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We write this newsletter at a time when we are all cautiously emerging from our winter burrows to check climate conditions outside. There may just be a chance that this winter is finally behind us.
We think that people in Boston are still with us. Their phones are still answered and there's no evidence they have all decamped to Arizona despite the nine feet of snow they've received. From all appearances the basketball games and hockey matches all seem to be being played at the TD Garden down from North Station and not at some league ordered temporary home in sunnier climes.
The winter in the US will exact a toll however. Early estimates are that "well above" $1 billion in natural CAT claims may be forthcoming as homeowners emerge to check roofs, sidings and walls for leaks and damage.
Broker claim teams are hard at work dealing with thousands of claims from ceding clients all seeking to somehow attach reinsurance level points. Given the endless snow storms and periodic "mini-thaws", followed by plunging temperatures, causing ice dams followed by yet more snow, insurers are trying to make the case that the claims (and the layers of snow from numerous storms) just added to the difficulties caused by the initial storm in a hope to add everything in under a single event to reach the reinsurance coverage.
Claim adjusters have been sighted on rooftops doing bores of snow layers to reach the initial snow layer closest to the rooftop (on top of which sat layer upon layer of snow from numerous storms) and exclaiming "Voila! Here is the snow from the single event which caused the damage."
The single event snow was of course affected by the 2nd, 3rd, 4th, 8th, 10th and 20th event snow too but it was in fact that 1st event snow which caused the ice dams to form and compromise the roofing materials. It's an interesting argument but one which means many millions of dollars to primary insurers.
Talking about primary insurance you'll find some interesting nuggets here from Nephila and Partner about the importance of a primary book --something that some of the brokers spotted a long time ago.
Change is the theme in the industry (again!) this month and even Roger Crombie has joined in the fray as his column indicates. (We always knew he was a "Big Ideas" man.)
And of course, as luck would have it, the very day we're going to print the news arrived of John Charman's Endurance Specialty Insurance purchasing Montpelier Re for $1.83 billion. More on that next month I'm sure.
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
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?
325 years ago at Lloyd's
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
The long discussed plans of Ace and Blackrock
seem to be a bit more defined. In an announcement last month the insurer and investment fund announced the creation of a Bermuda entity called ABR Reinsurance Capital Holding Ltd
. which is a hybrid reinsurance vehicle that Ace will cede a percentage of its reinsurance business into.
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,
Oh, and how does Ace feel about Big Data
? Read this
from Andrew Kendrick
the head of Ace's European Group::
"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".
Retention and waiting for claims
There is an old adage that the insurance industry is the only industry where you have to lose money to get paid back and then make a profit. Of course this is premised on the idea that rates increase after a loss event. From the primary levels where local regulators approve rate requests based on loss experience to the reinsurance level where prior year claim experience is evaluated in setting premiums this is an understood fact of life in the risk business.
In fact it's a part of the business that traditional carriers are closely watching in regards to alternative capital-backed reinsurance. After a loss (and after paying out all or part of that collateralized principal) will an alternative capital backed vehicle head for the hills or stay in the game to obtain the higher rates warranted by the claim that just wiped out their principal?
It's an interesting point and one compounded by a trend we see in the industry on the part of cedents retaining more and more of the risk --even though reinsurance is increasingly less expensive. This retention phenomena is happening even with retrocessions where premium prices have dropped precipitously.
With interest rates as low as they are and investment returns severely constricted a number of primaries and reinsurers seem to have decided to retain as much of the risk as possible to in turn retain as much of the premium supporting that risk.
New leveraging requirements from Solvency II don't help matters either. Twenty years ago you could leverage two to one against a dollar that you had in premium and in a decent interest rate environment (say 6% interest rate) an insurer could effectively get an 18% interest rate on that one dollar. Both those days and those interest rates are long gone.
About the only things we can see as positives from this trend toward increased retention is that insurers and reinsurers will get to keep more of the premium "in-house" and not need to cede it out for reinsurance. This has risks obviously as the reason you buy reinsurance is to protect your balance sheet and draw a black line under a PML for any risk(s). It just must be that with the increasing sophistication of underwriting and the need to retain more and more of the premium that insurers are willing to take that risk of keeping exposure even when reinsurance is so affordable.
Of course, too, the old adage of making money after losing money could still hold true here as well, With increased regulatory scrutiny even those risk bearers retaining more risk remain well within their risk solvency ratios and can determine after a loss event whether they want to benefit directly from increased premiums caused by the claim experience or cede a portion of them out to reinsurers.
This unfortunately is the kind of pragmatic, necessary calculation that gives rise to misguided comments from state capitals such as "These are people who actually hope for catastrophes so they can demand higher rates and larger profits" when describing reinsurers.
Germanwings crash in French Alps
Last week a Germanwings A320
crashed in the mountains north of Nice in France. The A320, a plane manufactured by Airbus
, is one of the safest planes in the sky
and is the workhorse of commercial fleets in Europe, North America and Asia.
Unfortunately the news associated with the crash is pointing toward a lone member of the cockpit crew who apparently set the descent controls at a setting so that the plane descended from a cruising altitude of 38,000 feet to its altitude of impact in the French Alps at 6,000 feet over an eight minute period.
, the owners of Germanwings, as well as a number of other European and Asian airlines have since adopted the rule
that prevails in the US that at least two crew members must be in the cockpit
at all times --there cannot be a situation that ever has only a single crew member alone in the cockpit.
If you have ever had a seat up front on a US domestic flight you will have noticed a well-choreographed procedure that takes place whenever a cockpit crew member needs to leave the cockpit. Two flight attendants come to the front of the plane when summoned over the internal phone system. One stands facing the passenger cabin assuming a position that resembles a determined bouncer at a night club and the other attendant exchanges places with the departing cockpit crew member.
For so long as the exiting cockpit member is in the lavatory (the usual destination) the flight attendant facing the passenger cabin remains in place actually eyeing any passenger daring to meet his or her gaze. Once the cockpit member exits the restroom he or she calls into the cockpit, stands in front of the ceiling camera, gives a hand signal of some sort and then the door opens and he enters and then the flight attendant emerges. Once the door is locked both flight attendants quickly return to their other duties.
Presumably the attendant facing the passenger cabin is meant to provide some type of physical impediment in case someone attempts to rush the cockpit in the brief second the door is opened.
Roger Crombie writing for CATEX Reports takes an off-beat view of the world of insurance
Everyone does have a Big Idea (or two or three)
I have never been what you might call an "ideas man." Others come up with the brainwaves; my job has always been to turn their proposals into reality or to point out their flaws. I have, however, had two Big Ideas in my time, both too big for the people who would have had the job of making them happen. Both related to insurance.
The first Big Idea came to me when I lived in Bermuda. As background, you should know that there was tension between the local population and foreigners, who were considered outsiders, and probably still are, having only been there for about 50 years.
The Bermuda Government's annual tab at the time was about $1 billion. Most of it was spent on a hopelessly bloated civil service, which often seemed to feel that its job was to place obstacles in the path of progress. The Government had increasing problems raising its annual billion, yet felt constrained by the need to limit the taxation of both local people and the international community, which was made up mostly of insurers.
This was the Big Idea: tax the insurance companies in Bermuda one percent of their premium income, which would have raised a billion and thereby obviated the need for all other forms of taxation. Locals could have enjoyed the same sort of total tax freedom that was the norm in Bermuda when I first arrived there in 1975.
In return, the insurance companies would have been granted the freedom to hire whomever their operations needed. Relations between locals and foreigners would have become much less fractious. This was a win-win idea, all the way round.
Wise in the ways of governance, I did not propose this publicly. I sounded out some insurers first, and they went for it. So I took the idea to the Government's behind-the-scenes policy man and led him to think it was his idea. This is always prudent when dealing with big-wigs (and especially magazine editors).
Just as this fellow was about to mention the concept at a Cabinet meeting, the Government changed hands and all good ideas previously espoused went out of the window. The new government had its own big idea: removing foreigners ("that'll solve our problems"). Thousands were removed (including me), and the Bermuda economy duly went straight down the drain.
The second Big Idea followed much the same trajectory. In Upper New York Bay, the waters off New York City, lies Governors Island, 172 acres of land so long unused that its apostrophe has fallen off.
Again, a spot of background. The race to Bermuda undertaken between 1993 and 2005 by the insurance industry left the US with a greatly diminished reinsurance sector. What drove the companies offshore was a combination of sensible regulation, low taxation and the desire to cluster with birds of a reinsurance feather.
Hey presto, I thought. What if the US authorities were to claim Governors Island as their own, and declare it Insurance Island? By virtue of its isolation in the waters off New York City, Insurance Island could have had its own rules - sensible regulation, low taxation and the cluster effect came to mind - and all the dollars and people who had migrated to Bermuda would return to the States, where they could live life as locals, watch the Yankees, and so forth.
Unwise in the ways of governance in the States, I first mentioned it to a few American insurers in Bermuda. Their eyes glazed over as they thought of the advantages of living in the Land of the Free and being able to pursue their work and their millions without interference from local obstructionists. One very, very senior fellow said he'd mention the idea to Mike Bloomberg, the billionaire playboy and then semi-permanent Mayor of New York City.
Never heard another word. Governors Island, still lacking its apostrophe, has instead become some sort of national park. Bermuda, given the recent consolidation of the insurance industry, is probably on its way to a similar fate.
With the death of these ideas went any hopes I might have had of becoming a Lord or a Kentucky Colonel, or what have you. While this is a great personal tragedy, the loss to the insurance industry, in the case of Bermuda and Governors Island, is far greater.
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
March 30, 2015
Jonathan Kent, a top reporter on the global reinsurance beat,had a great interview with Endurance's John Charman in the Royal Gazette last
month. As usual John Charman made some news although it certainly was unexpected. He said that he believed a tax in Bermuda on company profits is inevitable and that the levying of such a tax would disarm international critics who regard Bermuda as a tax haven....No sooner had Scor's Denis Kessler said that he believed "We are in a position today at Scor where we
are not forced to make a move and not forced to get married (he was talking about the current spate of mergers and acquisitions) that Sompo Japan Nipponkoa announced plans to acquire up to 15% of Scor stock which is publicly traded. In the cutthroat world of Japanese Keiretsus news of the Sompo investment immediately endangered Scor's relationships with Sompo competitors like Mitsui Sumitomo, Aioi Nissay Dowa and Tokio Marine. Scor's Victor Peignet was immediately dispatched to Japan and Tokio Marine is said to be staying with Scor as a client. No word yet on the other two but the Japanese renewals are typically completed on April 1 and Scor does have a long and deep relationship with them...William R. Berkley, founder and CEO of WRB
said that the insurance industry is "cheap" and slow to anticipate change. In a Texas speech Berkley said "We are a bunch of cheap son of a guns. We don't spend on anything. We're just bums, companies and agents both". He also had some blunt words for insurance agents who sell car insurance now that Google is joining the fray with a game-changing approach. "I'm here to tell you that you're screwed," said Berkley, never one to mince words...A cargo ship bound for the United Arab Emirates from Somalia sank about a half mile off the beach at Ras Al Hadd in Oman on March 2. The ship was apparently heavily overloaded with cargo --in this case no
fewer than 350 cattle. Omani fishermen casting nets for fish from the beach were shocked at the sight of 350 cattle swimming towards them and dropped their nets to come to their rescue. Apparently all 350 cattle and their calves survived. Not your typical day at the beach...