CATEX Reports
Issue 28 October 2013
In This Issue
Is the so called "dumb capital" getting smarter or does the future of reinsurance depend on it?
Will casualty reinsurance be next?
CATEX interviewed for Baden-Baden
More Roger Crombie and his distaste for EU rules
Sidecar redux: Nelson and Savage comments on Aon deal
S2, UK Regulator, Killer Hornets and Acts of God in Nigerian aviation


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Dear Colleague,



Welcome to the October edition of CATEX Reports. US based CATEX staff will be joining with our London CATEX staff the week of November 18th holding numerous meetings in London with clients and other interested parties.


Since CATEX was named Best Technology Provider in the Intelligent Insurer Global Awards competition last month we have been busy fielding inquiries about our products. The London meetings next month will be a good way to see prospects face-to-face.


Please email me if you are interested in seeing if we can arrange a time to see you in London the week of November 18th. We do have some open slots available.


Last month in CATEX Reports we observed that we thought the industry had begun to believe that ILS were here to stay. This month's we seem to see evidence that the inevitability of ILS mechanisms (maybe albeit "grudgingly") is well on the way to becoming the predominant view.


We also have an interesting story from one of the top casualty underwriters in the world who talks about casualty underwriting being a "social science." We tend to agree with that categorization and wonder if this is what reinsurance "traditionalists" are pointing to when they warn about "plug and play" underwriters who rely exclusively on models.


We have our usual Roger Crombie column too. Roger has noted the vacation time disparity between the US and the rest of the world. Being based in the US we may disagree with his conclusion --more vacation time would not be a bad thing.


We have a story too about a short interview Intelligent Insurer is publishing for their Baden-Baden edition with CATEX CEO Frank Fortunato. Fortunato reveals how and why CATEX's product suite evolved from the needs of the global Risk Exchange to the full service provider it is today.


We hope you enjoy this month's newsletter and as always if we may ever be of assistance to you please do not hesitate to contact us. We look forward to seeing many of you in London next month too.


Thank you very much.




Stephanie Fucetola

Senior Vice President/CATEX






"Dumb Capital" increases its IQ? 





After most conflicts the defeated side usually indicate that they believe that had they been permitted to fight a proper defensive campaign they could have extended or actually won the war


For example, Alexander and Darius had a pretty historic encounter in a place called Issus in what is now southern Turkey about 2,300 years ago. The defeated Persians military leaders likely would have said that had they had the flexibility to pull back their forces, and organize them into proper defensive positions, they could have held out indefinitely.


As the Tea Party has just discovered in Washington, D.C., it is rarely a good idea to hold on to your position at an "all or nothing" cost. Sooner or later, if the issue is important enough, you end up antagonizing everybody and you have to hold on against the collective might of everyone else but you.


That's maybe fine in a philosophical debate but when lives, or in our case something as pedestrian as money, is involved, compromise is usually a good strategy.


We don't want to take this analogy too far but it came to mind when we looked at the state of the reinsurance market this month.




There is little doubt that so called "mainstream," traditional reinsurers are starting to embrace the ILS market. Lloyd's has taken in the biggest of them all, Nephila Capital, which is now funding Syndicate 2357. Former Ace CEO Brian Duppereault is said to be working with Two Sigma, a hedge fund said to be in talks to buy SAC Capital's stake in SAC Re. Swiss Re continues to buy CAT bond protection and recently completed a $400 million dollar CAT bond cover. Finally, FM Global, and Liberty Mutual, two big US-based buyers of reinsurance are planning to cut reinsurance spending by nearly $500 million.



We doubt that management in Johnston, RI and Boston is planning to go without coverage this year but are looking at the ILS market as an option.


Meanwhile look at what's happening in the inwards area. Everyone is following up on John Nelson's observation that there does remain an exponential potential of growth in developing markets. When Lloyd's released its Vision 2025 we admit that we thought the extensive discussion about the need to serve emerging markets was premature in light of available capacity but that problem has been solved and then some.


Denis Kessler, who led the rescue effort to bring SCOR back to the top tier, noted this week that the emerging markets are where reinsurance has to go if it is going to take a meaningful role in helping to deploy the avalanche of cash that just seems to keep coming. He is seeking long term commitments to places like China and Brazil to develop relationships leading to years of future business.



Tom Bolt recently invoked the name of Cuthbert Heath, the legendary ("Pay all claims") Lloyd's underwriter of the late 19th century, suggesting that underwriters and brokers need to learn from their clients what new products and coverages can be developed and then sold to them.


Meanwhile, Nephila's Frank Majors has begun to talk about reinsurers acting as "transformers" themselves to provide the underwriting expertise needed to not only accurately price risks and process claims but to bolster their stock prices by being able to escape the claim reserve hangover by laying the risk off to collateralized ILS structures. We seem to note this in every newsletter but Neil Currie suggested this a long time ago.


Majors also noted that he doesn't see the world as a battle between traditional and alternative capital. He believes that the only issue is access to capital and that large reinsurers can access that capital too. Frank said "It's not about business models, it's about how you finance your activities."


                  Esser                                                   Charman


Toby Esser, CEO of Cooper Gay Swett & Crawford says that the appearance of so-called "intelligent capital" means that the traditional insurance pricing cycle has come to an end. Toby of course is referring to the oft-quoted categorization of new ILS money, by John Charman, as "dumb capital" as creating the surfeit of capacity that, in his view, will even out the peaks and valleys of pricing. (Somewhere that capital got pretty smart pretty fast).


What's happening? Are the "traditionalists" settling in for a long, defensive battle, the kind Darius' generals wish they could have fought at Issus? Or are they serious about embracing the ILS mechanisms and gaining access to the new money? Remember too that every other story one reads about the dropping level of property CAT premiums. And this is a market that the likes of SCOR, Lloyd's and Nephila are anxious to expand in?


Some traditionalists can point to the limitation of ILS activity thus far to only property CAT as "proof" that capital market investors would never sit for the long-tail (sometimes very long-tail) claim uncertainty presented by casualty business. ILS investors, say the traditionalists, want to cash out their investment on a predictable timetable and, if they sign up to support a year of property CAT coverage, they want to be able to cash out on the 366th day.


More important say the traditionalists, as appalling as the practice of so called "plug and play" underwriting may be, it at least is semi-defensible when setting premium rates based only on CAT model results. Casualty, argue traditionalists, is a completely different matter.


Thus far few capital market investors show an inclination to back casualty coverage. Is it a waiting game? Do the traditionalists think that once investment returns, and interest rates rise, the capital markets will be satisfied with the inroads they have made into the property CAT market and forget about any interest in casualty?


Or, from the perspective of the traditionalists, is it "worse" than they even know? Have pension funds, hedge funds and investors decided that even when investment returns pick up, the risk of the uncorrelated nature of a potential claim is worth the balancing effect it offers to a portfolio, that they are would be interested in casualty?


Think of how this potential interest could only be strengthened if investors had additional investment instruments supporting casualty risk that they knew would be accurately priced by a professional reinsurer.


Remember that while many brokers predict that property reinsurance rates will continue to fall there is a belief that rates are set to increase on a number of casualty lines including workers comp, healthcare professionals, construction, political risk and terrorism. If, as Toby Esser observed, this capital has indeed become "intelligent capital" then this trend will not go unnoticed.



Frank Majors does not think alternative capital investors are going anywhere -even when investment returns do increase. His point is that the "uncorrelated" nature of the probability of a reinsurance claim serves as a natural hedge to any portfolio manager who has other exposure in traditional investments.


Of course, Majors is correct, which is why even solidly conservative state employee pension funds are earmarking some money into this "uncorrelated" investment. It makes sense and there is a tremendous amount of money still out there.


If we at CATEX know that, then you can be sure that Frank Majors knows it, as does John Nelson, Denis Kessler, Tom Bolt and Toby Esser -as well as many others in the industry. The question is where else this money can land and we think casualty may be the next step.


           Is Casualty Next?





When we read this article about Jayne Plunkett, who heads Swiss Re's international casualty reinsurance operations, we were intrigued. Ms. Plunkett observed that when you're dealing with casualty, rather than nature, it means that you're dealing with people and that it's really a "social science," rather than a "natural science."


Maybe it's because the modelers have done such a good job with their products, and there is such a proliferation of quantitatively trained experts in the industry, but we found Ms. Plunkett's remarks startling. "Casualty", that mysterious, smoky, cave from which claims come, unbidden, generations into the future threatening the solvency of hitherto blissfully unaware insurers, is a "social science?"


According to Plunkett, Swiss Re's global casualty business requires it to "analyze and work with varying (legal) systems when it comes to contracts and claims payments. It gives us a different dynamic into the cultures of those countries, and how maybe claims are settled differently, and how people think about liability cover in those different markets."


Plunkett observed that casualty models are quite different than property CAT models mainly due to the "long tail" nature of casualty coverage. "I always say that casualty is 'social science' and not a natural science," she said. "What I mean by that is we have to understand the social fabric of each of those countries in order to understand the line of business."




Interesting words indeed from one of the top ranked casualty reinsurance experts in the world. How exactly does Ms. Plunkett's observation fit into the model of a "plug and play" underwriter? How does an ILS "quant" expert, fiddling with return risks and projected losses, deal with an understanding of the "social fabric" of each country in which a casualty line of business could be supported by an ILS?


Maybe this is why alternative capital structures has shied away from casualty risk. It's too hard to understand and too long to fully mature due to the nature of the long term claims development period.


But if Frank Majors is right, and investors are going to stick with uncorrelated risk no matter what happens, and if Denis Kessler, John Nelson and Tom Bolt are right, and if the industry has to develop new products in new regions for new clients, can there be any doubt that at some point casualty is going to become attractive to capital investors?


We think we know the answer. We think Lloyd's and Frank Majors have started it -even though we know that Nephila is largely, if not exclusively, property focused. But what they have done is shown how a licensed, Lloyd's syndicate can serve as a "transformer" to access vast pools of money. That's the first step. The next step is to have such a transforming reinsurer couple casualty risk with an ILS.


Given that casualty rates are going up, and ILS investors are supposedly staying in the market, we think that it will come soon. Such a move would be significant as it could lead to the same price ravaging of the traditional markets as it did in the property sector. Remember, the ILS investors can go lower in their return expectations because they are also seeking the uncorrelated safety of the insurance risk contrasted to their overall portfolios. A reinsurer or insurer does not have that luxury and, as we have seen, can be undercut price wise.


What does Ms. Plunkett think about whether alternative capital is coming to casualty? She said that there had been "some discussions" but "there is certainly a different element to the longer tail liability business. It's very complicated; it's complex, and you need to know how to underwrite those risks, and a very long tail."  Companies have to accept the fact that claims may "stay around many, many decades and you have to be willing to pay that claim 30, 40, 50 years in the future."


Ouch. Try fitting that one into an ILS prospectus! But again, if the premium is high enough and the "uncorrelated" risk need is strong enough we have no doubt that we will soon see it. The key is which reinsurers are going to get out in front and run with this by serving as underwriters, transformers and partial pool investors too. We think we can name a few....but won't.




CATEX Interviewed for Baden-Baden


The Monday, October 19th edition  (page 22) of the Baden-Baden Intelligent Insurer daily newspaper interviewed CATEX CEO Frank Fortunato. In case you missed it we're reprinting the short interview below



CATEX began as a risk exchange. Twenty years later, it was named

Best Technology Provider 2013 at the Intelligent Insurer Awards in Monte Carlo. Has your focus changed?


In hindsight, setting up an Internet-based risk exchange, to buy and sell reinsurance, in an era when business cards didn't even have email addresses on them, was pretty altruistic. However our experience with the exchange forced us to start working on capturing the whole of a commercial insurance or reinsurance transaction on one system. We've succeeded, but as it turns out it's not the original risk exchange that's using that system.


Who is using that system?


The system is the Pivot Point Transaction System. Once we did deploy it within the framework of the 'exchange', companies began to come to us saying they liked the software and wanted to license it for their own internal system use. We now have brokers, reinsurers, MGAs and binder partners using Pivot Point. The risk exchange is still operational but our focus is on client systems.



If Pivot Point encompasses the entire transaction does that mean your system replaces the customer relationship management, placement, contracts, accounting, claims, ledger and MI systems at a client?


That's what it could mean, but we've learned that sometimes clients want only a contract, claim, accounting, or binder system. If that's what a client needs that's what we provide. There is no need to license the whole suite.



What new products does CATEX have?


Our Data Vera tool is revolutionary. We use it to upload literally millions of unstructured data location files from Excel to our structured database. We can automatically pick out errors and propose corrections for the user. The accuracy, speed and cost savings from Data Vera make the rest of our product suite even more powerful because we intake more underwriting data. We see no reason why we should not capture all the data involved in a transaction, even down to the individual risk level. Data storage costs are cheap. It's better to have all the data in one place where it's correctly organized with a contract or claim.


We distributed this brochure describing CATEX and its current products. Our systems are applicable for reinsurers, reinsurance brokers, MGA's delegated authority participants and anyone needing to accurately and quickly convert unstructured spreadsheet data to structured data management or export to modelers, legacy systems, etc.






Roger Crombie writing for CATEX Reports takes an off-beat view of the world of insurance
Roger Crombie





My working life was spent in Europe and North America, and Bermuda, which lies in between. As a result, I was exposed to the guiding philosophies of both the Europeans and the Americans. One of these is infinitely superior to the other. It leads to improved conditions for working people, better paychecks and the forward motion of society in general.


It is, of course, the American system. In the States, work means just that. Work is something you do all day every day. Two weeks' vacation is considered plenty, and firing someone because they can't do the job often leads to better futures for both the company and the employee.


 My Mother, who worked hard, could never understand why she was given seven weeks' vacation every year, whether she wanted it or not. Nor could she see why she needed two weeks' sick leave, which she could carry forward as a sort of pension, since she preferred working to lying around.


The differences between the cultures - the one go-ahead, the other go-nowhere - was very neatly encapsulated in a recent comment by a spokeswoman for the Office of Economy and Labour, which presides over the Labour Inspectorate of Switzerland. The name and very existence of that body wasn't what hit me over the head, although typing it certainly does.


The comment, from a spokeswoman, was: "The top employees do a lot of extra hours. It is a general problem in banks and insurers."


Those whose brains are wired correctly will recognise that hard work isn't the problem. It's the solution. It's also why Europe will never amount to more than a can of beans, while the US perpetually extends its operating advantage.


Another issue that the Europeans have set their sights on is that of unpaid interns. Here, the US is starting to join in somewhat, but no one's perfect.


The argument is that not paying interns is akin, in the eyes of the European regulators, to slavery. These boneheads look merely at the present, without regard to the future. Unpaid internships are accompanied by the sound of doors opening. Experience as an intern makes being hired later much easier. How hard is this for people to understand?


Further, and it's astounding that I'd have to mention this, no one has to be an intern. It's a voluntary arrangement, a lot like sex. Say I offer to have sex with a woman. She may say no (and she usually does). I'm not going to pay her for it, but that may not be the reason so many decline. Nonetheless, decline they may and then they're on their merry way. Similarly, if someone offers you a job with no pay, you may decline it. Sheesh.


I'm a chartered accountant. To become one, I served four years of articles, a form of indenture, whereby I agreed to work only for my employer and to do my very best for him. I was among the very first poorly paid articled clerks, all my predecessors having paid their bosses to be allowed to work. I'll repeat that: the employees paid the boss. They were delighted to do so, what's more.


Why? Because if you served your time, worked absurdly hard and long, passed your exams and behaved with suitable decorum, you could one day become a chartered accountant, which was in those days a noble thing to be. A lifetime of decent earnings was assured, providing you remained ethical and hard-working. I won't argue that paying the clerks is the main cause of the collapse of ethics in my profession and others, but I would suggest that it has been contributory.


And if you put forward the notion that poor people couldn't afford to become chartered accountants, I'd say: so what? Poor people can't do anything unless they use the one resource in which they are no poorer than anyone else: the ability to work hard. By denying people the right to do that, the EU and its zombie staff are not ensuring the equality at whose temple they worship; they are ensuring its exact opposite: inequality, the continuation of poverty, and unfairness.


Good going, Eurocrats.

* * *


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

October 21, 2013




More on Aon-Berkshire Sidecar
berkshire  aon

We saw that Willis's answer to the Aon-Berkshire has launched. Willis has just announced their venture, Willis 360 Global.


We couldn't help notice the markets Willis has lined up for the sidecar. Both Hiscox and the People's Insurance Company of China (PICC) will accept Willis placed business on only particular portfolios.


There is a third market though that will insure across the entire Willis placed piece and it's none other than Berkshire Hathaway.


Of course Berkshire is already the market for the now famous Aon-Berkshire sidecar that caused such consternation several months ago. Since Ajit Jain is one of the most successful executives in the business we have to assume that he is pleased with the way things have been working with the Aon facility.


We also noted these two stories coming out of Lloyd's. They are maybe both sides of the same coin since rarely do messages come from the 12th floor at 1 Lime Street that are unintentionally in conflict.


Luke Savage, Lloyd's Finance and Operations Director was quoted in Global Reinsurance that the Aon-Berkshire arrangement was a "back-handed compliment" to the underwriting discipline at Lloyd's. (Mr. Savage is correct we think and we, as did many others, noted this too.).



He went on to say that, "The fact that the likes of Warren Buffett is willing to put up money blindly to follow what Lloyd's is doing is actually a back-handed compliment. It demonstrates that Berkshire Hathaway has a great deal of confidence in how disciplined this place is as a market."


Mr. Savage noted though that "If these facilities were to proliferate across multiple brokers and in bigger size there will come a point where it will become a concern."





The next day Lloyd's Chairman John Nelson sort of threw some cold water on the Aon-Berkshire deal and said that additional business coming into Lloyd's as a result of the deal is "minute."


Nelson was asked by the Financial Times if the amount of Aon business being placed into Lloyd's because of the sidecar was significant.

Nelson responded by saying "In the scheme of things, because of the amounts involved, the short answer is no."


If you are a regular reader of CATEX Reports you know that we are big fans of Lloyd's. In fact, we can think of no other institution that can manage to fire a warning shot and a reassurance stroke from two senior people within 24 hours and do it so deftly. It was left to Richard Ward to drive that point home.

Quick "Bytes"
Boy, do we hate writing about Solvency II. It's like a soap opera but here is the latest word. The EU has announced  "final delay" of its application date to January, 2016 meaning the entire regulatory scheme, that many companies paid many millions of Euros and pounds to comply with, is delayed again for two more years.....
Maybe this was just an eager headline writer but when we saw "Britain won't intervene in Catastrophe Bond market for now" we took note. The Prudential Regulation Authority did say that they would consider intervention if the new capital was bumping up leverage in the reinsurance sector overall, forcing reinsurers to hold more capital, presumably to ward off disaster if reinsurers "race to the bottom" to take on new risk that can't really afford....Another bit of data in the push to route ILS funds into "transformer" reinsurers comes from AIG's Samir Shah
(AIG's chief buyer of reinsurance) who lamented the inefficiencies of the ILS market. He criticized the numerous advisers needed for a CAT bond deal listing structurers, banks, CAT modelers, lawyers, claims specialists, auditors and the in-house attorneys at each....The hailstorms that struck Germany in July are expected to cost the industry some $2.7 billion Euros. A German insurance trade group said "the unusually large sized of the hail stones and the movement of the storms through populated areas" were the main factors....Swarms of aggressive hornets have killed 42 people in China over the past three months. The attacks, in Shaanxi province, are from a particularly venomous species known as the Asian giant hornet or vespa mandarinia. (We hope this is not one of those "new" risks the industry is being encouraged to look for.)
Finally, the Nigerian aviation minister caused a stir when she said air crashes in the country were inevitable "acts of God" and although "we do everything we can to ensure they do not happen we do not speculate on the cause of accidents" because they are acts of God. Poor choice of words perhaps as critics immediately responded saying "If God is in charge of safety in the aviation sector, we are then duplicating roles by paying a salary to the aviation safety minister."