Will we ever be there?

New products will lead to Capacity for Insurers

The big story in reinsurance is seemingly always connected to the oversupply of capacity. Companies merge with other companies in order to show more product diversification and geographic spread as well as to provide more capacity. Premiums keep decreasing because of an oversupply of capacity. New types of reinsurers set up in an era of withering premium rates, hoping to provide product more efficiently than traditional markets bringing yet more capacity.

And underlying all of it are the twin factors of a near unprecedented absence of natural CAT claims and an unprecedented influx of new capital.

Anderson

Meanwhile Aon Benfield keeps reminding us that it's an inevitability that this new capital will trickle down (or up --depending on where you sit) to the insurance industry. Eric Anderson mentioned this in May and said it again last month --joined this time by Bryon Ehrhart. Plainly Aon is betting that the incoming tide will breach reinsurance and hit the insurance sector.

Shah 

AIG may now see the same thing too. The move of Samir Shah from chief reinsurance buyer to head of capital markets means that one of the biggest insurers in the world wants someone expert at crafting alternative capital solutions for insurance products in the mix.

We keep wondering about the expected onslaught. When will it come? 

Yes, reinsurance premiums have taken a massive hit but unless you're a homeowner in Florida it hasn't affected your wallet yet.  Maybe we're cynical but, despite the concerns of central bankers about deflation, we just don't expect price decreases in our homeowners coverage or car insurance or personal umbrella policies because of the arrival of new capital in the insurance market.

What would be nice would be the appearance of some of the new products that Andersen has talked about --or we would even settle for an expansion of some of the existing products to make them more affordable to buyers.

We are reminded of this each week day if we are running as little as 10 minutes behind schedule.  In the United States, in the pre-dawn hours, when driving along a stretch of residential road on a school day, you will pass a strange succession of single schoolchildren standing sentry at the end of their driveways waiting to be picked up by a school bus.

On some stretches of the road there is a single child standing on just about every other driveway.  The only distinguishing factor about these kids, aside from the presence of those ubiquitous huge backpacks they all seem to tote around, is the realization that the children a driveway or two away are practically neighbors and most certainly know each other.

Yet they stand separate from each other. They do not leave their driveway. It is as if a canine invisible fence is barring their movement. Further inspection reveals that the children are certainly near enough to the same ages that they most certainly know each other and are probably boarding a schoolbus headed to the same school.

A passing memory may run through the mind of the motorist as he thinks back to his own 30 minute hike to a designated school bus stop where as many as a dozen students would gather waiting for the bus to arrive. Clearly there was no door side school bus service available in those days!

The thought is no more than a thought that until a day when this writer is 15 minutes late (not 10) and finds himself trailing the actual school bus itself. (As Colonel Katz in "Apocalypse Now"  would say, "Oh, the horror"). The bus proceeds to stop at every other driveway to pick up each of the students, one by one, until, with as many as 40 cars backed up behind it, it mercifully turns off the main road.

Being stuck behind a school bus is no fun. In the United States it is nearly a capital offense to pass one under any circumstances and you risk being the target of an RPG fired from a student on the bus should you take any action other than freeze in your place when its red lights begin to blink.

Why is this?  Why are students picked up at their own homes? Why would one student not walk 20 yards down the street to wait with a classmate for the bus? Why not instead of 15 stops the students congregated at one central stop and traffic delays were eased commensurately?

There is one reason and that's called liability. Back in the "old days" the insurer for the bus company or the school wasn't focused on whether a student had an accident headed on the way to the bus stop. An insurer would look in amazement at a suit from a plaintiff's attorney claiming a student had been hit by a car as he or she walked to a bus stop.  A pedestrian being struck by a car is serious, obviously, but the potential perils facing such a peripatetic student could well extend to dog bites or even kidnapping. It was just outside the scope of the policy's liability.

But soon things changed and claims began to be successfully brought against insurers for such harms and insurers did what insurers do --they increased premiums.

Now the only way a bus company or a local Board of Education can obtain the required insurance is with a policy chock full of conditions that mandate that the child does not leave the family driveway until the bus appears.

Congratulations to the insurance industry. It has managed to regulate the behavior of 9 and 10 year old children who, per the eyewitness testimony of this writer, do not move from their driveways until the arrival of the bus. If only their teachers could enforce such discipline!

The point is that possibly the entry of alternative capital to the insurance industry could bring some of the same trends we've seen in reinsurance. Perhaps the loosening of terms and conditions could see the easing of per-driveway pick up school bus service?  Perhaps the loosening of terms and conditions could see the return of 4th of July fireworks celebrations in small towns, county fairs and veterans' halls? Who knows how much our lives would improve if businesses and organizations could buy affordable, rational coverage?

CATEX Licenses Data Vera to SCOR 

 CATEX announced its grant of a worldwide license to SCOR to Data Vera, a key component of the CATEX Pivot Point Transaction System.
 

The Program Business team of SCOR Global P&C Americas

Data Vera enables online collaboration, both within the company and with business partners, to quickly resolve any data issues.  Data Vera, also, maintains a strict audit log that tracks any changes made to the incoming data by either the user or auto corrected by the system.

Was that an OPEC meeting in Monte Carlo? 

Something else came to mind this month as we watched reinsurance premiums continue to fall. In the US the price of regular gasoline has dropped now to as low as $1.81 a gallon. The advent of US shale oil production, combined with the steadfast refusal of Saudi Arabia to reduce oil production, has led to an over supply of oil in the world. Add to that the economic slow-downs in China and Europe and there is more fuel around than one can shake a proverbial stick at.

We couldn't help think of analogies to the reinsurance market. OPEC, which has essentially fractured, could be likened to the traditional reinsurance industry.  But like the traditional reinsurance industry it no longer "speaks" with one voice.

Some OPEC members like Venezuela are adamant that oil production needs to be cut and cut dramatically as a way to increase the prices. The problem is that countries like Venezuela have national budgets based on petrodollars and implementing a unilateral cutback means the elimination of vitally needed revenue.

Maybe those reinsurers that we hear whispered about who hve relaxed their underwriting standards to at least keep premium coming in are like Venezuela?

But then who is the parallel in reinsurance to Saudi Arabia?  The Saudis have told OPEC that they will pay no attention to the concerns of the cartel but are going to continue oil production at the same level regardless of the price effects on smaller producers. The Saudis believe that their oil can be brought to the market cheaper than anyone else's and they seem determined to drive the price lower and lower so that others cease production because they can no longer afford drilling with such a low payback for the oil.

This is a tough analogy to make but maybe alternative capital fits into the Saudi model by injecting more and more capacity into the market regardless of the effects on premium rates. And, like the nervous non-Saudi members of OPEC, the insurance ratings agencies are warning reinsurers to practice disciplined underwriting, in fact even ILS providers have begun to beat the disciplined underwriting drum too, all in an effort to avoid being the Saudi Arabia of reinsurance.

But the real price disruptor in the oil market has been the entry of the flood of oil from US shale production and this seems to be the target the Saudis are aimed at.  Already, as the price of oil has dropped, layoffs and shutdowns have rippled across the US production system.  Extracting oil from shale layers is a far more costly proposition than pumping it out of the Arabian desert.

North Dakota oil well                                     

The shale producers seem a bit like traditional reinsurers who really can't afford to see the price drop below their production costs. When you hear reinsurers say they won't write below their "technical levels" that means they won't underwrite the risk because they know that they will lose money on it. As shale oil producers in the US cease operations it's because their costs are exceeding the returns they would receive with oil at $45 a barrel.

The difference between the oil and insurance markets of course is that most people think oil doesn't have a "tail". An insurance or reinsurance policy sold at a low premium rate is not just a vehicle to generate a premium invoice. It also represents a potential liability that can lurk, hidden, within the balance sheet of the market for years to come.

But there are "tails" in the oil market too.  Raise the price too much and big buyers will increase auto mileage standards, develop alternative production sources and conserve energy. Sound familiar?

We aren't going to even think of an analogy in insurance for the Russian oil market.  The most we could think of would be a monoline Florida windstorm reinsurer?  Ouch.

XL acquires Catlin
  

The acquisition of Catlin by XL was the biggest news of the month. It's hard to remember that XL was in a bit of a spiral in 2008 when Mike McGavick came in and you have to acknowledge the job he has done.

McGavick                                  Catlin