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March 2008 Archives

March 31, 2008

Walk the walk

Dear friend,

It's nice when people say what they mean and mean what they say, isn't it?

For example who said this?

"I’m very sceptical about acquisitions. I think that most insurance M&A destroys value, and does not create it. You can probably name ten loss-making, value destructive M&A deals in insurance in ten seconds and if asked you to name ten good ones, you probably can’t."

Give up?

It was Chris O'Kane speaking to me early last year.

Well, hats off to someone who puts his money where his mouth is.

Instead of paying over the odds for an incumbent, Mr O'Kane has decided to build his own Lloyd's operation by transferring existing business into the venerable institution.

Hats off to Aspen! (and they managed to keep it a secret too)

This is also another one of theose full-circle moments, back in 2002 Aspen flew out of Wellington and Lloyd's and now it seems at least part of the boomerang has come back

March 28, 2008

What all top layer junkies should know

Dear friend,

It’s great how long flights give you the chance to catch up on a bit of reading.

For instance, I picked up an amazing book in the airport lounge on the way out to Dubai last week for the World Insurance Forum.

It’s called The Black Swan and is by a former bond trader turned philosopher called Nassim Nicholas Taleb.

It’s all about the way our simple human brains just aren’t equipped for the challenges that high impact, low probability events can have on the world and our performance in it.

Never has a tome been more relevant to the psychology of underwriting in general or the psychology of underwriting reinsurance in particular.

Why are we condemned to repeat the mistakes of the past? Why do we find ourselves constantly taking on large risks that we are not sufficiently paid to assume?

This book explains everything.

It’s mostly our own psyche’s fault — it seems our brains are always looking to rationalise things after the event and turn them into neat easily understandable stories.

It makes life easier for us but makes us live in a self confirming delusion like fat, contented turkeys who are suddenly surprised one day to be given the chop and slung in the oven by the farmer who has been so kindly feeding them for the past year.

Based on the visible evidence, what turkey could have guessed what was coming next? Right up to the point of death the farmer had been really nice and friendly!

It’s the things you don’t know that will get you.

Here’s a little experiment Mr Taleb uses:

Read this simple series of numbers;

2, 4, 6

Now, you have to guess what the rule is linking the sequence of numbers – to help, you get to formulate 5 new three-number series and I will give you a simple yes or no answer as to whether they too follow the rule.

Of course in experiments most people just formulate similar series where the numbers rise by 2 each time, like 8, 10, 12 or 6, 8, 10.

And of course these suppositions are correct. So by the fifth try most people are pretty confident of their theory for the number rule (that the number series goes up in increments of two).

Then they are surprised that the rule is dead simple — numbers in ascending order!

So 1, 589, 1,000,000,000 also fits

As does 1,000,000,000, 20 billion, 5 trillion!

Ouch – I’d hate to be on the top layer of that unlucky series of numbers!

How easy it is to be wrong — especially if you ask yourself the wrong questions when analysing a risk.

And what’s so silly is that after the event it’s easy to see where you went wrong — (and then you start rationalising why you missed it and fall straight into another trap).

We seem to happiest finding simple patterns in past events and projecting them into the future, and this leaves us highly vulnerable to unexpected (and often highly improbable) extreme outcomes.

Sound familiar?

Get down to the bookstore — this is a work of tortured genius that all underwriters should be forced to read, especially top layer junkies

March 26, 2008

Heads I win tails you lose

Dear friend,

Nothing’s ever quite what it seems in Florida is it?

On the face of it the move to curb the bloated excess of the extended Cat fund in the wind-exposed state is laudable as, for a small increase in original premiums, it spreads risk off the Florida taxpayer and more onto the private reinsurance market.

But weren’t we forgetting something?

In a word. Citizens.

Check this out from the excellent bill analysis that comes with the legislation.

“However, about 42 percent of the liability of the FHCF is currently payable to Citizens Property Insurance Corporation (Citizens), the state-created property insurer. Therefore, about 42 percent of the bill’s reduction in potential liability to the FHCF would be shifted to Citizens. If Citizens incurs a deficit, it may also issue bonds funded by assessments levied on the same base of policies that are subject to assessment for the FHCF (subject to certain assessment amounts that must first be levied against Citizen’s policyholders)

Generally speaking, about 42 percent of the estimated savings in potential assessments by the FHCF would not be realized by Florida policyholders after accounting for the potential increased assessments by Citizens. Alternatively, Citizens may need to have a larger rate increase to account for the loss in FHCF coverage, when it begins charging actuarially sound rates on January 1, 2009”

Or in other words 42% of the taxpayers’ gain in lighter Cat loss burdens will be clawed back as it falls on the scantily-funded Citizens.

Easy come, easy go — out of one state scheme and into another!

(And I love that bit at the end about Citizens charging actuarially sound rates in 2009
– which Florida politican is ever going to commit electoral suicide with that one?)

March 11, 2008

The political cycle

Dear friend,

We in the reinsurance business know all about cycles

Just as boom begets bust, we know that a meteoric rise often precedes an equally meteoric fall from grace.

The faster and higher the rise, the swifter and steeper the fall.

The laws of physics apply – the reaction tends to be equal and opposite to the action that created it in the first place.

And so it looks as if the Spitzer wave has broken on the beach and is rolling back out to sea.

If it has to be goodbye, so be it. So long, Eliot we’ll never forget you.

But you never know — in politics there’s always another wave coming along.

Lie low for a while, dear Eliot, tread water if you can, and you may surprise some with the force and speed of your comeback.

But nothing you do will ever surpise us!

We'll keep an eye out for you at Reinsurance Towers.

March 7, 2008

Aigrain's Fourteen

Dear friend,

Fourteen percent ceding commission?

Hardly worth getting out of bed for, is it?

That’s all Swiss Re is getting out of its 20% quota share with Berkshire Hathaway, and apparently there’s no profit commission either.

Swiss Re made a disclosure, those excellent people at Keefe Bruyette and Woods (KBW) have been poring over it (I’ve got my own copy of the figures but forgive me if I defer to others’ better judgement in these matters!).

According to KBW, fourteen points gives a little bit of relief over Swiss Re’s 11.2% administrative expense ratio.

KBW sees this as “superficially charitable”.

But as a broker, I certainly don’t!

We all know Buffett drives a hard bargain, but to me this seems a little tight…

The quid pro quo?

KBW understands that Buffett is not getting any access to Swiss Re’s client data under the deal, and of course, the underwriting pen is still firmly gripped in Zurich.

So that puts paid to one of my early theories — that this was a prelude to a future possible takeover by BH for Swiss in a few years’ time.

It’s great to have disclosures like this —except that this one fails to answer the fundamental question:


I still don’t get it.


Dear friend,

Hey – it’s good to see that it’s not just us lazy journalists who make mistakes

Check this SEC confession out from Aspen:

Item 8.01 Other Events
Form 10-K Typo

On February 29, 2008, Aspen Insurance Holdings Limited (‘‘Aspen’’) filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2007. There was a decimal point missing in a table on page 23 of the Form 10-K.

Under the table entitled ‘‘Analysis of Consolidated Loss and Loss Expense Reserve Development Net of Reinsurance Recoverables’’ in the column for the period as at December 31, 2002, the figure for ‘‘Cumulative paid losses, net of reinsurance recoveries, as of: Five years later’’ should be $61.9 million rather than $619 million.

$557.1m here and $557.1m there, and pretty soon you’re talking real money.

Funny that us lazy journalists, or that legion of highly paid equity analysts, didn’t spot it then!

March 6, 2008

Hot Diggitty Dam!

Our New recruit Alex Ferguson writes:


In my time covering the (re)insurance business I’ve seen some interesting twists and turns in the wild ways of PR.

There was the external PR girl who decided it might be a good idea to pump out a press release just after an oil refinery had blown up in the USA, killing 15 and injuring over 100.

The release was to remind us what fabulous energy insurance broking services her client offered in the wake of such a disaster.

The problem? Her client already did a huge amount of business with the oil company who owned the refinery!

Then there’s one about the chief executive who despises being called a reinsurer – or a (re)insurer, despite the fact that he writes some reinsurance and even retro.

But Willis – yes, readers, the same broker that encouraged its own to wear garish badges telling everyone who would listen to ‘Bring it On!’ went one better when I read their press release yesterday:

“Willis China Appointed Insurance Consultant for the Operational Assets of the World’s Largest Hydropower Project, the Three Gorges Dam”

Sorry, was that the Three Gorges Dam?

The same one that displaced around 1.4m people from their homes and, (if you listen to the anti-capitalist/anti-globalisation anti-everything protest brigade) almost drove a species of rare dolphin into extinction?

We don’t wish to pry, but surely on the very same day the firm managed to get off the Burma 'dirty list'

(apparently, the sandal-wearing veggie-munchers weren’t too happy about Willis doing business in such a politically volatile area), was it the world’s best idea for Joe Plumeri, Willis’ chairman and CEO to write how proud he was to be associated with:

“…one of the greatest engineering feats of the twenty-first century”?

Celebrity modelling death match

Dear friend,

Has black become white and white become black?

Has the world gone crazy? Have we gone crazy?

This is what we ask ourselves at Reinsurance Towers as we sit down, turn on our computers and gawp at the world around us.

Another day, another disparity in windstorm estimates.

RMS reckons European winter storm Emma cost between €300m and €700m.

Quite a wide margin of error, you might think, and fair enough, since the storm only blew through at the weekend, affecting multiple countries etc etc.

But then AIR says it probably cost €750m - €1.3bn.

So you see my dilemma - there's not even an overlap between one and the other!

They are mutally exclusive. One is from Mars and the other is from Venus.

It suddenly reminded me of a line from a Dire Straits song (don't ask how!) called Industrial Disease about street preachers at London's famous Speakers' Corner.

"Two men say they're Jesus - one of them must be wrong!"

So, which of these two technological evangelists are we supposed to believe?

Do we believe A and not B?

or B and ignore A?

Or just conlcude that both are probably wrong.

Faith in modelling is hard won and easily frittered away.

But modelling firms can so often be their own worst enemy.

Maybe it's time to climb down from the soap box?

Editor's blog, photo of Mark Geoghegan

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