Data Vera ,Emerging Markets & Donald Rumsfeld
There seem to be several themes emerging from the articles we've perused over the last month. Let's see if we can break those themes out a bit so we can discuss them.
First, and everyone is well aware of this, but the Big Three brokers have confirmed that CAT reinsurance rates dipped as much as 20% for some lines at the January renewals.
Second, claims costs for insured risks from natural and manmade catastrophes continue to remain at overall low levels. There are exceptions of course, such as Canadian claims from natural catastrophes which reached an all-time high in 2013 but US and European insured claims came in much lower than 2012.
Third, Swiss Re, has noted that the total amount of uninsured losses from natural catastrophes has jumped significantly --even though the insured losses from the same events has dropped. Part of that dynamic is well understood by CAT modelers who make a living plotting the fine lines along projected storm paths and concentrations of insured risk.
Fourth, Swiss Re noted as well that the increased sum of uninsured losses, by definition, meant that population and urban development patterns had shifted and that new opportunities now exist for new products and additional coverage.
Fifth, as could be expected (if overall insured claim totals are down) most of the uninsured losses occurred in the emerging markets. Emerging markets of course continue to be the focus of just about everyone as the Swiss Re numbers are just another indication of what everyone has been talking about for years --there is a lot of prospective new business "out there".
Sixth, Lloyd's has officially admitted that the so called new capital is welcome to come into its Lime Street market so long as it adheres to its rules, it seems a safe bet that finally after this long talked about financial convergence there will be a capitalization convergence to go after the trillion and a half dollars of new business that could be written if the products are developed and the purchasers identified.
Seventh, we have people like Ulrich Wallin at Hannover Re stating that there is no way his underwriters are going to be tempted to write business below its price simply to take in premium. He intends to "sit out" rather than get on a risk for a questionable price. Evan Greenberg at Ace and John Charman at Endurance and others have said the same in the past few months too.
There seems to be a lot of combustible material around just waiting for a match to be lit. There are enormous sums of money coming into the market looking for risks to underwrite. We have the 326 year old institution of Lloyd's finally stating the obvious --that this new money is welcome to come into the market so long as it plays by its rules (remember that this means a coherent and believable business plan to market capacity and then underwrite it at a price that Lloyd's will approve and monitor.)
We have ever growing evidence of increasingly large uninsured losses in emerging markets which to any entrepreneur this side of C.E. Heath should indicate a big opportunity for new products and coverage sales. And we have underwriters signaling as clearly as possible that they don't intend to budge and start writing the familiar "known" risks at prices below what they've modeled them out to be.
We're reminded of that amazing Donald Rumsfeld press conference during the second Iraq war when he started talking about "known unknowns" and "unknown unknowns".
In this case the "known unknowns" can be loosely classified as US CAT risk, and with the exception of Germany and Austria perhaps, European CAT risk. These risks have been relatively claim free of late and are modeled and understood down to the decimal point. The path of a storm represents the "unknown".
AIR has a recent study indicating a possible $385 billion US loss from a pinball track hurricane that hits Miami and North Carolina then New Jersey and New York. The same study tracks the same storm a few degrees off the worst case path and produces an "only" $55 billion loss. Despite the variations in degree everyone understands this "known unknown" and given the fact that US CAT rates are down about 20% most people must be comfortable with this.
But as Rumsfeld said of "unknown unknowns", "there are things we know we don't know", and indeed these unknown unknowns are largely in the emerging markets. These, by the way, are the same emerging markets that are going to take the industry to $2 trillion annually by 2025.
Confused yet? You should see the TV clip of the faces of the reporters at the Pentagon press conference when Rumsfeld was going through this. His point though is germane to our situation.
If the arrows are all pointing to the emerging markets as the future of reinsurance, and the emerging markets currently have the highest concentration of uninsured losses, then that means those areas and possible LOB's could be categorized as "things we don't know we don't know". In a best case scenario even the most optimistic would only admit that those areas present "things we know we don't know" or known unknowns.
So how will those risks, locations, risk characteristics, loss history ever become less inchoate? How can we change them from an "unknown unknown" to a "known unknown"? You can guess.
Eventually, probably at a local market level, someone will start compiling this data on an Excel spreadsheet --on a lot of Excels actually. That data will then be passed to a retail broker who will begin to pass it up the chain --to a primary insurer, to a reinsurance broker to a reinsurer(s) and ultimately it will be sent for modeling.
Think of it. A trillion-plus dollars of new business is sitting out there waiting for the industry and, by and large, the first time it will arrive at our doors it will be in Excel attachments. Yikes!
If spreadsheet difficulties currently lead to problems in making pricing judgments on risks from the developed world, on risks we are familiar with, how difficult will it be to get accurate information for pricing from those spreadsheets coming from emerging markets?
One word answer? Very.
The CATEX Data Vera product can help. It's a way of accurately and quickly collecting data from emerging markets and at least transforming the answer from an unknown unknown to a known unknown. Data Vera will tell you what you're missing and, based on your business rules, what data is wrong.
Data Vera has been successful in clarifying and speeding the utilization of unstructured data from developed markets sent by Excel. Imagine what it will do for the same coming from emerging markets. Consider being able to change your emerging market data from an "unknown unknown" to a "known unknown". With a known unknown you now at least know the question to ask and where to put the correct data when it's provided.
We think Data Vera will have enormous implications for emerging market underwriting. We're willing to bet that if you see a demo of it you will feel the same. Data Vera can quickly intake disparate Excel data, convert it to structured data, accurately analyze each data cell, provide auto-correct values for inaccurate data and produce many multiple modeling, underwriting, regulatory, ACORD and XML reports all from one single processing and perform these tasks in seconds.
Now of course there is the little matter of the former US Secretary of Defense who we suspect may be readying a complaint letter for us. But, you never know, maybe he will be pleased with the credit.