, of course, rose.


The underwriters of the day were caffeine addicts who lingered all day in coffee houses. Excited fellows would charge in, offering details of vessels and cargos in need of insurance. The proto-brokers would cry "Double lattes all round!" and set to signing their names at the bottom of the page containing descriptions of the risks. The traditional view is that underwriters got their name from this practice, but it is more widely believed that in England's clearly delineated social status, these gentlemen were considered of lesser value than writers. That view that no longer holds.


The first fire insurance contracts were written in London in 1680. The impetus for this development was the Great Fire of London, which in turn led to the first recorded insurance company, the Hand-in-Hand fire office, established in 1696. (True: the Hand-in-Hand became part of Commercial Union in 1905.)


The Hand-in-Pocket insurance office fared less well, however. It tried two advertising slogans: "Our hand in your pocket", which inhibited the flow of new business; and "Our hand in our pocket", which finished off the claims side.


The heat these early fire policies generated was followed in London by the first accident policy - a new product developed in record time for an industry with a reputation for caution - just 160 years later, in 1840. To even things out, in the interests of fair play and all that, reinsurance was banned in Great Britain from 1746 until 1864. Banned!


Much has happened since then, of which three highlights are all the true insurance student needs to know.


            (1) In 1922, Cornelius Vander Starr founded American International, to insure chopsticks against blight;


            (2) In 1963, Fred Reiss invented the captive insurance company when he was detained by Bermuda customs for a week while they investigated his hat; and


            (3) In keeping with long tradition, Lloyd's of London still offers excess of loss on the ingestion of human beings by dinosaurs.


* * *


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

February 21, 2013





Quick "Bytes"

We had to read this twice to believe it. It seems that 27 tons of caramelised goat cheese exploded as it was being hauled by truck through the Brattli Tunnel in Tysfjord, Norway last month. It took 5 days to extinguish the fire --Nowegian police said that the high concentration of fat and sugar in the cheese made it burn "almost like petrol". The tunnel will be closed for weeks for repairs. Here are photos --someone will pay a claim for this which might be preferable to actually eating anything this combustible....


tunnel before tunnel after 

           Brattli Tunnel in normal times                                  Brattli Tunnel after cheese fire        


In January a factory operated by a French subsidiary of the US chemicals manufacturer Lubrizol 75 miles northwest of Paris developed a gas leak. The gas was called mercaptan, a supposedly harmless additive to natural gas, but complaints about the smell were registered as far away as London.....Maybe Nick Prettejohn, former Lloyd's chief executive, still has an inkling as to what his old employer is thinking. In a speech last month he said that could be modelled, sliced, diced and eliminated resulted in the crash of 2008 --with spooky reminiscence of our own (reinsurance) spiral of the late 80s". Nick would probably not disagree with Tom Bolt's call to query the models....Tom Bolt told a group of London market undewriters that "I am killing myself trying to keep you guys out of the newsparers on this one" referring to the need for underwriters to clearly document all their broker remuneration arrangements. Arrangements need to be "quantitatively and qualitatively" auditable he said.....You can be sure we saw this one in Global Reinsurance when an unamed source told the magazine that modernizing the Lloyd's Back Office System (formerly Project Darwin and now Central Services Refresh) may cost "60 million GBP, 70 million GBP, 80 million GBP, 120, 130 or 140 million GBP.....RMS estimates that US and European pensions with $10 trillion portfolios are at risk of losing $1 trillion in a once in 100 year event that causes the average retiree to live only 5 years longer such as the discovery of a wonder drug..... Peter Bickford, a friend of ours, had an article in the Insurance Advocate about the on-again off-again New York Insurance Exchange...


Finally, Cathedral's John Hamblin did a masterful job on January 30th talking about World War I and relating several poignant, personal stories about British servicemen fighting in the trenches. It's worth watching again, or seeing it for the first time, if you missed it...