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There are some interesting things going on in the lead-up to the January 1 renewals. It seems that more reinsurance premium continues to be subtracted from the pool, yet the most optimistic ILS underwriters are saying that once government insured programs come into the market, there will be more than enough for everyone.
Regulators and ratings agencies have been keeping an eye on measures taken by reinsurers to keep competitive. S&P recently warned that multi-year reinsurance contracts offered by markets might temporarily avoid the risk of future premium decreases but could leave reinsurers in the cold if losses occurred and rates increased during the period they were locked into the multi-year deals.
S&P also noted something that we have seen Lloyd's Tom Bolt warn about, using nearly the same language, when he talks about markets adding "cyber-coverage" as a "throw-in" to deals. He says that such a practice, if it exists, is going to end real soon.
We read the papers too so this concern made sense to us. After all every day reveals a new data hacking story. What we didn't connect, and obviously what Tom Bolt did, wasn't revealed until S&P said that it was worried about reinsurers throwing in cover for "unmodeled risks" as an inducement to sign up to a multi-year contract. That "unmodeled risk" could possibly expose them to disastrous future claims.
With all the talk about maintaining underwriting standards, S&P indicated that it was clearly concerned that the tough market could be forcing reinsurers to forget the basics while trying to desperately retain market share.
We suspect these warnings are also intended as reminders as we enter the renewal period. Lloyd's is keeping a sharp eye on capitalization and will be watching closely for extensions of cover that haven't been thought out and modeled in a diligent manner.
Lo and behold we also saw an article titled "The Future of Underwriting: Away from Spreadsheets". If you are a regular reader you know that we need to say no more!
We have our usual Roger Crombie column too. Last month's Monte Carlo meetings have prompted some introspection on his part about why he now stays at home!
CATEX will be in London the week of November 3rd to meet with our colleagues in our London office and also with clients and prospects. If you are interested in seeing us please let me know.
As always any comments or questions would be appreciated --either about CATEX Reports or any of our products.
Senior Vice President/CATEX
Regulators looking carefully at add-ins
In any "buyers' market" the seller is left with only three choices. He or she can reduce the price of his product; or he can sell more of the product at the same price; or he can stick to his prices (or as Tom Bolt would say "hold their nerve") and decide to offer no price or volume discounts and wait until the cycle turns.
In the midst of the worst premium price slump in recent memory we've seen examples of companies adhering to all three avenues. It's a tough thing to watch your market share, that you've built up over years (and tens of thousands of frequent flyer miles) erode right in front of you. Sooner or later the temptation to say "enough" and do whatever can be done to hold on to those clients, becomes too much to resist.
Pricing is relatively "public". The details are usually confidential but during the back and forth from the broker to other markets word usually leaks as to what the premium price of the "winning" offer is going to be. Depending on how low the price is, and how badly those who lost out really wanted the deal, sometimes people will talk. It's surprising how many reports of premium prices make it to the industry dailies and are not corrected the following day.
Pricing is one thing. Even if you are the market most determined to retain a client or a piece of business, no matter the cost, you won't agree to an off the charts, unsustainable premium and risk your copains de reassurance calling you to inquire about your mental state. There aren't too many places to hide on price.
There are other places to hide though and we should have noticed this last year when reports surfaced that supposedly Aon Benfield was pushing wording changes on some of their contracts. Last year the wording changes were reported to affect the so-called "hours clause" , making the claim window terms more generous to the buyer.
There was reported to be some grumbling from markets --even some initial public statements that certain markets would not agree --in the end the word is that most markets did agree to a case by case discussion with each cedent on wording changes like the "hours clause". Even in a down market a buyer the size of Aon Benfield is tough to ignore.
As it turns out there may be other changes too. We've seen that changing policy reinstatement terms in favor of cedents has already been made public but apparently is even more in the way of coverage riders thrown in as part of the deal.
Whether this additional coverage is a vestige of old practices, or something that has been considered and willingly added in, we don't know. However, after this recent salvo from S&P nobody can claim that they weren't put on notice to go back and clean up their old wording.
According to reports S&P is concerned that additional features are offered to secure the business including the bundling of unmodeled risks and adding cyber or terror coverage. This observation is precisely what Tom Bolt at Lloyd's was talking about when he recently wrote to managing agents reminding them to properly monitor and price their cyber exposures.
Bolt said "We are very skeptical about efforts to merely patch some cyber cover into existing policies, for example via a write-back on a cyber exclusion," he explained. "In short, if we call you, we expect you to be able to tell us what your aggregate exposure to cyber is and the associated premiums," he concluded.
Maybe in the 1970s throwing in cyber and terrorism (floor mats with that new car anyone?) wasn't a bad idea but right now it's akin to playing Russian roulette. This is S&P's point when it expressed fear that the reinsurance industry could be unwittingly assuming more risk, with potentially disastrous results, by relaxing wording standards and agreeing to multi-year deals.
The question remains what else is buried in those contracts? Exclusions exist for a reason --they represent "black holes" that either haven't been modeled or, worse, have been modeled and are known to represent bottomless pits to steer far afield of.
Of course the details of a multi-page contract are usually obscure and the premium price is the headline. You can agree to a premium that won't embarrass you but can include unsavory items needed to actually make the deal happen in the details.
Maybe, at least from what S&P and Lloyd's are suggesting, people are beginning to look more closely at those details. There has been fair warning that if, in fact the sky does fall in, you had better be sure that those details aren't too unsavory or you won't be getting too much sympathy from either the ratings agencies or the regulators.
Ceding companies are buying less reinsurance
Liberty Mutual reportedly is consolidating its outwards reinsurance buying for specialty and international business. Liberty has informed its counterparties that it is either cancelling or non-renewing a number of treaties across the specialty and international units.
Liberty is thought to be aiming at reducing the number of reinsurance treaties across its business from over 100 to less than 40. The company presumably will then buy group multi-line retro covers with the goal of obtaining balance sheet protection. Liberty apparently believes it can retain and manage attritional losses within its growing surplus.
A total (get ready for this number) $300 to $400 million of premium could be subtracted from the traditional reinsurance market as a result of this move.
Far be it from us to second guess this move but it does prompt a few thoughts. If reinsurance premiums are lower than they've been in a long time why do this? "Low" is a relative term of course and in this case regardless of whether rates are "low", "medium" or "high" it will amount to $300-$400 million staying at 175 Berkeley Street in Boston. That would be more than reason enough perhaps.
175 Berkeley Street, Boston
It may well be that a company as large as Liberty, which may have previously allowed localized purchase of reinsurance, would benefit from a more coordinated, group purchase type of solution. Maybe a decade or two ago it might have made sense for local country units to buy their own coverage, having better knowledge of the risks and specific underwriting knowledge, but in this day and age grouping all the reinsurance needs together and determining what can be retained and what needs to be ceded does seem to make sense. The fact that it is occurring at a time when reinsurance rates are low may be a coincidence.
But there may be at least two other reasons too. Remember that any business that is ceded to a reinsurer is business that sees a transfer of premium to a reinsurer. Investment returns for insurers are at very low levels. Insurers need to invest in "safe" assets and nowadays that translates into returns that are 2% or 3% at most.
By keeping that projected $300-$400 million of premium at home Liberty stands to increase its investment earnings by as much as $12 million or so. That sum, while not a vast amount, certainly will help at the end of year earnings compilation.
Scor's Denis Kessler, who has often lamented how central banks are ruining the insurance industry, may be right again --maybe even more than he knew. Holding on to risks that are normally ceded to reinsurers may not be the preferred route but the enticement of the added investment income compared to the premium expense it would have incurred buying the cover, is very attractive.
Allianz, for example, has pared back its reinsurance spend by nearly $2 billion over recent years. At a 3% investment earnings rate that amount would generate an additional $60 million annually in investment income. Sooner or later these numbers begin to add up. They add up so much that Amer Ahmed, CEO of Allianz Re, said the trend for large insurance companies to restructure their reinsurance spend by managing it centrally, is a "one-way ticket" or here permanently.
There could be another benefit to this trend. Reinsurance premiums paid to a reinsurer aren't created out of thin air. They come from component parts of hundreds of thousands policies, or, for a company the size of Liberty, millions of small commercial and retail policies. We have reported in the past that the commercial and retail primary markets have not only avoided the premium decreases of the reinsurance market but in some instances continue to show growth. In other words they are a "bright spot".
Remember what we've seen in Florida. Consumers in Florida seem to be knowledgeable about reinsurance and once they saw CAT cover prices dropping they began to agitate for rate reductions on the wind portions of their homeowners cover. By and large those have been granted.
Florida Commissioner Kevin McCarty would have eventually made those reductions but there is nothing like public outcry to prod things along. Liberty Mutual has operations in all 50 states and that means rate filings to 50 insurance departments. If Florida regulators demanded that primary premiums be reduced because of reinsurance price decreases who's to say it can't happen elsewhere?
Remember that premium prices for reinsurance are unregulated. They are transactions between sophisticated parties. But premiums for many primary lines are indeed regulated. When a primary carrier files with a state insurance department for a rate increase the material required is usually voluminous. There is even usually a step in the rate consideration process in which the public can comment.
In those filings there is usually a line item, or several in fact, which break out the cost of reinsurance associated with the rate request. If the cost of reinsurance (a cost out of the hands of the buying primary insurer) has increased the carrier will seek to recoup that increased cost as part of a rate increase.
But if the cost of the reinsurance has dropped then that decrease would also be reflected in the rate filing. This is the "dip" that consumers in Florida were watching for and which they discovered that prompted pressure on McCarty to reduce rates.
"Before the Flood"
We still may see more, a lot more, capital
Any observer could be excused for thinking that the recent infusion of alternative capital into reinsurance represented the high point for new capital coming in. Well, you may be wrong if you thought that. In fact we may still be "Before the Flood" (hence the 1974 Bob Dylan & The Band cover from the album of the same name). There may be much more to come.
Here are a few data points from the month. Despite the fact that there may be more than $60 billion of alternative capital in the reinsurance market a number of observers have said that there is much, much more to come. According to Aon's Paul Schultz there are vast sums of pension funds money on the sidelines eager to participate.
Traditional industry response to this flood has been at various levels. As we have seen in past CATEX Reports there have been warnings that the new capital has no claims paying record and cannot adequately price risks. As a result, the thinking goes, when a very substantial claim does come they will be ill-prepared for it financially (because they underpriced it to start with) and have no claim-paying experience.
We all know the punch line to this argument--that's why a traditional, well capitalized, multi-line reinsurer with a long track record is the best bet. It's hard to argue with that one.
Then we have those who are welcoming the new capital. We picked up on this years ago with Neil Currie who saw a role for reinsurers acting as underwriting managers on behalf of the new capital and deriving new revenue streams from these services. The same point was most recently driven home in a rousing speech by Hamilton Re's Brian Duperreault in Baden Baden.
This approach has become much more sophisticated over time. Many traditional reinsurers now maintain their own alternative capital vehicles, or sidecars, that act as an adjunct to their normal operation. Since the cost of capital funding these vehicles is lower than the cost of the combination of premium and equity funding a traditional carrier the logic goes that traditional carriers can write business priced lower, via their alternative capital vehicle, than they would ever even consider writing on their traditional paper.
Everest with Mount Logan Re, go down the list --Lancashire with Saltire Re I, Renaissance Re with Upsilon Re II, Validus with Alpha Cat 2013 and Partner Re with Lorenzo Re are all examples of this.
Now Mike McGavick at XL has weighed in on this by saying that he too views so called third party capital as an opportunity. XL it should be noted has helped form New Ocean Capital Management which is a CAT fund manager that may serve XL by going beyond the way other sidecars have aided their sponsor reinsurers. If we read what New Ocean is going to do correctly they could turn out to be a smaller version of Nephila Capital and invest alternative capital, agnostically, to provide underwriting capital for reinsurance deals not limited to XL.
Then we have another reaction and it's one that only a few people can afford to take. The two most public advocates of that position are Swiss Re's Michel Lies and Lloyd's John Nelson. Their view is that there is so much discussion about whether alternative capital is either good or bad that it seems as if people are overlooking what's right in front of the industry. New risks. A lot of new risks. Hundreds of billions of dollars of new risks. Maybe as much as a trillion-plus dollars of new risks.
Nelson is on the record several times saying that he foresees some $1.4 trillion in new premium by 2030 --mainly coming from emerging economies and risks currently held by government entities that hopefully will be passed to the commercial sector.
Swiss Re's Lies is about as unambiguous as one can be on this same topic when he says "I am deeply convinced that the key issue for this industry is to find a bridge to all the risks on this planet which are not covered yet and, not to be too afraid about having capital interested in being connected to risk."
Talk about trying to change the focus. Just in case the message wasn't received he went on and said the reinsurance industry "was so serious that it prefers to cry" over the difficulties affecting the circa 20 percent of global insured risks, rather than focusing on the remaining 80 percent of risks that were uninsured.
Of course the key to both John Nelson and Michel Lies's confidence lies in Lies' comment about the threat posed by alternative capital when he said "Alternative capital may represent a challenge for some of us but I don't believe it will present a challenge for the most important of us."
Scor's Denis Kessler summed it up nicely (Scor is, after all, the fifth largest reinsurer) when he said that many cedents are choosing to work with larger players because of the desire for global coverage and a desire to work with reinsurance partners across multiple lines of business.
Kessler said this development is "good news for large, global players, but bad news for Tier 2 and Tier 3 players." He said "these companies are increasingly finding themselves remote from the client and under the greatest threat from alternative forms of capital."
It's reassuring to see that behemoths like Lloyd's, Scor and Swiss Re do see this as a period of unprecedented growth opportunity and if the alternative capital can be harnessed to help drive that growth so much the better.
Underwriting should move away from Excel
If you are a regular reader of CATEX Reports you know that one of our concerns is the stranglehold Excel data has over the risk industry. We operate a trading platform that processes over $5 billion annually and importing clean, accurate data into our system is critical. Our Data Vera product has solved that problem for us and for our clients.
We were pleased to see this headline, "The future of Underwriting: Move away from Excel", in Global Reinsurance. The article notes that it's anyone's guess as to how much information the insurance industry has stored in spreadsheets. (We have some guesses.)
Nicholas Line, chief actuary at Markel, notes that although spreadsheets are simple, transparent and easy to manipulate those same assets can be weaknesses. "They can be too easy to change". Line said and "You might have an issue with the version you're using and the version being used in a different office or a different country. And you might end up with a copy of a copy of a copy, with mistakes or changes creeping in".
Fortunately for Markel they have solved those issues by replacing spreadsheets with .Net tools. But many others have not solved these issues. They can by using CATEX's own .Net tool Data Vera.
Accurate data is the indispensable ingredient needed by underwriters. Tools like Data Vera provide it. See this article on page 11 of Intelligent Insurer's Baden Baden Today by Kevin Brawley describing how even a small amount of inaccurate data can skew an underwriter's model and thus a rate --and how tools like Data Vera can avoid that potential disaster.
On Thursday, October 23rd, during a meeting of the Acord Club in London, the Lloyd's broker RFIB talked about how Data Vera and the CATEX platform helped them, to not only better manage their binder book, but to cleanse all of the delegated authority data and convert it to structured data suitable for reports of all types.
Data Vera also has an analytics overlay, complete with graphs, maps and charts, which are made available via Extranet to coverholders and markets. Of course binder data is only one stream of insurance data that comes on an Excel. We all know there are many types of data on spreadsheets and Data Vera accurately and quickly cleans each data cell and converts the data to structured data available for any export.
A PDF of the presentation is available. CATEX would be happy to arrange a 30 minute demo of Data Vera for you.
Roger Crombie writing for CATEX Reports takes an off-beat view of the world of insurance
If you think you saw Roger you were mistaken....
I was not present in Monte Carlo when CATEX won its second Best of Breed award a month or two back. I also wasn't there when the company won its first, a year earlier. I haven't visited Monte in about a dozen years, after attending the Rendezvous only once.
Monaco produced a bad reaction in me, not least when a supermarket clerk tried to charge me in euros what my bill had come to in French francs. (This was around the time of the euro supplanting the franc.) The clerk saw me as a hapless visitor and was sure I wouldn't notice the difference. I was buying a small baguette, some cheese and a pat or two of butter, for which she attempted to charge me the equivalent of about $700.
There were many other reasons to hate Monaco, but only one is relevant here: the Rendezvous itself. As a non-drinker, and (as a journalist) an unacceptable risk to have around, I spent my time in the Principality watching TV and hanging out with other journalists.
It's not just the Rendezvous that I no longer attend. This month marks the third anniversary of the final insurance conference I went to. I missed them at first, but now I can't think of a single reason to attend one, other than to be awarded a prize or arrange an out-of-town-or-country tryst with some fabulous insurance babe.
It is possible that I reached my full complement of conferences over a 20-year period. Living in Bermuda meant being able to attend a conference whenever a story was needed at short notice; conference season on the Island is a year-round operation. So if I averaged six events a year, a conservative estimate, that means I attended more than 100 of the damned things. That, surely, deserves some sort of medal, especially since for a freelance, a conference means the double whammy of a week's lost earnings, plus the associated expense.
For any kind of journalist, such conferences are a mixed blessing. Birds of a feather and all that; one spends the entire week locked in conversation with other bored journalists, discussing the shortcomings of everyone in the industry (other than ourselves). I didn't attend more than a handful of educational sessions, since I already knew everything.
I'm not conceptually opposed to the idea of thousands of insurers gathering in one place for a jolly. Lord knows, I once enjoyed the bonhomie at summits, conferences, rendezvous, and the like all over the civilized world, as well as in Monte Carlo.
The CEO of a major reinsurer once told me that the only reason he attends these events is for fear of his absence being noted, were he not to show up. If everyone understood that, no one would ever go to another conference, and everyone could have a two-week all-expenses paid vacation in Baghdad or the Ukraine instead. They'd emerge refreshed and ready to do whatever they do.
Ah, you say, but how can I take the pulse of the industry without being there? Reading CATEX Reports would be one way. Talking to people in your own office or home town would be another. It surely cannot be necessary to travel to Florida or Europe to meet insurance people. There are probably some in your own house or street, and the 8:15am train to any big city must be chock-a-block with them.
What finally made me understand that I was wasting my time arose near the end of my conference career. The editor of a national insurance publication in the US, a man spectacularly devoid of a sense of humour, asked me what I was doing there. "I write about insurance," I replied, without appending the entirely necessary words "you fool".
I asked him why he was there. "Oh, you, always joking," he said and sauntered off to resume his life without me, which could only have been worse.
To not attend such bashes is to be in a state of grace. Somehow, the people you want to meet and greet are never there, and the worst oafs in the history of risk spot you upon arrival and then glue themselves to you for the duration.
The good news for you is that now you can attend the Cayman Captive Conference or Standard & Poor's annual Bermuda bash without the slightest fear of running into me.
* * *
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 email@example.com.
Copyright CATEX Reports
October 23, 2014
Some notable retirements in the news....Allianz CEO Michael Diekmann will retire in May, 2015. He will be replaced by Oliver Bate currently
responsible for the Allianz global P&C division...and Jamie Veghte is retiring as head of reinsurance operations at XL Group at the end of the year....Air France was reported to have renewed its large all-risk insurance program on expiring terms igniting concerns that rate increases in the airline market will fall short of expectations. But sources are now talking about a "genuinely differentiated market" with the Air France renewal in
sharp contrast to a 30% increase for loss-hit Brazilian carrier Gol Transportes Aeros and a 100% rate increase for TransAsia Airways. Safer carriers receiving lower rates than unsafe carriers? This is a bad thing?....Ace has announced a new product called Image Protect designed to help companies in MENA effectively manage their reputation risk. Clients can choose coverage options 1 and 2 which would protect against terrorism, assault, hold-up, hostage taking, strikes, riots, fire, collapse, explosions and natural disasters.....MENA is a pretty tough neighborhood and it is not known if there is an exclusion for acts perpetrated by ISIS or the Islamic State. Presumably there is not such an exclusion but a report by Control Risk says that ISIS
activities (a mild term indeed for the litany of atrocities attributed to them!) pose a significant risk that corporate activity across MENA could be seriously affected by the conflict....Speaking of reputation risk currently Malaysian Airlines would seem to be the best example of a company that suffered damage to its reputation. A report says that one of the passengers on MH 17, downed over Ukraine, was wearing an oxygen mask. Dutch investigators said that the fact that a passenger had time to don the mask meant that all on board were not killed instantly when the missile struck....Here's another reputation risk possibility, unforeseeable perhaps by even by the best underwriter, but the descendants of a woman they claim portrayed "Aunt Jemima" in the 1930s are suing Quaker Oats
Copyright? Quaker Oats
for $2 billion. The suit was brought by two great-grandsons of a woman, Anna Harrington, who they allege was key in formulating the recipe for the nation's first self-rising pancake mix in the 1930s. They claim Quaker Oats failed to pay her royalties on products bearing her image. Quaker Oats, a PepsiCo subsidiary says that Aunt Jemima was never based on an actual person (living or dead) and denied that such an agreement existed....The Waldorf Astoria hotel on Park Avenue in Manhattan was purchased by the Chinese insurer Anbang Insurance Group for $1.95 billion. Hilton Worldwide will continue to manage the 1,232 room hotel for the next 100 years...Alexander Stubb blames the deteriorating economic conditions in Finland on Apple.
Apple Logo Stubbs
Everyone complains a bit about technology but Stubbs also happens to be the Prime Minister of Finland. He said on CNBC that the iPhone killed the Finnish company Nokia and the iPad killed the Finnish paper industry...Obese Americans cost insurers billions while living. Now it seems there are post-mortem costs too. A fire that damaged the roof at the Southside Cremation Services in Henrico, VA. was likely sparked by a "rather large body". The fire
Southside Cremation Svcs (WTVR-TV)
started when the furnace used to cremate the 500 lb body got too hot and the rubber roofing near the smoke stack ignited. An "average sized adult" takes two hours to cremate but a 500 lb person could take up to 5 hours. You get the picture. Fire policies for crematoria will likely consider obesity-related exclusions....