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December 2006 Archives

December 13, 2006

Required reading for all Cat writers

Dear friend,

RMS have just sent me a report they've done all about how the industry should approach insuring flood risk New Orleans and other cities like it in the light of Katrina.

It's called Flood Risk in New Orleans. Implications for Future Management and Insurability.

I haven't had time to have proper look at it yet, but I just wanted to share it with you.

I remember Hemant Shah of RMS saying at our Monte Carlo 2005 round table that flood risk was "the third rail of modelling - you touch it at your peril!"

Needless to say sparks will fly and this looks like required reading for all Cat writers.

Low-hanging fruit

Dear friend,

I don’t get it – why hasn’t capital come flooding in to fill the gap in the burnt out cat, ILW and retro markets? What’s wrong with everyone?

This stuff is good business — it was a great write this time last year and it is still a great write today. Lets’ face it – right now what else is a good write?

I've just had a chat with someone telling me that ILWs paying out on $20bn US wind losses are going at 30%-plus on line. And you can't even get $10bn-trigger ILWs any more!

So we are charging just under a one-in-three rate for $20bn windstorms.

Hang on a minute – this is crazy.

The boffins at Colorado State say there is a 50/50 chance of a Cat 3 or above making US landfall any one year. How many of those will produce insured losses over $20bn?

Well, for the answer check out the great presentation Bob Hartwig of the iii made back in March 2006 – page 11 has all the details.

Since 1900 and even including adjustments for inflation, growth in coastal properties, real growth in property values and increased property insurance coverage, Bob says that only five hurricanes caused more than $20bn in insured losses.

What’s more, two of those were very close on $20bn and could have conceivably come in just under the magic payout number.

So our experience rating suggests that the burning cost here is 4.7% (106 years divided by five).

And you’re getting around 30%.

What are you waiting for? Why would anyone want to be wind-proof?

Surely now’s the time to get yourself more wind-exposed!

Spread the word – go and get the backers on board– this can’t last.

December 11, 2006

'Tis the season NOT to be jolly

Dear friend,

It seems Christmas decorations aren’t the only things being pulled out of cupboards and dusted down for their annual outing — ‘the long-range Hurricane forecasting season is upon us..

After Tropical Storm Risk got the divining rods out of the cupboard the other day, now it is Philip Klotzbach and William Gray of Colorado State University (with special assistance from William Thorson)’s turn.

Print it off and its 23 pages might make a good paperweight or something. Otherwise ignore it, it’s too depressing.

And I’ve had a thought — why isn’t this lot funded by a Florida State University? Or Mississippi, Louisiana or Texas? Or why not an East Coast Ivy-Leaguer? Surely they are the ones that need to learn about Atlantic Hurricanes?

Shouldn’t Colorado should be into quakes and volcanology?

Ah, the altruism of academia!

December 8, 2006

One plus one equals sticky renewals

Dear friend,

I was down at the Gherkin earlier in the week along with the rest of the world’s press to hear what the brains at the world’s number one reinsurer had to say about the renewal season, amongst quite a few other things.

(In case you didn’t know the Gherkin is the informal name Londoners have christened Swiss Re’s iconic cigar-shaped glass and steel skyscraper in the capital in the insurance district. I think even Swiss Re has given up trying to call it by its real name of ‘30, St Mary Axe’!)

I never need much of an excuse to get down there and gawp out of the window at the incredible view, and knowing I was going to be hearing Swiss Re’s predictions for global supply and demand for insurance in 2007, I made time in my diary to attend.

The man charged with looking into the financial crystal ball is Thomas Hess, Swiss Re’s chief economist. Mr Hess is a jovial and friendly character, who always has a smile on his face — I suppose he’s what you might describe as a natural optimist.

He’s been a guest on our Monte Carlo roundtables for the past couple of years and he is very good company indeed — Thomas consider yourself duly invited for 2007! Incidentally, Thomas Hess is also the main editor of the Swiss Re’s highly-regarded Sigma reports.

On to the point — Thomas gave a great presentation, with all the big numbers and trends — impressive graphs and slides illustrated the talk as the story of reinsurance results to date was described with élan.

Then we came to the supply and demand outlook for 2007, and it got slightly lower-tech.

Here’s the back-of-an-envelope prediction:

Demand up 6% — supply up 6%. A creditable score draw! A perfect balancing act.

Here’s the breakdown.

Exposures +4%,
Higher capital requirements due to model tweaks +1%,
Higher asset exposure +1%.

Profits +10%
New Bermuda money +1%
Dividends -2%
Equity buybacks -1%
Acquisitions financed out of own funds -2%

I think I’ll leave it at that.

Except to remind you that if the best that the most optimistic person I know can predict for next year is a balanced market, then what hope is there for us pessimists?

Look out below! This renewal market is going squidgy

December 7, 2006

What's the point of long-range forecasts?

Dear friend,

No sooner do we put the lid on another North Atlantic Hurricane season, than the first predictions for next year are published.

The guys at Tropical Storm Risk (TSR) are saying that we’re odds-on for another above-average season like 2004 or 2005.

Or 2006?!

Of course the problem is that this is what they were saying this time last year about 2006’s season.

Check out the full forecast – (you get there by going to the site and scrolling down below the globe image).

Once you’re there, look at the ‘forecast skill’ then get back to doing what you were doing before!

Recently our UK sister title Post magazine carried a great article from Professor Mark Saunders of (TSR) on what went wrong with the 2006 forecasts.

This speculative stuff is great fun, but strictly for pleasure (ie for scaring Cat-exposed colleagues at the Christmas party!) and not for serious business — only use long-term averages for calculating your technical prices.

December 4, 2006

Is it you doing all this North Korean business?

Dear friend,

I’ve just found a very entertaining story on the Fox News Network – all about alleged reinsurance wrongdoing worth up to $150m from the much-maligned government of North Korea.

Now I know Fox has a bit of a reputation for sensationalism, but I must say the article looks well-researched, balanced and seems very plausible.

I love the bits about beautifully-produced death certificates and inventories of goods lost in fires and accidents being produced in double-quick time, when they would take ages to be processed in the West. I love the bit where underwriters wanted to send a diver out to check a ferry wreck, but were flatly refused - these guys have style!

It just goes to show that in matters of utmost good faith, it pays to look into who you’re doing business with.

How things have changed — to think I used to sometimes find it difficult placing blue-chip Spanish business due to the innate mistrust of many London underwriters! The Spaniards may have taken forever to send documentation and proposal forms over, but none of my clients ever set out to defraud underwriters either.

These days it seems anywhere is fair game — but honestly, I imagined there were limits to what even the most silver-tongued brokers could achieve - the communist dictatorship of North Korea being one of them.

So, it’s time to come clean — have you placed any of this stuff?

Did you knowingly pay for a production broker to fly out to Pyongyang to see the guys at the state-run insurance monopoly, the Korea National Insurance Corporation (KNIC)?

I do hope it was a worthwhile trip!

December 1, 2006

Want the big choc on Christmas Eve?

Dear Friend,

Here’s a story that proves that in order to prosper in business you need to be prepared to give something away in order to eventually harvest success.

Either that, or it shows that it always pays to operate with Machiavellian deviousness!

This is a true story to me this morning by Michelle Worvell, the editor of one of our sister titles Insurance Age.

Today is the first of December and time for Advent calendars to be cracked open, and time for children and children-at-heart everywhere to open the 1st door on the countdown to Christmas Eve.

As a child Michelle used to share a calendar with her younger sister. Every year when December the first came around, you can imagine the excitement, as parents unwrapped the cellophane and the chocs come tantalisingly close.

Then comes the inevitable question “Who’s going to open the first one?”

“Me, Me, Me!” comes the inevitable squeal from the younger of the two.

Then in an unexpected flowering of philanthropy Michelle pipes up to her younger sister:

“Go on, you have it”

Younger sister devours the first chocolate of the year, parents are stunned and proud of their older daughter.

Praise is heaped on Michelle from all quarters — that letter to Santa looks like getting answered in full this year.

Said older daughter takes the praise and smiles deviously to herself know that tomorrow it will be her turn to open number 2. She can’t believe that she has done it again!

She is going to get the even numbers and will be scoffing the immense pièce de resistance, gran finale, Archangel Gabriel of all chocolates on the 24th of December!

Talk about a win-win situation! Sucker your sister whilst making out that you are doing her a favour.

Brokers — there’s got to be a way of using this technique with underwriters — I just can’t quite figure out what it is yet!

---------- Reinsurance Book ---------

All this talk of Christmas has made me think of Christmas presents and how tricky it is to find the right gift for the person who has everything.

Are you a catastrophe broker or underwriter — or do you know one and don’t know what to buy them for Christmas? Maybe you just want to learn a bit more about this discipline? Well, I’ve got the perfect stocking-filler for you!

The other day I found out that we had a books division in our company one floor down from us and that they publish titles on reinsurance. It just seems crazy that no-one had bothered to tell the editor of reinsurance magazine about this before!

Anyway they publish a really great book called Catastrophe Risk and Reinsurance — A country Risk Management perspective.

It’s got contributions from top brains at the World Bank, EQECAT, Swiss Re, Munich Re, Columbia University, the Wharton School of business, amongst others. Boffins galore — what this lot don’t know about Cat risk probably isn’t worth knowing.

And all that knowledge is contained in 311 fully-indexed pages.

Edouard Schmid of Swiss Re describes it as “A comprehensive summary of the tools and prerequisites for natural catastrophe financing schemes, based on practical examples and top expert input from around the world”

Job done! One less Christmas present to worry about.
Catastrophe Risk and Reinsurance will do the trick!

December 20, 2006

Happy Renewals - see you in 2007

Dear Friend,

Right now I am taking my family on holiday, so this will be the last time I speak to you until 4th January.

Have a Happy Christmas and a I hope you are not too exhausted to pop a cork or two to usher in the New Year.

See you then!

And you can tell me all about what happened in this last-minute renewal season!

I must say I don't envy you.

Busting a gut on the days between Christmas and New Year is one of the things I certainly do not miss about reinsurance broking.

Try not to be too jealous of me.

December 15, 2006

Great minds think alike II

Dear friend,

You’d think with the renewal season in full cry and Christmas just over a week away, news would dry up — but quite the contrary – it’s been a busy old week!

Gallagher Re have teamed up with Nymex

(which these days includes the Chicago Mercantile Exchange - CME) and PCS to produce tradable US property damage futures and options. Now that is something we’ve been advocating for quite some time.

If the industry is serious about tapping capital markets, it needs to present them with instruments they are familiar with.

It’s no good telling every Hedge Fund manager that there’s good money to be made in the Cat markets right now if their only way of accessing them directly is to invest in a sidecar with a minimum three-year timeframe.

A lot of these guys want instant action. They want to call their broker and buy and sell in the blink of an eye, not call their travel agent to book a two-week trip to Bermuda (with their whole legal department in tow) every time they want to go long or short!

Well done to Gallaghers for making this coup — I bet the other reinsurance brokers are going incandescent with jealous rage!

Of course, the CBOT Cat contracts flopped back in the early nineties, but the world has changed fundamentally since then— for example Hedge Funds only handled a tiny proportion of assets back then — these days they’re huge.

We have been advocating the development of a futures and options market for quite some time (albeit options based on an insurance pricing index rather than actual damage) — check out an article by our old friend Robert Miller that we ran back in September 2005.

Trading should start in mind-January and we wish them every success.

It’s just a shame that they are too late to scoop innovation of the year at our 2006 awards!

December 14, 2006

Great minds think alike

Dear Friend,

As if to prove the old saying that great minds think alike, no sooner do I post about low-hanging fruit in the retro market than Brit takes up the clarion call!

Brit re-enters retro with $100m Norton Re Bermuda start-up

Of course Brit has been trying to get this together ever since deciding to pullout of writing retro for its own account. After all, it has had a good team of underwriters sitting idle for about a year now (ouch!).

Their first idea to start a cat sidecar didn’t get investors excited, but this version seems to have got past first base.

Good news for everyone, but whilst $100m is not to be sniffed at, it really is a drop in the ocean. The Brit team could probably deploy ten times this capital by 1/1 if institutions would stump up the cash.

Come on investors, the water’s lovely!

Editor's blog, photo of Mark Geoghegan

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