CATEX Reports
Issue 42   January 2015
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Dear Colleague,              

 CATEX has a London office and has senior staff members working there. Senior CATEX personnel from the US visit London on a monthly basis to meet with UK staff, CATEX clients and CATEX prospects.

 We will be in London the week of February 2 for the entire week with the centerpiece of the trip being the two presentations we are participating in with Lineage and RFIB at the ACORD office in London. The 11 am event is completely booked and we have scheduled another one for 12 noon. If you want to attend please RSVP here

 We will be seeing several dozen other companies as well but can always squeeze someone in if you want to meet with us so please contact us.

 There was a lot of "beginning of the year" commotion this month but more importantly we saw the start of a shift towards a realization that one way for the abundance of reinsurance capacity to be deployed may be to look at the needs of the end customer. Aon Benfield's Eric Andersen has been saying this for a while and it prompted some thoughts on our end.

 We also couldn't help but think about similarities between the state of the global oil market and the current state of the reinsurance market. After looking a little more closely at it we think that, as expected, most markets operate in the same manner. Questions of supply & demand and market share, and what people are prepared to do to retain market share, sounded very familiar.

 News of the XL purchase of Catlin came too as did an interesting reflection about what XL's Mike McGavick may be thinking ahead to --a guess we must emphasize --as we don't know.

 Of course no sooner than we nearly complete an issue of CATEX Reports came news that Axis Capital and Partner Re have agreed to an "11 billion merger of equals" that will create a company with combined gross premiums in excess of $10 billion and a top five ranking among global reinsurers.  We will have more on this no doubt in our next issue.

 There is the usual column from Roger Crombie. Roger remembers "alternative capital" from way back and can look ahead to the day when it will itself become the traditional capital being pressured by an upstart.

  As always any comments or questions would be appreciated --either about CATEX Reports or any of our products. 




Stephanie A. Fucetola

Senior Vice President/CATEX








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.




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.



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 Veraa key component of the CATEX Pivot Point Transaction System.

The Program Business team of SCOR Global P&C Americas

will implement Data Vera to enhance its ability to manage its direct insurance portfolio, through customized automated reports, for an overall improved reliability and timeliness of reporting.


CATEX CEO Frank Fortunato said "SCOR is one of the top five reinsurers in the world, and SCOR's teams in Paris, London, New York and Chicago are well known to us. We are confident that we will make SCOR's implementation of Data Vera a significant success for them."


Data Vera is a SaaS application that imports unstructured spreadsheets of all shapes and sizes, analyzes and validates every single data cell based on configured rules or learned behavior, and auto-corrects data automatically based on learned behaviors without having to setup or manage cumbersome templates and/or having to manually pre-process the incoming spreadsheets.  


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.

The markets and analysts expressed surprise at the deal but apparently Stephen Catlin and McGavick have been talking about it since 2013.  Considering that both were publicly traded companies it's a wonder that news of the discussions never leaked out.
The advance talks may help explain why the deal went through so quickly. It was only 23 days from the date of the announcement by the two that they were in discussion that news came that the deal had been agreed to.
The new combined entity, XL Catlin, will be the 8th largest reinsurer in the world and an instant heavyweight in Bermuda and London. Both companies believe that the integration process will be successful --which is what you would expect at this stage but in this case we think McGavick will make sure that it happens.
We don't see Stephen Catlin going anywhere either. He will be the vice executive deputy chairman and in that position will be certain to wield the needed influence to move the integration along on schedule.
McGavickMcGavick                                  Catlin
There will be the inevitable redundancies as McGavick has noted, and some commentators are still quibbling about the price XL paid and the dilutive effect of the stock it issued to make the deal.  But we think there is another angle here that has thus far been overlooked.
McGavick, like all of us, has been getting warmer and warmer in his description of alternative capital. Like all "traditionalists" (there still small congregations of Russian Orthodox "Old Believers" from 1685 out on the steppes of Russia) he started out wondering about the commitment of alternative capital. Then he evolved to saying he was "agnostic" about capital and now he has noted the sophistication and underwriting awareness of hedge fund and pension investors.
It's worth noting too that McGavick also set up New Ocean Capital with very little fanfare and word is that they have been quietly but effectively toiling away at a structure that would create investor capital pools to be matched with risks.
It may be that there is a much more grand vision in play here that we haven't seen yet. With the diversification and geographic breadth of the risks flowing into the new combined XL Catlin McGavick may be able to package risks directly into the capital markets
This is happening now, as we know, but to be able to put it together in a large scale, assembly-line process would be like discovering the Holy Grail under Bermudiana Street. He may just be able to pull it off too.

CATEX in Lineage pilot with RFIB

If you are one of the 352 Lloyd's coverholders writing business in Canada then you certainly know who Lineage is.  If you are one of the dozens of London brokers and markets placing or writing Canadian binder business then you definitely know who Lineage is.


For the rest of the world here is what Lineage is:

Lineage (Lloyd's Information Exchange) , an on-line system for the reporting and settlement of Canadian dollar binding authority business, is comprised of three major components-Insurance Reporting, Business Intelligence and Accounting & Settlement


In 2013 the total direct premiums written on all classes of business in Canada was $52 billion (CAN). Over $2 billion (CAN) of that amount was placed into Lloyd's.





Think of Lineage as a box in the center of a diagram. To the left of the box are the 352 coverholders sending information to Lineage. Once inside the box Lineage works its magic and its information is ready for export. To the right of Lineage is information coming out of Lineage to London brokers and markets. 

Lineage identified two areas that could benefit from a closer look at how technology could make the data transfer process more efficient. 

As you would guess the data flow from the 352 coverholders to Lineage would be an obvious choice. A large part of this data transfer is currently manual and certainly will benefit from new technology.

But it was the second part of the data transfer process where Lineage decided to begin. The transfer of information from Lineage directly to delegated authority or bordereau management systems, operated by Lloyd's brokers and markets, was where Lineage believed a "pilot" program would have a benefit.


CATEX responded to a market-wide request from Lineage last year and agreed to participate in the pilot. RFIB,a London broker which is a licensee of the CATEX Bordereau Management System, was eager to participate too.  RFIB handles Canadian delegated authority business and was interested in working with CATEX and Lineage to develop a direct interface from Lineage into their Bordereau Management System.

We will be talking about the pilot project at a meeting to be held in the ACORD office in London on Thursday, February 5th.  Our first session was set for 11 am but we've reached capacity already and scheduled a second session for 12 noon on the same day.


Speakers will include:


Lucie Payette, Senior Operations Manager, Lloyd's Canada Inc

Mark Kinsella, Head of Information Systems/Services, RFIB Group Ltd.

David Belsham, Divisional Director, RFIB Group Ltd

Tom Bailey, Chairman, CATEX Europe


If you are interested in attending the 12 noon event at the LUC you must register in advance

Several CATEX personnel from the US will be there as well and we look forward to seeing you.


  2015 perspectives
There have been a spate of predictions/warnings from industry figures as 2015 begins to unfold.
James Vickers, Chairman of Willis says that diversification is the key for reinsurers. Vickers believes that the time for the business model to focus on specific higher-margin lines is over and that reinsurers simply have to "grit their teeth" and take some business.
He thinks that  reinsurers recognize that they have to support certain buyers. He said  in turn some buyers "looked at quotes and didn't push for the lowest. They recognized that by doing so they would do away with some relationships that are valuable to them".
Nick Frankland, Guy Carpenter CEO EMEA, thinks that the effect of alternative capital flooding into the reinsurance market will force the industry to "reset".
He said "I think the business generally will need a reset. It needs to work to a lower cost of capital model, which will see a period of increased creativity around the use of additional capital, as well as enhanced return periods"..

Frankland thinks that "we are poised on the brink of a really fundamental change in this industry and the next twelve months are likely to confirm that."
Aon has weighed in too. Eric Andersen, CEO of Aon Benfield has refined his view that we first heard at the NY InsiderScope last May by saying that "the swim lanes of the old market place--where it was the insurance broker to insurer to reinsurance broker to reinsurer to retro-provider --are starting to collapse."
Andersen sees a "vertical integration" of distribution but that any efficiencies that would be gained from slimming down the broker chain will be for naught if "all of this consolidation does not lead to more risk taking, and a broader appetite for products to meet the ultimate need of the customers."
Andersen has noted in the past that he thinks reinsurance has much to learn from being closer to the client.  He has complained about the abundance of reinsurance capacity but a scarcity of reinsurance product. He compares this to his experience in retail with Aon Risk Services which he says saw a plethora of products but a lack of capacity.  That mismatch. he thinks, is an opportunity and we agree with him.
Just to round it off here is another prediction. Aon Benfield has predicted a continuation of the multi-year slump in US property catastrophe rates at the April1, June 1 and July 1, 2015 renewals.  Barring loss activity Aon Benfield thinks that nationwide, commercial and Florida exposed clients will see decreases of up to 12.5% this year.
For Florida alone the broker says it forecasts decreases of 2.5% to 7.5% which, at this point, may be viewed by markets with relief. 
This "bottom" is pretty far away isn't it? We've been thinking it was in sight for years.



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


Alternative Capital: The theory of evolution    


Snap test: what does the phrase "alternative capital" mean to you, in terms of insurance?


Your answer will depend on your age. If you were happening in the industry back in the early 1970s, the words "alternative capital" would probably make you think first of captives. The early development of the self-insurance market was fought tooth and nail by the brokers, who feared disintermediation  -- the death of the middle man, i.e. themselves. Self-insurance won the fight, but the brokers won the war. Look around. If the time of your time was the 1990s, "alternative capital" would bring to mind Bermuda. For 15 years from early 1994, to mix metaphors, the Atlantic Tiger was the Silicon Valley of reinsurance and insurance (in that order). The cluster of talent and fresh capital that arrived in Hamilton changed Bermuda first, then reinsurance, and finally the world. 


By 2000, the term "alternative capital" was no longer correct, in that so-called alternatives earned more than half of all global insurance premiums. Few referred to alternative capital for a while after that, and then, suddenly, there was a new form of alternative capital, made up of securitized bonds and highly selective coverage. ILS is the legend under which a frothy profitability has been delivered by the new alternatives.


So far, so good. The new alternative market has not had a 1993, 2001 or 2005 to deal with, thank goodness. One has the sense that such a year can't be far away, but people in insurance pretty much always feel like that. One thing's for sure: any of the aforementioned years would test the ILS market in a way that no one truly wants it to be tested.


In what seems like no time at all, securitization has become a $100 billion market. What was once "the dog that wouldn't hunt" (a senior Cayman insurance regulator's view in the mid-1990s), securitization has of late attracted buckets of dough.


"The high volume of catastrophe bonds coupled with 11 sidecar transactions totaling $1.4bn, and collateralized reinsurance vehicles," Aon Benfield Securities (ABS) reported recently, "allowed alternative capital to capture approximately a 20 percent market share of property catastrophe reinsurance volume" for the year to June 30, 2014.


ABS separately reported that total global reinsurer capital at June 30, 2014 stood at $570 billion. In another report, Aon Benfield mentioned $62 billion of "deployed alternative capacity", with doubtless much more sidelined, awaiting developments.


The now-traditional markets have taken note of the newcomers' incursions into their space. A half-hearted war of words has broken out between the traditionalists and the ILS crowd. Both sides have charged the other with a lack of discipline in the January renewal season, amid weak reinsurance markets.


ILS is not only under-pricing, the charge list reads, but also lacks underwriting experience and skill. The ILS people argue that traditional reinsurance capital has itself been under-pricing to retain market share.


The alternative sector is, however, "more disciplined than ... some are thinking," Mike McGavick, of XL Capital, told Legal Monitor Worldwide. "Some are thinking that the alternative guys just came in and whacked the market. No, what happened was the traditional players were so focused on keeping (their market) shares that they got engaged in their own little frenzy.


"Generally speaking, it wasn't so much what the alternative capital guys were pricing at, it was the frenzy among the existing players not to lose share in reaction," McGavick said. "I don't feel the alternative guys, and I certainly know I don't expect our alternative guys, are going to be somehow irrational," McGavick added. "I think they have a different set of costs. They have different appetites."


In insurance, what goes around comes around. If the ILS market can survive alongside its traditional reinsurance competitor - and all the signs are that it will - history tells us that in about, oh, 10 to 15 years, ILS will itself face competition from a new form of alternative capital.


It's the way of the world. As Harvey Dent, a troubled character in some of the Batman films, puts it: "You either die a hero or you live long enough to ... become the villain".



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

January 26, 2015

Quick "Bytes"

On January 22 Tom Bolt, Lloyd's performance management director released a market bulletin  reiterating Lloyd's guidance for managing agents on distribution costs and broker remuneration in a bid to ensure 



that they remain compliant with the 2010 Bribery Act. No word on what prompted Bolt to reissue the warning...At a record level of $62 billion alternative capital now represents between 40% and 50% of global catastrophe reinsurance capital or 12% of total reinsurer capital according to Aon Benfield....Insurance Insider reports that Bermuda CAT specialist Montpelier Re which put itself up for sale last month is reportedly finding it


hard to attract proposals. Its business is predominantly heavily commoditised cat reinsurance that has been most affected by rate drops...Here's an exclusion for homeowners coverage. The legalization of marijuana in Colorado two years ago has led to a sharp uptick in home explosions. In 2014 32 homes exploded. Apparently people are pumping



butane fuel through a tube packed with raw pot plants to produce "hash oil'. The room then fills with explosive vapors and you can guess the rest...Travelers has replaced its cat excess-of-loss treaty with a huge aggregate cover as part of a restructure that brought its main renewal date forward from July 1 to January 1. The new structure is believed to be the biggest agg cover in the market since AIG dropped the limit it purchased to $1bn for January 1, 2014. No word on the markets identity but it's believed that Carpenter broked the deal...A bartender working in an Ohio country club frequented by House Speaker John Boehner was arrested



for threatening to assassinate the Speaker by poisoning his red wine. Boehner, who is known for both his fondness for red wine and Camel Ultra Litesthanked the police for making the arrest...Yes, it's true. We cannot resist Kim Jong Un stories. We did see "The Interview" but won't comment here but we also saw this story. Apparently


Kim Jong Un                             Possible Entree 


Kim Jong Un actually has a chain of restaurants that are used primarily to generate foreign exchange to send home to Pyongyang. Most of the restaurants are in China near the North Korean border but, up until 2012, one was in Amsterdam.  Supposedly Kim could be opening a restaurant in Scotland and serving national favorites such as dog on the menu....Finally, we note with sadness the death of Bryan Bumsted, senior underwriter at Bermudian hedge fund reinsurer Third Point Re, who died too young at the age of 37 from cancer. He was well-liked and well-respected by colleagues in London, Bermuda, New York and Europe and he will be missed. Our condolences go out to his family and to his friends at Third Point Re...

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