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October 2007 Archives

October 31, 2007

Long live the revolution!

Dear friend,

When I started Fac magazine almost two years ago I did so because I thought I saw a gap in the market — all the magazines out there tended to be about treaty reinsurance.

And since I used to be mostly a direct and Fac broker myself, I thought it would be fun to reconnect with my old haunts in the weird and wonderful end of the (re)insurance firmament.

Also there would be no shortage of things to write about — pure facultative reinsurance and all the other wonderful grey area stuff that could be described as global specialty business, which could range from helicopters to prize indemnity and fine arts to product recall.

The timing was also perfect in that many of the major treaty brokers were heavily promoting their newly founded or re-branded facultative departments and there was change in the air.

Ten years ago, when a major wave of consolidation was hitting the global primary insurance industry, it looked like the end was nigh for traditional Fac purchases.

I mean what would a firm with the financial strength of an AIG or a Zurich need to buy facultative reinsurance for? As cedants got bigger and bigger, it looked like Fac spend would wither away as retentions rose and underwriting expertise was leveraged globally.

But it didn’t turn out that way, did it? As cedants got bigger and richer, they had more resources to spend analysing their books of business —and lo and behold — they started to realise that a little well-targeted fac spend could go an awful long way when compared to the blunt instrument that a treaty often entails.

Also as smaller cedants were picked off one by one, traditional treaty reinsurers found themselves more and more shut off from old business flows, so they became more open to facultative offerings, especially as they were more treaty-like and professionally packaged.

When I started I used to wonder if this story had legs, or whether it was just a clever marketing ploy.

But two years on and it’s plain to see that this trend will continue to develop — especially as we enter the era of capital market convergence.

What is an ILW if not the ultimate Fac purchase? And as more off-the-shelf ILW and tradable Cat options products come onto the market, out of our industry, it is facultative players who are likely to the quickest to adopt apply a trader’s mindset and do the business.

This is because Fac players do so many more transactions than their treaty cousins. Anyone who can go out and get you a five over five and work hard for their brokerage is likely to be a better options trader than a technical underwriter who does less than 100 deals a year.

So this Fac revolution is real and it’s happening on multiple fronts

You used to buy Fac because the risk you were handling was either too big or too weird. These days that’s not even half the story. Long live the revolution!

October 26, 2007

So nice that you have to name it twice

Mairi MacDonald, Reporter writes:

Dear friend,

As Bill Clinton apparently once said, “Baden-Baden is so nice that you have to name it twice."

But as a newcomer to the industry it was with some trepidation I packed my bag on Saturday night ready for the reinsurance industry gathering at Baden-Baden.

The pre-warnings had been no – it’s much more formal (no chinos) yet much more relaxed (less elbowing through packed out cafes); much more serious (renewals on the way) yet less stuffy (fewer CEOs, more hands-on underwriters and brokers).

Due to arriving at Heathrow Airport ridiculously early thanks to an over-cautious cab company; the inevitably delayed flight (the curtain separating business class from the cattle truck was ‘damaged’ apparently and the plane simply couldn’t leave without an engineer’s visit); and despite a breakneck journey down the autobahn from Stuttgart airport, it was nine hours later before my colleagues and I hauled up in Baden-Baden for XL’s symposium.

Congresshaus delegates heard Swiss Re’s European capital markets guru Luca Albertini discuss convergence in reinsurance and capital markets; Don Mango of Guy Carpenter deliver a complex presentation on the impact to this industry of ERM (not an onomatopoeic response to the detailed PowerPoint slides, but the industry’s current buzz-acronym) and a thought-provoking talk by lawyer Jean Alisse of Dewey and LeBoeuf on the importance of the European Union’s business insurance sector inquiry.

The next couple of days were certainly less hectic than experienced on the Cote D’Azur but proved a valuable opportunity to meet some great characters, pick up news tit bits and decide once and for all that wiener schnitzel might sound exciting, but is essentially best left alone.

I wouldn’t say the German spa town exactly re-charged the batteries but with the beauty and charm of the surroundings, the town’s functionality and enough luxury to satisfy a reinsurer’s every whim, it’s clear the town will remain at the heart of the industry thoughout its rapid changes, as history has proven.

Our editor Mark Geoghegan’s back next week so no more waffle from me, you’ll be relieved to hear.

October 19, 2007

Credit where credit's due

Dear friend,

I’ve got to be quick today, it’s shaping up to be a busy one with most of the team getting ready to go to Baden Baden.

Hats off to New York insurance superintendent Eric Dinallo for having the strength of character to say that alien reinsurers are welcome and needed in his patch.

In an era that is seeing US protectionist talk on the rise it is also laudable to hear someone who has understood that the cost to alien reinsurers of posting collateral ends up as an unnecessary extra loading onto US citizens.

Collateralisation amounts to a trade barrier and trade barriers often ending up costing the imposer of the barrier more than they do the foreigner.

And with Solvency II not so far away it makes little sense to make the foreigners load up — after all a line from Munich Re, Munich, Germany is as good, if not better for the cash, than the same line from Munich Re America.

I like the use of the sliding scale credit too — you only get to avoid posting any collateral at all if you have two separate AAA ratings. So finally we have an incentive for reinsurers to seek a return the highest echelons of the rating firmament. Reinsurers have always moaned about how there is rarely any market recognition of superior ratings quality and financial strength, well now we have someone calling their bluff.

Twenty years ago all the top ten reinsurers in the world were triple-A.

It’s just fairly amusing that the only current AAA-rated player out there happens to be US-domiciled!

Come on everyone – at last a reason to hang on to some surplus capital, of which I hope you currently have an abundance.

October 16, 2007

Physician heal thy former self

Dear friend,

This made me laugh this morning:

London's market reform group (MRG) has reported some pretty good take up of the new electronic claims file (ECF) by (re)insurers and brokers - but they missed their third quarter target and it looked like they were probably going to miss the 100% take-up by year end target too.

So out with the big stick from Sue Langley of Lloyd's, who played a reverse variation on the name and shame game.

Instead of naming and shaming she named and praised the good guys who were already 100% adoptive of the new technology.

But of course in doing that she omitted the others.

Who needs noise when silences such as these can be so deafening?

Sue used to work at Hiscox as chief operating officer and chaired the G6 group of large progressive, reform-minded managing agents that was formed in the wake of the Kinnect disaster.

This band of brothers was going to go it alone if necessary and show the small techno-laggards a clean pair of heels.

Funny then that not a single one of these has yet adopted the ECF fully!

They might all soon be preparing for a visit from their former chair!

PS.. And can you spot the obvious major omission on the broking side?

I'll send a bottle of Rioja to the first one to comment with the correct answer! (Editor's decision is final).

October 12, 2007

No comprendo

Dear friend,

This Connecticut Attorney General Guy Carp business is getting my head in a spin.

I don’t think that these State prosecutors and competition wonks have a clue what they are doing.

Facilities and binders come about when you have a whole pile of business that nobody really wants to do individually, but when you add it all up it comes to something worth getting out of bed for.

If a small cedant who hasn’t got enough income to maintain a decent sized treaty wants a 33% proportional bit of Fac on a risk that pays a sum total of $6,000 in premium, no-one will look at that business on a bespoke basis – it will lose them money — it is simply not worth doing for $2,000 less commission (and don’t even think about hitting minimum brokerage).

So unless there is a facility up and running the business is going to have to be declined to the original customer — and presumably end up on the books of a bigger national competitor, who may (or may not) charge more.

Maybe it’s not fair — but that is how capitalism works — the small and weak don’t get such good deals as the big guys — why should they?

It’s as simple as that — brokers have to ‘steer’ business of this sort into facilities. This is not out of greed — it is simply that otherwise they would have to turn it away. In fact it’s not steering at all.

It’s take it or leave it, but it’s an honest sort of take it or leave it. You can’t be steering if there is only one road to take in the first place. Take it or leave it is fair — and don’t forget that there are many other competing facilities and many other brokers out there.

The client never has to buy, he can walk away and try something else.

Also the main allegations against Guy Carp presuppose that there was an open market ready and willing to accept small business to which the broker was somehow denying its customers access. But no such market exists, except perhaps for direct writers (who would probably give less commission and impose harsher terms).

Are the powers that be saying that reinsurers should be forced to quote against their will on business that is uneconomical to service?

They might as well propose nationalisation of the reinsurance industry and have done with it!

They just don’t understand — but this doesn’t mean they won’t try and ‘improve’ the market and end up making everything less competitive.

Here's that complaint in full - 107 pages of scary reading!

And here’s a little family parable about understanding:

Last night I got home to the family and did the usual fatherly thing of asking how my son’s day at school had been:

“Did you have a nice day at school”

“Yes”, came the slightly perfunctory response, in that dulled uninterested tone that children use when they’re learning by wrote or collectively saying good morning to the teacher.

So I thought I’d try a different tack

“Did you score any goals?” (he loves football, so this usually gets his attention)

“Yes, I scored two — and one was with my left foot,” he added proudly (for everyone knows that in our right-footed universe left foot goals count at least double)

Now I had him warmed up I thought I’d go in for the big one:

“What did you do in class today?”

“We did English.

"I like English.

"I am very good at English.

"English comprehension is my favourite.” He chirped.

Wow, a proud dad moment — only six and already an academic genius (just like his father!)

“So, do you know what 'comprehension' means?” I asked, expectantly.

“No” came the answer, accompanied by a winning six-year-old smile!

October 8, 2007


Dear friend,

What a stormer! A $425m property facility placed in London from Marsh.

If ever evidence was needed for a soft property market, then this surely is it.

London knows that from here on in, as cedants hang on to the good stuff, it's only going to be offered nasty mining risks, ropey textile mills and heavily cat-exposed everything, so it's time to fight back.

And what a fightback - a one-stop shop to rival anyone. London doesn't mind a good old fight for business and it has the brokers ready willing and able to pull the market together and bring it on.

Only thing is it better be good and keen or it's not going to do any biz.

Reminds me of the old International Fire Consortium (IFC).

I remember many fruitless hours standing in line by the boxes of the main binders as it slowly disintegrated in the post Hurricane Andrew slide.

Ah, these facilities - they're so shiny and new when they are constructed - you can just smell the freshly applied paint.

Today's technology should at leat help the followers have a reasonable idea of what they're writing, but they are tough to make work.

And there's something else here - I know it's mainly for US and Canada, but I promise not to tell Neelie Kroes if you don't.

She didn't say anything in her report about market-wide consortia specifically, but from what she did say in general we know she probably wouldn't like them if she knew about them, would she?

October 5, 2007

Smoking chilli peppers, Batman

Dear friend,

It seems we at Reinsurance magazine are cursed.

At our last office it was terrorist car bombs parked outside that spoilt our day.

Then we moved to new offices in London’s trendy Soho and, apart from all the drug addicts, prostitutes and ghastly media industry caricatures prowling the streets, we thought we were relatively safe.

How wrong we were. The other day I left for home by the back entrance of our offices, which are on a dead-end street, to be met by a fireman in full regalia.

He was merrily blocking off my exit at the end of the road, with that ‘police line do not cross’ tape you always see on action thrillers on TV.

“You can’t go out this way, you’ll have to go round another way,” he sneered, adopting the surly tone so beloved of low-ranking public servants when they are temporarily in a position of authority.

“Well, there is no other way — it’s a dead-end.” I replied

Stunned, embarrassed silence from London’s finest.

“You don’t you really want me to stay here, do you?” I said, trying persuasion “otherwise why would you be you be cordoning the street off?”

Poor man was a bit deflated.

“Okay, you can go out that way,” he sighed begrudgingly. Then he paused as I crossed the line, “But remember the barrier is there for a reason,” he said, unable to resist a final attempt at justifying detaining me further.

“What reason?” I muttered to myself, instantly hoping he hadn’t heard me, lest he change his mind and force me back into my dead-end prison.

Once free, people I spoke to said it was a suspected serious ‘chemical spillage incident’.

Then the next day the BBC published the real story.

At first it makes you laugh, then it makes you wonder.

What sort of chance do we have when we are protected by people who block off dead-end streets?

And in a country dominated by spicy oriental restaurants of all nationalities, isn’t this chilli fumes problem rather a common one?

Maybe it is something the emergency call operators could filter out by asking a simple question like “Is your office above a Thai restaurant, by any chance?”

It is often only when you experience something at close hand that you see how far it can depart from the lofty ideal it is supposed to be.

Firemen are supposed to be helpful and competent. Unfortunately not all of the ones you get to meet possess either of those qualities. It’s just luck.

The front line in our battle against fire and terror losses cannot always be relied upon.

The lesson for today, as ever, is you must always rely upon yourself.

October 1, 2007

Save us from the clones

There’ll be a day of reckoning for these reinsurer clones; you mark my words.

Not that I’m criticising — after all, the belief that you can model everything is a persuasive and seductive one. And we humans want to feel as if we’re in control of our destiny, that we’re charging the right price and doing the right thing. Like old dogs who’ve run away to the circus, every day we dream up new ways of doing old things and somehow convince ourselves that we are putting the dark ages of the past behind us.

It is a noble and just cause and is what differentiates us from the lesser mammals. When man’s ancestors picked up sticks and stones and started using them to crack open nuts, they were only doing exactly what all the men in white coats at the Hedge Funds and modelling companies are busy doing — trying to work out how to do things better.

Of course, some unfortunate ones amongst those early nut-cracking pioneers were the first to discover the fact that extreme nut allergies can be a killer!

Bummer! How unfair the world is — no sooner do we learn how to fly than the Gods conspire to bring us back to earth with a resounding thud, and a grinding crunch of broken bones and snaggled teeth!

The news that a lot of the converging between capital market players and reinsurers has latterly been occurring more on the reinsurers’ turf has surprised me somewhat. These days brokers tell me they can more or less mirror ultimate net loss covers in the capital markets. Hurrah! No more basis risk!

Well, let’s hold up that mirror — because if you look in it you will no longer see a beautiful gleaming hi-tech capital market princess — but a veritable old reinsurance toad, warts and all.

Reinsurance is akin to driving a vehicle blindly through a minefield – danger is all around and you never really know quite what is going to blow up next. Given this fact — you’re usually better off doing it in a tank than a flashy sports car.

But this reinsurance mistress is a seductive siren.

You may start off nice and easy, pure, unchaste and mathematical — you’re almost boringly antiseptic and statistical; but before you know it, you’re cracking open exotic nuts left right and centre and wolfing down the contents. You never really know whether you’re going to like what you end up swallowing or if you’re going to choke.

And that is why I’ll warrant it won’t be long before this Greek tragicomedy is providing us with a few wry chuckles.

Editor's blog, photo of Mark Geoghegan

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