- Terror strikes in Europe again
- CEO transitions at major (re) insurers
- Buffett's Annual Letter signals strong appetite for primary insurance
- Are brokers ready for the data challenge?
- Roger encounters data issues of his own with his bank
- Quick Bytes: Kessler says UK exit would be a disaster; ILS investors want model data; Legal & General CEO thinks S2 cost was a waste; Data breaches surge; ISIS incurs its own data breach
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The bombings in Brussels once again have cast the pall of terrorism over much of our industry. Our deepest condolences go to the families of those who were lost in this latest act of savagery.
Despite the terrible news life goes on for reinsurance and insurance. Personnel changes at the top of some of the world's largest insurers and reinsurers were announced and Berkshire Hathaway signaled a very strong approach to pushing its Berkshire Hathaway Specialty insurer into Europe.
There was also an interesting statement from Hamilton Insurance about aggregation risk of cyber liability. Brian Duppereault stated that Hamilton is not going to cover it as a class until its true aggregation risks are known.
We've also noted a trend involving better modeling of risks at their initial entry into the insurance risk chain, namely when the initial premium is set. This seems to be intensifying as more reinsurance related entities are moving into this space.
The Berkshire Hathaway annual report was released and as usual Warren Buffett's letter to stockholders revealed several interesting points. He clearly indicates that the "bread and butter" business of primary insurance is now his main focus.
Our regular Roger Crombie column is here too. Roger too it seems has been bitten by the data discussion except in his case he actually was bitten by it financially or nearly so until he started to investigate.
As always if you have any questions or comments about CATEX Reports, or want more information about CATEX, please feel free to contact me.
Thank you very much.
Stephanie A. Fucetola
Senior Vice President/CATEX
Terror strikes again on the continent
We are writing this piece shortly after the bombings in Brussels. Once again terror has struck its ugly hand in a major city resulting in the death of innocent people. The videos of blood spattered survivors being led by rescuers through familiar airport concourses and Metro platforms that we ourselves have traversed in the past have the effect desired by the perpetrators. Outrage, sadness and, yes, fear too, which is the ultimate goal of the killers.
It seems as if there is no safe harbor from this emotional disruption. The UK "Brexit" vote, with the possible future of Europe teetering in the balance, looms in less than three months. The US Presidential campaign, with seven more long months until the election, has already devolved into a spectacle leaving most watchers recoiling in embarrassment. Military tension in the South China Sea seems to be increasing with each passing week and the global economy has been shifting up and down like a yo-yo since the start of the year.
In the midst of this carnage and disruption we encountered Warren Buffett's annual letter to Berkshire Hathaway shareholders
. We will discuss it later but anything Buffett writes is worth reading and particularly so from the insurance perspective. In this case though we derived the most satisfaction simply from the man's unquenchable optimism
about the future. It was a good anchor to rely on while the TV screens were flashing images of Brussels.
We can't predict the future but this next bit of news might be something to remember. A regional German far-right neo fascist
political leader, who had campaigned for office calling the influx of refugees
entering Europe "lawless primates" and "benefit-scrounging tourists", was involved in a car accident
on March 16th. He was seriously injured.
The first people to arrive at the accident scene were two vans filled with 16 Syrian refugees who were passing by. The vans stopped. Two of the refugees ran to the car and dragged the man out and administered first aid until the ambulance arrived. The political party represented by the injured man issued a statement saying that the Syrians had "likely performed a very good, humane deed."
It's possible that the actions of the rescuers can show us that extremists on either side of the fence, who paint enemies as entire cultural, religious, national or racial groups, are dead wrong. In this case it was proven to us by disenfranchised, homeless refugees who had everything to lose by aiding the man and staying until authorities arrived. They stopped, stayed and helped anyway.
Transitions: Corporate and Personnel
There was a lot of movement on several levels this month. In one month it was announced that the heads of Munich Re, Swiss Re and Axa were retiring. Munich Re's CEO Nikolaus von Bomhard, Swiss Re CEO Michel Lies and Axa CEO Henri du Castries all announced their retirements.
At both Munich Re
and Swiss Re
the newly promoted CEO's, Joachim Wenning and Christian Mumenthaler respectively came from reinsurance backgrounds. Munich's new CEO Joachim Wenning comes from the life reinsurance division. It's no secret that large reinsurers are looking more carefully at life reinsurance and longetivity coverage as sources of increased revenue. By naming one of the world's top life reinsurance operators as its new CEO the largest reinsurer in the world is signaling that it does not intend to step back from that strategy.
Meanwhile at Zurich Insurance the arrival of Mario Greco from Generali occurred as expected on Monday morning March 7th. From press reports the walls didn't shake and the earth didn't move (pundits have taken to referring to Mr. Greco as "Super Mario" a nod to his notable revamping of Generali and to the expectations surrounding his role at Zurich.) What did happen though was that Zurich quickly announced that instead of renewing its European CAT reinsurance contracts on April 1 it would simply extend them for three months. Mr. Greco, it seems, wants to get a handle on one of the biggest expenses faced by Zurich which are the premiums it pays for reinsurance.
Zurich was one of the early adopters of so-called "centralized reinsurance purchasing", to better coordinate the overall reinsurance spend with the corporation's overall financial exposure. In the past year though the company sustained serious losses --in the Tianjin explosion, the UK storms and US auto--that exceeded their reinsurance. Those losses, combined with the overall change in Zurich's financial condition, certainly would set the stage for a "time-out" while the new leadership reviews internal exposure, changed conditions and the lowered cost of reinsurance cover before it makes the next move.
Insurers are increasingly attracted to lower reinsurance premiums as a way to move liabilities off their books. This would seem a basic principle of reinsurance but remember that in the rush to "move down the food chain", to get closer to the risk and keep more of the premium, it's possible that some insurers ended up keeping too much of the premium --and
ended up holding more of the risk at higher retention points.
Events like Tianjin, or the trio of UK storms, are like the gifts that never stop giving
. The insured losses just keep increasing
. You can assume that reinsurance purchasing decisions are back to focusing on capping losses at an acceptable level --and having someone else pay for losses above that level. Picking up revenue down the food chain by retaining exposure can be profitable but very costly if things go wrong.
One company that makes no secret about its determination to move down that food chain is Berkshire Hathaway Specialty Insurance
. In fact when it was formed both Warren Buffett
and Ajit Jain
that they intended to make Berkshire's enviable balance sheet available to commercial insurance buyers right down at the lowest level of the chain.
In Berkshire's case you can bet that BHSI isn't ceding any coverage out to anyone other than a Berkshire reinsurer. Berkshire will get the whole premium, but it will cover the whole risk. Few companies can risk doing that. But as Buffett said in his annual letter "if the industry should experience a $250 billion loss from some mega-catastrophe (Tianjin, Eva, Frank and Desmond take note: you have a long way to go to reach this level! Editor's insert.) --a loss about triple anything it has ever experienced --Berkshire as a whole would likely record a significant profit for the year because of its many streams of earning."
Buffett went on to say "We would also remain awash in cash and be looking for large opportunities to write business in an insurance market that might well be in disarray." Just in case you didn't get the message he concluded with "Meanwhile other major insurers and reinsurers would be swimming in red ink, if not facing insolvency."
Last July, in a Wall Street Journal story
, Ajit Jain signaled that Berkshire was going to begin to cut back its appetite for CAT exposure
and "move down the food chain to get closer to the risk and keep more of the premium. A big part of that new appetite is going to satisfied by BHSI which has developed more than $1 billion in premium volume in less than three years.
Remember that Buffett's view on insurance is slightly different than anyone else's. He views the insurance subsidiaries as "float producers", that generate cash that can be used for investments. The float is the money the P&C operations receive in premiums upfront that may be needed to pay claims later on.
Float production is a big business at Berkshire. By 2015 a total of nearly $88 billion in float had been amassed
. Berkshire paid out about $24.5 billion in claims
in 2015, but it was replaced by new premium. You can see why Buffett regards the float as a revolving fund. As he said
in his letter "Daily, we pay old claims and related expenses and that reduces the float." "Just as surely," he continued "we each day write new business that will soon generate its own claims, adding to float."
But don't think that the Berkshire underwriting operation is only a giant scheme to generate cash for investment purposes. Far from it. In fact in the annual letter Buffett sets out the four disciplines that a sound insurance operation must adhere to. He emphasizes that in addition to serving as a float generating machine, his underwriting operations are finely tuned toward creating underwriting profits. That means, at essence, that the underwriting takes in more money in premium than it pays out in claims, operating costs and claims expenses.
Buffett has long known that his entire underwriting operation, spread across Berkshire Hathaway Reinsurance Group, General Re, GEICO and BHSI is adhering to his "Four Disciplines" and that each is doing their best to produce underwriting profits, in addition to generating float. But for the first time in 2015 Berkshire included insurance underwriting income in its earnings. One can guess the relief amongst those line managers to finally be recognized for the underwriting contributions they've been making but that's not why, after all these years, Buffett is recognizing underwriting profits.
He hadn't included underwriting income because its insurance results were "then heavily influenced by catastrophe coverages. If the wind didn't blow and the earth didn't shake, we made large profits. But a mega-catastrophe would produce red ink". To be conservative, when stating its earnings, "Berkshire assumed that underwriting would break even over time and ignored any of its gains or losses in our annual calculation."
Why the change now? Back in 2010 Buffett said "underwriting results are volatile, swinging erratically between profits and losses" but that "Over our entire history, though, we've been significantly profitable." Five years later, explaining why underwriting results would be included, he said "Today, our insurance results are likely to be more stable than was the case a decade or two ago because we have deemphasized catastrophe coverages and greatly expanded our bread-and-butter lines of business."
Moving down the food chain indeed! The "bread-and-butter" LOB's of straight out commercial business is the raison d'etre of BHSI and the company has rapidly expanded beyond the US.
We noted last year that BHSI had expanded into Australia, New Zealand and Asia. Now BHSI has set its sights on Europe. Tom Bolt, the outgoing Head of Performance Management at Lloyd's, will take up the job of CEO of a new unit and president of BHSI's UK and Southern Europe operations. Gregor Koehler has been named president of BHSI's Northern Europe operation. Bolt will be based in London and Koehler in Duesseldorf. Remember that Warren Buffett promised to build BHSI into a specialty insurer that would generate "billions" in premium volume within a few years. The effort in Europe, which "is the biggest insurance market in the world", bodes well for Berkshire. Expansion will produce stable underwriting results, which Buffett has confidence enough to begin including in his financial statements. That new premium, of course, will also contribute substantially to the generation of "float".
Risk targeted insurance premiums
Sometimes you hear a comment that crystallizes many trends that are converging at once. We think we heard such a comment when, at the A.M. Best
annual conference in Arizona in March, Hamilton Insurance Chairman and CEO Brian Duperreault said
data analysis could be either a threat or an opportunity for brokers
in a world where advanced analytics contributed to the intermediary's value.
As to whether the broker could actually bring such a level of value he said "I think the answer is a qualified yes-if the broker or agent brings a level of expertise and counsel that far surpasses what the carrier offers or the client can determine himself. This means setting the gold standard for manipulating and interpreting data."
There are several implications to his comments. Mr. Duperreault clearly notes that both insurers and their clients are rapidly gaining better data analysis capabilities of their own data. This means that the insurance buyer is aiming at better understanding his own data prior to going to the market. And anyone reading the industry trade press is aware of the herculean efforts currently exerted by insurers to better understand the insured's data once they receive it.
What Mr. Duperreault is telling the brokers is that if they want to continue to bring value to a transaction they need to be able to understand, interpret and manipulate that data better than the owner of the data and better than the insurer who is setting rates based on that data.
This is a high bar for an intermediary to meet. It explains the vast sums invested in data analytics by the broker community. By any measure of effort Mr. Duperreault's message, it would seem, has already been received by the broker industry.
As all of us know there's a big difference between "getting the message" and actually doing something about it. In this case well capitalized insurers with armies of actuaries and analysts have long since jumped into this race with both feet. They've been joined by players further down the risk chain including larger MGA's and risk management units of large commercial insurance purchasers. Everyone is seeking a better understanding of the risks represented by the data.
we began to hear this data drumbeat several years ago. Our Pivot Point System
software provides transaction and claim detail down to the lowest granular risk level
. We had assumed that underwriters and analysts would be thrilled with that level of extreme granularity so that virtually "atomic" accounting and underwriting
could be applied to each specific risk processed through the system.
They were, in fact delighted. But it developed that clients generally did not have the granular risk data to load into our systems. All too often our systems were presented with only aggregate risk data by clients with the explanation that they simply had no more detailed information.
But when we raised our noses from the insurance and reinsurance grindstones it seemed that everywhere we looked disaggregated, granular data was available to consumers. Banking, online retailers, reservation websites, Amazon, etc. were force-feeding as much granular data to consumers as they could ingest! If the start of the insurance rate building process is based on understanding the potential perils to which any one risk is exposed, then surely it would only be a matter of time until insurance demanded that granularity?
As Brian Duperreault alluded to that time has now arrived
. If we needed more confirmation we read remarks
by Robert De Souza, CEO of Aon Benfield Australia and New Zealand
who said the "majority of insurers now price risk at address level, and the availability of high-resolution hazard data allows rates to be calculated to each specific property."
The CATEX Pivot Point software is designed to import and process risks at the most granular level and currently churns through nearly $7 billion annually in premiums and claims. The challenge for our clients has always been to obtain risk information at the most granular level to use Pivot Point to its fullest extent. And a significant percentage of our transaction activity is Delegated Underwriting Authority business so you can guess where this is going.
Converting placement, claim or settlement bordereau to reporting templates approved by regulators is actually the easy part. The hard part is ensuring that the data included in those bordereaux is accurate. Since the hinge of our system's success swings on being able to load the most granular data into our transaction system, we had no choice but to build a better way to import disparate data; cleanse it; complete missing fields; provide a full audit log of all changes and then be able to export data to any report template without the need to import the same data all over again for a different destination template.
Our Data Vera application
can do all this without the need for laborious and often mistake prone mapping
of fields to output templates. Data Vera is able to learn as it goes
and recognizes previous choices made in regards to a specific contract, facility or even system-wide to suggest an appropriate data value for a non-conforming data value.
The Data Vera application imports, cleanses and exports data to any desired format and is now the preferred means to import data on to our Pivot Point systems for brokers, MGAs and markets. Our clients can be assured that the data has been cleansed to an enterprise standard level and they can direct the export of that data to any destination they desire.
To revert to Messrs. Duperreault and De Souza, there is yet another obvious use for cleansed and complete data. CAT models, or models of any type for that matter, have been brutally exposed to the gaps caused by poor and incomplete data quality over the years.
Data Vera can fix this problem too. To Data Vera any model template is simply another export destination, just like the ACORD 3001 standard, XML or legacy template. A client can add a specific data template for any model as a data destination easily and quickly.
Data Vera maintains all the data it takes in, including fields not needed by clients. If the data is in the incoming data source Data Vera imports it, cleans it, validates it and stores it in case it's ever needed. All the data is converted to structured data and maintained in a "data mart" ready for export to any template.
In our view having accurate data is the key to just about everything. In fact it's so important that it's one of those things that has often been overlooked. It's like saying you need to stop smoking and lose weight. Everyone knows it but when bad things happen they are surprised. We won't be surprised again.
Data exported from Data Vera into either a CATEX Pivot Point system, a legacy system, a competitor's system, a regulatory report, or a CAT model will be of unparalleled accuracy with a complete audit log reflecting every single data cell change that Data Vera has made.
We've found that clients are sending that audit log, with a copy of the original data received, and the cleansed and validated data, back to the sender demanding a "sign off" so that they affirm the data is now accurate. Not only has no one responded saying the Data Vera cleansed data is inaccurate but several have now engaged our Data Vera clients to clean more of their data for business they previously weren't seeing.
The need to have confidence in your data seems to extend pretty far down the "food chain" of risk - and why not? Even the smallest coverholder or broker wants to have a better understanding of the business they are processing. Neither the metal filing cabinets packed with spreadsheets, nor the desktop file with the multiple formatted Excels, can provide any help on the road to "setting the gold standard for manipulating and interpreting data" but Data Vera does.
Models reach down to set primary rates
We couldn't help but connect the first two articles. The first article tracks the emphasis on moving down the food chain to provide coverage to primary and commercial risks. The second article tracks the possibility of actually using models and data to develop targeted underwriting for a risk or location.
As increasingly sophisticated risk-bearers begin to move down the food chain to get closer to the client it won't be a surprise if increasingly sophisticated modeling begins to be used on individual risks to set premium prices. This, after all, is precisely what De Souza predicts.
Modeling at the initial level of risk intake has generally been accomplished through "rating engines" in which data points are loaded into an analysis system that can produce a premium rate based on risk-specific data entered by an agent or underwriter. Recently, with the implementation of telematics, these quoted rates have become much more specific to an insured or prospective insured. The technology does exist as de Souza says to assign the correct premium to a specific risk.
Above the nuts and bolts rating though is the larger CAT risk. Running a full model analysis for one risk, which won't produce a very high premium in itself --and in fact which is in the quote stage and may not even be written --has simply been cost prohibitive to insurers. Typically a load factor has been assigned to the risk based on its location and type.
We suspect that this level of analysis is already occurring at the initial intake level for certain risk bearers. We doubt for example that entities such as Nephila Capital and BHSI are moving down the food chain to insure primary risk without having a very good idea of what the potential losses are from that risk and ensuring that the premium is set at an adequate rate. In the cases of Nephila and BHSI the risk of loss is likely to be completely retained by them with no cessions to any reinsurer. The lack of that kind of backstop could mean that the full scale model analysis is being brought down to the risk level before the initial premium is set.
Inevitably other insurers will follow this path. This is good news for the industry as it certainly means that there is a better chance for rate sufficiency at the initial level. Combined with enhanced use of telematics, we will soon be seeing individualized, targeted setting of insurance premiums at the primary and commercial levels. And it's probably good news for the modelers too because it means their analysis will be employed more frequently.
This is an important development especially right now. We continue to see warnings that substantial insurance growth is expected from emerging markets. Swiss Re was the latest reinsurer to predict that "In high growth markets, and especially in Asia, we expect to see strong exposure growth for both life and non-life insurance, further accelerated by urbanization and increasing insurance penetration among the growing middle classes."
Swiss Re also indicated that it was ready to disrupt the current value chain in a major way if it believed it was in its own interests to do so. Swiss Re Chairman Walter Kielholz said that the reinsurer was prepared to disintermediate intermediaries in order to get closer to the risk. The distance then would be shortened considerably from Swiss Re's corporate solutions team to global Fortune 1000 corporate risk managers. Remember, it wasn't that long ago that Swiss Re was a direct reinsurer only. They are quite familiar with the machinery ex-brokers.
The problem with banks and your financial data.....
Roger experiences data loss that seems to be legal
Antonio Simoes, chief executive of HSBC Bank with responsibility for the UK and Continental Europe, said this month that he believed problems in British banking would be fixed by 2020, but it would take "a generation" before banks are once more trusted by the public. It's going to take me rather longer.
Since 1968, I have been a customer of what may very well be the world's worst bank. The Royal Bank of Scotland has lost big money for the past eight years straight. It has burned through all the rescue money lent to it by the British Government (unlike other British banks, who are repaying or have repaid their loans on schedule).
I discovered recently that such lousy performance is not the result of a few grand mistakes at Board level (although those don't help), but by endless errors of the most basic sort. I offer two examples, to show you how banking, at least in Britain, works. Or, more correctly, doesn't work.
On my return to the UK some years ago, I carried with me a banker's draft for all the money I had in the world. Not allowed to buy real estate in Bermuda, where'd I'd lived for decades, I had instead invested in shares, but these had to be sold before I returned to live in the UK.
The size of the draft widened the eyes of the so-called banker who was dealing with me. I use the word banker in its loosest possible sense: his business card contained errors in the bank's address, phone number and, yes, even his own name.
"You must have our Private Banking service," he said, and promptly signed me up for an account that would have cost $30 a month, rather than paying interest on the capital, had I fallen for it.
About two weeks ago, an RBS manager I've never heard of called and accused me - accused is the right word - of not owning a million Pounds (about $1.4 million) in investable assets. I've never had that much, sadly, in any kind of assets, I told him. "Then how did you get into Private Banking?" the manager sniffed, as if I'd crashed a party at Buckingham Palace.
That they had invited me into the club did not deter him. I was summarily booted from Private Banking, which was no great inconvenience. A couple of days ago, however, I was told that, in downgrading me to the rank of ordinary customer, the bank had wiped all my records. My account balance remained, although the records indicated that the money had been deposited that morning.
Gone forever were all records of my past transactions. That would not be a problem, except that the bank does not accept written instructions from its customers (!). Fool that I am, I had assumed that the bank would maintain details of my transactions, such as international payments. Nope. All wiped.
Mercifully, I don't bank online. Do you? Have you read the contract? RBS offers online banking on the contractual understanding that all errors of any kind are the customer's fault. If the bank hands my password to Russian hackers and my money is stolen, that would count as my fault.
My brother fared worse than I did. When he and his wife divorced, he issued detailed instructions to RBS to divide the matrimonial assets. Instead, the bank's trust company sold all the matrimonial shares and took for itself all the money in the matrimonial accounts. "You don't seem to have any assets with us," RBS told my brother a few weeks after he asked why he hadn't had a statement.
It took almost a year of repeated nagging to recover the assets, and another year for the bank to agree that it was liable for the capital gains tax its actions had unnecessarily incurred. A few hours after that happened, the bank miraculously found all the original assets.
As compensation for the two-year nightmare into which RBS had dumped my long-suffering brother, it gave him £50 ($70) and two bottles of cheap wine.
Data is the second most valuable asset. Customers' data, of course, is the first most. Deloitte's audit report accompanying the 2015 financial statements of RBS said: "[F]or the IT application systems and databases that support financial reporting, the existence of ... deficiencies during the year and at the yearend meant there was an increased risk that the data and reports from the affected systems and databases were not reliable."
The banks are part of the bedrock of our financial security. Surely they could do better than this?
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 email@example.com.
Copyright CATEX Reports
March 29, 2016
In a speech at Lloyd's SCOR's Denis Kessler warned that a UK exit from the European Union (EU) would be a "disaster" for (re)insurers in both London and Europe. Kessler said that a Brexit would cause uncertainty in the short term as the UK negotiated separate deals with the EU, a process he thought, that would last three or four years before the situation stabilized...Talking about models panelists at a recent Securities Industry and Financial Markets Association (SIFMA) conference said that the disclosure of risk analysis (model results) in the offering document of an insurance linked security continues to add value even with the growing sophistication of ILS investors...Somewhere Ed Noonan is smiling when he read Willis Towers Watson UK CEO Nicolas Aubert's comments that large broker facilities are not necessarily in the best interests of insurers looking for a balanced placement strategy...The CEO of Legal & General Insurance in the UK, Nigel Wilson, believes that most of the sums spent on complying with the Solvency II regime would have been better spent on British infrastructure. The UK has spent 4 to 5 billion GBP on Solvency II, and "80% of that has been a waste," Wilson said, "That should have gone into houses and roads."...A Japanese court shut down a nuclear reactor that had been re-started after the March 2011 Fukushima related moratorium. The court agreed with nearby residents who had sought the closure saying in connection with the power plant that there were "points of concern in accident prevention, emergency response plans and the formulation of earthquake models."...The 112 day long massive natural gas leak from a Los Angeles storage facility at Aliso Canyon now appears to have been the worst accidental discharge of greenhouse gases in US history. The facility is owned by Southern California Gas Co....The Breach Response unit at Beazley says that data breaches have increased by 60% between 2014 and 2015. The insurer said that there is a concentration of incidents in the healthcare, financial services and higher education sectors. The loss of non-electronic physical records remained the same year to year--steady at 16% of the total...The Islamic State suffered a data breach when a USB stick was stolen from the head of ISIL's security police by a disillusioned member. The stick included "22,000 names, addresses, telephone numbers and family contacts of Islamic State jihadis". The authorities now have possession of the data...
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