I am pleased to send you the March, 2013 edition of CATEX Reports.
Once again, since we have so many new readers, a little update on our company CATEX might be in order.
CATEX has been in operation in Princeton, NJ and London for 19 years and develops software as a service for the global reinsurance and commercial insurance industry. Our products are particularly applicable to reinsurers, reinsurance brokers, delegated authority (program business) capacity providers and coverholders.
Our clients range from very large insurance companies to very small brokerages and MGA's. Because of the web-based availability of our systems the size of our client, large or small, means that we can treat each client with the same level of service and responsiveness. Our attrition rate is negligible and most clients have been with us for years.
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 simply click here.
Now, for the March issue, we have been thinking about John Charman's warnings about underwriting and dropping premium prices that were featured in last month's newsletter. When we reviewed the news cycle over the past month with his admonition in mind we began to see a bit of a pattern. Let's see what you think as we lay out what we think we see.
As usual, Roger Crombie has another column this month. For this one he describes his past experiences as a moderator at industry forums and events. Actually, having been in attendance at a few of the events he described we can verify that his comments are largely accurate!
Thank you very much.
Stephanie A. Fucetola
Senior Vice President/CATEX
Remembering What Charman Said
When you hear the word "convergence" in regards to the risk industry it typically has meant the narrowing distance between the traditional (re)insurance underwriting industry and the capital markets. We've often discussed how the new collateralized ILS sidecars are conflating the two worlds within their own operations.
We think we see another kind of convergence unfolding right now. First, we cannot forget John Charman's warning that this "new flood" of money (coming from the capital markets) into the reinsurance industry is going to inevitably result in increased competition with a corresponding drop in premiums, below what they should be from an underwriting perspective, as traditional carriers struggle to keep up with the new entities.
Next, we continue to see concern being expressed by Lloyd's in ensuring that syndicates understand exactly what it is they are underwriting in aggregate. You may remember that after the BP Macondo oil spill in 2010 Lloyd's ordered syndicates to perform aggregate casualty stress tests. Lloyd's had seen that the same managing agents provided cover to many of the parties associated with the spill including Transocean, Anadarko, MOEX and Halliburton. As a result the potential aggregate exposure to the incident was high and the casualty clash stress test was demanded.
According to Insurance Day these casualty clash reports continue to be regularly submitted and montored now almost three years since the disaster.
Then we saw in the Royal Gazette that PWC and Conning and Company both noted that Insurance Linked Securitiues (ILS) are now "key" to reinsurance but warned that the flood of new capital is leading to reduced premiums and was weakening the importance of underwriting.
Underwriting is supposed to be supplemented by modeling information --not replaced by it.. There has been a spate of news this month about; the need for better US tornado models; improved CAT models in Asia's clustered growth areas with massive risk concentrations; Marsh and JLT both observed that a funadamental rethink of CAT modelling is necessary especially in connection with supply chain risk; and RMS is preparing to launch its updated North Atlantic hurricane model.
Remembering Tom Bolt's words at the CATEX London reception in January one can't help but hope that his warning that "underwriters are not supposed to simply use the model's metrics in setting the rate but just as important need to rely on their own data and experience." will not be coming true. Certainly more and more modeling tools will soon be available but hopefully underwriters will not rely exclusively on them.
John Charman was worried that underwriting is diminishing in quality and that the flood of new ILS vehicles will further weaken its importance. If the models catch up to the demand for metrics in Asia, North American tornado and supply chain risk is it possible that the new entrants will simply blindly follow the models in setting rates? Obviously, some market insiders are already thinking that way.
John Charman's view on the primacy of underwriting seems to be shared by several key figures. First, none other than Warren Buffett said that "dim prospects" lie ahead for the insurance industry because of unprofitable underwriting and low investment returns. Buffett says that insurers need to set "a premium that will deliver a profit after both prospective loss costs and operating expenses are covered and be willing to walk away if the appropriate premium can't be obtained".
Warren Buffett goes on to observe that many insurers..."simply can't turn their back on business that is being eagerly written by their competitors". He thinks "that old line, 'the other guy is doing it, so we must as well', spells trouble in any business, but none more so than insurance". (Charman was concerned that traditional reinsurers would loosen underwriting standards just to match the premiums offered by newly minted competitors.)
Then we saw comments made by Partner Re's CFO and EVP William Babcock at a conference hosted by Bank of America. Mr. Babcock responded to a query asking if he was concerned about how traditional reinsurers would compete against the "new breed of collateralized reinsurance funds".
Babcock responded by saying that the real answer was whether reinsurers become more specialist on the underwriting and knowledge side of the business and allow someone else to specialize in providing capital for underwriting capacity.
This was an interesting response when you think about it and one we've seen echoed in other newsletter editions. Babcock is indicating that underwriting is the strength of any reinsurer and that successful underwriting could be then hooked up to any capacity model.
Neil Curry at Renaissance Re suggested this concept months ago and took it a step further by suggesting that succesful underwriting by reinsurers could make them sought after for the risk domain knowledge that the capital markets and hedge funds need to bolt on to.
Bronek Masojada John Berger (Copyright:Royal Gazette)
Finally, Hiscox's CEO Bronek Masojada, one of the most respected voices in reinsurance, said that the hedge funds industry's move into reinsurance has been a boon for Hiscox and for the insurance business. He said "the reinsurance market is evolving and we must change with it". He noted that Hiscox has already partnered with Third Point Re, run by the no less respectable industry veteran John Berger.
Now, and here is our point, if you think that either Bronek Masojada or John Berger would not, as Warren Buffet would say, "be willing to walk away if the appropriate premium can't be obtained" then we have a bridge to sell you in Brooklyn. If you think that Partner Re's underwriters wouldn't similarly be able to "walk away" then we may still have some swampland in Arizona for you to buy.
Let's go back to what John Charman said last month. Charman said 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 new cash means fast new capacity which means that the traditional cycle of hiking rates after major catastrophic events is no longer set in stone. Which means that Charman's "hot money" will lead to weaker underwriting, increasing underwriting losses, and ultimately weakening or collapse of traditional reinsurers.
It's interesting to note that Warren Buffet said exactly the same thing nearly word for word on the need for underwriters to produce a profit independent of the balance of the operation's revenue.
You can bet that Warren Buffett, Bronek Masojada and William Babcock understand the importance of an underwriting profit and being able to say "no" if they don't like the terms of a proposal. We think that for some "practitioners" these upcoming days will indeed be boon times and great fortunes will be made. However, as Buffett noted "There are a lot of ways to lose money in insurance and the industry never ceases searching for new ones".
We fear that the concerns regulators still have, as evidenced by their heightened regulatory scrutiny of underwriting aggregates, combined with the view of respected third party analysts that the appearance of the new ILS entrants will cause premiums to decrease, plus the flurry of activity by modelers to better serve currently unserved markets could all add up to present a very dangerous time ahead for (re)insurers not as disciplined as Berkshire, Hiscox, Partner Re and others. It's a time to be very careful and to keep Charman's warning in mind.
Google Coming to German Insurance Market?
This should not be a surprise to anyone, although we did not mean to swing the cannon of disturbing news from the underwriters in the preceding article to their bretheren brokers across the aisle, but Google is coming into the insurance market.
According to Insurance Day Google is planning to set up its own price comparison site for auto insurance policies in Germany perhaps as early as July 1 of this year. This is a big market as about 20% of all German car insurance policies are purchased online. Because it is a big market there is a healthy group of insurance price comparison sites already in operation such as Check24, Transparo and Verivox into which drivers enter their information and are presented with a list of quotes from insurance companies.
These sites earn money through commissions paid to them by insurers. Out in Mountain View, California, at Google HQ, where Sergey and Larry are planning their global domination (uh, what part don't they think they have yet?) we suspect that someone noticed all the money that Google was earning on click ads that Check24, Transparo and Verivox had placed on Google trying to attract car insurance prospects to come to their respective sites.
According to Insurance Day Google receives 5 to 6 Euros per click on one of the price comparison ads and in peak periods can get as much as 15 Euros a click. As most of us sort of understand, Google auctions off the top positions for the search answer page if a user enters terms like "car insurance" or "reasonable car insurance". Since one successful policy completion can average up to 100 clicks the German price comparison portals pay out millions for advertisements on Google.
Well, you don't get to be as succesful as Google is by missing chip shots. Google noticed the revenue stream and seems to be figuring why not have their cake and eat it too? They can continue to earn money from the ads placed by the other price comparison sites but meanwhile will gain commission paid by insurers when policies are sold via Google's own comparison site.
Google was not prepared to comment but did note that "in the insurance market there is a gigantic wave in the on-line direction and that new players are coming into the market too".
Yes, Another Solvency II Update...
This next article was probably predictable. First, we note, as we always do, the caveat that we hate writing about Solvency II, as much perhaps as you do reading about it, but things have taken an interesting turn.
You may remember that last month's newsletter noted that the top German insurance regulator observed that she thought S2's implementation would be delayed until 2017. Keep in mind that prudent people have seen S2 coming for years and years. There is quite a lot to it which is one of the reasons why it keeps getting delayed. There are new quantifiable and qualitative measurements for risk based capital reporting, all underscored with a faster turn around time for insurers and regulators to better be able to understand trends while they are happening. Presumably action could then be taken to lessen damage and forestall financial disasters.
If there is one thing we know it's that the people running (re)insurance companies are generally pretty prudent people. We doubt whether bungee jumping, bull fighting, or that awful American spectacle Ultimate Fighting, are pastimes engaged in by the majority of the senior management of Europe and London's insurers.
We've also found that the people charged with providing regulatory guidance to this group of prudent people are generally as prudent or even more so than the people they are charged with regulating. The last thing we could imagine a regulator would want is a group of prudent insurer managers complaining that his or her oversite was not prudent enough.
Thus several years ago when it seemed as if S2 was on track (it was initially set for EU wide implementation in 2012) Lloyd's decided to try to get ahead of the curve
and set about developing their own S2 equivalency model. Like most things Lloyd's does it was a consenus building exercise that included hundreds of meetings with practitioners at Lloyd's before a final plan was agreed upon.
Then Lloyd's, again acting in good faith, believing that the EU would eventually approve S2 in a timely manner, began to set benchmark deadlines by which time its syndicates would have to reach goals along the path to full Lloyd's S2 compliance.
There was much grumbling to be sure. Lloyd's has survived things like the Great San Francisco earthquake, the asbestos claims of the 1980s, the 9/11 terror attacks, Hurricane Andrew, etc but it was understood that if Europe was ever going to implement S2 the London market could not afford anything less than to be fully compliant with it.
A lot of money has been spent to bring Lloyd's toward compliance with a standard that now the continental Europeans can't seem to get around to pulling the trigger on. Can you guess what's next?
John Hastings-Bass, chairman of Lloyd's insurer Novae,
warned last month that early adoption of the S2 regime by the Lloyd's community "looks increasingly fraught with cost dangers and that the S2 that is eventually approved by Brussels (if it ever is --our comment not Mr. Hastings-Bass) will be so different from what was envisioned when it was first proposed that Lloyd's players will have to tear up all that we have done and start again
Ouch. You can see his point though as he went on to note that the long delayed S2 had "imposed a significant financial and regulatory burden on the market". Presumably, he has a right to be upset as we would think most if not all of that burden came right from Novae's bottom line.
Hastings-Bass concluded by saying "Let us hope that our British desire to embrace all that is European (and, in this case, all that may be European) is not another example of zeal outweighing benefit". We mean no disrespect but we were instantly reminded of the possibly apocryphal 1930 London Daily Mirror
headline when heavy fog prohibited ship travel between England and Europe. The headline supposedly read "Heavy Fog in Channel: Continent Cut Off".
One sort of has to admire him for speaking his mind. He is angry but, hopefully his anger is aimed at Brussels, and not the 12th floor at Lloyd's. Imagine what his reaction would have been if S2 had come into effect as originally scheduled and Lloyd's hadn't prepared and Novae was not in compliance with the standards European cedents demanded of their reinsurers?
As we said...prudence. Then we saw this from Aspen group CEO Chris O'Kane
who, referring to S2 said that is is "hugely embarassing
" for a CEO to keep having to tell his team to be S2 compliant when the regulators changed the implementation date "again, again and again". Mr. O'Kane went on to note that "In the UK the cost of compliance of S2 to date has been around 3 bn GBP ($4.5 billion US) and we are not yet compliant. That really is quite a lot of money
Indeed $4.5 billion is quite a lot of money --in anyone's book. Later on in his remarks, which were made at a conference in Doha, Mr. O'Kane said something quite interesting though. He said that S2 did have some value and that "I think enshrining a capital model at the heart of decision-making and ensuring corporate boards understand the risk weight implications is actually hugely important".
His point is that the S2 route to achieving the "hugely important" goal of enshrining a capital model in connection with risk weight decisions is "circuitous, expensive, unhelpful and it is by no means clear that it is going to move the position to the desired goal, which is a better rgulated, better capitalized industry."
Before we again mention the conundrums of levels of prudence faced by regulators and insurer managers it might be useful to look at the particular British perspective of regulations coming from the EU from a little bit of a higher altitiude.
You might not know this (we didn't) but the millions of pages of regulatory directives that have been issued by the EU in Brussels over the years have permeated their way into every phase of British life. If you wanted to, for example, build an addition to your home in England you need to comply with construction and building codes that are EU-wide that have been formulated in Brussels. British fisherman need to throw any part of their catch back into the seas (dead or alive) if they exceed their EU mandated quota. Ask nearly anyone from England about these regs and you will hear their own personal favorites. The EU standards as they apply to most aspects of commercial life have to be met by British business as a result of the path Britain chose in 1973 when it joined the then European Common Market.
This is the perspective the British are coming from. Keep in mind that it would be hard to argue that Lloyd's didn't invent reinsurance 350 years ago and that as O'Kane said the insurance industry has served Europe extremely well for the past 50 years. "We have not had major significant failures across the EU", he said and "I feel S2 is a solution in search of a problem that probably didn't exist".
Keep in mind, too, that anti-EU popular opinion in the UK is so high that Prime Minister David Cameron
has promised a nation-wide vote on whether Britain will remain in the EU.
What's a regulator to do? What is management to do? Hopefully, when all the emotion and grumbling is stripped away everyone will realize that in this increasingly interconnected world there was little choice but to be as prepared as possible.
Roger Crombie writing for CATEX Reports takes an off-beat view of the world of insurance
Anecdotes of Roger Unleashed on the Dais
What You Might Have Missed at Insurance Conferences
For a while, I was in vogue as a speaker at insurance conferences. For the highly opinionated, it's the best kind of work: you get paid to go somewhere and sound off for a bit. Once that's over, you're done. No writing it up and polishing it all night. Stick a vacation on the end of the trip and you're living large.
One firm flew me to Las Vegas, that quintessential hellhole. I was to run a humorous panel with a couple of stooges they'd dug up for me. Both were senior insurance lawyers. Both were advised that my instructions were to put on a personality show, and that I might treat them poorly. Very early on, one of them made a good point, and I said: "You, Sir, are not as stupid as you look."
He had been given fair warning, but the look on his face was that of a dog who knows you're going to shoot it. To be fair, he gamely recovered and later took me out for a sensational meal designed by a famous chef. After dinner, he took me aside and asked if I could get us more bookings. No fool, that man.
The undoubted highlight of the Vegas gig was armed hotel gunmen escorting me to my room at one point, despite my having done absolutely nothing wrong. They take no prisoners in Vegas. Guilty; innocent: they don't care. They shoot you either way. And this was at the Wynn Hotel, a supposedly top-notch joint.
The Vegas gig came about because of a performance I had put on in Bermuda a few months earlier. I had chaired a panel with the straightest straight man in the world, Brad Kading, the president of the Association of Bermuda Insurers and Reinsurers, a trade group representing half a trillion dollars of insurance assets.
The Fairmont Southampton Princess was the venue for all the best and biggest conferences in Bermuda. For this gig, there were 800 people in a semi-circular room, and two chairs on the stage. I opened by remarking how proud I was to be sitting where so many reinsurance rear ends had sat before. It all went downhill from there.
Seized by the spotlight, I demolished poor old Brad, who is a thoroughly decent fellow who little deserved his roasting. In the Q&A at the end, a woman in the audience asked what I thought of Barack Obama, who had, on the same day, won the Nobel Prize and sent a rocket to the moon, which exploded.
"Ah, yes," I said, "the great peacebringer, who, on the day he is recognised for his peace-loving nature, bombs the moon." It wasn't that funny, but a wave of laughter took off and nearly knocked me off the chair. It was one of the three or four supreme moments of my life.
Two gigs in this field came on successive weeks. First, I hosted a wealth management and insurance conference with Steve Forbes as the main speaker. I was asked the night before the event if I would compere the show, since whoever had the job suddenly couldn't make it. All went well. I did a 10-minute summary of Bermuda and everything she meant, and then took on a panel of eight leading business people for an hour's chinwag, without being unforgivably rude to any of them.
The next week, it all came together when I acted as MC for the World Insurance Forum at the fabulous Tucker's Point Hotel & Spa resort. Without warning, they gave me a studio with TV cameras and the A-list of global insurance to interview for 15 minutes apiece. Twenty-five of the so-and-sos they sent me, many clearly unwilling to have anything to do with the whole idea, but under some mysterious obligation whereby they had to face me.
I upset Lord Levene early on. He spoke of his impending retirement, and I joshed by saying: "Surely not, my Lord. You don't look a day over 40." His Lordship missed the humour and took umbrage. From Germany they came, from London and from New York, to chat to a man who had no credentials whatsoever to be a TV star. The lack of training seems to be the hallmark of my career, as you may have spotted. A feller's got to do what he can.
My proudest moment, though, came in Brighton, a resort on England's south coast, where I featured in a panel on global insurance. "What do you think of our industry?" I was asked. "It's a fantastic enterprise," I said, "especially when you consider that it's staffed by idiots." The room and all 400 insurance staff in it went very quiet. Sensing that I'd overshot the mark, I added "Present company excepted, of course." A giant whoop of laughter went up and I was all but carried out on people's shoulders. It was my final public speaking engagement.
Footnote: Sadly, my movie career has stalled, and I am 'resting' between roles, even though I've never actually had a role. My producer has seemingly failed to acquire the necessary finance and, perhaps as a consequence, suffered some sort of mental decline that culminated in a visit from the Police to my private apartment late last Friday evening. The theatrical profession appears to be somewhat less solidly constructed than the world of insurance.
* * *
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
February 21, 2013
Maybe you have never heard of Stefani Joanne Angelina Germanotta
, perhaps just like you've never heard of Paul David Hewson? Well, Stefani is also known as Lady Gaga and Paul is also known as Bono. So much for trivia. We spotted Lady Gaga nosing into our (re)insurance arena this month. It seems there is a battle brewing between her management company and three Lloyd's syndicates who insured her 2012 "Born This Way" concert tour. Lady Gaga cancelled a concert in Jakarta, Indonesia because religious hardliners claimed she was "vulgar" and "the envoy of the devil's child".
Gaga claims that Jakarta police were unable to guarantee her safety at the concert and she cancelled. The syndicates are claiming that the policy covered cancellations only as a direct result of terrorism or a threat of it. Speculation abounds though that whatever spat is going on over the Jakarta cancellation is a prelude to what is sure to be a claim fight now that Gaga cancelled the remainder of her 2013 North American tour due to hip surgery. The Jakarta related suit is about only $150,000. It's estimated the the lost profits for the North American cancellations will be about $25 million.....Aon is witholding reinsurance claim payments totaling $600,000 to two Iranian insurance companies. The two Iranian companies provided primary cover for an Iranian airline, Mafan Air, that is on the US Iranian sanction list.
The two insurers put in a claim for a loss and Aon has collected the payment from the reinsurers but the broker is witholding the money from the Iranian companies because of the sanctions.....We saw Johnny Manziel pop up in our space too.
He won the Heisman Trophy, as the best collegiate football player in the US, and he apparently decided to buy an insurance policy protecting his future professional football earnings up to $5 million in case he is permanently injured while continuing his college career. Interestingly, apparently only about half of the 4,000 professional football players in the UK and Wales (in the US we would call it soccer) elect to buy such coverage and are content with a standard policy that pays out only a maximum of $37,500 should they be permanently disabled.....It seems that annuity insurers and disability insurers have something in common with the US Veteran Administration. According to a recent study the US is paying about $12 billion annually to compensate soldiers who have left military service or family members of those who have dies in coinnection with the wars in Iraq, Afganistan and the first Persian Gulf war. Similar type compensation costs for the Vietnam War total about $22 billion annually; World War II costs $5 billion annually; World War I costs $20 million annually; the 1898 Spanish-American War costs $50,000 annually and the Civil War of 1861-1865 costs $1,752 annually. Yet another consideration for any government planning on combat to solve a problem....And news that the US FBI has apparently made significant progress on the biggest art heist in history --the theft of about $500 million worth of 13 pieces of art from the Isabella Stewart Gardner Museum in Boston--led us to some examination.
Stolen Vermeer: "The Concert" Stolen Rembrandt: "Storm in Lake of Galilee"
The 1990 heist included works by Rembrandt, Vermeer and Degas. When CATEX-TV broadcast the news that the FBI at least now knew the identity of the thieves but not the location of the art we speculated that insurers somewhere (presumably at Lloyd's) would have reason for optimism. Sadly though we learned that the Isabella Stewart Gardner Museum did not have theft insurance at the time of the robbery. We assume that they do now.....