Issue 51
October 2015
In this Issue
  • A very large plum often goes unnoticed
  • Buffett and others de-emphasize reinsurance
  • Solvency II will likely lead to more reinsurance
  • CATEX named Best Technology Provider for 3rd consecutive year
  • Nelson warns on corporate irresponsibility
  • Roger cannot get into the insurance "food chain"
  • Quick Bytes: VW scandal, ILS, ANV, Ace/Chubb and phone call from the Pope

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Dear Colleague, 

It's striking sometimes how quickly things change.  We've been back from the Monte Carlo Rendez-vous for just over a month and already the Zurich-RSA acquisition has collapsed; initial signs that CAT pricing reached a floor have evaporated and the expected continued influx of capital seems to have slowed.


One of the perils of a monthly newsletter is that in the time it takes to write you almost have to go back and rewrite it because everything has changed.


Monte Carlo was very busy this year. There were many more attendees from Asia and India than in past years. Their presence boded well for hopes to fill the "protection gap" that people say insurance needs to fill to become more relevant.  


But no sooner than the conference ended did we read stories saying that much of the "protection gap" was in the US and Europe. One upside was the identification of the need for new products such as cyber that led to the quantification of underinsurance present.


Monaco was very warm this year too. Duty at the Cafe de Paris became arduous with parched attendees begging waiters to be served $7.84 Diet Cokes and Perrier water. Assuming the Euro is at $1.12 to the USD).  If you had the bad luck to arrive too late to secure a table protected by the awning you were broiling by 2 pm.


We discovered that the Cafe de Paris also possesses a sprinkler system too and it's not one for use for fire fighting or gardening purposes.  Apparently a fine, cool mist descends upon the sweating table denizens for a minute or two.  We were hoping to see it in action but no luck!


Suffice it to say that by the time the evening receptions started just about everyone needed to shower before dressing more formally. You could tell those who had spent the days in air-conditioned suites conducting meetings easily enough when you saw them at night.  They didn't quite have that drained look that those of us out in the trenches all day across the street had!


We have our regular Roger Crombie column too and it points to a bit of a disconnect on the ground when he is trying to buy coverage but can't even obtain a quote.


If you have any questions or comments about this newsletter, or CATEX and its product suite, please contact me.

Thank you very much.

Stephanie A. Fucetola
Senior Vice President/CATEX

The silent name on the list

We were in a meeting room in the lower levels of the Hermitage Hotel on the Sunday morning of Monte Carlo week. The event was the annual A.M. Best "Reinsurance Market Briefing" and there was not a seat to be had in the room.

The briefing is always well attended, although it's held on a Sunday morning.  Stefan Holzberger, John Andre and Robert DeRose were presenting. Attendees were following along either by flipping the pages in a briefing book or watching the overhead screen at  the front of the room.

AM Best forcefully drove home the point that in the near future things will be very different. The titles of a few of the graphs should provide you with the color.  They included Global Urbanization Trends, Current and Future Global Population Centers and the current Global Insurance Density.  It was clear to any listener that Asia, China in particular, is the least densely insured area but has the most explosive population growth.

One thing you can count on with AM Best is that they always bolster their statements with facts --more than you can consume maybe on a Sunday morning but there was no mistaking the sense that a torch was being passed if it hadn't been already. Western Europe and the US comprise 70% of the global market share for reinsurance today while Asia comprises 21%

It wouldn't be a stretch to envisage that attendees at this briefing in 2025 might see those numbers reversed.

With such a large pool of prospective insurable risk ahead of us AM Best logically interwove the impact of both alternative capital and the burst of M&A activity which appears to still be ongoing.  Insurance players, it seems, are clearing the decks for the next, inevitable wave of opportunity that is ahead.

Slide 23 of the 43 slide briefing showed the top 50 global reinsurers.  There were no surprises there and the presenter went down the list of the top ten offering a brief summation of each.  As is always the case in these "top 10" lists a name appeared that really doesn't fit in and this listener was wondering with interest what the presenter would say about it. The name, occupying 7th place, was Reinsurance Group of America, Inc.  The presenter skipped it with no mention and went on to number 8.

Not wishing to appear ignorant this listener cast furtive glances about the room to see if others had noted the omission.  He concluded that if they had noticed the omission of mention of the world's largest life reinsurer they weren't showing it.

The briefing continued with descriptions of CAT bond issuance, "convergence" and hedge fund reinsurers but this listener began to remember something that David Cash had said at a conference last year in Bermuda. "It's probably not well known in this room," he told a room of executives from insurers and reinsurers, "but the largest reinsurer in Bermuda is a life reinsurer, Athene (Life Re Ltd).  Athene has something approaching $60 billion of assets on their balance sheet. It is far bigger than the other Bermuda reinsurers."

Life insurers need to maintain reserves for long time periods. When the rate is set the length of the period the reserve is to be held is computed and an expected interest rate is factored in.  Interest rate expectations, as we have seen, can sometimes lead to calamitous circumstances such as what must have happened in the 2008 financial crash and its aftermath.

Investment returns are at near historic lows and people are living longer. The sheer volume of life insurance in force does contribute to huge reserves that must be maintained but we wonder how profitable the business actually is. In P&C when the primary business becomes weak there seems to be less reinsurance purchased as cedents increase their retentions to try to keep as much of the premium as prudently possible.

This might explain why, despite the clean projections offered by mortality tables, there hasn't been particular alternative capital activity in the life reinsurance sector other than the occasional longevity risk bond.  We wonder though what might happen when investment returns claw their way back to "normal"? Might life reinsurance be the next stop for alternative capital? The business would certainly seem to offer an even better "uncorrelated return" than even CAT risk for pension funds and the like.

If alternative capital does see opportunity in life reinsurance in the future we wonder about the current life insurance distribution model. Currently the commission on sale of a life insurance policy can equal the annual premium for the first year. Whether that's fair price to pay for product distribution we don't know but it sure explains the endless advertisements on American TV for the direct sale of term life insurance by certain writers.

We also wonder about the effects of Solvency II on smaller life insurers in Europe and whether the new standards might require them to buy more reinsurance to meet them.  Then we wonder about the emerging middle class in China and know, from precedent in the West, that life insurance policies are generally sought after as heads of households attain some relief from the need to pay day-to-day bills as they seek to leave something to their families in case of untimely death.

In short we do think that there will be a need for more life reinsurance in the future. How can there not be if financial solvency standards are strengthened and more policies are sold? We'll have to wait and see if alternative capital is attracted by the success of those large reinsurers referenced by David Cash.  With the modeling metrics involved we don't see how they won't be interested.
 Buffett and Jain begin to do just what they said they would

While in Monaco one of the industry websites picked up the Wall Street Journal story which ran over the summer in which Warren Buffett and Ajit Jain were quoted talking about the high point of reinsurance having passed.  Surprisingly, the story was much discussed even though it was several weeks old.

Fortunately it was not until after Monte Carlo that news came that Buffett had reduced his stake in Munich Re to below 10%.  From what we can tell the pure numerical profit to Berkshire from the sale approximates about $700 million but the bigger news is that a conglomerate that owns Gen Re, some 3% of Swiss Re and National Indemnity, seems to be putting its money where its mouth is. Or in this case taking its money off the table by reducing its exposure to reinsurance.

The WSJ story in the summer also included Berkshire's plans to continue to move "down the food chain" as Jain outlined to get closer to the client.  The closer you are to the client the larger the slice of premium you can keep and in the case of Berkshire, with its own reinsurance capabilities, this pretty much could mean that all of the premium can be kept in the group.

Berkshire Hathaway Specialty Insurance, founded two years ago and which Warren Buffett himself has said will be a very, very valuable piece of the Berkshire constellation, has been writing primary business in the US, and is supposedly now set to enter the primary industrial insurance market in Europe. 

Berkshire it seems is de-emphasizing its reinsurance premium focus and switching to primary premium whenever and wherever it sees an opportunity. With Berkshire Hathaway's AA rating, and "in-house" reinsurers ready to accept any excess risk, we can see why Buffett believes that BHSI will soon be a global powerhouse.

We saw that Insurance Group of Australia (IAG) is abandoning its plan to expand in China "delighting" its investors who had expressed misgivings over the strategy.  IAG's announcement was a sudden shift because new management at the insurer had been saying as recently as last week that there "won't be any huge change" to the company's strategy that China would be a "key focus" of its growth plans.

Remember that Berkshire has a $500 million stake in IAG and analysts believe that the change in expansion plans would have to have been backed by Berkshire. This struck us as curious. IAG had been planning on expanding into the Chinese insurance market or moving down the food chain if you will, so it seemed logical to get close to the customer as the Chinese market expands.

Tianjin losses have continued to mount --some "alarmists" have been speculating that losses could reach as much as $6 billion -- and access to the blast area has continued to be strictly controlled. There's a fear that there may yet be an environmental liability shoe that will be dropped when all the information is finally revealed. 

Reports have surfaced that several large Chinese insurers will be incurring significant losses as a result of Tianjin as their own retentions have been exhausted. If the same premium cycle exists in the Chinese primary commercial coverage market as it did, let's say in the NZ earthquake market, then we would have thought the timing to be right for IAG to make a move into the Chinese market.  We think we can probably guess Berkshire's next move.

It was three years ago when Berkshire's International Insurance Limited was granted a license to write New Zealand natural peril CAT insurance.  The Canterbury earthquake resulted in upwards of $30 billion NZ in claims. Businesses that either had no quake coverage or not enough now were desperately seeking it.  Markets who had been walloped by Canterbury claims, were curtailing their NZ aggregates but Berkshire had made it clear that they would provide any limit needed --at a price of course.  

From Berkshire's perspective since the NZ quake rates had been driven up dramatically by the earthquake losses there was no better place to be than in New Zealand.  They had the capacity no one else had and they could reap the benefits of the higher premiums caused by the underwriting experience sustained by others.

We're wondering whether we will see a New Zealand redux now in China with commercial industrial coverage.  We won't be surprised if we soon see a story saying the BHSI is commencing major operations in China which is why we were surprised to see IAG reverse course.

Solvency II will likely lead to increased reinsurance sold

Assuming there are no derailments (and with this issue that would be a surprise) it seems as if Solvency II will be implemented in early 2016. There was some discussion in Monte Carlo of what the financial solvency standards implementation might mean for the demand for reinsurance.  

SCOR indicated that it expects to see an increased and new demand for capacity from some of its larger, global clients as S2 approaches.  SCOR believes that large insurers are putting together plans to shore up risk capital or plan for additional risk transfer when S2 becomes mandatory. SCOR believes that these measures could result in the purchase of additional reinsurance.

Victor Peignet, SCOR Global P&C CEO said that the reinsurer expects some of its large global clients will want reinsurance for subsidiaries that weren't previously reinsured.  You can bet that these discussions are taking place this week in Baden-Baden. SCOR will be able to leverage its existing client relationships and its new AA- rating from S&P to create this new demand.

It really wasn't that long ago (2003) when S&P had placed a BBB- rating on Scor.  Denis Kessler took over as Scor CEO in November, 2002 and over thirteen years has worked to place the reinsurer among the world's elite. At the Scor party, held at their pavilion during the Monte Carlo Rendez-vous, the company could be forgiven for laser-projecting its newly earned AA- rating up on the back wall of the Casino while a band played a triumphant melody and the guests cheered. It was a good moment.  
Big Data treasures not Big Data burdensCorporate irresponsibility and not so subtle switch in investment strategy
A broker told CATEX twenty years ago that "after binding" everything is vanilla. His thinking was that the broker's placement expertise proved of value structuring the agreement but the tasks of invoicing, remittance recordation and claim adjustment could be left to a collective processing unit working across the industry.

The idea was that the so called "back office" consumed a disproportionate amount of expense in comparison to the routine tasks it performed.  One solution was for a broker to off-load this burden, "cap" those costs, and still have clearing functions performed.

The world has changed in twenty years. We wonder whether those same forces that led our broker friend to lament the high cost expense of back office processes remain valid.  We think not.

"Big Data", the enemy of back-office efficiency twenty years ago, holds insights into your business operations. Why not use today's tools to get the most out of it instead of giving it away?

The CATEX Pivot Point software and data conversion application, Data Vera, allow licensees to operate back office processes at the speed of light and manage multiple processes simultaneously. One professional can even manage clearing processes across multiple subsidiaries in multiple countries.
When our broker friend told us everything was vanilla post-placement we took that as a challenge to construct a system that allowed for undreamed-of efficiency and have it operated by a reduced number of his own employees.

Things are happening faster today than twenty years ago.  We haven't convinced every one of the merits of "real time" clearing and closing yet but we have clients closing their books now on a weekly basis rather than monthly. Our clients have a better understanding of how their aggregate book is performing at a given time.

We are in the business of reinsurance technology.  We did note comments by PwC Bermuda's chief Arthur Wightman in Monte Carlo when he said " We really do feel technology companies, as an example, will start to look at insurance as a possibility for them to explore, given their technological capabilities." 

Not to worry --we do have the technology to do just that but we're not underwriters or claims specialists and we don't plan to be. But we do know about the efficiency permitted by technology so it was interesting to see Wightman's comments.

Efficiency isn't about sending an outsourced army to perform a repetitive task over and over again. Efficiency is about developing smart tools that allow for small numbers of people to oversee the software performing that same task. 

We must be doing something right (and Arthur Wightman aside --it's sticking to our knitting) because we were pleased to learn while in Monaco that CATEX had been named the Best Technology Provider of the Year by Intelligent Insurer magazine.

The award is made based on survey results from hundreds of respondents and it's the third consecutive year CATEX has been named the Best Technology Provider.  

We're grateful to our clients and our supporters and we work hard every day to earn and keep your trust. If you are a client you already know this.
Things have sure changed for Zurich Insurance since the last Reports.  Back in early September, Zurich looked set to swallow RSA without incident.

In less than a month, the possible acquirer went from conducting its due diligence on RSA, to bolstering its own reserves for US auto, announcing some $275 million in claims from Tianjin and laying off 10% of its workforce in Germany.  

It goes to show just how difficult these big mergers are and causes a greater appreciation of how things must have aligned for XL and Catlin and for Ace and Chubb.  We suppose that we needed only to look at the Axis effort to acquire PartnerRe to remember that.

There are a few strands we've noticed.  First, in August, after the Berkshire retrenchment from reinsurance began, we saw Warren Buffett fork over $32+ billion for Precision Castparts, a company that generates 70 percent of its sales by making nuts, bolts and other fittings for the aerospace industry. 

Then we saw an article talking about how  the wealthiest European families are focusing on less risky sectors such as consumer goods and cement businesses. To be fair the same article cited the Agnelli acquisition of PartnerRe as one of these less risky purchases too.

Then we saw this article quoting Lloyd's John Nelson speaking at the Lloyd's annual dinner last month. Nelson said that in his opinion companies are too focused on profit and risk eroding the trust of the public. He said a lack of trust in business had been "fed by a steady diet of negative business behavior" since the financial crisis of 2008.

He went on to say that "Just on these last weeks we have seen business --and big business--demonstrating serious corporate irresponsibility." The dinner took place soon after Volkswagen admitted that "defeat software" was in fact installed on certain of its vehicles to enable them to pass emission tests.

Nelson said "For too long now, many businesses have been focusing exclusively on their own profit and return on capital and that we can only make the case for open markets in trade if business shows greater transparency, greater social responsibility and greater accountability when things go wrong."

Sharp words indeed from someone at the very pinnacle of international commerce.  If Bernie Sanders reads them he will approve.

Maybe Buffett, Old European money and Nelson are on to the same thing. We have the IMF warning that the world is set for a mass default by emerging markets. We have the BOE Governor Mark Carney warning about the "transitional risks" which are financial risks which will result from the process of economic adjustment towards a lower-carbon economy. And we have an unprecedented slump in reinsurance and commercial insurance rates.

Nelson spoke of a "trust deficit" that in his perspective is a risk with serious implications. If there is a trust deficit what better place to have your money than in nuts & bolts manufacturers, cement companies, consumer goods, and pure reinsurers that deal only with other insurers. 

More importantly, how better to control the trust deficit than to have a company run by a family or by a long-term stable investor. If Nelson is right about most of the trust deficit being caused by the unrelenting pressure to meet quarterly earnings maybe removing that pressure is the better option.

Roger experiences the bottom rung of the "food chain"
If premium begins with the customer then Roger is out of the frame

Roger Crombie
Two recent insurance-related events - or non-events - left me scratching my head.

The first relates to the D&O coverage of the company that manages the apartment complex I live in. The management company has about a million dollars' worth of coverage. The annual premium looked a little high to me, so I called a pal who works for one of the larger suppliers of D&O, to ask if he could advise.

He gave me the name of a man in his company who might be able to help. I phoned him, and the conversation immediately went astray. I explained that there were 89 apartments in the block, and he corrected me: "In England, we call them flats," he said.

I should have let it go, but words are my meat and veg., and I happened to know better. An apartment, I explained to him in the nicest way imaginable, is one of a number of dwellings in a purpose-built block. A flat is what you end up with when you reconfigure the interior of a single home into a number of discrete units.

"Nonsense!" the fellow said, and that was that. I explained the nature and benefits of the policy in force, and asked if he would give me a quote. I indicated that I would advise the Board to buy if his price were lower, for comparable coverage, than we currently pay.

It was by no means the biggest deal he'll ever do, and his commission wouldn't buy him the yacht or fancy car he probably hopes to own one day, but I was asking if I could buy one of the products he sells.

I never heard from him again. 

Does that mean that (a) his company can't provide the coverage for less than he thinks we're paying now; (b) the premium was too small to be worth the investment of his time; or (c) he's just not that interested in doing his job properly?

It wasn't a big deal, so I forgot about it ...

... until, about a month later, when the same thing happened again. The local authority to which we belong introduced a policy of shared sidewalks. (I may have mentioned this before. If so, I owe you three paragraphs, which may be claimed at any time up to Christmas. You name the topic.)

The population in the district I live in has the oldest average age of any in the UK: 71. Since we have a college in the district, almost everyone not in college must be approaching 100 years old. I recently started to collect my pension, and I'm one of the sprightlier citizens around.

These aged people have been told that they must share the sidewalks with bicyclists. You know what that means: Velcro-clad youngsters aiming to set the land speed record, trying to avoid older people moving very slowly indeed. It's a recipe for disaster, but the cyclists have been very vocal about how riding on the roads can endanger their health.

The local authority did the math, and decided in the most callous fashion imaginable that the loss of old people was less damaging than the loss of young people. As a result, a certain number of older people have been sentenced to death in the name of progress.

Having myself been injured trying to get out of the way of an oncoming cyclist not long ago, I thought it might be time to take out some insurance against a repeat event. I let my fingers do the walking and phoned a local broker. 

He helpfully explained that, since Britain has a nationalised health service, I could not buy coverage for medical expenses. My annual income, he also explained, is too low to qualify for insurance against its loss. Finally, building owners are responsible for what happens on their doorstep, whether the buildings contain flats or apartments. That left personal injury, which the broker said would not amount to much. I said I'd like it anyway, and asked if he would obtain a quote for me.

I never heard from him again, either.

If you're reading this, you probably work in insurance. Can you explain why these people don't want my business? They don't know me, so it's not personal. Selling insurance is what they do, or in these cases, don't do. Any ideas?

Roger Crombie is an American Society of Business Publication Editors national award winner. An English chartered accountant who 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
October 22, 2015
Quick Bytes

The emissions software scandal at Volkswagen could end up being a CAT loss for the D&O market. Sources have told the Insurance Insider that VW holds two D&O policies --one for the US and one for Germany with the US policy said to have at least a $100 mn limit and the German policy supposedly at EUR300 mn ($336 mn). The financial impact, from fines alone in the US, could be as high as $18 billion...A.M. Best's Robert DeRose thinks that over the next ten years global reinsurers will likely increasingly act as service providers to capital markets or ILS investors, with operating units providing transformer or fronting services as access to efficient capital becomes more important. We remember that Neill Currie at Renaissance Re picked up on this possibility long ago...In one benefit of the Ace acquisition of Chubb we saw this response from Ace in connection with the company's withdrawal of staff from its Chinese joint venture Huatai and subsequent emphasis on its Lloyd's platform to write business in China. Ace said "Ace Group has had a longstanding presence in China dating back to the 19th century and considers China to be a significant long-term business opportunity."  Ace was founded in 1985 but Chubb was founded in 1885. ..There are reports that the Ontario Teachers' Pension Plan is actively contemplating the sale of its insurance business ANV. ANV had previously said that it's still considered to be non-compliant with Solvency II by Lloyd's and added $4 mn in new capital as a result...Goldman Sachs is said to be working with Aspen on its hedge fund reinsurer effort and has apparently been selected to oversee the proposed vehicle's investment portfolio. The initial target capitalization is $500 mn...Exor CEO John Eikann announced in Monte Carlo that he plans to push PartnerRe into the top tier of global reinsurers and predicted that in the future it could rival giants like Munich Re and Swiss Re...Lloyd's director of finance, John Perry, warned new players to the industry who expect high profit margins that they should expect disappointment. Speaking at the Lloyd's interim results press briefing, Perry contrasted the market's half-year return on capital of 10.7% to the 15% returns seen in stronger periods and said "anyone entering the industry expecting to make those sorts of returns is probably going to be disappointed"...and finally, in the wake of Pope Francis' visit to Cuba and the US last month there is the story of the air traffic controller at the L.F. Wade International Airport in Bermuda who was radioed by the Alitalia jet as it passed over Bermuda on the way to Havana from Rome. She was soon greeted by the Pope himself who sent his greetings to the people of Bermuda. Bermudian premier Michael Dunkley said he was "delighted and appreciative" of the Pope's gesture...

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