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CATEX Reports
Issue 37  July/August 2014
In This Issue
Pigeons or Hawks: Who will emerge to lead?
How will premiums increase in the new "non-cyclical" world? Where are the new risks?
Mergers ahead? If the "dance floor" opens everyone will be on it
Lloyd's observes The Great War
The NHS encounters Roger Crombie
Neil Eckert, Syncora and Detroit, Willis to start Managing Agency and Japanese primaries increase quake rates


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Dear Colleague,

    When we think that events couldn't become more unpredictable we've been shocked by the downing of Malaysian Airlines 17 over eastern Ukraine. Only two weeks earlier I had travelled the same air corridor on the way to see clients in Asia.


    Israel's Ben-Gurion Airport was off limits to US and most European passenger flights because of nearby missile strikes. El Al, the Israeli carrier, was still flying and former NYC Mayor Michael Bloomberg, in a show of support, abandoned his private jet and flew to Israel from New York declaring that the airport was safe.


    And in Tripoli, Libya no one is quite sure what the damage will be to a number of civilian airliners which have had the bad luck to be parked at the Tripoli airport as a battle has raged for weeks now for control of the airport.  Most insurers with a piece of any of those hulls have already begun to make some hefty reserves.


    The impact of MH 17 and MH 370 will be considerable on the aviation insurance market. The mainstream media has picked up on this with a prominent story in the New York Times titled "The Payments are Piling Up for Air Insurers".


    Meanwhile, back at the ranch so to speak, John Charman's Endurance has walked away from its effort to acquire control of  Aspen after an increasingly bitter battle.  Aspen has reported strong numbers but its stock price has fallen to the pre-Endurance bid level.


   The ILS vs traditional reinsurer debate seems to have been rejoined with none other than Swiss Re's Michel Lies jumping in which might have prompted a number of ILS advocates to claim that traditional reinsurers will soon be extinct.


   All of this is occurring against a backdrop of plummeting rates.  The Monte Carlo Rendez-vous next month, which will see hundreds of reinsurers and brokers huddling to try to make sense of it all, promises to be an active session.


   Even Roger Crombie was not immune from the headlines as he will tell you of his injury sustained while dodging a bicyclist on a sidewalk!  He's on the mend now but his observations about health care are revealing.


   CATEX has progressed its Data Vera product by leaps and bounds and has fully deployed it with existing clients in the London market. CATEX demonstrated Data Vera to a number of companies in London the week of July 28th. If you missed a demo and want to see one please contact us and we will schedule it for you.


   Oh, and we can't overlook the fact that Ajit Jain and Warren Buffett seem to have gained about $3 billion in premium from Liberty Mutual in exchange for taking a huge portfolio of long tail liability risk off their hands.  How many times have we heard Mr. Buffett talk about the "float" (this time $3 billion worth of it) and what Berkshire can do with it before claims require payment.


   The Monte Carlo Rendez-vous week is September 13-17 this year.  We are setting up our meetings now and would like to see you. Please click here to request a meeting.


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


Thank you very much.




Stephanie Fucetola

Senior Vice President/CATEX








Lloyd's Lime Street entrance


Pigeons or Hawks?


  We saw an interesting thing the other morning in front of Lloyd's at about 7 am. There were two monstrous but magnificent birds flying back and forth from the traffic gates about 100 meters apart from each other right on Lime Street between the Willis and Lloyd's building.


There were "handlers" stationed at each gate and after some questioning of one of the handlers (from a prudent distance) we learned that this was an avian control company that on a daily basis brings two Harris Hawks in to fly these repetitive loops back and forth in an effort to scare off pigeons.


Falconry display featuring harris hawk parabuteo unicinctus

                                                              Harris Hawk

Come to think of it we have rarely seen pigeons in the area and the presence of the hawks on a daily basis seems to work to signal to those urban fowl that they had better stay away.  We asked if we could photograph one of the hawks and were told "Yes, but do so at a safe distance because if the hawk thinks you are challenging him he may come after you." 


Continuing with this avian theme we reluctantly report that we chickened out taking a photo so we grabbed the image above from the web.


We don't mean this story to be apocryphal but we couldn't help see some similarities between the great debate raging now between traditional reinsurers and alternative capital fueled ILS carriers. We leave it to the reader to determine who is trying to scare off whom --or who is the hawk and who is the pigeon in our analogy.


It's been an odd few weeks --seemingly building into a possible crescendo for the meetings in Monte Carlo next month. We saw Horseshoe Group's CEO Andre Perez saying "the traditional catastrophe reinsurance model is dying already."  Perez was speaking at the Insurance Day 2014 Summit in Bermuda.



Regarding traditional reinsurance, Perez went on to say "It will have to die because what ILS has already proven, from my perspective, is that reinsurers will eventually become glorified Managing General Underwriters." 


Then we saw Swiss Re's Michel Lies say in a statement "With clients expected to continue to rely on reinsurers for services and long-term support, we believe that alternative capital cannot replace the traditional reinsurance model."




No one would ever suggest that a reinsurer of the size of Swiss Re could have been included in Andre Perez' comment but Swiss Re went the extra mile to drive home the point. Swiss Re noted skepticism about alternative reinsurance capital looking to write long-tail, low volatility business with higher combined ratios and boosted by aggressive investment strategies. Swiss Re believes clients could incur substantial risk because the hedge fund reinsurers in particular do not fully collateralize liabilities they are underwriting.


 There was a lot of back and forth like this over the past weeks but it all seemed to be overshadowed by two big industry stories. First, of course, the ongoing effort by Endurance to acquire Aspen. Second was the acquisition of Liberty Mutual's long tail environmental risks by Ajit Jain's Berkshire Hathaway for a payment of $3 billion. The deal broker was Tiger Risk.





Of course it wouldn't be a stretch for someone like Horseshoe's Perez to point to Berkshire as a validation of his point. We all know Warren Buffet's view of the "float" and $3 billion is a lot of "float" especially for a potential liability total of $6.5 billion that could be paid out many, many years into the future and paid out gradually at that.


And because of the huge cash pool at Berkshire, that $3 billion can be well leveraged. (Berkshire's Q2 results showed $2.06 billion in investment gains compared to $622 million for Q2 in 2013.)  Buffett's investment returns are legendary and being able to invest the new $3 billion in premium probably means he will out-perform on returns the claim amounts required to be paid over years to come.


The big difference though between Berkshire and the ILS carriers is that you can be sure that, based on Jain's multiple experiences acquiring long term, long-tail accounts, that Berkshire underwriters have a pretty good idea what kind of claims will be involved. Berkshire will also be managing the claims which has already prompted some concern from critics.




Regarding Endurance and Aspen it seems --and we have no special insight into this --that the vote tallies from the Aspen shareholder preference vote on the proposed Endurance bid would have given John Charman enough to petition, under Bermuda law, the shareholders to direct the Aspen Board to work with him toward a buy out.  It was close though --Charman was said to be looking for 25% and he didn't quite get that and several of the large institutional investor services didn't support his bid either but mainly due to procedural issues.


In the end it seemed as if the steadfast refusal of the Aspen board to engage with Endurance and the less than rousing reaction from the Aspen shareholders when combined with the lack of support from the investment advisory services was enough to convince Charman that his time would be better spent elsewhere. It's interesting to note that both Endurance and Aspen then reported very good Q2 numbers too.


 But we would be less than candid if we didn't note that we're detecting something else going on too throughout the industry. These debates about alternative capital carriers and traditional reinsurers can go on forever (and, God forbid, they may!). There can be more dramatic observations that the industry has undergone a permanent seismic change as a result of alternative capital as Willis' James Kent suggested.



There can also be speculation about increasing mergers and acquisitions as reinsurers begin to look at rivals and see whether complementary synergies may exist that could make a combined entity stronger as Scor's Denis Kessler admits everyone will need consider. And, of course, there can be continued calls for technological innovation, as Lloyd's Inga Beale recently issued to improve the processing of placements, claims and payments --whittling down that cost associated with back office costs.


But something seems to be missing doesn't it?  We keep reading about the potential of $2 trillion in new premium "out there" in new markets with a need for new products. There also seems to be a widening supply of capital ready and interested to underwrite these risks. And premium rates on existing business are either stalled or dropping, a situation bad enough on its own, but when combined with the current investment climate represent a near lethal challenge.


All of the data points indicate an industry sort of treading water doesn't it? We know how hard it is to develop new markets, and, let's face it, China is not the friendliest environment for Western insurers either legally or practically. But doesn't this whole scenario make you wonder where the next Cuthbert Heath is keeping himself or herself? 


There certainly is no shortage of trailblazers in the business who could act singularly and or collectively. The top rank of the industry is replete with super-talented people.


Is it that the individual reinsurers and brokers are so parochial (yes, don't worry, we're stockholders too and like that kind of parochialism) that nobody can break from the pack and say to the rest of us that this is the way to the future --follow me?


We don't know the answer but in some ways we fear that the so-called "cycle" could reactivate due to natural events and large claim losses will appear eventually leading to a culling of markets and resulting higher rates. That would only mean that this discussion is postponed --until a date in the future when the effects of communication and globalization will be even more pronounced and once again we will be seeking leadership from the descendants of today's CEO's and regulators.


It will be a bigger challenge then too. There will be more alternative capital and many more risks of much higher value to insure.




Where are the new risks?







There have been a number of stories in the past weeks about potential new risks for the industry to provide coverage for but let's start out with a basic premise articulated by none other than Swiss Re.


"We should also keep sight of the tremendous untapped opportunities emerging risks represent. If something is a risk for the insurance industry, it is likely to be a risk for our clients as well - which means they might be interested in covers to alleviate the potential impacts of the risk. Given the breadth of the emerging risk landscape, possibilities for solutions are vast, and the insurance industry could and should expand its role, mitigating emerging risks and enabling society to advance further."


This is the view of Swiss Re Emerging Risk Management.


The picture is becoming more clear to us. There is a load of excess capital in the industry now chasing largely the same pool of risks. Low premium prices means that some companies won't bother to even quote on some risk thus foregoing premium but the price keeps dropping as more and more capital comes in.


One obvious answer to the problem is to find new areas to provide coverage for and use the industry's underwriting expertise to its maximum advantage. We heard this refrain from Pat Ryan and Aon's Eric Andersen back in May at the InsiderScope conference. Get to your clients and learn what they're afraid of and develop a product to respond.  This is the effort that's needed now and someone needs to break from the pack.


Where to start...that's a tough question with a lot of potential answers.



Chris Klein of Guy Carpenter notes that "the world's six fastest growing companies are involved in IT, social media, networking, advertising and branding. These are the industries that have quite significant exposures which have not yet been fully explored, investigated or priced. We have to take the initiative. We are in the business of risk. We have to take some."


Another possibility deals with the exposure, largely undisclosed, of publicly traded companies to natural disasters. At a UN summit hosted by the International Insurance Society organized by Willis in London at the end of June, Willis' CEO Dominic Casserly made an interesting observation. He said the "UN's global assessment of risk from natural disasters showed direct losses of $2.5 trillion this century. These risks are material for many companies leading to concerns about the future and less confidence to invest and create jobs."



Casserly explained that investors in many of the world's largest companies would be surprised if the companies they invest in suddenly were to disclose how large their exposures actually were to natural disaster. We have seen that with the floods in Thailand that held up Japanese auto production for weeks.


The risk capital required to insure against these disasters would be a very large amount and if companies were required to disclose their natural disaster risk there would then be an immediate need for greater insurance and reinsurance capacity. Providing coverage for $2.5 trillion in losses would mean a big enough pie for both the ILS and traditional carriers.


Here's another one. There are now 100 buildings in the world over 300 meters (985 feet) in height. According to Allianz the value of many of the construction and property risk projects for each building exceeds $1 billion. Even more telling is that Allianz says that in 6 years the average height of the world's 20 tallest buildings will be 600 meters (1,970 feet) which could logically mean a doubling of insurance capacity needed.


Here's another possibility. With all the discussion about the reinsurance industry not being placed into the "systemic risk" classification, thereby incurring greater regulatory scrutiny, isn't there a teeny tiny bit of that "systemic risk" borne by banks and financial entities that is ripe for coverage by insurers and reinsurers?


The global financial system continues to expand and even within the insurance industry supply transmission chain of premium payments and claims payments there are likely junctures that could be examined for exposure. With the alphabet soup of IBAN, SWIFT and ABA codes is there not simple "systemic risk" (an oxymoron, we know) that could be examined avoiding corporate misfeasance coverage?


As we write this we've learned that hackers allegedly based in Russia have stolen 1.2 billion passwords and log-in ID's.  And to boot some 500 million email addresses have been stolen too.  This is simple (again, we know it's not "simple") cyber-theft and not cyber-liability although of course it will soon enough evolve into liability claims as the perpetrators begin to cause damage.


                                                         Coronal Mass Ejection 

Finally, on our little tour, this could be the biggest one of all. On July 23, 2012 NASA reports that the Sun released two massive clouds of plasma that barely missed an encounter with Earth. Technically called a coronal mass ejection had this storm hit Earth "we would still be picking up the pieces". According to the National Academy of Sciences the total economic impact of the encounter could have exceeded $2 trillion (a single event no less) or 20 times greater than the cost of Hurricane Katrina.


We understand that its proper to focus on reducing costs throughout the industry and look for more efficient ways of doing business. However most practitioners estimate the cost of business processing and remittances comes to no more than 3% of the premium dollar.


If the combined effort of every well intentioned crusade to reduce those costs results in a reduction of those costs by half it would be declared a victory and rightly so. But is that really where we want our attention focused now? CATEX has to focus there --we are a system designer and system operator and that's our bread and butter --reducing those costs. But we hope that someone is looking at the larger picture.








The big will (maybe) get bigger...




Our next issue will come out the week of September 22, after the Monte Carlo Rendez-vous.  It's certainly going to be an interesting time over there. We have already lined up dozens of meetings with brokers and reinsurers to talk about our products and that's just us. We know that the reinsurers and brokers are booked up to the max and will begin to get first indications on the January renewal needs in the market.


We expect that the ILS people will have a significant presence there this year. They were represented last year but now, as alternative capital represent some 23% of US catastrophe capacity we would think they would assume a more formal profile.


Most of the real nuts and bolts occurs in hotel suites and during private meetings but we will be able to get an insight into the way things are playing out by who is meeting with whom at the tables in the Café de Paris and in the hotel lobbies. 


Of course there may be some other things going on too. Do not dismiss John Charman's attempt to acquire Aspen as a one off thing.  Now that premiums are down, even despite the absence of significant claim activity, some reinsurers are beginning to look like acquisition targets.  The name of the game now --as everyone seems to be saying --is that the best way a reinsurer can protect itself, and grow, is to become bigger, more diversified and able to add value across lines and geographies.




Even the largest of companies aren't dismissing further acquisitionsScor's Denis Kessler said that although Scor had no acquisition plans he pointed out an interesting reason for the probability of no such activity. He said that the global financial crisis had made cedents much more aware of having too much counterparty risk with one reinsurer.  Kessler is one of the smartest people in the business but if Scor, the 5th largest global reinsurer sees no benefit in acquisitions it doesn't necessarily mean that smaller reinsurers feel the same way.


Nevertheless even Denis Kessler is a realist. He said Scor is "in a position where we could catch up" and that should M&A activity commence it could take on a life of its own. He said "Once the dance floor is open, everyone wants to dance."


We will be watching for any dancing and let you know. 



Not "the war to end all wars" unfortunately



Trenches of world war one sandbags in Belgium 

                                                World War I site in Belgium                                     




Earlier this week the centenary of the beginning of World War I was observed. 100 years ago seems like a long time but if you have ever walked across the battlefields at the Somme River or in Ypres and seen the military cemeteries you have the sense that the war was much more recent.


In fact if you look at the headlines of the newspapers even today you can see events being shaped by World War I. Much of the conflict for example in the Middle East can be traced back, with little effort to the effects of the war And of course we've skipped over the horrible genocide and humanitarian crises in the Balkans in the 1990s.


If you have ever entered the Lloyd's building from the old entrance on Leadenhall Street and immediately turn around you will notice a plaque up on the wall.  The plaque lists the names of the 214 practitioners from the Lloyd's market who lost their lives during the war.  We dare say thousands of people pass by the plaque every year and don't even notice it.



One person noticed it, and of course Lloyd's itself is aware of every little bit of history (and there is a lot of it) that they have sitting under their large roof.  So something has been done about the names on that plaque and it will go a long way toward bringing those fallen back into our living memory.


John Hamblin who is Active Underwriter at Cathedral Syndicate 2010 has been a friend of CATEX for many years. Throughout that whole time we have of course been aware of his deep interest in World War I and there has rarely been a trip made to London from our end in which we do not bring him some bit of WWI memorabilia or literature.


In fact in January of last year John gave a talk about World War I at a CATEX event in London and following it he and Tom Bolt agreed to the outline of what John has now done for the Lloyd's World War I remembrance.


Click the links provided to see what Lloyd's is doing to honor their people and what John Hamblin has done to bring these people to life. You can bet that young underwriters and brokers milling around the underwriting room will look up from time to time at the Lloyd's TV sets and note that many of the casualties were younger than they are and worked for companies they know.  Thanks, John Hamblin.






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

 The UK Health Care System Encounters Roger


The business of health insurance is too complicated for a simple mind such as mine. The British have nationalised health insurance, and everyone complains bitterly that it doesn't work. The Americans have private health insurance, and everyone complains bitterly that it doesn't work.


Whenever politicians of any stripe attempt to fix what's broken, everyone complains bitterly that it won't work, and later complains bitterly that it didn't work.


For decades, I've avoided all of it by remaining well, but recently I suffered an injury. Trying to avoid an oncoming cyclist (on the sidewalk), I fell over a metal bike stand and damaged my leg.


At first, I thought it best to self-medicate, i.e. apply ice, bathe and keep the weight off my leg. That worked well until the area became infected. My leg and foot swelled up to the size of Donald Trump's ego. This made me glum, mostly because I would now be forced to seek medical treatment. What a hollow feeling those last five words invoke.


I was told by friends to visit a "walk-in National Health clinic".  Mirabile dictu, a doctor saw me inside 20 minutes. He prescribed antibiotics and a tetanus shot. I went home with an arm full of tetanus and a packet full of pills. Total bill: zero. I revised skyward my opinion of the NHS.


After the pills had run their course, my wounds clearly hadn't. True, my leg was now only the size of, say, the average politician's ego, but still. I returned to the limp-in clinic.


Sorry, they said, we're only seeing emergencies today. I couldn't in all conscience declare myself one. That ruled out a visit to the emergency section of the local hospital, too. Not wanting to wait until I became an emergency, I tried to enroll at a local doctors' practice. I'd not needed to until then. There are truly sick people around, and I don't believe in taking up scarce medical resources when I don't need them.


One doctor's practice after another told me they couldn't help. Outside their catchment area I was, or something. So: no help for me, even though I pay all my taxes and have private health insurance on top of it. My only course of action was to wait until my leg became an emergency matter and hope that it could be fixed then: a few days, say.


I limped downstairs to see some pals, who promptly swung into action. They bundled me into their car and wheeled me round to a practice that had said categorically that they could not help me. It's useless, I told my friends, let's go home.




My pal put his foot down, which was more than I could do at the time. There was some kerfuffle, but my friend was adamant. Way beyond mirabile, 20 minutes later, I had joined the practice and seen a doctor, who prescribed some stronger antibiotics and anti-inflammatory tablets. A pharmacy next door filled the order and sent me home. Total cost: three dollars, because I bought some pain killers to ward off the headache I'd acquired from the day's events.


Several medical people had told me that day that nothing medical could be done for me. A few words from my friend, however, and I might return to living a useful life, although I'll never play the piano again. That's OK, because I couldn't play it before. Oh, and I haven't taken a turn for the nurse. (Those were the two lines my father trotted out without fail whenever illness struck him, and I felt I owed it to him to repeat them here.)


I'm nine weeks into this, and only just now starting to recover, having seen or spoken to six doctors and a nurse, and taken four rounds of antibiotics. All at no cost.


I don't know what to think now. Years ago, in Toronto, I fell asleep in an odd position during the wedding of Andrew, Duke of York and the Duchess Fergiana, and my neck locked up. While I was waiting in Emergency, a man walked in with a knife embedded in his forehead. They insisted on seeing me before him, since I'd arrived first. I left without seeking treatment so that his interests might be furthered.


I have nothing clever to say about health care at this point, except this: do whatever you can to stay well. Being ill will make you sick, and without the right attitude and paperwork and won't-take-no-for-an-answer friends, you'll apparently stay that way.
Editors Note: Roger is now vastly improved and we are looking forward to seeing him soon.



* * *



Roger Crombie is an American Society of Business Publication Editors national award winner. An English chartered accountant who lives in

lives in Eastbourne, on England's South Coast, 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

August 11, 2014




Quick "Bytes"


Neil Eckert is back. Just as we went to press he announced a new start-up MGA called Linear Re which will structure specialty reinsurance deals
for investors from the capital markets.They expect to be active by 2015...For anyone following the City of Detroit bankruptcy we saw a familiar name pop up last month. The Detroit Free Press reported that
"An obscure but combative insurance company deeply entangled in Detroit's financial problems has become one of the city's fiercest foes in Bankruptcy Court". All Bermuda-based Syncora Guarantee is trying to do is prevent the court from wiping out the pension debt deal blamed for plunging Detroit into bankruptcy. Syncora guaranteed some $1.4 billion of that debt in 2005....Lloyd's Inga Beale said that individual Lloyd's Names are "a very important part of Lloyd's future." Beale also said she is determined to modernize the Lloyd's market saying "we want to get much more involved on the placing side, so data can flow all the way through the process."....JLT's Dominic Burke summed the state of affairs up nicely when he spoke about rates that continue to plummet. he said "If capital becomes either ill-disciplined or naïve, then it won't be long before they lose their shirts."....Validus Re has acquired US-based Western World Insurance for $690 million. Ed Noonan said that "this is as straightforward a strategic acquisition as you can get. We are missing the world's largest insurance market, the US, which is also the world's largest market for the short-tail products in which we specialize."...Willis confirmed that it owns a stake in Lloyd's start-up insurer Acappella and would increase that stake to a majority position
and establish its own Lloyd's managing agency. Willis is one of the first brokers to obtain a controlling interest in a Lloyd's (re) insurer since the 2009 regs on broker ownership changed...Japanese primary insurers are set to raise premiums for earthquake insurance by an average of 15.5% despite the abundance of inexpensive reinsurance available. Jiji Press reports that losses and information from the 2011 Tohoku quake are being factored in causing the increases....Brian Duperreault's Hamilton Insurance may be planning an IPO as early as next year. He said "Future plans for the (Bermuda-based) Hamilton include taking the company public but this won't happen before next year."...Finally, and yes, we know we should be seeking professional help about this, but we cannot resist news about North Korea's Kim Jong-un.
                                          Kim Jong un and emaciated worker
Here he is at a synthetic lubricant factory. Note the cadaverous worker standing next to him contrasted to the pudgy leader. From the look on the poor fellow's face he is terrified that the Supreme Leader has not only stopped at his work station but seems about ready to plunge himself into the gooey lubricant....