In search of premium and savings 

Will analytical underwriting triumph after all?

Movement and more movement...the reinsurance industry is changing at a very rapid rate no matter where you look,  Amwins and Nephila have agreed to a follow form type of arrangement which will see Nephila officially coming in to underwrite US primary insurance risks. We had expected that Nephila, after its syndicate set-up at Lloyd's and its Florida insurer investments, would move into the US primary market overtly and the Amwins arrangement may only be a first step.  No one is better than Nephila in attracting non-industry capital and putting it to work in the underwriting arena.

Reports are that Partner Re was so interested in diversifying its portfolio to include primary insurance that it was the proactive party who reached out to Axis (and apparently only to Axis) to propose a merger. Reports included that Partner, too, had concerns about fast moving changes caused by alternative capital. Could Partner have sensed that Nephila and others were ready to move into the primary sector where rates have not tumbled as in reinsurance?  

Aon Benfield's Paul Schultz thinks it's a foregone conclusion that alternative capital is coming into the primary space and makes no bones about Aon Benfield being ready for it by redefining the role of the broker --who will switch (if he or she hasn't already) from a "simple" transactional conduit to the roles of modeler, investment adviser, book balancing resource, growth consultant and spiritual adviser to clunky primaries ready to take the plunge into alternative capital coverage.

Meanwhile, waiting at the door tapping its foot impatiently waits alternative capital. Even the UK Chancellor of the Excheqeur announced plans to work with the reinsurance industry to attract more Insurance Linked Securities business to London. George Osborne said "this alternative form of reinsurance makes greater use of capital markets and is a key growth opportunity for the sector".

If there is one thing the capital markets can do better than the traditional reinsurers it's extracting costs from the overall transaction price. This has long been a concern of Lloyd's which has stated that it thinks its current transaction costs are placing it at a competitive disadvantage.

As we've stated here in the past it's inevitable that capital markets are going to focus on the broker commission structure as a cost center for review.  Unsurprisingly, the brokers who many think were as responsible as any sector for the introduction of alternative capital are now a bit horrified to see that the attractive little child that once was alternative capital (which could be used effectively both as a negotiating tool with reinsurers and as a profit center as consumer of broker related services),has now grown into the proverbial 800 lb gorilla living no less right amongst them as most brokers maintain ILS units charged with actively seeking out deals and finding investors and clients to match them with.

These 800 lb gorillas are apparently, if we read the tea leaves correctly, beginning to wonder why the broker placement commission can't be reduced or whether it's needed at all.  No less an authority than Willis' global placement head David Martin commented that --coming from the other direction, on the retail end --internet aggregators are already beginning to get into the small commercial market and then "it's only a matter of time before they figure out how to get into the mid-market, and so on. The model of being an insurance broker is clearly under threat."

If that's not enough more information has been revealed about Google's plans for so called "driverless cars".  We are the first to suggest that we at least would not ride in a driverless car until EVERYONE else was riding in one as we can guess at the problems that could be caused by human controlled vehicles in a highway setting dealing with computer controlled cars!  But what was very interesting was news of a device that Google already has which can be placed into cars today which will effectively result in personalized, individualized car insurance ratings (and the resulting premium price) based on the driver's rate of speed, use of signal lights, wearing of seat belts, weaving back and forth, etc.  Imagine the treasure trove of data Google, the biggest Internet data aggregator of them all, will be able to offer car insurers in their role as auto insurance agent.

Is this a surprise?  Remember that the creativity of the reinsurance market has been essentially offering "personalized" solutions to clients for years. Mechanisms such as no claims bonuses, ceding commissions and endorsement wordings have allowed even the traditional market to effectively reward or penalize the client based on its performance.

With the advent of ILS into the arena a purchaser need only create a proposal sheet describing exactly the type of coverage it is seeking in great detail and then put it into the market. With the increasing lack of coverage opportunities for reinsurers and ILS carriers the buyer is certain to at least get a response if not ultimately be able to consummate the deal on its own terms.

We're not so sure that this is necessarily a bad thing. We can understand how difficult the specter was twenty years ago of even attempting to develop "individual" rates for a reinsurance cedent. The idea of doing the same for a retail buyer ended up at best with the development of geographic "ratings territories" and broad classifications of insured based on their experience ratings.

The world has changed and this isn't exactly a news bulletin for only the insurance industry.  Look at medicine. Now we even hear the US president discussing targeted cancer treatment based upon specific mutations of DNA and RNA found in individual cancer patients. Two patients can have the exact same cancer but be receiving two distinctly different immuno-therapy treatments.

With the amount of data available to the insurance and reinsurance industry which ranges from construction detail, premium payment history, claim history, modeling information, financial background and on and on why shouldn't the industry be setting rates in as individualized a manner as possible?

In an aside we wonder if 325 years ago in Edward Lloyd's coffee shop whether certain financial backers were quite aware of the risk taking proclivities of certain ship masters. Surely they knew a particular captain was more likely to wait out a storm at sea rather than steadfastly sailing through a treacherously navigable channel to simply meet a delivery date. Do you think the owners of the ship commanded by the cautious master paid less for coverage than the owners of a ship commanded by a known risk-taker did?

We'll have to examine the Lloyd's archives if we ever are granted access to them for that one but we can guess at the answer.

The bottom line though is that the balance of power is shifting away from so called "intuitive underwriters" and relationship based placement brokers towards the actuaries.  All of this data --so called "big data" -- now allows for computation of a fairly specific rate that can be assessed against a specific buyer.

Don't think for a minute either that those buyers (just the same way accident free drivers call their insurers when their rates increase) aren't doing the same calculations.  So far it seems that the ILS carriers have seen this opportunity more clearly than their traditional counterparts.
 

London to become an ILS Hub

The UK Chancellor of the Exchequer George Osborne made some news last week when he said in a speech that he believes the use of ILS and reinsurance more generally represents an important growth sector and wants the UK to be at the center of developments in this field. 

                                         Osborne with the UK budget in hand

London remains second only to New York as a world financial center and its insurance and brokerage businesses contributes around $45 billion to the British economy. But what Osborne actually said caused some ripples around the risk-bearing world.

Osborne said of his plan that "to take this forward, building upon the UK's position as a world leader in the global insurance market, the government will work with the industry and regulators to develop a new competitive corporate and tax structure for allowing insurance linked securities to be domiciled in the UK. This alternative form of reinsurance makes greater use of capital markets and is a key growth opportunity for the sector."

We cannot count the barrels of ink that have been consumed writing about the seemingly endless discussions about alternative capital and the reinsurance industry over the last twenty years.  But now, in March, 2015 here it is in black and white. The top financial official in the United Kingdom has announced that the government is determined to make London a hub for ILS insurance and will work to create tax law changes needed to place the London based ILS market in as competitively advantageous a position as say for example Lloyd's of London.

This is big news yet when Osborne made his announcement it was greeted with a bit of a shrug by the industry and why not.  This barn door has long been open and any horses inside have run out long ago. It's catch-up time.

Ace extracts more premium from the reinsurance pie
  

ABR Re is looking to raise between $800 mm and $1.3 billion for capital prior to its launch.  Ace will own a 9.9% chunk of ABR Re and the business it cedes into it will thus never make it out to the traditional reinsurance market. It has been reported that Ace plans to cede business into ABR that currently is costing it about $500 mm in reinsurance premium (you can now subtract that amount from what's available for placement globally.)

In addition to the brokerage that Ace will save on the $500 mm it cedes into ABR it's been reported too that the insurer will be eligible for as much as a 50% profit commission on the business it places into the facility. This incentive will ensure that ABR will not become a graveyard for adverse risks --in fact it will ensure quite the opposite --and Ace will continue to maintain responsibility for claims administration.

Blackrock of course will manage the investment portfolio and it's hoped that superior returns will result from the investment acumen the giant investment manager will bring.

Evan Greenberg has been signaling this for a long time and this structure seems to represent a concerted effort to identify every juncture where expenses can be transformed into profits that drop right to the bottom line. You can be sure too, that with the 50% profit commission, the underwriting will be precise and exact,

 "We need to prepare for a long-term arms race when it comes to 'big data'. Currently there is a mismatch between awareness and action." The industry must do more to bridge that gap, he says. At present the brokers are spearheading data capture, but all segments of the industry need to take 'big data' seriously, says Kendrick. "Those that don't capture 'big data' will become uncompetitive and ultimately irrelevant".

Kendrick says that 'big data' has the potential to unlock opportunities such as live claims and underwriting intelligence that will enable insurers and reinsurers to have increasingly constructive conversations with clients. "Big data could make real time pricing a reality and revolutionize what the industry does".