CATEX Reports

We hear people say "so much for global warming" this winter and, although we know the data indicates otherwise, this has already been a trying season for anyone in the northeastern US. Worse, there are still 7 more weeks to go until Spring!

The weather makes us think of so-called "natural catastrophes" a large part of which are caused precisely because of climate conditions and, as Swiss Re has noticed, have begun to have an even more costly effect as population patterns have changed.

We have noticed too that despite Lloyd's ambitious plans to expand into the emerging markets of Asia, Latin America and Africa it will be those old standbys --the US, UK and Europe that One Lime Street expects to drive revenue in 2014. That's not a surprise. You can't turn a ship the size of Lloyd's on a dime, so to speak.

Speaking of ships certain underwriters are no doubt rolling in their graves as news comes from China that plans are afoot for an HMS Titanic theme park complete with audio and sensation effects of the ship's iceberg strike and subsequent sinking. Does that mean in only 100 years there will be theme parks offering amusement park-goers the opportunity to experience the Northridge earthquake or other awful, costly losses of the current day?

Lloyd's it seems has finally come out and admitted what everyone saw that they've been doing anyway --embracing the so-called "new capital" right through their front doors but requiring it to play under their rules. Steve Evans at Artemis picked up on this (we've been saying the same for months) and it was subsequently confirmed by John Nelson in an interview.

We have our usual Roger Crombie column too. Roger has stumbled into the esoteric, but apparently dangerous, world of claims examination. It's a bit of an "eye-opener" as you will see and we can guarantee that the next time an examiner shows up after a fender bender you will look at him or her with more curiosity.

Finally, we will be sending a group of US-based personnel to London the week of March 3rd and will be conducting marketing meetings on both Data Vera and Pivot Point. If you are interested in seeing us we can schedule it if you email me.

We do have sad news to report. Samuel Fortunato, a CATEX co-founder, passed away at age 84 on January 8th after a brief illness. Many of our CATEX Reports readers knew him and there is a story about him below. He will be missed by many not the least of whom are his associates at CATEX.

As always please feel free to contact me if you are interested in more information about CATEX and our products.

Thank you very much.

Sincerely,

Stephanie Fucetola

Senior Vice President/CATEX

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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.

Wallin

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".

Rumsfeld

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.

A Very Big Player May Return to the Field

James Vickers at Willis observed a while back that the burgeoning ILS market was forcing reinsurers to react. After the 1/1 renewals we've begun to see just what he meant.

Apparently the majority of reinsurance buyers demanded bespoke contracts at the 1/1 renewals. How many is a majority? Well, Carpenter's Nick Frankland said that "The amendment of terms and conditions played a large part in this year's renewals with 99 percent of cases now

requiring a bespoke contract."

Frankland

That's sort of an amazing statement when you think about it. Reinsurance contract drafters are familiar with the bingo-game like, numerical sequences of ordering up wordings clauses from a contract clause bank. Usually there are changes but generally they are not wholesale changes. It must have been a busy period in the contract departments of intermediaries through the holidays.

It may get even busier if the news from Florida holds true. One of the biggest elephants in the jungle is coming back to the playing field and has already stated that contract terms and conditions will be a top priority.

Nicholson

Jack Nicholson (no, not that Jack Nicholson) the COO of the Florida Hurricane Catastrophe Fund has chosen not to buy reinsurance in recent years, preferring instead to rely on post-event bonds to fund potential claims. At a public meeting in January Nicholson said that the FHCF may ask its trustees for authority to place $1 bn-$1.5 bn of reinsurance limit for the 2014 hurricane season.

Given that Florida wind reinsurance rates are down anywhere from 10% to 20% Nicholson seems ready to lock in protection rather than risk going to the bond market to raise money after an event strikes. This is big news for reinsurers as this level of prospective premium income is a big shot in the arm for them.

Nicholson is an old hand at reinsurance buying though and is going to expect the rate reductions that has apparently whetted his interest in returning to the reinsurance market. And he has indicated that reinsurance contract "terms and conditions" will be a key factor for the FHCF as they mull their decision.

Lloyd's Pulling Levers to Enforce Discipline

We always notice admonitions from industry leaders and regulators that they will either refrain from underwriting risks at unattractive prices or, in the case of the regulator, will be closely watching to ensure that bad business is not being written.

As we noted above Hannover Re is only the latest (and to be fair to Ulrich Wallin he has stated this before) to indicate they will take their underwriting pens and go home if they can't get the premium price they believe they need. Evan Greenberg at Ace, John Charman at Endurance and Robert Hiscox also quickly come to mind as executives who have sounded the same warning.

When we began to see these warnings they also usually came with the prediction that someone, somewhere would "break ranks" and start writing business at unsatisfactory premium rates just to intake the cash.

We don't see that many "break ranks" warning any more and it may be that the traditional reinsurers are continuing to hold the line. The low claims experience can only help them there.

Of course there remains the so called"plug and play" underwriters who run proposed business through a model and supposedly then set a premium without necessarily correlating that rate back through any available claims histories.

These "plug and play" underwriters seem to be viewed by the traditional markets as the ones most likely to break ranks but from where we sit any evidence that any premium undercutting is actually occurring is only anecdotal. Undoubtedly people out in the trenches have better information and it would be interesting to learn it.

Sometimes though people are in a position where they can take a proactive step and try to enforce underwriting discipline across more than an underwriting unit in one company, or indeed, across a market as a whole.

One such effort seems to have occurred at Lloyd's when, according to reports, Tom Bolt's Performance Management Directorate declined to approve more than half of the increase in planned premium income requested by Lloyd's managing agents for 2014.

Bolt

The PMD has already strengthened the underwriting discipline at Lloyd's by expanding the business planning exercise that managing agents are required to submit to and significantly boosted monitoring and oversight of their operations throughout the year.

Again, only via anecdotal evidence, we are aware of an increased level of rigorousness in the oversight and planning process that syndicates at Lloyd's encounter as Bolt's group seems deadest on ensuring that no one managing agent gets too far off the rails.

The most recent news means that Lloyd's has sent back 2014 business plans with a bit of a red pencil indicating that they will not approve the level of proposed premium increases --and thus increased exposure --sought by syndicates.

We suspect that this insistence that syndicates downgrade their expectations on underwriting profitability is indeed a "fresh indication of the deterioration in market conditions" that has been evident recently.

No matter what you may think of Tom Bolt and the Performance Management Directorate one cannot accuse them of being asleep at the switch. Between the oversight and proposed premium increase reductions they are using every arrow in their quiver to enforce underwriting discipline.

CATEX Co-founder Samuel Fortunato

In November 1991 Samuel Fortunato was the Insurance Commissioner of New Jersey. The Atlantic coast of New Jersey, and much of the US eastern seabord, had just been pummeled for several days by a very strong "nor'easter" storm.

Clooney, Wahlberg and Junger

Later, Sebastian Junger in his book "The Perfect Storm", and George Clooney in the movie of the same name, transformed the storm into the stuff of legend for readers and movie-goers alike.

It was no legend in New Jersey however and storm damage was not to be matched until over 20 years later when Superstorm Sandy struck.

In tense meetings held in New Jersey Governor Jim Florio's office P&C insurers with NJ homeowners exposure were threatening to cease writing business along the coast unless rate relief was granted. In New Jersey, as in most areas, the majority of the population and the highest percentage of insured property is found along the coast.

Ultimately emotions settled down, due no doubt to eventual rate increases and new reinsurance capacity to come from Bermuda but a seed had been planted in Sam Fortunato's mind.

In the spring of 1992 he presented the Governor with a proposal which would lead to the creation of a primary insurance risk exchange. Sam's feeling was that smaller New Jersey centric insurers, or insurers without national exposure, could benefit from a facility that would allow them to trade portions of their NJ wind exposure for portions of other exposures, to different perils in other parts of the country, insured by other primary insurers who might have their own geographic-centric problems in their own states.

In some ways we later realized that he had stumbled onto the building blocks of a perfect model for a successful reinsurer operation . More than a few executives told us over the years that the "exchange rate" of say Marin County earthquake risk for x number of NJ coast wind risks was a logical outgrowth of the aggregate book balancing soon being pioneered by people like Bill Riker at Ren Re.

In any event then Gov. Florio was defeated in his 1993 reelection bid and in 1994 Sam, Frank Sweeney and Frank Fortunato founded The Catastrophe Risk Exchange, Inc. more popularly known as CATEX.

We can trace our lineage direct to that proposal Sam prepared for the Governor and it is one of our most valuable corporate treasures.

We will miss Sam for his wit, his intelligence, his advice and as a guide. Some of us at CATEX will miss him as a father too. We all thank him for everything he did and are grateful for the time we had with him. Here is a link to his obituary and to an interesting New York Times profile of him.

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

Roger Crombie

Previously Unknown Perils of Claims Investigating

If you have an enquiring nature, claims investigation might be the job for you. After all, what could be more interesting? Some guy claims $2.5 billion when his chihuahua goes missing and you're assigned the job of looking into it. You arrive at his house and from under the stairs, you hear a muffled whining. "Oh that," the guy says. "That's my daughter. She's doing a science experiment for her school."

Undaunted, you open the little triangular door under the stairs, and there is Eye, the chihuahua. Case solved. Your company is saved from a massive payout. You're a hero.

In fact, it's nothing like that simple. Recent reports in the insurance press have stated that insurance department staff investigators are wearing bullet-proof vests when going about their business-and not just to find out if the Cayman-based captive subsidiary of the Bermuda branch of a Swiss company owned by Saudis is adequately funded.

Per National Underwriter, "department investigators of the non-forensic type are dealing with whether to wear protective gear, carry guns and respond with baton techniques or deadly force to defend themselves during interviews with the subjects of their investigations, who may possibly be violent types perpetrating insurance fraud."

Insurance fraud is a growth industry. Why suffer an actual loss when you can invent a story and cash in? The National Insurance Crime Bureau (NICB) has reported a 27 percent increase in the submission of questionable claims by member insurance companies since 2010.

"Some States may choose to arm investigators, while others may use other safety or protective equipment such as batons, pepper spray, etc.," said National Underwriter.

"State insurance departments may want to determine the need for safety or protective equipment such as bullet-proof vests, based on the situation, the witness or suspect and prior criminal history," stated a proposed document on guidance for investigators who were up for review in December by the National Association of Insurance Commissioners.

The NAIC even has a colour-coded system for assessing threats. It ranges from blue for verbal threats to red, "where deadly weapons are flourished." Responses along the color spectrum range "from attempting to leave the situation to 'striking muscle groups,' defense spray, baton techniques and using deadly force with whatever weapons, natural or not, are available."

Why limit this technique to investigators, I ask. I can think of an attorney who needs a spot of deadly force. Since weapons are hard to come by in peaceable England, I'm thinking of inviting her over to see the view from my balcony and then throwing her off. Given her track record, she'd probably never hit the ground; she won't do anything her clients want.

Violence is always the wrong answer, of course, even in a meeting with a dozen dolts, none of whom will stop trying to impress each other.

The NAIC guidance backs off when push comes to shove. It says: "... departments should consider developing an investigator safety form." Now you're talking. What criminal in his right mind would attempt to carry off an insurance fraud, knowing that a form had to be filled out?

"This form would contain personal information concerning an investigator which can be provided to law enforcement agencies in the event of an emergency," the NAIC says. "The forms should remain on file with the department and access should be restricted to only those few individuals in a 'need to know' position."

The NAIC suggests "requiring interviews or examinations to be conducted in a protected, public venue such as a restaurant, coffee shop or public library; the insurance department office; or a law enforcement office or courthouse which will have metal detectors and screenings prior to entry."

Tyson

Why not go the whole hog, and have metal detectors installed at your local Starbucks anyway? Require people to take their shoes and belts off when being investigated. Conduct all meetings in the company of security guards. Mike Tyson seems to be under-employed. What a great investigator he would make. No claim that entered his bailiwick would ever be paid.

In fact, the world must be full of ex-boxers and other 'striking muscle groups.' Get hiring, insurance companies; you have nothing to lose but your claims.

* * *

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 [email protected].

January 27, 2014

Quick "Bytes"

We know everyone has been waiting for this but the suit filed by the estate of Michael Jackson against Lloyd's insurers Cathedral and Talbot seems to have been settled. The insurers had written a $17.5 million non-appearance policy to cover Jackson's 2009 comeback

tour. Although Jackson certainly did "not appear" (you could be forgiven for wondering about that because of the movie and concert specials the estate released based on his rehearsal sessions) the insurers were able to claim that Jackson hadn't seen a physician (other than cosmetic doctors) since 2005. And, as you can guess, the policy included very strict medical examination and medical disclosures which the insurers claimed the singer did not fulfill....That big pre-Christmas credit and debit card hacking incident at Target stores in the US

involving information from 70 million customers seems to have ended up with insurers. Reports indicate that Target had some $165 million in coverage for itself and executives against cyber crime. Ace, Axis and AIG have been mentioned in the press as being on the risk....State Farm has sold its Canadian P&C and life insurance companies to Desjardins Group. The new Desjardins will be the 2nd largest P&C company in Canada with total premium if $3.9 billion. Intact Insurance will still be #1....Those groups of cigarette smokers you see huddled at

office building entrances won't include government officials anymore --not in China at any rate. The government has banned all officials from smoking in schools (good!), hospitals (better!), sports venues or on public transport (best!) and they can't smoke at all when working...Everyone has supply and logistic problems it seems. The Berlin police found 310 pounds of cocaine stuffed into cartons of

bananas delivered to 5 supermarkets. A senior police official said "This was obviously a mistake. I don't know where the mistake was made in the perpetrator's delivery chain".....Finally if you do still smoke, or if you are a still smoking Chinese official fed up with anti-smoking rules and are considering a move to Washington DC, pay attention to this. More than 5,800 gas leaks were discovered under the streets of our nation's capital emanating from aging natural gas pipelines. But, not to worry, only 12 of them were leaky enough that "if you dropped a cigarette down a sewer or manhole it could have blown up"....