CATEX Reports
Issue 41   December 2014
In This Issue


 Quick Links  

Contact CATEX


Princeton, NJ


+1 (609) 683-0888

Dear Colleague,              

 You can always tell when the end of year frenzy has begun. It seems to pop up no matter how much preparation is done or how pronounced the effects of alternative capital may or may not be. One thing is for certain and that is we are squarely in the middle of it.

 We've also begun to see what might only be the beginning of that long predicted wave of consolidation. First Renaissance Re announced that it was going to acquire Platinum Re. Next, just before we went to press, XL announced that it was in talks to acquire Catlin.  No doubt there will be more to come.

 We've also begun to see questions about possible past paradigms for alternative capital being raised now by some in the industry.  Comparisons to the "dis-association" that mortgage backed securities holders had with lending banks are being mentioned when talking about possible "remoteness" of capital investors to underwriting.

 Lloyd's has taken a firmer stance on cyber-risk, and this was done prior to the hack of Sony.  And AIRMIC picked up on Tom Bolt's discussion last month about expediting creation and delivery of the (re)insurance contract.

 Roger Crombie asked us if we would mind if we wrote about something completely unconnected to insurance and reinsurance and since it is the holiday season we happily obliged. His article below is, we think, one of his best.

  As always any comments or questions would be appreciated --either about CATEX Reports or any of our products.  And of course all of us at CATEX wish you the best for the Holiday Season and the New Year too.




Stephanie A. Fucetola

Senior Vice President/CATEX









Virtual Insurers? 


 There is an unusual strand in the discourse of late that has begun to pop up.  It's called "de-leveraging".  If a risk is de-leveraged it means that the insurer no longer needs to maintain a reserve to pay a possible claim. That's not a bad outcome if you are a risk bearer but that's the financial definition of de-leveraging.  It also has another meaning though in practice which could well mean the severing of responsibilities that an underwriter would have for risks insured because the obligations to pay any resulting claim has been kicked far down the lane.

 There are a number of examples for this type of de-leveraging. Perhaps, because we live in New Jersey, we can't help but be reminded of the infamous Joint Underwriting Association (JUA), which at one time in the late 1980s, provided car insurance to 53% of all NJ drivers.  This meant that the voluntary auto insurance market insured less than half of the state's drivers.


 The JUA was funded not by insurers but by the premiums paid by any

driver assigned to it plus a $222 annual surcharge imposed upon all New Jersey drivers.





 The JUA had no underwriters even though it was the largest auto insurer in New Jersey. Underwriters from the voluntary market insurers would kick policy applications out to the JUA if they were not to their liking.


 Worse yet was the fact that the claim process was administered not by insurers but by data companies who processed the claims and mailed the checks out.  


 Between the absence of any underwriting or claims infrastructure the JUA was one of the original "virtual" insurance companies.  It didn't even need to make money so long as the surcharges and premiums kept coming in and the cash flow covered claims.  As a result the JUA ran up a debt of some $3 billion.  


 There are two lessons to be learned here. The first and most obvious is that if the money needed to pay claims is too remote from the underwriting operation there is a sharp decrease in underwriting standards.  If you know you are going to pass the risk to a third party, and not be responsible for the claim, you could do the underwriting blindfolded.


 The second lesson pertains to what is sometimes referred to as the  "Valu-Jet" effect.  Here's how this one goes.  When ValuJet flight 592  crashed in the Florida Everglades on May 11, 1996 killing all 110 persons on board a number of interesting things emerged in the investigation of the crash.


ValuJet DC-9 



 Like most discount airlines at the time, ValuJet did not own any hangars or spare parts inventories. The measures the airline took to hold down costs were aggressive to say the least. Pilots had to pay for their own training and were only paid after completing flights. The company outsourced many functions that other airlines handled themselves.


 For example it subcontracted aircraft maintenance to companies who in turn subcontracted the work to other companies. Whenever delays were caused by mechanics ValuJet cut the pay of the mechanics working on that plane.


 The deadly crash of Flight 592 was caused by an on board fire triggered by partially full chemical oxygen generators that were illegally stowed in the cargo hold. ValuJet banned the transport of such cargo but the NTSB investigation would reveal a pattern of errors and sloppiness exhibited by temporary employees of subcontractors who either were unaware of the prohibition or didn't bother to check the manifest.  Even worse, the generators were loaded onto the plane without their safety caps in place..



 There were other serious safety incidents as well which eventually led to the FAA grounding the airline in 1996. 

 You should be able to get a sense of where this is going to go in terms of reinsurance but before we get there let's go back to the first lesson learned from the NJJUA --the one about ensuring the distance between underwriter and claim is close enough to maintain the correlation between claim loss and proper premium setting.


 There was an interesting conference sponsored by the Bermuda Monetary Authority in Bermuda on December 4th.  XL's CEO Mike McGavick started talking about things that reminded us of the NJJUA and ValuJet. 


Mike McGavick 



 McGavick was talking about the possibility that alternative capital (over $44 billion of it thus far in 2014) could ultimately contribute to instability in the system.  He likened the potential risk to reinsurance to the sub-prime mortgage boom that led to bank collapses and triggered the economic crisis.  He said "in essence this is the story of the real estate crisis and that is the risk here because the risk is being removed from those who took the risk."


 Lloyd's Chairman John Nelson was present too and he didn't blink either. Nelson said (he is after all a banker and is well aware of de-leveraging) Nelson said, "It's going to be a continuous challenge that as the alternative capital market develops the temptation to detach the risk from the capital becomes ever greater and there will be kinds of securities where the returns look really alluring, but if we do that we will destabilize the whole thing exactly as happened in sub-prime mortgages."



John Nelson



Both statements were startling.  We are, after all, in a world now where pools of money contract with underwriting teams to write risks. Those underwriters in turn contract with modelers to estimate risk of loss. In some instances management of claim activity is also contracted to claim specialists and the process chugs along almost as a virtual insurer.


 McGavick said "The advantage of the integrated model is you're betting with your own money. That changes how you feel about it."


 We know that McGavick is agnostic in terms of where his underwriting capital originates but we think his statement could have been made by any number of people including Hannover Re's Ulrich Wallin, Swiss Re's Michel Lies, Munich Re's Nikolaus von Bomhard and SCOR's Denis Kessler.  If a risk bearer is an integrated entity, where underwriting, modeling,  claims and management are all eating at the same table you can better avoid the JUA and ValuJet scenario because it is your money at risk.


 Also present at the Bermuda conference was Nephila's Frank Majors, who, one could argue, is one of the largest providers of alternative capital to the reinsurance industry.  Frank Majors is a very smart guy and he certainly knows to step off the tracks if a train is coming. When asked what he thought about this whole de-leveraging discussion he told the truth and said that alternative capital "is taking a risk off levered balance sheets and on to unlevered balance sheets".


Frank Majors



 Majors went on to say that "the effect of the alternative capital is actually to de-leverage the industry significantly and that in this stage of (its) development it is very different from the mortgage securitization which was a process of adding leverage."


 Frank's response was 100% accurate. We think he could have gone on to say that alternative capital has allowed these very sophisticated and savvy risk bearers to access capital far less expensively than ever before and that while yes, abuses can happen (eating too much ice cream will kill you too), there is a certain amount of prudence one would attribute to a risk bearer that would lead one to assume that it will run its operation properly. Just because it is getting capital cheaper doesn't mean it will throw everything it ever learned out the window.


 Keep in mind, we think that Frank Majors could have gone on and said something like that --it is the basic operating premise of all these ILS carriers, isn't it?  Here's what he did say:


 "This development of alternative capital does have the possibility for concern, or abuse, or misuse, or being taken too far into the future. Right now, I'd like to make the point that the effect of the alternative capital is actually to de-leverage the industry significantly. So it's very different right now, in this stage of development, very different from the mortgage securitization which was a process of adding leverage. If you have access to deeper pools of capital, that should add stability, unless it's abused in some way."


Keep in mind that by its actions Nephila is the antithesis of the virtual insurer. Remember that it has staked a syndicate at Lloyd's and is reported to have purchased stakes in three Florida insurers. Frank is doing exactly what he has said he would always do and as he notes the alternative capital market is different right now from the MBS market of 8 or 10 years ago. But as he has recognized, there is a potential for abuse there. 


 Nephila has always played on the right side of the tracks (to use our railroad metaphor) but it would be interesting to learn their views about so-called "ValuJet insurers", or those playing on the wrong side of the tracks.  






New AonBenfield service for Reinsurers



 We've talked in this space about Aon's Global Risk Insight Platform (GRIP) which collects placement information on the retail business placed by Aon which is then made available to carriers.


GRIP caused some grumblings from insurers who argued that Aon was essentially trying to sell their own data back to them.  They are the ones who insure the risk after all.  Aon has persevered though and GRIP "is thought to have generated hundreds of millions of dollars in new revenue for Aon over the last few years, with $10 mn-$20 mn in annual fees from individual carriers in some cases."


 That kind of revenue is a godsend in a soft market so Aon Benfield in this case seems poised to take a page from the successful GRIP story and launch a similar product for reinsurance.  Aon Benfield places more than $30 billion annually in reinsurance premium so there is an enormous amount of data available to them.


 Aon Benfield calls the product Re/View and it's being marketed to reinsurers to help them identify and evaluate new growth areas in which to increase market share as their current business models continue to be pressured by low premiums.

Insider logo  


 The Insurance Insider is reporting that Re/View data is pulled directly from Aon Benfield's global billing system which represents approximately 40% of the market. The product is said to anonymously analyze cedent programs on an aggregate basis to identify areas for better deploying reinsurance capacity. 


 The Insider says that Re/View "provides no data or analysis that may be deemed detrimental to Aon Benfield's ceding company clients, with no details on the profitability of placements for reinsurers, or pricing studies, program structures and individual cedent names or underwriting results."


 A senior reinsurance source quoted in the article said "Knowledge is very important when you're starting a new line. If you can identify who the individual brokers are that are dealing with the business and what accounts to target it's a shortcut to understanding the market."


Merger Mania 



 John Berger, the CEO of Third Point Re in Bermuda, is famously quoted as saying "If you take all the Bermuda companies, and take out the biggest guys but put everybody else's name into a hat, if you pull out two names at random you can make a great case why those two should be together. And it's mostly about expense."
  Berger flat
John Berger

 According to Deloitte you could safely identify Ace and XL as John Berger's "biggest guys" that would have been taken out of the hat leaving everyone else.  A prescient observation indeed in light of what's been occurring this past month.
 First there was news that Renaissance Re would acquire Platinum Re. Then there was news that one of the "big guys", XL, was acquiring Catlin.  
 The Ren Re news wasn't particularly surprising. One of the biggest benefits for Ren will be increasing its US presence.  Ren Re has only 8 employees in the US while Platinum has 86 based in New York, Chicago and Stamford, CT.  We had to remember what Bob Deutsch, of Hamilton Insurance said on December 10 when he notes "God seeks out concentration of risk and then punishes you for it".

                                                           Bob Deutsch
 Deutsch was commenting about the next M&A news nugget of the month --that  Montpelier Re was considering a sale process.  Certainly Ren Re's expansion into the US which will be achieved by the Platinum deal will take a major step toward lessening its risk concentration (to the extent Ren Re had any concerns) as well as obtaining an annual run-rate expense savings of $30 million after implementation costs.
 We saw as well that Peak Re was reported to be making a bid for Sweden's Sirius Re which would allow it to obtain, among other things, Sirius' Lloyd's platform.

 But the biggest news of course was XL's bid to acquire Catlin for 2.5 billion GBP. The acquisition of Catlin, with its 2,400 employees and its GWP of $5.3 billion US would make the combined entity a top 10 player in the global reinsurance market.
 We keep going back to John Charman's comments when he kept saying that size matters and that the more services a carrier can provide to its clients the better off you will be. It seems we weren't the only ones listening.

 A number of London based companies are now using the CATEX Data Vera system.Additional brokers and markets have licensed it on a "pilot" basis and the results look great so far.  

 Data Vera imports any type and number of Excel spreadsheets and validates every data cell within prescribed business parameters chosen by the client.  The system learns as it goes and recognizes incoming values and suggests corrected data based on the client's previous choices.

 Once the data is cleansed Data Vera swiftly processes it to any multiple of export formats needed by the client.  At any interim step in the process, after the data cleansing, the incoming data can be matched against data in the client's data base to see the effect of the new business on metrics such as aggregate exposure in a geographic area, LOB, premium, etc.

 The Data Vera ecosystem continues to expand. Not only can Data Vera help ease the pain associated with formatting data automatically to modelers templates it now send data direct to modelers and receives modeled data back from them.

 All the data --from the original incoming Excel, the corrected data, the data template creation, the export to the modeler and the return of the modeled data is stored on Data Vera
and accompanied with an audit certificate showing who made any data correction, what the correction was and when it was made.

 By next month's CATEX Reports we will have significant upgrades to Data Vera that we are looking forward to telling you about.  We have answered many of the questions we've been hearing by building a certain set of processes that will be very well received. More to come....

 If you want to see a Data Vera demo please contact us.





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

 A youthful Roger meets the Chairman of the Board




This being Christmastime, with the Editor's kind indulgence, a story having nothing whatsoever to do with insurance or, for that matter, with Christmas.

Dateline: New York City, November 1981. On the Upper East Side of Manhattan, at the Carlyle Hotel, stands the Café Carlyle, perhaps the most sophisticated nightspot in the world. The words plush, elegant, and uptown are all germane.

The rain fell hard in Manhattan that night, as I got out of a taxi on 76th Street and entered café society. I had gone to meet the legendary jazz pianist George Shearing. He wrote Lullaby of Birdland and had been my father's musical partner for a number of years in the 1940s. George was playing the last night of a two-week residency at the Carlyle. I wore a $1,000 Italian suit, in the days when for a grand you could buy a farm, two or three rental houses, some wives and a new identity.

I sashayed into the hotel lobby and veered left. Some goons met me at the door of the café and inquired as to my bona fides. The suit vouched for me. I was led to a darkened nook, where George and his wife Ellie were relaxing. The whole place smelled sumptuous. I myself had splashed on a gallon or two of something special.

We traded notes on how everyone was, and then George had to go onstage, so I accompanied Ellie to a circular table, front and center. Other guests were already at the table, friends who had dropped by to soak up a spot of sophistication. It was like being in a TV commercial for Martini. I drained my gin and tonic slowly in these high-class surroundings, lest I drift too far into the role.

George had played half his set before a palpable wave of hysteria suddenly invaded the place. The tightly-packed audience behind me began to part like the Red Sea and everyone started whispering, loudly. The excited rustle crescendoed its way towards us.

Francis Albert Sinatra was making his way through the room. The Chairman of the Board, with a dame on each arm. He was very short and his hair was bluish in parts. Behind Frank was a tall guy with a glass eye (Jilly Rizzo) who kept his right hand in the inside pocket of his impossibly white silk jacket, above his heart. It was as if he might have a gun in there, which I'm sure he didn't. Of course he didn't.

                                                          Rizzo and Sinatra

Frank sat down at our table. Jilly stood behind him. Clockwise, it went like this: Old Blue Eyes; his wife Barbara (ex-wife of Zeppo Marx); some people; then, directly across the table from Frank, little old me; then Ellie; then some other people; then the Kid from Hoboken's other date, unknown to me. I was three degrees of separation from Hugo Z. Hackenbush and no degrees at all from Frank Sinatra.

Around us, people were gawping, some literally open-mouthed. George finished his set and joined us. I was just some schmuck from nowhere, but they let me play among the stars. At one point, Frank turned to me and asked: "What's your story?"

I failed to disgrace myself, and pretty soon the conversation switched to a language I couldn't understand about people I'd never heard of. It was oddly fascinating. Then I received the elbow, which was only fair. I bade the gang farewell and went in search of my coat.

The weather outside was frightful. It was raining sideways in sheets, so I stood in the lobby waiting for a taxi. Suddenly, a little old lady with hair of green, standing next to me, started hyperventilating and then just about had a grand mal seizure. I swung around, and there was my good friend Frank and his associate moving smartly, hats on, heads down, shoulders forward, as if it were raining indoors.

They left ... the woman recovered ... I eventually caught a taxi ... that's how I met Frank Sinatra ... have yourself a merry little Christmas.


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

December 22, 2014

Quick "Bytes"

 If you are a regular reader you know we were going to mention the "hack" of Sony Corporation in an apparent response by North Korea to the making of the Sony film "The Interview".  The movie's plot involves an


assassination attempt (successful by the way) against Kim Jong Un the North Korean leader.  North Korea warned Sony not to complete the movie but the studio maintained production. Shortly prior to the movie's scheduled release date all of Sony Picture's systems were hacked resulting in an unprecedented volume of data being stolen. The US government is squarely placing the blame on North Korea for the attack in which hundreds of millions of dollars worth of damage is said to have been incurred by the studio....Just to the south on the Korean peninsula some more news was made when Cho Hyun-ah, the daughter of the Korean Air Chairman Cho Yang-ho ordered a Korean Air A-380 (yes, the big one) back to the gate at JFK before takeoff because she was served macadamia nuts in a bag and not on a plate. The unfortunate member of the cabin staff who served the nuts was forced to kneel in submission in the First Class cabin and endure a verbal tirade from Ms.Cho who at the time was also the head of cabin services at the airline. Ms.Cho has since resigned all of her positions at


Cho Hyn-ah apology 


Korean Air and at the South Korean chaebol, Hanjin, which owns it. The chairman apologized on South Korean television, bowing deeply, saying he "didn't raise her right"....Renaissance Re's Kevin O'Donnell said that "weakening of terms can be a dangerous trend in our view. It can involve not only a reduction in deal economics, but also an introduction of


 Kevin O'Donnell


unmodeled risks to the portfolio". This comment tracks our earlier CATEX Reports story identifying these unmodeled risks sneaking in the door...The addition last month of $57 million to the ground-up loss to the reinsurance treaty of the International Group of P&I clubs from the Costa Concordia


Costa Concordia 


sinking partly related to the cost of cleaning up mussels that were inadvertently brought into the area where the ship capsized by tug ships. We wonder if this risk was modeled?....The decrease in the cost of oil is good news for drivers but Boeing has its eye on it too and for different reasons.  The company is concerned that cheap fuel costs will encourage airlines to hang on to older, gas guzzling planes rather than purchase new, more fuel efficient aircraft like the 787....Finally, and we will state this right here for our Pyongyang readers, after all this brouhaha over a movie (The Interview) that we never would have spent $9 to go see we can assure you

Kim Jong Un 


now that once it is released we will see it. If you like you can email us and we will tell you what theater and show time we will attend in case you are really interested....Happy Holidays to everyone and we will see you next year.