Issue 53
December 2015
In this Issue
  • Lloyd's prepares to spend big on IT upgrade
  • Berkshire and Nephila move down food chain
  • Lost bets: climate accord signed & Willis wins Towers Watson vote
  • AIG moves signal Icahn still can make waves at 79 years old
  • Aon London job losses feared
  • Underwriting and modeling warning signs for "coverage gap"
  • Tom Bolt will ride off into the sunset in 6 months
  • Roger encounters China when it really was Red China
  • Quick Bytes: Amrisc offers 15 months for price of 12; Zurich to replace Senn with outsider; and Cathedral Capital moves

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Dear Colleague, 

As we count down to the end of 2015 most of us are happy to see it go if only because it was so difficult to get a reading on the year. 

Companies merged with each other creating global giants. Smaller companies, especially monolines were warned that they would soon be extinct yet one global giant is being criticized for being too big. 

Premium prices have continued to drop or at best stall but companies still seem to be earning money. CAT losses seem to be receding in memory yet everyone knows that the other shoe is bound to drop. It won't have happened in 2015 it seems.

Lloyd's is embarking upon a huge new IT infrastructure upgrade which is welcome news. We wonder whether there may be a better, faster and more cost effective approach that could at least be examined.

It seems that Berkshire is sticking to its announced plan of "moving down the food chain" and it seems as if Nephila has the same idea.

We note that Tom Bolt, the Director of Performance Management at Lloyd's announced his departure for later next year and we suspect we haven't heard the last of him. We hope not at any rate.

Our regular Roger Crombie column is here too.  Roger remembers a trip to the Chinese border with his father many years ago. Luckily, both of them returned.

We were pleased with the comments we received about our own little news item at the intro to the Quick Bytes section last month. And, of course, if you have any questions or comments about this newsletter, or CATEX and its product suite, please contact me.

We wish you and your families a very happy and peaceful holiday season.

Thank you very much.

Stephanie A. Fucetola
Senior Vice President/CATEX

Old systems: are they the right foundation?

The insurance industry was among the earliest adopters of computers and data-processing. When you send out tens of millions of monthly premium invoices, and receive the same back in remittances, the earliest mainframes seemed like a godsend to insurers the world over.
Computers became more powerful, and with better software, insurers recognized that they could develop the capacity to do much more than track simple invoice ledger processes. Individual carriers soon found themselves possessed with singularly enormous amounts of data related to risk characteristics, claim records and payment patterns of hundreds of millions of customers.
All of this data had to be entered by hand. A few of the "ancients" among us may remember the punch card system of data entry. At the time it was hailed as a great time saver compared to the meticulous, precise, manual transcription of data culled from stacks of paper files into the mainframes. Eventually it was realized that if agents and brokers could collect data in a format that would fit into the insurance company mainframe, at the time of the policy application, time could be saved and efficiency could result as the applicant's data could be run against other data already stored in the mainframes.
That realization gave rise in 1970 to the birth of ACORD.  Originally an acronym for Agent Company Operations Research and Development, ACORD's initial focus was standardizing the many proprietary forms being used by carriers for new business and claims submission.
But some things never change. Individual companies had strong beliefs in the distinctiveness of their own underwriting standards thus the underwriting submission forms were and are indeed proprietary.  To overcome this very first challenge ACORD commenced work on the vaunted "ACORD definitions". If the submission forms were proprietary why not simply de-compose those forms and extract every possible data request and match an agreed-to definition to each?
It sounded like a simple enough idea, and in retrospect was probably the only approach they could have taken, but it took time.  Initially all the original ACORD members had to agree to sign off on each definition. Then it was realized that for ACORD to be universally accepted the effort had to be extended to carriers and agents beyond the initial membership. A potentially damaging result could ensue if a limited subset of carriers and agents agreed to definitions that others would eventually question.  What was needed was the eventual unanimous acceptance of the standards later on. Such acceptance would mean that the standards could be used across organizations as the use of networking and Electronic Data Interchange became more and more prevalent.
All of this took time --a lot of time. People could be forgiven for thinking that ACORD would never achieve its purpose as the organization effectively had rolled up its sleeves for years (decades perhaps) to compile the Rosetta stone of insurance data dictionaries. Whole careers were begun and ended during the time it took to complete the data definition work.
At times it seemed that the project was unintelligible and impossibly ambitious. Usually, though, insurance company executives, although not fully understanding its import, continued to support this initiative and in time things started to happen.
While some in the industry may have viewed its mission as hopelessly quixotic, insurance IT professionals were keenly aware of what was going on.  For the first time the US property and casualty industry was moving along a path that would produce an agreed upon data standard for every single possible bit of information that a P&C insurer would ever need. How respective carriers compiled those data standards in submission requirements were their own special "value add" but at least the standards would be the same. It was a massive achievement.
The data vocabulary grew larger and the work extended.  Other industry sectors began to notice too. If normally rational executives continued to approve large budget requests for annual renewal of their own company's ACORD work maybe this was something that needed to be looked at more closely?  Why was the focus only on P&C?  Why not life and health too?
As Information Technology increasingly became more important to insurers, good IT heads became as valuable as "hired guns" and acquired mobility within the industry. They moved --taking the message with them.  It was only a matter of time until the reinsurance market too began to hear the rumblings of what had been a US-based effort to standardize data for the US P&C industry. 
The widening reinsurer interest signaled a potential qualitative change. For the first time the electronic data standards being developed by ACORD, which were to come from producers to carriers, would need to be sent by those same carriers upstream to reinsurance brokers and reinsurers. That primary carrier would no longer be the final destination of ACORD data. If there was enough reinsurer appetite it would be passed upstream to them.
For reinsurers,it seemed, any discussion of data standards would be a good thing as they may have been the farthest out on the food chain in terms of having any data standardization. It was clear reinsurers understood the value of data standardization as reinsurance EDI data standards were being progressed in Europe by LIMNET (London Insurance Market Newtork) and RINET (Reinsurance and Insurance Network) community. With the demise of RINET in 2001 this work was accepted by ACORD and the goal of a single universal standard glittered in the distance. 

The bottom line was that the industry was making real progress in setting an agreed-to data standard that would allow for the exchange of even the most complex data between parties. ACORD can and does support business transactions between brokers, insurers and reinsurance carriers internationally.

Importantly though, ACORD was a peer-to-peer standard, borne out of its history and there were questions as to how such a standard could be applied to a central services, shared business operation.  Lloyd's and the London Market had been a central service, hub based operation for decades and it was, and is, a critical component of the global insurance and reinsurance process.
In the 1970s, Lloyd's was enduring the claim effects of ever-widening interpretations by US courts in the asbestos liability and workers compensation lines. This situation worsened in the 1980s when courts started levying punitive judgments surrounding asbestos data and unforeseen risks. The classic example were the asbestosis and mesothelioma claims filed under employers' liability or workers compensation policies that hit many syndicates.
Since the risk hadn't been foreseen back in the 1940s, when many of these policies were written, there obviously had been no reserving made. In fact it wasn't until asbestos related illnesses developed years later that claims were even made.  It was one of the most difficult moments of Lloyd's history and to its credit the society survived.
But near death experiences, if they don't kill you, can be good learning tools and Lloyd's quickly began to expand the data requirements mandated of its syndicates.  The mandated central core services were moved into the 20th century and syndicates and managing agents were required to submit data electronically into Lloyd's central systems.  Lloyd's was determined to use data to supervise market behavior and guard its solvency.
A host of peculiar Lloyd's and London market systems arose ultimately including POSH, LIDS, CLASS, LIPS, LORS, CWS/CWT, DFV, eAccounts, ECF/ECF2, IMR, APIX, etc. The systems had one purpose and one purpose only --they were to serve the market and provide information on the activities of the syndicates. The systems were designed to intake premium, claims, reserve and risk information directly into the Lloyd's bureaux. A positive by-product of this demand for information was that these systems began to allow transfer of payment and coverage information to Lloyd's.
The systems spawned a burgeoning back office operation with Lloyd's employees charged with the input of market data into the central core systems.  The challenge faced by individual American companies, sorting their incoming data and preparing it for data entry, and then actually entering it onto a system, was replicated by Lloyd's across many dozens of syndicates and entry onto several separate Lloyd's systems. The process was daunting and mostly manual as anyone who had ever visited the Lloyd's back office center in Chatham can attest.  

London Market systems were created over a number of years and developed in a step-wide fashion adding new functions to existing architecture. Like the systems operated by American insurers at the time the Lloyd's systems were "closed" systems.  The notion of systems communicating with each other was in the distant future. These systems, for the most part, required people interacting with the market to accept the London data architecture and build messages to the London requirements.
By the close of the 20th century two seminal changes had occurred. First, it was clear that ACORD might actually work. Insurers and reinsurers, if they chose to accept ACORD data, might be within reach of the long sought dream of data standardization. Second, was the rise of the Internet which meant that by great good fortune ACORD had managed to produce the right result at the right time. By 2010 it was clear to most that the Internet had rendered closed systems obsolete. Technology was aimed full-tilt at improving XML, Open Source and other developments to better allow data to flow to any party via the Internet. Security concerns were rapidly being addressed with the introduction of "private clouds" and advanced encryption methods. 
For the insurance and reinsurance industry it was clear that the Internet meant that if data was standardized it could be transferred successfully from party to party. It was also clear, that if ACORD standards were universally accepted, data could be transferred from brokers to insurers, to reinsurance brokers and to reinsurers, and then to regulators without the need for large, institution-specific, cumbersome systems that couldn't communicate with other systems.  Those systems were becoming the equivalent of the brick and mortar stores by-passed by Amazon.
We go through this history because we, like everyone else, have noticed a $400 million project being worked on at Lloyd's. It's called TOM and it stands for Target Operating Model. It's an ambitious project and it seeks to revamp and improve the current Lloyd's systems.
The scale of the project is huge. You can see that the project managers are determined to secure "buy-in" at all levels. Committees have been meeting and Power Point project talking points have been circulating around Lloyd's for months. 
When a 7 ton elephant starts to move around in the jungle it usually means other animals will adjust accordingly. And by any definition Lloyd's is a 7 ton elephant.  There is no IT vendor involved in the insurance and reinsurance industry, CATEX included, who is not watching what TOM is doing and hoping to be involved in the effort.
We were curious though as to why the filter the TOM organizers seem to have chosen, through which to view systems improvement at Lloyd's, seemed predicated on maintaining the institution specific Lloyd's systems that were originally developed years ago? We wondered why, after all this history, Lloyd's isn't taking the easiest and most cost effective route to accomplish its aim and at least re-considering the value of central services?

What if Lloyd's, in its regulatory role, simply required the direct reporting of necessary information from its constituents and mandate that the information come in ACORD format?  The technology is here now and the insurance industry has already paid for it. Why not use it?
Instead of revamping and boosting its extant, expensive "central" systems why not simply decommission them? They have more than served their purpose already. If Lloyd's was to set the data standards it needed, required of any and all its market players, and be willing to accept this data directly from individual participants, a very different end goal could be achieved in which participation in the market did not rely on mandated central services.

A set of elective ACORD enabled shared service components could be adopted by market participants where they make economic sense. And where Lloyd's needs to control a process, for example the disbursement of syndicate funds to enable Lloyd's to guarantee payment, these processes too could utilize the same shared service.
Nothing is ever as easy as it sounds. Believe us, we know this. We are writing from the US and have heard numerous "simple" solutions to very difficult problems advanced by political candidates in the lead-up to the US election next year.  There are no "simple" solutions to meeting the goals of the Target Operating Model either. 
As an example of the complexity faced by the TOM organizers, many of these Lloyd's systems, and that "burgeoning" bureaucracy of Lloyd's personnel charged with data entry to those systems, were transferred to Xchanging in 2001 as part of an arrangement that saw Xchanging accept responsibility for the Lloyd's backoffice.  

If you read the news, you know that Xchanging may be purchased by CSC (at least as of this week) and you can bet that somewhere in the due diligence material there is a line item for anticipated revenue from the Xchanging Insurance Services subsidiary.  Waving a wand and reducing or removing that line item won't sit well with some people.
We're always nervous about big projects --every vendor is. We've found that the more constituents that need to be pleased the greater the risk is of problems. Somewhere, while reading the myriad of press attention received by TOM, a distant warning bell went off in our mind.

Maybe it was the goal of securing market buy-in at all levels for TOM that was repeated over and over again? Maybe it was the placement of a TOM suggestion box in the main reception of Lloyd's during the launch of TOM where anyone could deposit a suggestion about what he or she thought TOM should do? Maybe it was the bevy of consultants that have appeared who are coalescing all of this market opinion into dramatic power point presentations? Or maybe it was the realization that any new owner of Xchanging would look askance on any plan to reduce its revenue which by default would limit available options for reform?

Actually, though, all of these moves and ideas are about the only thing the TOM directors could have done. Buy-in from all levels is an absolute requirement. We know what can happen if you don't have that "buy-in". Also important is the capability to accept the odd suggestion coming in from left field. Of course, the Xchanging relationship is a fact of life and recognizing it at least means they are prepared to deal with it. And as far as consultants are concerned, well...someone actually has to do the work.
We don't know but we do know one thing. It's a gigantic effort and we're glad it's not our money. Apparently we're not the only ones who feel this way. Building on the architecture of systems developed forty or so years ago may well eventually work, if enough time and money is spent. We hope all options, including those involving upgrading to what the rest of the industry is doing, are at least being considered.

Our soapbox position on this subject comes in part from years of being asked whether our own systems are ACORD compliant. (They are.) It usually is the first question posed after "Has anyone asked you if you wanted coffee?" In fact we've been asked that question in London --numerous times. Why did they bother we wonder?

Outside of One Lime Street there is a world of digital company and market data transfer going on. Regulators at the PRAC and in the US are receiving their regulatory required data. Individual company Solvency II models are being populated. Individual companies are not only transferring data between each other but with other sector businesses in the industry. Even the holiest of holies, personal data from end consumers, is being dealt with securely and effectively.
Maybe it can work just as effectively inside One Lime Street as it does outside the building?  It sure would save a lot of money. Besides, the industry has already paid for it.

Berkshire and Nephila move closer to the risk

As we wind up this year there has been a spate of serious activity by some major players to "move down the food chain" to get closer to the client. Ajit Jain had been quoted back in August that this was Berkshire Hathaway's avowed intention but everyone had thought that the proximity effort would be accomplished only through Berkshire Hathaway Specialty Insurance.

Not so.  Berkshire Hathaway Direct Insurance Company has secured an A++ financial strength rating from A.M. Best and is planning on writing and selling workers comp and business owners' package policies (BOP) directly to customers over the Internet.  The company plans to strip out transactional costs associated with placing this kind of business and potentially delivering a competitive advantage.

Potentially delivering a competitive advantage? No kidding.  What business owner wouldn't at least be curious about getting a quote from Warren Buffett's company to provide his BOP and workers comp coverage?  We would think that with the proper targeting of Google ad placements BHDI's site will become a very popular destination.  

According to reports Berkshire's new online insurer has a 90% quota share in place with Berkshire's National Indemnity Company thus ensuring that BHDI's "risk management, including overall exposures, risk appetite and control systems will be fully incorporated into NICO's existing risk management program."

The flexibility of Berkshire's model is essentially allowing BHDI to function as a primary commercial carrier sidecar to NICO.  This arrangement means that Ajit can control the spigot as needed--or as premium prices continue to be attractive --as 90% of the BHDI premiums and 90% of the exposures will end up with him anyway.

It's possible that stories noting Buffett's waning interest in reinsurance as evidenced by his decreased investments in Munich Re and Swiss Re are only part of the story. The impetus he has placed on initiatives such as BHDI and BHSI seem to indicate that he remains very interested in insurance --and of course the fabled "float" he obtains from premium payments.  What Buffett is doing is what Jain said he was going to do last summer. He's moving down the food chain to obtain a bigger percentage of the premium and cut out the costs he'd have borne in traditional broker placed reinsurance as the risk moves up the food chain.

It looks as if Nephila Capital is following a somewhat similar path. Nephila, the world's largest asset manager in the ILS space, has been edging closer to the original insured, working down the "food chain" for a while now. Its work with State National, Amwins and Amrisc are clear indicators of this strategy as the ILS giant seeks to put its $9.5 billion in assets to work at the more attractively priced primary policies it can obtain through fronting relationships.

Earlier this year Nephila announced the formation of Velocity Risk Underwriters a managing general agency that will underwrite and front business direct to Caravel Insurance which is owned by Nephila. Velocity was set up as an MGA to directly and indirectly engage insurance carriers licensed to sell insurance in targeted US states.  The insurance risk will then be transferred back to Nephila through quota share reinsurance. Velocity will charge fees for the services back to Nephila in the form of commissions on written premium.

The Nephila high command in Nashville isn't planning on letting any grass grow underneath Velocity as it's ramped up hiring and signaled that it intends to participate in 2016 policy take-out business from Florida's Citizens Property Insurance.  Velocity is looking to insure wind only policies emerging from Florida's insurer of last resort, a peril with which Nephila has, to put it mildly, some experience.
 Woe to the bettor: Climate pact signed and Willis wins

Just over the past week came two surprising bits of news. First, was the signing, by 195 nations, of a climate accord in Paris. The signatories agreed to reduce their carbon output "as soon as possible" and to do their best to keep global warming "to well below 2 degrees C".

The importance of the achievement cannot be overstated. Remember, there are still people (some of them are running for President) who believe climate change is a hoax, and that the scientific "evidence" supporting it is a fabrication.  The fact that 195 nations, at different levels of economic development, have agreed to be legally bound in an effort to reduce carbon emissions is a clear signal that finally mankind has recognized the climate change threat. 

The agreement will become legally binding only after the 55 countries who produce over 55% of the world's greenhouse gas ratify the Agreement

Both President Obama and UN Secretary General Ban Ki-moon spoke about the importance of insurance and reinsurance in the fight against climate change as did XL Catlin's Mike McGavick and Swiss Re's Michel Lies.  Risk assessment is, after all, one of the industry's strongpoints.

The second surprising bit of news came at the end of last week when Towers Watson shareholders rejected the advice of institutional shareholder advisory firms such as ISS and Glass Lewis and voted to accept the $8.9 billion merger offer from Willis.  The original deal, for $8.7 billion announced in June was severely criticized by analysts and Willis was forced to sweeten the deal by an additional $200 million.

It would have seemed risky to bet against the shareholder advisory firms and their recommendations but 72% of Towers Watson shareholders voted in favor of the deal.
Carl Icahn can still ruffle feathers as AIG learns

Fallout continues at AIG after activist investor Carl Icahn called for the insurer to be broken up into at least three entities.  The vitriol has increased as Bernstein & Co. analyst Josh Stirling said that the time had come for the "creative destruction" of AIG and that "today AIG is worth more dead than alive."

We note that the criticism of AIG, from all parties, seems to be addressed if and only if the company splits into at least three separate specialized insurers.  The bulk of the complaints seem to be focused on the idea that the company is too big to manage and has too many fingers in too many pies.

We offer no opinion.  But we do note that over the past two years every insurer in the world it seems has been trying to merge, acquire or be acquired so as to be part of something that is just like the international, multi-line insurer that AIG in fact is.  We could in fact offer several citations from respected industry figures warning of the perils of being either too small or too focused on specific lines of business.

It wasn't all that long ago that the "activist investor" Icahn was known as a "corporate raider" or someone who bought stakes in companies he thought was undervalued and then profited handsomely if and when the company was acquired or divested itself into parts. The "active part" of the raider's process was to work to make these dispositions possible --publicly if necessary. As a result, Icahn's mere presence as a significant shareholder in a company came to be enough for observers to think that a company was "in play". 

Icahn's strategy has been immensely successful financially for him, and for the people who invest in his fund. He rarely is forced to get actively involved with a company as his sturm und drang usually works, forcing the company to be broken up and sold as profitable parts, or bought at a nice premium. In fact, as far as we can remember, (and the 79 year old Icahn has been doing this for a long time so we may have missed a few) it was only his experience with the now defunct US airline TWA that was one of the few times he did get stuck running the company. It was a rare instance when his public agitation failed to produce a sale. He got "stuck" all right and ended up buying TWA himself making a profit of at least $469 million in the process. 

There's nothing wrong with making money. Carl Icahn is very good at that. If anything we suppose we wish we had the foresight to invest in his investment fund a long time ago. All of this history though came to mind when we began to see the official AIG response to Icahn's demands.

AIG CEO Peter Hancock's first response to Icahn heartened the insurance industry. It seemed that AIG was going to stand firm and not break the company apart.  Hancock did note that there would be "staff reductions" but frankly no one was prepared for what was to follow. 

During its third quarter results call at the beginning of December, AIG revealed it was planning to part company with 23 percent of its 1,400 most senior executives. Over the past six weeks or so the number of senior AIG executives who have lost their jobs is staggering. Of course if Hancock is serious (and he sure seems like he is) cutting 23% of 1,400 does mean eliminating 322 very senior jobs. It should then come as no surprise that thus far the CFO, Head of Commercial Insurance, EVP of Global Claims and Operations, Head of Insurance Capital Markets and more division heads than we can name have been part of the cull this far.

There's an obvious temptation to suggest that perhaps AIG has gone too far in its efforts to appease Icahn. After all, any plan that ends up cutting so many people working in some of the jobs that were axed can lead one to wonder about the perspicacity of the planners themselves. If all of these people and jobs were ripe for cutting then how come the company didn't act sooner? That's a tough one to ponder as we know some of these people and they were, in our opinion, good at what they did.

There's another temptation too and this is to look at AIG as a "victim" being buffeted about by a legendary old corporate raider.  To Hancock's credit he hasn't pushed that button. He could do it too. Remember, AIG was bailed out by the US taxpayer and not only repaid the loan but also paid the government a profit of nearly $23 billion. Painting Carl Icahn as "the other" here, trying to axe the jobs of AIG employees maintained at such a dear price by the taxpayer, would seem to be within the capabilities of a junior level advertising executive.

There may be a reason why the official response from AIG thus far as been counter-arguing Icahn on the merits of a company split and agreeing that some action is needed to reduce expenses. We read this article in Insurance Insider.  We'll let it speak for itself.
Jobs losses feared at Aon LondonCoverage "gap", underwriting and BI claims
According to Aon its London "Global Broking Centre is a mini-London, with 750 people speaking 25 different languages; more than $5.25 billion in annual premium, more than 10,000 clients and solutions ranging from finance to space exploration."

Aon has such "centers" in Bermuda and Singapore as well as London. The idea is that any coverage needs submitted by a client will benefit from the attention of a multi-disciplinary team of modelers, brokers, contract writers, loss adjusters and accountants who will not only be knowledgeable about the risk but will work across business lines to harness the full potential of the world's largest broker.

It's a great concept and Aon has been very successful with it. The Global Broking Centre also manages to convey a certain level of intimidation and fear to other brokers, in this case participating in London business, with an almost "Don't even think about it" kind of implied warning.

Imagine our surprise when we saw this headline in Insurance Insider last month: "Aon wholesale job loss fears". It seems that the two initiatives Aon announced last month, Aon Client Treaty and Aon Carrier Link, have sparked fears of job losses in the London Global Broking Centre.

Let's look at this. The Client Treaty program will have 20% of each risk that's put through the Global Broking Centre placed into a pre-agreed to panel of insurers led by XL Catlin. There won't be any need to find markets or to negotiate prices as the markets are committed to a "follow form" facility.  

One could well imagine that XL Catlin won't be an easy customer to negotiate with for Aon as their pricing is going to have to stand up to scrutiny for the rest of the panel. There will be some negotiating margin perhaps but at the end of the day XL Catlin will get the price they will need to make the deal work --both for them and for the markets behind them.  

According to the Insider "As such the labor intensive placement work, with individual risks shown around the market by skilled brokers, will diminish." 

Any such decrease in the amount of work required from these skilled brokers could invite redundancy as "remuneration costs are, as elsewhere in the London market, relatively high."

One source told the Insider that "With 20% less work to do it doesn't make sense for Aon to have the same number of brokers in London."

As if that's not enough bad news (if you're a London Aon broker) the effects of Aon Carrier Link could, in our opinion, be even more drastic

Supposedly, Aon serves over 450,000 clients in 120 countries producing $78 billion in premium. Lloyd's currently only accesses 6,000 of these clients producing just under $1.8 billion in premiums. If Aon Carrier works as it's intended to work Aon will put a "material portion" of this $78 billion in premium directly into Lloyd's right from Aon global retail centers.

Currently the Aon retail regional centers wholesale the business into London via, yes, the Global Broking Center, which then does the placements in London. It is thought that the use of "costly London-based brokers is relatively inefficient and particularly, with smaller risks, renders the placements uneconomic."

Carrier Link will allow the Aon retailers to use a system which will plug the retail risks directly into London thereby cutting a link out of the chain and reducing costs and widening margins.

The link that would be cut out are the services (and fees) paid to the Global Broking Center. Presumably, in this era of continued falling premium rates, the "widening margin" means that the subtraction of the costly London broker will fall to Aon's own bottom line.

For the Lloyd's syndicates the Aon Carrier Link is a potential gold mine as the better part of nearly $75 billion of new premium could potentially be seen.

For Aon, although they may be required to make adjustments at the London Global Broking Center, the prospect of their worldwide regional retail outlets being able to offer direct placement into Lloyd's means that its already gigantic retail business could grow substantially. Aon no doubt is envisaging the so called "coverage gaps", in under-insured areas and LOB's, as candidates for this placement into Lime Street.
There is an interesting confluence of trends emerging if you look closely at the under-insured markets and business interruption claims.

More and more studies are pointing to the vast coverage gaps in the developing world. Sometimes you can see gaps in the more developed world as when Hurricane Patricia, the strongest hurricane in the history of the Western Hemisphere barreled on shore in Mexico but caused only "negligible" insurance losses.

Typhoon Mujigae, which caused economic losses of $4.2 billion in the Philippines and China as well as Typhoon Melor which as of this writing is lashing the Philippines, will both have produced low insurance losses.

The coverage gap isn't new news. In fact one of the great hopes of the global insurance and reinsurance industry that the gap will be filled in the future providing new premium and growth.

That's why we were surprised to see the concerns expressed by Vincent Vandendael, Lloyd's Director of Global Markets when he said "What we see also as a challenge in Asia is actually the uneven underwriting expertise, which can lead to certain dislocations in the market. When there is very little experience or expertise people start looking at risks in a very different way."

When you add the inadequate comprehensive modeling capabilities of perils and locations typically found across Asian countries to the "uneven" underwriting expertise it sends a warning shot over the goal of bridging the so-called coverage gap which seems to be the key to success in the future.

Then we noticed this story about BI claims. Allianz reports that the average property BI claim is now about EUR 2.2 million as compared to the corresponding average property claim of EUR 1.6 million. That means that the BI claims seem to be running about 36% higher than the property claims.

Allianz says that "The growth in BI claims is being fueled by increasing interdependencies between companies, the global supply chain and lean production processes.

Remember the flooding in Thailand in 2011? Over 800 people died and the images were terrifying. But it wasn't until the water flooded hundreds of industrial estates and productions lines around the world began to shut down that the world realized which companies and what assembly lines were tenants in those industrial parks who had been forced to close. The total insured claim bill, a significant part of which are BI losses, has been estimated to be near $15 billion.

We thought of this earlier this month with the flooding in Chennai, India. Chennai experienced massive monsoon rains and over 280 people died. In the affected areas were production facilities of Ford, BMW, Hyundai, Renault, Daimler and Eicher Motors

Total economic losses to India were about $3 billion but the insured losses were only $300 million. The industry was lucky. It could have been worse.

Lloyd's noted that it does take time to build up the requisite underwriting expertise and points to the "60% of underwriting staff at Lloyd's Singapore who are locals" as compared to twenty years ago when the Singapore market was small.

Models are another matter as even heavily modeled areas have shown. Storm Desmond, which struck northwestern England earlier this month, could cost British insurers as much as $400 million. Interestingly, Amber Rudd, the UK Energy and Climate Change Secretary, conceded that Desmond's strength was likely affected by climate change.

For insurers though an equally important issue was that the rainfall and flooding had been classified by models as a "once in a hundred year event".  Desmond was the second such storm in the same area in only 10 years and will cause British insurers to adjust their forecasting models to cope with more frequent floods.

The comment by Rudd was a bit of a wakeup call as PwC UK's Domenico Del Re observed "This is the first time the MET office has attributed these unprecedented level of rainfall to changes in climate. This has far reaching impacts on how the insurance industry assesses flood risk on a forward-looking basis."

After 7 years Tom Bolt to step down at Lloyd's

We noted the news that Tom Bolt, the Lloyd's Director of Franchise Performance Management, announced that he would step down in mid 2016. Bolt has been in his position for nearly 7 years since taking over from Rolf Tolle, the first occupant of the position which was created in 2002. 

Some say that when Lloyd's created the Franchise Board in September, 2002 that it was "the day that members approved a plan that will radically alter the way the London market is conducted."  For the last 7 years Bolt has been charged with overseeing that Board.

We'll cover this story more in future editions as well as the search for Bolt's replacement but for now all we will say is that Tom Bolt will be sorely missed. We noticed two interesting pieces that you may be interested in. One deals with Bolt's contribution to Lloyd's. The other piece captures several of Bolt's more humorous quotes.

We were never quite sure where he got his material for some of these but some of them are very good.
Roger encounters China when it was the "real" Red China
Enjoying the holidays in Eastbourne

Roger Crombie

By tradition, here at CATEX Reports, my December column tends not to relate to insurance. Instead, in what is being described as the Chinese century, here is a reminiscence from pre-handover Hong Kong.

How I came to be in Hong Kong need not delay us here. Why my father was there too is equally none of our beeswax. What matters is that I found myself staring down the barrels of machine guns belonging to licenced killers, a few seconds away from starting World War III. Okay, I exaggerate - I hardly did any actual staring.

We stayed in central Hong Kong. Overwhelmed by the manic intensity of it all, I suggested we visit greener pastures to the north. We bought train tickets to the end of the line on the Kowloon-Canton Railway, and half an hour later arrived at a station called Lo Wu, which was the end of the line and then some.

My natty old Dad was in his blazer. I wore a polo shirt with a classy little horse on it, bought new for $3 the day before from a woman with a wheelbarrow full of them. I thought we might have a spot of lunch and then swan about Lo Wu, obtain its measure, try to meet girls, that sort of thing.

We came upon some metal barriers. My father, wise in the ways of the Eastern mind, suggested that we turn back. "Nonsense," I said, "I didn't come all this way to turn back. Did Edmund Hillary turn back a few feet from the top of Everest? No. Did Albert Einstein turn back when he got as far as 'e=mc something'? No. Onward!"

"Where you go?" asked a little old Chinese train conductor dude, who worked on the little old Chinese railroad. He made an effort to bar our way as I led us through some exit turnstiles.

"Cup of tea," I said, knowing the crucial place that tea plays in the ceremonies of the East.

"Go back," said the ticket-puncher abruptly, taking the tickets out of my hand. "Go back."

I wasn't in the mood for this, especially when the worst the guy could do was to inspect my ticket. I was about to explain that I was a BBC World Service correspondent, which I was at the time, but a little voice told me not to.

My new friend, who peeked with beady eyes from under his peaked cap, looked piqued. "Go back!" he said.

They'd been standing there all along, in plain view. I just hadn't seen them. They were three yards behind him, backs to the wall. The two of them were in camouflage gear, with helmets. They each cradled, like fragile babies, a fat automatic machine gun which kills hundreds of people without a fair trial or even inspecting your ticket. All these guys wanted to inspect was my corpse.

They were, I later discovered, highly-trained, lethal and remorseless killers. Silently, in perfect synch, both soldiers raised the noses of their ugly steel weapons a meaningful fraction or two in my direction. Strolling is now a capital offence in China (as, apparently, is golf).

I thought Lo Wu was just a checkpoint for charlies. I didn't know we were standing at the border of the Peoples' Republic of China. I didn't know that a few days earlier the country which issued my passport had denied entry to some Chinese citizens on a technicality, kicking off an international brouhaha.

No one mentioned this when I paid for the air fare. If they'd had a brochure saying "On Day Three, the Kowloon-Canton Railway will carry you in comfort to charming Lo Wu, where you will be mercilessly gunned down by military thugs," I'd have bought a one-way ticket and died $2,000 richer.

"Back," I said, a grin of comprehension dancing across my features, "we go back." And back we went.

The part of Christmas I can bear has to do with the innocence of the new-born, which gets somewhat overlooked in the rush. Without innocence, I'd have been (a) front page news in every newspaper in the world, and (b) dead.

You can have the fabled East with its rich history and proud traditions. I'm staying in Eastbourne on England's south coast, thank you very kindly, where a man may walk wherever he likes and the main weapon in use is the snide put-down.

Merry Christmas.

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
December 16, 2015
Quick Bytes

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