Another Measure of D&O Risk?

My grandfather never believed in the efficacy of reforming the criminal mind, "once a crook..."

I don't know Barry Minkow beyond reading the story in the WSJ today (here and on pg1 of Marketplace) but after serving time for a "stock swindle" he seems to have won the praise of the FBI according to the article and is trying to (profit from) pointing out corporate fraudsters.

This reminds me of the early days when Howard Schilit (who never served time) used business school students to demonstrate manipulation of corporate earnings and wrote his book "Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports" (description on Amazon here).

Advisen reached out to Howard, we had a great breakfast meeting listening to how he took some reports on a handful of companies from the grad school lab to an actual business. I always enjoy hearing these stories from entrepreuners like Howard, the courage to start a business using your own family money can't be appreciated enough.

Howard started CFRA in 1994 and sold it on to what is now the RiskMetrics Group (see press release here). Howard brought in an executive from Goldman Sachs to institutionalize his models such that there would be indicative scoring on thousands of public companies while deep forensic due diligence might only be completed on a few hundred public companies.

To provide commercial insurance underwriters with an important measure of risk, especially to those in the D&O market, Advisen has carried the indicative scoring, the full reports and a dashboard of CFRA scores to make risk analysis quicker and more complete. This measure of risk is incorporated into our company exposure look-up pages, available in our risk & insurance search engines and in our configurable underwriting work-ups.

I'm curious whether readers would find Mr. Minkow's research worthy of being included in our risk profiles. His company is the Fraud Discovery Institute here.

Please let me know in the comments or by e-mail.

Thank you

The Professional Lines Market Speaks

Yesterday Advisen published a report on how D&O losses will be $5.9 billion from subprime and the credit crisis, the report is here.

Today we published a report on E&O losses - an additional $3.7 billion. We are the only player to publicly forecast this figure - because we have data that others don't have. The report is here.

In today's press release we also called for the end of the soft market. Not just in D&O or E&O for financial institutions, but broadly. See the release here.

We've had a ton of feedback on this. Tomorrow we're publishing comments from the following: Ryan Collier, Kevin Lacroix, Christopher J. Cavallaro, Peter Taffae, Joe O’Donnell, Chris Warrior, Brian Wanat, Gary Dubois, Paul Schiavone, Chris Duca, Nick Conca, Chris Hewitt, Tim Kelly, Jason White, Larry Goanas, Dennis Donovan and Dennis Gustafson.

I just wish we'd hooked up a chat board around this.

$9.6 billion in Insured D&O and E&O Loss from the Credit Crisis

The PLUS International conference expects over 1,600 attendees in San Francisco this week including 4 from Advisen.

Timed for the start of this conference Advisen has launched a special edition newsletter (see here) to publish news stories about professional liability and most importantly, to publish unique and groundbreaking research by Advisen.

Today we started with a revised forecast (upwards) as a result of the meltdown of the subprime mortgage market and the ensuing credit crisis. for D&O insured loss. In February, Advisen forecast $3.6 billion of insured losses but as the credit crisis has mushroomed into a global financial calamity, we have revised the forecast to $5.9 billion.

The free report on D&O losses is available here.

Advisen is the first to forecast the insured loss for E&O from the credit crisis saying that E&O losses will be centered around mortgage brokers who will see thousands of smaller lawsuits and around mortgage lenders who will see fewer, but higher value suits, the total being $3.7b.


The free report on E&O losses is available here.

AIG has had top market share in both financial institution D&O (19%) and E&O (34%) and Advisen expects new insurers to enter the market. To prepare buyers, brokers & insurers for operating in the new world order in the financial services sector, Advisen has published a comprehensive 38-page study of the changed industry landscape and how it impacts on risk and insurance.

The full report on the financial services industry is available here.

Commercial Insurance Brokers Speak out about AIG

Below is a summary of our report on what 611 commercial insurance brokers had to say about the AIG situation. For the full report click here.

I thought it noteworthy that 47% of brokers said they believe the AIG commercial insurance units will be broken up and they had concerns such as one broker saying "AIG's book of multinationals needs all the the p&c Companies to stay in place worldwide."

AIG uses its marketshare as leverage and this isn't always appreciated, as one broker said, "Couldn't have happened to a more appropriate carrier! As you sow, so shall you reap!"

Others disagreed: "The knee jerk reaction by some brokers to replace AIG is insane. This is not the revenge of Kemper or Reliance, and it's unfortunate that there are so many ignorant brokers out there."

With AIG's stock down over 90% and shareholders diluted 79.9%, AIG employees with stock compensation and stock in their retirement accounts are hurting and other carriers are poaching talent as quickly as they can. One broker summed up their concern as follow "It will be difficult to continue doing business with AIG as in all probabliity the personnel at AIG will change with good people finding new positions with more promise then a wounded AIG can offer.

Some brokers thought they would be comedians: "If AIG fights to to pay claims for/to its insureds, what logic says that AIG will repay its loans to the federal government?"

Some showed appreciation for Advisen which I appreciated, "Thanks for conducting this survey -- I've been curious about what other insurance executives think."

Below is the press release. Contact me if you have questions or trouble getting the full report.

SECOND ADVISEN SURVEY SHOWS THAT BROKERS ARE MORE CONFIDENT THAN RISK MANAGERS IN FINANCIAL SECURITY OF AIG COMMERCIAL INSURANCE UNITS

HOWEVER 47% OF BROKERS BELIEVE AIG WILL HAVE TO SELL SOME UNITS; CONCERN EXPRESSED


New York. October 7, 2008 – Advisen Ltd., the leading provider of content, analytics, and technology to the global commercial insurance industry, today released a special report based on a survey of brokers following the American International Group (AIG) liquidity crisis. On the heels of a similar survey of risk managers, Advisen sought to measure brokers’ confidence in AIG after the $85 billion loan by the federal government. “Wary” was how the vast majority of brokers characterized the attitude of their clients towards the unfolding situation at AIG, but with only one respondent claiming that clients are “panicked”, most brokers of commercial insurance are confident in AIG after the federal loan and few are recommending clients switch from AIG.

The Advisen survey of risk managers found that about two thirds intend to get quotes from AIG’s competitors at policy renewal, but according to the broker survey, few buyers have yet given their broker firm instructions to replace AIG. Brokers also opined in survey results about the potential impact the insurance pricing cycle and the potential impact on their fee and brokerage income.

“Survey results show that brokers have communicated to policyholders that AIG’s insurance subsidiaries are secure,” said David K. Bradford, EVP and Chief Knowledge Officer of Advisen. “However, while brokers have been a force for calm in the marketplace, survey responses indicate that brokers don’t yet know how much diversification clients will seek, or whether this crisis will impact overall market pricing or brokerage income.”

This Special Report is based an exclusive survey conducted by Advisen from September 26th-30th with 611 respondents Almost 65 percent of respondents described themselves as “executive management.” Eleven percent classified themselves as “producer,” and a similar number as “marketer/broker.” Almost 20 percent of participants worked for one of the four largest brokers.

“In conversations with brokerage firm executives attending this week’s CIAB Insurance Leadership Forum the story lines are the same as when we surveyed brokers a week ago” said Thomas P. Ruggieri, CEO of Advisen from the conference in Las Vegas. “Execution risk of the asset sales has been cited as a common concern among brokers. They also worry about potential of breaking up the commercial P&C units. While brokers are watching ratings actions carefully, they are comfortable with the present security of AIG’s property & casualty subsidiaries.”

The eleven-page Advisen Special Report on the Broker survey results is available here:
https://www.advisen.com/downloads/BrokersSpeakOutonAIG.pdf.

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What Risk Managers are Saying about AIG

In the wake of AIG's near collapse, there were a lot of rumors about a mass exodus of corporate policyholders of the AIG insurance subsidiaries.

Advisen had 1,000 buyers of commercial insurance complete a survey. Having a 15% response rate means they were dying to speak up.

Most commercial insurance buyers reported to Advisen that, while they are confident in the financial strength of AIG following the $85 billion loan by the federal government, two thirds of AIG commercial lines policyholders plan to get quotes from AIG’s competitors when their policies renew. Excerpting from Advisen’s Special Report, one likely outcome is that AIG will compete vigorously to retain business, potentially intensifying price competition in an already-soft insurance market.

The full report is available by e-mailing corner@advisen.com.

The AIG Liquidity Crisis and It’s Impact on the Insurance Market

Advisen has just published a QuickNote (find it here) which explains how AIG is set up, how one of the smallest of its 4 divisions (less than 10% of overall revenue) got involved in derivatives based on mortgage back securities, including subprime securities.

These securities don't trade on exchanges like stocks and they don't have daily pricing from many sources and as the subprime market collapsed, AIG was forced to show lower value for these securities and the derivatives. This led to the market asking AIG to put up cash collateral (over $40b) and AIG the parent didn't have the cash.

AIG has 2 divisions with many subsidiaries writing insurance policies, 1 division for commercial lines and 1 division for personal lines. Together they are 88% of the parent's total revenue and nearly all of the positive value of the balance sheet. AIG can't take cash from these subsidiaries because state regulators require cash on hand to cover claims. Therefore AIG was forced to announce a plan to sell assets (non-core businesses).

AIG wasn't able to do this quickly enough to provide cash collateral so the government provided an emergency loan, fired the CEO for not averting this crisis and brought in a new CEO to get the assets sold to pay back the government.

Meanwhile the insurance subsidiaries are profitable and have lots of cash to pay claims.

AIG staff have seen their stock wealth disappear, risk managers are getting questions from their officers and directors, the ratings downgrades didn't help. and generally this may lead to a reduction of market share by AIG.

These are the issues in the marketplace and this paper gives buyers and brokers the facts they need to separate the problems in the one division that nearly bankrupted the parent from the sound health of the insurance subsidiaries.

Below is the executive summary of the briefing by Advisen on AIG. The full report is available here.

Liabilities incurred under sophisticated financial instruments ravaged American International Group. As AIG teetered on the verge of bankruptcy Monday and Tuesday, brokers were flooded with calls from nervous AIG policyholders. However, the financial strength of AIG’s insurance subsidiaries was not threatened: insurance regulations insulated the insurance entities from the losses. Tuesday evening the U.S. government announced an $85 billion loan to the company, averting a collapse. Assuming AIG’s customers don’t abandon the company in large numbers, the long-term impact of the crisis on the insurance pricing cycle should be minimal.

This Briefing was written by David Bradford, Executive Vice President and Editor-in-Chief, dbradford@advisen.com, 212.897.4776.

Penny for your thoughts

With the size of these market cap drops, how steamed up are Mssrs. Lerach and Weiss in their cells today?

Advisen M&A ?

I was asked recently by Mergermarket about whether Advisen would be interested in M&A activity. Here's the relevant excerpt from the published article (which is for their subscribers only so I don't provide a link):

New York-based insurance data group Advisen ... although US-based, ... operates in Europe, through its London office. Advisen's managing director for Europe Mason Power ... said the group could engage in M&A activity if there was a "two plus two equals six type of concept". "We are always looking for third parties we can work with. If it made more sense to our clients to do M&A, then we would look at it," he added. Advisen has some 100 employees, and provides information into underwriting, marketing and purchasing commercial insurance. The group is privately-funded and independently-owned.

Advisen has partnered with dozens of firms (clients and third parties) to aggregate the leading database and set of analytics in the commercial lines insurance industry. Where we can work with any third party to deliver value to our customers, we are very interested. Contact me to discuss.

Notes from the John Street Club Luncheon - New York, Sept 5th

Talking about the soft market:

John Keogh, head of ACE Overseas pointed out that beyond continued overcapacity, rates won’t change while carriers are cash flow positive in a soft market. But that when cash dries up they will have a panic and topping up balance sheets now will not be as easy as in 2005. John thought we’re probably 2 years away from the bottom.

Greg Flood, head of IronPro, echoed those thoughts and noted that the soft market will be strengthened after the end of the releasing of reserves but also pointed out that subprime is percolating and is major, even beyond the D&O market for financial institutions.

Talking about industry M&A activity:

Bill Malloy of Private Equity firm Aquiline Capital talking about actively looking for new investments but finding the challenge in valuations, focused on “distribution space” saying that 1-2% growth doesn’t sustain their desired valuations of 8-10x EBITDA.

Willis and Contingent Commissions

To follow up on my post about Marsh hoping for new revenue from contingent commissions (here), Willis CEO Joe Plumeri spoke out in a story (story here) saying that it's unfair that only certain brokers are prohibited from taking these commissions while other brokers and agents are free to do so.

Mr. Plumeri believes that transparency is a competitive advantage for Willis and would like to see these fees abolished for all brokers.

In the UK, risk management association AIRMIC took one of its strongest positions on the subject (story here) calling for automatic disclosure. Currently if asked brokers must disclose, but AIRMIC is calling for disclosure even when not asked by clients.

The issue has been addressed by the FSA, the regulator for financial services including the insurance industry, but the latest position seems to indicate that the market should decide. The association of brokers (BIBA) has unsurprisingly agreed that regulation is not required.

If AIRMIC didn't stand up to take this position and raise awareness to the FSA, nobody would.

Marsh stock, 4 years later

As a follow-up to my earlier post today about Marsh, the following stock price shows the dramatic fall in prices in late 2004 after the Spitzer investigations were announced. The market took out nearly $1b from Marsh in reflection of the projected lost revenues from contingent commissions. Since then both Willis and Aon have outperformed Marsh with Aon up close to 75% from its 2004 share price.

Marsh settlements - closure?

Two stories in the news about Marsh this week caught my eye.

First was Advisen Senior Legal Analyst Anne Wallace's summary of an update to one of the nearly 9,000 cases in Advisen's large loss database of litigation which talks of the closure or final settlements stemming from the Spitzer investigation:

On July 3, 2008, attorneys for Marsh filed a Settlement Agreement and Brief in support of settlement of the Multidistrict Litigation entitled “In Re Insurance Brokerage Antitrust Litigation” filed in 2004.

This action alleged that insurance companies and insurance brokerage firms worked with one another to allocate customers and markets resulting in charging and collecting inflated premiums from policyholders.

The district court dismissed plaintiffs’ federal antitrust and RICO claims in the commercial case. Plaintiffs’ third attempted appeal has been withdrawn in favor of this settlement.

This Settlement is funded by the undistributed remainder of the earlier NYAG settlement, which totals about $69 million. $62 million will form the Litigation Settlement Fund; $5 million of this fund will be to resolve state claims. The remaining $7 million will be available to Marsh to settle the remaining “tag along” cases.

All parties have agreed with this settlement and set a final fairness hearing date of August 8, 2008.

When settlement is approved, this will bring to a close a large chapter in this 4 year saga for the insurance industry.

The class for this settlement does not include any valid “opt-out” plaintiffs or any party that has benefited from any prior “actual or threatened or other proceeding…concerning their purchase of Insurance, including but not limited to any Participating Policyholders in the NYAG Settlement Agreement”.

The class plaintiffs have previously settled with both the Zurich and Gallagher Defendants for $121.8 and $28 million respectively.

Second was the story by Liam Pleven of the Wall Street Journal (story here) which talks about how authorities in NY are reconsidering the settlements and opening the door to potential reinstatement of contingent commissions in some form. Liam's articles states how Marsh has a lot riding on this.

So is it closure? With European brokers reinstating these fees at 2.5% of premium and the EU to review this and potentially New York reconsidering, could we see these come back? I know our friends at AIRMIC and RIMS will have a lot to say about this, or should.

To subscribe to our alerts on this and similar litigation e-mail me or call +1.212.897.4820.

Nanotechnology: Liability risks on par with asbestos?

Advisen published a briefing written by Research Analyst Johanny Cruz (contact) which details the scope of the commercial market for this emerging technology, the potential risks involved, the research underway to measure the potential exposures, and how the insurance industry is handling the potential liability.

A quick look at Advisen's Policy Form Repository and Clause Comparison Tool would show that the industry is likely to exclude this liability until products can be developed.

Recent press coverage on the report include Bermuda's Royal Gazette (story here) and Strategic Risk (here). Excerpting from the report (which can be purchased by calling +1.212.897.4800):

Lines of insurance potentially impacted by nanotechnology include:

• Workers compensation insurance: coverage for employees involved in developing,synthesizing and processing engineered materials, as well as workers using engineered nanomaterials in their jobs.
• General and products liability insurance: exposure to loss from users of products containing or releasing nanomaterials.
• Product recalls insurance: the cost of recalling a nanotechnology product with unacceptable claim experience or safety defects.
• Environmental liability insurance: damage caused to the environment from engineered nanomaterials released intentionally or accidentally.
• Property insurance: the fine particle size of engineered nanomaterials could cause ignitable dust to form.
• Medical malpractice insurance: physicians and hospitals using nanoengineered medical products face potential liability for errors and unforeseen negative outcomes.

While nanotechnology holds enormous promise, the risks associated with these new processes and materials are still largely unknown. The insurance industry is only now beginning to assess the liability issues ... and a lack of insurance availability could stifle innovation and slow the introduction of valuable new products.

The current exposure to manufactured nanoparticles is mainly concentrated in workers in nanotechnology research and in nanotechnology companies. The US national nanotechnology initiative has estimated that around 20,000 researchers are working in the field of nanotechnology.

However, according to a report released by the International Council on Nanotechnology, only about one in three manufacturers of nanotechnology conducted monitoring for exposure to substances.

Target: Anheuser-Busch

Nice plug for Advisen's Dave Bradford in a story (see here) in a local paper about Anheuser-Busch and how shareholder suits are being threatened should the company not negotiate a sale to InBev. I expect there to be leaks that will publicize the size of their D&O program and who writes it.

It includes the obligatory play on Budweiser advertising:
"Shareholders are mad because the board has just said 'no' and pulled up the drawbridge and said, 'This Bud isn't for anybody but us,' "

Market Reform in London: a status report

The Market Reform Office recently held a briefing citing the continued success of adopting online processing of accounting and claims in the London market.

April showed 90% of premiums were filed electronically with 65% of changes in premiums filed electronically. The goal is to get both figures to 100% and to have no vans driving paper from Lime Street to the processing centers outside London.

Brokers are still filing these accounting notices mostly through ACORD messaging but also uploading scanned documents as well. It might sound like scanning documents which then get printed at the processing centers is not really a big step, but the market had to start somewhere and the end vision remains of having structured ACORD messages to move data from one database to another without re-keying at the bureau processing centers.

The MRO highlighted how activity is picking up where Bermuda business processes through the London bureau – no doubt due in part to the efforts of Advisen and Web Connectivity who have now installed the island’s first ACORD messaging gateways.

While these back-office processes are moving online, the front-office insurance placing process remains a laggard in terms of market adoption. Aon proudly cited how “80% of recent treaty renewals were supported electronically”, but a recent report from consulting firm Watertrace showed that the market only wants to get involved in e-placing when full integration is available. ACORD is responding by “fattening the skinny placement guidelines”, to be piloted later this year.

Straight Talk from Bernstein Research

I always appreciate people like Todd Bault at Bernstein Research who tell it like it is.

Bernstein Research is the NY-based arm of securities brokerage Sanford Bernstein & Co and Todd is the Senior Analyst covering the insurance industry. One of their most important metrics is the Bernstein Statistical Monitor (BSM) which tracks price trends as a component in analyzing the financial health of insurance underwriters.

Todd has decided to stop relying on data collected by the CIAB survey of brokers and agents and instead to rely on data collected by Advisen on behalf of RIMS – and to restate previous BSM figures dating back to 2004.

In explaining why, Todd doesn’t hold back in citing the bias of brokers and agents when reporting pricing changes. I’ve posted before about the supremacy of empirical data over anecdotal data – that data that Advisen collects straight from risk managers is more reliable than calling brokers and asking them to summarized quarterly client renewals in ranges such as “down 5-10%”.

All of us at Advisen are glad Todd did his research and found our survey results, available here.

Report from AIRMIC: The Global Pain of Tax on Premiums

Cargill is the second-largest private company in the US and operates in 66 countries. David Ketley, Cargill’s UK risk manager, explained how even the best of best efforts result in less-than-perfect compliance.

Every country has rules about what tax on premium is due, who has to pay it, what filings are required and when they are due. These taxes vary by coverage type and business class, so it’s a matrix on top of a matrix. Frequently it’s the underwriters who pay on behalf of the client but sometimes it’s the duty of the broker and in some cases the client who has to pay.

Advisen carries data from a third party service provider on the rules and regulations in 165 of the world’s 195 countries, including how taxes on premiums are to be paid. David Ketley said it’s hard to keep up and cited how Advisen Front Page News alerted him to a change in Australia’s rules. But this panel discussion highlighted that while the tracking of these rules is tough, it is far from the whole of the challenge.

For example, while the tax liability is ultimately paid by the risk manager, as AIG said – it’s part of their expense ratio, getting an invoice or receipt is next to impossible and ensuring that the amount has actually been paid is also difficult – this is quite unpopular with corporate compliance officers.

Allocation by risk managers of these taxes is also difficult – the consensus among the audience was that it was more important to regulators to see a consistent approach over many years than to get every allocation correct down to the last penny.

Cargill was joined on the panel discussion by Mike Stalley, Founder & CEO of Fiscal Reps which effectively administers the tax calculations and filings and payment on behalf of insurers in EU countries, another in a never-ending series of cottage industries in the global commercial insurance market.

When the panellists ended the session by saying that tax on broker fees was another massive challenge, we left the session informed, but perhaps depressed.

Report from AIRMIC: Today’s D&O Cover (Part II of II)

With recent D&O cases focusing on fraud exclusions, extradition and a focus on financial mismanagement, you could easily forget some of the other core exposures for companies and their Directors & Officers.

Law firm K&L Gates reminded us of the need for protection against cases where Directors & Officers are sued for “putting profits in front of safety” in cases where employees suffer fatal accidents on the job – where Derivative Actions can be brought on the back of suits against the company.

Further exposures include where Directors & Officers are held liable for pollution by the company, or where cartel activity occurs (see the 2 British Airways executives resigned after the fuel surcharge price-fixing investigations).

Jane Harte-Lovelace and Sarah Tulpin of K&L Gates’ Insurance Coverage Practice (they defend companies and their Directors and Officers, and don’t act on behalf of insurers) gave a series of tips – specific policy form wordings that can cause the D&O product not to work as expected. I will ask them if we can republish their whitepaper in Advisen Front Page News but here are a few highlights:

• The definition of “wrongful act” needs to include any “breach of duty” as the recent Companies Act of 2006 in the UK codified the duty of Directors & Officers to include the broad definition “duty to promote the success of the company”.
• Ensure that the allocation provisions are in place should the company and the Directors & Officers share defense legal teams and costs.
• Pay particular attention to the definition of “investigation” as it relates to cartel activity

Advisen has a repository of over 2,000 standard policy forms including 400+ D&O policy wordings. Each can be compared on a topic-by-topic basis and with keyword searching, it’s very easy for clients or their brokers to check these terms of coverage. Drop me an e-mail for more information.

Report from AIRMIC: Today’s D&O Cover (Part I of II)

In a detailed presentation to close the workshops at last week's AIRMIC Conference in Edinburgh, broker HSBC and law firm K&L Gates gave a serious lesson about how the devil is in the details for companies and their Ds & Os looking for the right form of coverage.

Adrian Jenner, who heads HSBC’s Mergers & Acquisitions and Management Liability practices out of London, talked about the evolving D&O structure saying that most companies are pulling back on excess entity coverage for the company’s securities and instead focusing premium spends on coverage for the Directors and Officers themselves as well as for the company.

Adrian further noted that HSBC has just placed D&O policies for 3 clients where there was specific DIC D&O coverage for individual directors, and that all of these clients had taken audit committee Side A coverage as well.

This talk of evolving D&O program structures reminds me that in the PLUS Bermuda D&O Symposium that Dan Bailey suggested separate sublimits for defense claims and expect Advisen to issue a report shortly on rising defense costs and why the end of the Lerach and Weiss era is not as warmly received among underwriters as you might expect.

Report from the AIRMIC Conference in Edinburgh, Scotland

Good showing at the Conference - the biggest turnout for a non-London event in AIRMIC's history. Some of the developing themes in discussions here:

Two issues highlight the delicate balance AIRMIC straddles between the demands of the membership of risk managers and the leverage of the insurers whose products are so necessary to those risk managers.

First, risk managers last year announced that they would band together to produce a benchmark of claims paying by underwriters. In the last 12 months there has been a high level of serious discussion with the insurers but no product. Perhaps this discussion is the baseline goal for AIRMIC, but they are looking to produce some results of this survey by the end of the year.

Second, risk managers are upset about insurers' overuse of Reservation of Rights in the claims negotiation. The expected response from underwriters of an agreed protocol for this was well-received.

Separately, Directors & Officers Insurance (D&O insurance) is at the forefront of many panel discussions and with the hardening market for financial institution buyers of D&O and the expected impact on the general corporate market for D&O, it's not surprising.

Marsh sent a press release out about its online benchmarking database which highlights just how much larger Advisen's is.

And finally, John Hurrell, CEO of AIRMIC is a great public speaker and not just because of his impassioned plug for the Advisen / AIRMIC Benchmark Survey, but because he's already connected to the AIRMIC membership in this, his first Annual Conference.

How big is the Global D&O Market?

For a number of reasons there isn't a precise number for the total value of premiums on Directors & Officers insurance. For one, every company reports using a different nomenclature or taxonomy for their coverages.

Advisen estimates total global D&O premiums at around $10.5B.

Of this the total U.S. D&O premium is $6.25B of which $4.25B is public company D&O premium, and $2B private company D&O premium.

Our methodology for this figure is based on
(a) Advisen's benchmark databases (the largest online database) where the D&O premium is adjusted by the relative market share of our database participants
(b) estimates of D&O premium as a percentage of total reported Other Liability – Claims Made premium, and
(c) input from a number of large D&O writers as concerns their D&O premium volume and their estimates of their total market share

The figure is important as a reference for what happens when subprime claims hit the market. Advisen's February 2008 estimate of $3.6b in insurable D&O loss will be revised upwards in a soon-to-be-released report (including Errors & Omissions loss estimates), but the single-year impact will not approach total premiums.

The impact will hit the financial institution carriers hard and the resulting ripple effect will be very significant in the D&O space, but is not enough to put the whole market underwater. Let me know if you want to be on the list when the report is announced.

D&O Premium Correction, When not If

Further to my recent posts about the coming change in D&O premium rates (see here), another wholesale broker in London and Advisen client gave some specifics about REIT D&O policies being non-renewed (again, non-renewals are rare) and also suggested an interesting angle about coverage terms.

With D&O underwriters only now issuing new forms in response to the subprime crisis, by the time premiums correct these forms will still be in use meaning that premiums will go up and coverage terms stay broad.

When will premiums correct? His forecast is that general or commercial D&O rates will shift to a hard market in Q2 or Q3 of 2009.

Subprime cases by type of filing

With 282 subprime lawsuits and other actions to follow, the chart above shows the breakdown by type of case including some of the most noteworthy:

82 Subprime Securities Class Action cases

23 Subprime Derivative Shareholder cases

19 Subprime ERISA Class Action cases

15 Subprime Securities Fraud cases

So if Henry Paulson feels the worst is over in terms of the creation of subprime and other credit exposure (story here), the fun is just kicking off for the insurance industry.

282 And Counting

Advisen is now tracking 282 subprime lawsuits and other actions related to the overall credit crisis and yesteray's v7.0 of Advisen enables on-demand charting which I hope readers will find helpful. The above is a distribution by industry sector.

The Price of Apples

Amazing how many good D&O stories I missed on vacation last week from the Siemens claim to Aspen hiring away quality D&O underwriters from Lloyd's Managing Agent Novae, to D&O legend James Weatherstone taking the helm for Arch Europe.

Catching up with a Lloyd's broker yesterday who brings in US risk to London, D&O price volatility is up. In the Financial Institution market for D&O and E&O, the underwriting markets are shrinking their lines, and in one case flat-out non-renewing a policy. In general corporate D&O the impact is less profound but the tide will turn.

I'm also happy to report that the AIRMIC Benchmark Survey is well underway with the majority of respondents coming from Financial Institutions who want to get a good sense of where the D&O market is.

Don't forget us little people

I want to congratulate our friends at Exari on building a business from scratch and finding the right investment partner to get them to the next level.

Exari is document assembly software and while it was initially designed by lawyers for use by other lawyers who build the same legal documents repeatedly, the software is well-suited to the commercial lines insurance industry. Guy Carpenter have found a great way of using it and Marsh is working it into their systems now.

I share offices with Geoff Maskell and Martin Kett who opened up Exari Europe and launched it into banking and insurance companies and if you read the press release about the private equity firm's investment (here), you'll see how they are now big shot VPs and Board Members. I just hope that when they return from the RIMS Conference, that they remember us little people.

Congrats also to Exari founder Jamie Wodetzki, whose Breakfast Blog is among my favorite reads.

Benchmarking comes to the UK

Yesterday Advisen and AIRMIC announced the launch of a Benchmark Survey similar to the one Advisen has produced for RIMS for 6 years.

Picking up on my theme of how empirical data is superior to anecdotal data (see post here) AIRMIC Benchmark Survey is the only one of its kind in the UK where data is collected directly from risk managers, thereby providing the most accurate tracking of buying trends for all major coverage lines across a wide array of commercial insurance buyers.

For more information on participating or getting results, please e-mail airmic@advisen.com.

The survey results will provide AIRMIC members and other subscribers with benchmarking charts using relevant peer group comparisons. The data will make risk managers and other industry professionals more informed in considering the structure and expected cost of their insurance programmes. The service will answer questions such as “How much coverage do my peers buy?” or “Am I paying too much for my insurance?”

Risk managers who are not currently AIRMIC members are welcome to participate and/or to use the results of the survey in making more informed decisions about their insurance programs.

AIRMIC chief executive John Hurrell said,

“We have long admired the RIMS Benchmark Survey and are delighted to work
with Advisen on producing something similar.”

Credit Crisis Loss Review: Clash Cases Abound

In looking at the developing litigation database around subprime, Advisen tracks ‘clash’ cases, also called ‘related cases’ in a number of ways.

First, the classic related case, a single complaint that names multiple parties. In these cases, especially securities class actions, a company is sued and the complaint also names the auditors and/or lawyers for any malpractice and possibly underwriters related to any public debt offerings.

Advisen categorizes these cases by party and allegations made against that entity. A company is entered under Securities, the auditors/lawyers/underwriters are entered under Professional Practices. Losses are associated with the party that actual paid it, making it simpler to calculate D&O losses from E&O losses.

For the Subprime/Credit Crisis, we have 30 related cases as of April 28:
Related ID: 7561 Calamos Global Dynamic Fund 2008
Related ID: 7201 Deutsche Bank 2008
Related ID: 7182 Bank of America 2008
Related ID: 7181 Huntington Bancshares 2007-2008
Related ID: 7061 HSH Nordbank - UBS 2008
Related ID: 7041 Centerline 2007-2008
Related ID: 6982 Nomura 2008
Related ID: 6962 MBIA 2008
Related ID: 6961 Ambac Financial 2008
Related ID: 6941 National City 2008
Related ID: 6862 Morgan Stanley 2007-08
Related ID: 6841 Teletech 2008
Related ID: 6802 Tarragon 2007
Related ID: 6801 Impac Mortgage 2007
Related ID: 6781 E*Trade Financial 2007
Related ID: 6742 Luminent Mortgage 2007
Related ID: 6741 New Century Financial 2007
Related ID: 6321 Bear Stearns 2007 - 2008
Related ID: 6241 Sagittarius CDO 2007
Related ID: 6222 Thornburg Mortgage 2007
Related ID: 6181 UBS 2007
Related ID: 6003 Homebanc 2007
Related ID: 5981 Regions Morgan Keegan Select Bond Funds 2007
Related ID: 5661 Citigroup 2007
Related ID: 5603 Washington Mutual 2007
Related ID: 5283 Hovnanian 2007
Related ID: 5163 Beazer Homes 2007
Related ID: 5162 Countrywide Financial Corp 2007
Related ID: 5161 Fremont General Corp 2007
Related ID: 5021 American Home Mortgage 2007


Second, Advisen tracks cases that have a common initial trigger. Examples of this are Enron, the In Re: IPO cases and the Subprime and Credit Crisis cases.
Subprime & Credit Crisis: Related Case ID 4000 – Total Cases to date: 280; Losses to date: $87,156,390.
Clash cases that are sub-types to the Credit Crisis:
Related ID: 7503 Student Loans - Credit Crisis 2008 - Various cases as secondary to Subprime
Related ID: 7123 Credit Default Swaps 2008 - CDS failures re subprime crisis
Related ID: 7202 Auction Rate Securities 2006 - 2008 - Cases related to ARS, sales practices and credit crunch

Third, we track cases by type of remarkable risk. These types of cases filed by different parties and governmental entities around specific allegations. For example: anti-trust and price-fixing charges, market timing violations and the Foreign Corrupt Practices Act.
The example of this for Subprime/Credit Crisis cases is:
Related ID: 5923 Predatory Lending - Investigations from Mortgage Crisis

Subprime and credit crisis litigation is so pervasive that we now have to track the various strains of it.

Benefits of ECF

This month's Market Reform newsletter (here) offers a very good article by executives at Lockton detailing how use of ECF has allowed a higher degree of focus and execution on the complex tasks of broking claims while reducing the unnecessary overhead of handling routine claims matters. Here are some of my favorite quotes:

You can put together a package of, say, six claims, totalling no more than
€1000 in a matter of minutes. Previously these would have taken hours to walk
round the market.

The MI reports that the in house workflow system is now capable of producing
allow for a much more proactive approach to the working day....(which) allows us
to start to measure each stage of the process. This in turn means we can start
to set target turnaround times for each stage and flag up where these aren’t
met. This means that we can manage by exception and not just progress work in
strict order.

(Before ECF) claims staff were constrained by the hours that underwriters
were open to accept files

What brokers do and how they get paid

How do buyers of commercial insurance work with their brokers now? Since the Spitzer investigations rocked Marsh and others in the industry, have things changed? How has the fierce soft market impacted the way brokers are paid? Advisen and RIMS wanted to find out.

Today is the first day of the annual RIMS Conference and we announce the results of the Advisen / RIMS Broker Services and Remuneration Study — based on data gathered in February from 1,519 participants — which has found that insurance buyers are driving brokers to change their service offerings and the way brokers are compensated.

The results are part of the 2008 RIMS Benchmark Survey™ book available here.

While virtually all survey respondents continue to use brokers to place insurance programs, the majority agree that brokers are shifting from commissions to fee-based compensation. With this shift towards fee-based pricing, respondents note a broker trend towards supplementing dwindling commission income with added services.

It's an incredible tool for buyers to benchmark the value for money received from their brokers and for management at brokerage firms to benchmark the level of services they offer as compared to their competition.

The other half of return

Insurance companies make their earnings from underwriting profit and investment profit on the premiums collected. I haven't really covered that angle to date.

While the big story has been the bond insurer subsidiary (SCA), and subprime exposure, yesterday's XL's earnings announcement (here) talks about the hit from investment return.

The Finance Director of Lloyd's gave some comments to assure the markets that the Lloyd's Central Fund is well tended to - see coverage here.

The subprime bodies are buried in both areas and upcoming earnings announcements will show further evidence of what we at Advisen are seeing, an end to the soft market in one important market sector (Directors & Officers and Errors & Omissions insurance for Financial Institutions), although the imbalance of supply and demand is too great to change the overall market dynamic. For more on the topic, click here.

Return of the Anecdotal Jedi

Just as I had posted about the significance of empirical data in analyzing premium rate trends in the commercial insurance marketplace, CIAB comes out with an announcement that proves my point clearly. See here for coverage including the following:

three-fourths of the agents and brokers reporting that renewal premiums for
their small and medium accounts were down 1-20 percent compared with fourth
quarter 2007.

I'd like to see how a broker could be taken seriously using data so imprecise. See www.rims.org/benchmark for precision.

Empirical strikes back

A lot of one, one of the other.



Many journalists are running stories on the soft market and are using surveys as the base of their articles. There are two types of surveys data: anecdotal and empirical. There are a lot of anecdotal surveys while the RIMS Benchmark Survey produced by Advisen is the only one based on empirical data.



Today we announce the publication of the 2008 RIMS Benchmark Survey book which details the 2007 buying year for Risk Managers in North America (get your copy here). Just as our quarterly results showed, the soft market gained momentum across the board, including falling property rates for the first time since the 2005 hurricanes.



The annual book goes deeper than premiums and analyzes the total cost of risk (TCOR) including the retained losses and the expense of risk administration (salaries, etc.).



Anecdotal data comes from questions of brokers such as "do you think rates will continue to fall?" or "will they fall between 5 and 10%?" Instead, Advisen collects data right from risk managers on their buying of all commercial lines insurance coverages and with over 1,000 corporations reporting in 2007, the data set is the largest available.



While the overall picture is of a free-fall in premiums, this amount of benchmarking data enables comparison by industry, size of company, and other combinations to find any aberrations. For instance, changes in TCOR were not evenly distributed across industries and the book lists 14 industry groups for peer comparison.



Importantly, we also include the first installment of an annual survey about broker compensation. Risk managers provide a clear indication of how they compensate their brokers (general fee / placement commission); how much they compensate their brokers; broker market share by product; which services are currently included in their fees and which additional services risk managers would like to buy from their brokers.



It's an incredible benchmarking tool for corporate risk managers to demonstrate their relative sophistication in insuring their risk as well a road map for brokers to develop additional products and services for clients and prospects.



To buy your copy of the RIMS Benchmark Survey book including the full results of the broker survey click here. Discounts apply to RIMS members.

Subprime propaganda

Greg Flood is on a concerted campaign to reverse the soft market. Today Advisen Front Page News carried an article by AM Best in which the Ironshore underwriter explains the magnitude of the claims from subprime on the D&O and E&O markets. See the story here.

Last week Greg was quoted in Post magazine (story here) talking about how he sees insured loss from subprime surpassing $8b.

IronPro is new to the market, is well-rated, and doesn't have legacy subprime exposure to force high reserves. In other words, Greg has been sitting on the sidelines waiting for the right time and apparently he believes the time is now:

“We’re taking excess layers that are very high. We’re looking to reestablish
insurance for companies that are looking to get it.”

Chalk this up as another indicator of the bottom, the end of the soft market, at least for the specific buying of D&O and E&O for Financial Institutions. Greg says his competitors are seeing 30-40% increases in D&O and he wants in. Data from the RIMS Benchmark Survey and from retail and wholesale brokers do not show this type of increase, but we won't be surprised if the next batch of renewals did.

Subprime Updates

Fitch published an estimate of $3-4b in D&O losses from subprime. See press coverage here. Echoing what Advisen published long ago and agreeing with Advisen's stated opinion that losses will be felt by a handful of large underwriters, Fitch said they didn't see a change in overall premium rates.

I have written about the imbalance of broad market supply and demand (here) as too great for even several multiples of the $3.6b estimate insured loss. Next up for Advisen is update this estimate and to include Errors & Omissions losses.

Meanwhile back at the plaintiffs bar ranch, Advisen is tracking 269 subprime and credit crisis-related lawsuits, of which 62 are Securities Class Actions used in modelling insured D&O losses. This count continues to climb.

Show me the data

According to an article I just read covering the World Insurance Forum in Dubai, discussing whether the financial market turmoil will impact underwriters' willingness to pay claims, Martin Sullivan, CEO of AIG,

pointed out that the recent profits reported by the insurers are not commonplace. He said that the U.S. insurance industry had only made a profit in three out of the last 30 years.

1 in 10 years? For now, I am filing this in the "how is this correct" file.

I have been in this industry for nearly 6 years and I have yet to see a real debate about claims payments except those that involve attorneys. Typically they are characterized by marketing professionals who purport to run claims departments talking about claims being their "shop window".

Q1 2008 Premiums: No broad market impact by subprime

Advisen released the results for Q1 2008 of the RIMS Benchmark Survey. See the press release here. The picture continues to be good for buyers and not helpful to broker earnings nor the long-term profit picture for insurance underwriters.

The cycle has not found bottom despite incredible financial market turmoil. My post yesterday discussed how Lloyd's is not concerned. Advisen clients I speak with are of mixed minds - those that are in the market for professional lines insurance (e.g. directors & officers, errors & omissions, crime) to financial institutions (lenders, investment banks, funds), those guys are not comfortable with what they have written and are looking forward to the influx of claims that will shake up who writes what and how this volatility will increase pricing in this space quickly.

We have to wait and see how litigation progresses - currently we are tracking 259 cases, including 62 securities class actions related to subprime and the credit crisis. The potential is for the concentric circles of loss to mount into something that has ripple effects within the markets far beyond D&O for financial institutions. See a recent post about this here.

The results have been picked up in the trade press already with an additional quote by Advisen's Dave Bradford in a story by Financial Week here.

Mr. Bradford said financial services and investment businesses, which have been
hit hard by the subprime mortgage meltdown, will see directors and officers’
liability insurance rates rise because of the increase in claims they face. But,
he added, there will be a steady decline in rates for most companies not exposed
to mortgage losses. “It wasn’t until the first quarter that underwriters pushed
through significant rates increases for financials. But it hasn’t spread beyond
that fairly narrow group.”

Lloyd's Profits up, subprime concern down

Lloyd's reported record profit of GBP3.85bn for 2007, up from GBP3.66bn in 2006 (enough to give CEO Richard Ward a 46.5% pay raise).

Despite growing fears in the market about the impending losses from subprime and other market turmoil, Lloyd's brushed off an anticipated GBP 100m in such losses as not material and "within the normal course of business".

Ward highlighted the job ahead (and perhaps why Rolf Tolle earns slightly more than Ward) as "to manage the cycle, focus on underwriting discipline and focus on underwriting for profit".

See the full story here.

In other Lloyd's news, the search for Lord Levene's successor is apparently on and the bar is set high - see a full detail of Levene's career path here (including how he, like me, roots for Chelsea).

PLUS

CEO in town week is always action-packed. Some of the highlights of movements around London:

Advisen has been added to the committee for PLUS Europe. Tom Ruggieri is on the main committee and I am on the Working Group, chaired by Tom Sheffield of Aon. PLUS has built a solid franchise for networking and learning in the Professional Lines industry and we are pleased to help them take the Europe chapter forward under the leadership of Andrew Newman of RK Carvill.

Interestingly, Tom Sheffield practiced law for a firm in Chicago in defense of insurance companies in D&O cases, and Aon has made a very shrewd move in hiring Tom to lead their Technical Practice. With his deep experience on the way the product works, Tom is a leading expert on how wordings and structure can be tailored to respond as imagined by a client.

On the subject, I loved this quote from Matthew Allen of London law firm Eversheds:

Insurance is not like a betting slip you just collect on, it's a living,
breathing organism that you have to manage with careful expertise to ensure it
responds when you need it.

Steve McGill was at the PLUS dinner, having just left as leader of XL's Professional Lines in Paris to head up a similar team for Catlin US, based in Los Angeles.

There will be another PLUS Europe Symposium in London in October 2008 dealing with the impact of the financial markets turmoil on the D&O and PI / E&O industries with Advisen leading a panel.

Exhaustion Trigger Language

I can't think of any other context than insurance policy wording where the two words "exhaustion" and "trigger" would come together.

Thanks to a tip from John McCarrick of Edward Angell Palmer & Dodge (a founding father of PLUS and a good friend to Advisen), Kevin LaCroix explained the significance of the ruling by California's intermediate appellate court on March 25th which found that Qualcomm could not collect on its excess Directors & Officers (D&O) policy where it had settled with the primary carrier for less than the full limit.

See the D&O Diary post here.

Without blaming any party or any type of industry player in general, Kevin noted that the product needs improvement in order to prevent an insured getting "stuck" and noted how "many excess D&O carriers now offer exhaustion trigger language that reduces the restrictions on the kinds of payments that could trigger the excess carrier's payment obligation."

Advisen's database of over 400 D&O policy forms enables a full comparison of which policies offer this trigger language and we will be conducting a study on the topic for our subscribers. For information about this, contact me on mpower@advisen.com.

The Devil is in the Details

When incorporating a business, setting up the bylaws seems less important than getting revenue operations going.

But an interesting article in today's Advisen Front Page News Europe notes how a bit of forethought early on could pay off in terms of D&O coverage:

Not honoring the laws of the business type they've chosen is the "main mistake"
entrepreneurs make, she said. Common mistakes include ignoring bylaws, not
having a corporate board and using business assets for personal objectives.

The "she" is Nancy Rapoport, the Gordon & Silver Ltd. Professor of Law at the Boyd School of Law at the University of Nevada, Las Vegas.

To subscribe to Advisen Front Page News Europe click here.

Chase Them Down

Hits to this blog show one of the most widely-read posts discussed complaints about the small decrease in capacity of Lloyd's - see the post here.

In today's Advisen Front Page News we ran a story on the topic about Lloyd's managing agent Ascot Underwriting who announced they were decreasing their "premium income capacity by 28% to GBP450m". See the story here.

In citing how the weak U.S. dollar and the soft market of decreasing prices for commercial lines insurance coverage combined for a "double whammy", Ascot's business development manager Michael Bullock provided a noteworthy comment:

You might well find you lose out on good accounts because you can't chase them
down quite to the extent the market might do.

We haven't seen new capacity in the past month or so, we're seeing existing providers announcing cuts like Ascot - it's just a matter of time before some claims come in and change the supply & demand equation and they are likely to happen in a big way in the area of management and professional lines coverage for financial institutions (D&O, E&O/PI).

Where that ripples in terms of increased pricing remains to be seen. Overall, supply is still disproportionately high as related to demand.

To follow this and other stories subscribe to Front Page News here.

The Cinderella Story

With the title of this post I refer not to the beginning of the college basketball tournament in the U.S. which begins today and is known for the "Cinderella stories" of overachieving college teams, but rather to a story in today's Advisen Front Page News quoting Lord Levene, Chairman of Lloyd's.



Levene hits on two of my favorite themes about Lloyd's - the need for paperless processing (see my posts on the subject here) and the tension among old and new capacity providers at Lloyd's in today's soft market (see my recent post here).



In discussing how progress has been made in ending the van runs from Lime Street, Levene notes that there is a long way to go before paperless processing is a reality and hints at the fact that the insurance industry could be at a competitive disadvantage to other capital providers such as the investment banks pouring money into the industry and securitizing policies. I love this quote from Lord Levene:

'If we are to end our status as a Cinderella industry we have to improve
the quality of our systems.'

Advisen has invested in Web Connectivity which enables paperless processing through its award-winning ACORD messaging gateway EnabledB2B.



And answering the complaints (of Mr. Hiscox and Mr. Catlin) about allowing new money into Lloyd's, in affirming how Lloyd's has agreed to manage the cycle through the Franchise Directorate, Levene said:

'I think there is an extreme lack of candor in this industry.'

The story can be found here.

Who covers Bear Stearns?

The Insurance Insider does it again, see their story here which lists Chubb as writing the first $15m above Bear's retention of $25m with XL on the next $15m and HCC the last $15m and AIG writing a $25m excess of $50m Side A.

Tipping Point

Commercial lines insurance pricing is set by the economics of supply and demand.

As evidenced by the chart on the right there is a serious imbalance. Using US policyholder surplus as supply and US GDP as demand for insurance, the ratio of supply:demand is represented by the red line currently at 3.7%.

Note that the median in recent decades is 3.2% meaning we are at high levels and that there is a fierce downward pressure on pricing.

When does it change? What's the tipping point? Could the new litigation beyond subprime bring about this change?

I heard an interesting take today from a senior reinsurance broker in London who says the tipping point has always been the first major reinsurance firm that refuses to write anything further and that this has a ripple effect, starting with the primary insurance underwriters that rely on this reinsurance.

This broker sees a period of time beginning in the next 6 months where capacity is scarce and serious profits can be made from escalating prices, despite the fact that as the crisis widens and deepens, Advisen's $3.6b estimate for D&O losses is likely to increase.

He sees Q2 2008 reports leading to painful discussions about reserves among underwriting firm managers and that this will lead to somebody being that first firm to close up the Financial Institution D&O shop.

In the meantime he's placing a ton of excess layers for those wanting to take advantage of capacity while it's still available.

As the turmoil in financial institutions continues to play out wickedly in front of our eyes, the insurance industry awaits the inevitable claims. The question is whether the inevitable contraction of capacity and increase in pricing will be isolated to financial institution D&O or even to D&O or whether the impact of these claims can have a material impact on overall insurance pricing.

Update on Subprime cases

Advisen now tracks 236 subprime-related lawsuits. Of these, securities-related cases lead the table with 74.

As the underlying exposures continue to evolve beyond subprime, Advisen is tracking related write-downs, litigation & the expected impact on insurance. It's likely to be more of an E&O or PI event for insurers than a D&O.

For a look at Advisen's large loss database including all 236 subprime cases, call +1.212.897.4820 in NY or +44(0)20 7929 6929 in London or london@advisen.com.

To follow this and other stories on Advisen Front Page News click here.

The ink on the contracts isn't even dry...

On the first trading day after the JP Morgan buyout of Bear Stearns, Coughlin Stoia filed the first Securitis Class Action Suit against Bear Stearms.

Advisen has been tracking all of the other (subprime-related) cases against Bear Stearns that lead up to this liquidity crunch and buyout.

Advisen Front Page News will will have a Featured Case article covering the suit and listing out the other cases for tomorrow's edition. To subscribe to Front Page News click here.

To get your hands on Advisen's database of over 4,000 security class actions (out of 8,000+ cases in total), call +1.212.897.4820 in New York or +44(0)20 7929 6929 in London or info@advisen.com.

Spirit or Letter of the Contract?

Law firm Barlow, Lyde & Gilbert LLP wrote an excellent story concerning the relationship between the reinsurance contract and the original insurance contract. We covered it in Advisen Front Page News Europe today (see here).



The English Court of Appeals ruled in favor of the reinsured (a ceding insurance company from the U.S.) over the London market reinsurer in saying that the spirit of the reinsurance contract was to match the coverage terms of the original insurance contract.



Never mind that the case deals with the original insurance companies having to pay for losses which occurred outside the term of the insurance contract. The ruling is an important one for the London reinsurance market signalling that where the insurance company pays the reinsurance company must honor the legal ruling that led to this payment.



Being an American in London, I particularly enjoyed the following conclusion from the article:



"Reinsurers' arguments in the present case had a whiff of an assertion (although they were careful not to say so expressly) that Lexington were an American Corporation and had therefore to take unsatisfactory decisions on the chin, while reinsurers were English (or doing business in the English market) and could not be expected to do so. That, of course, will not do."



Barlow, Lyde & Gilbert have just subscribed to Advisen and join the list of law firms with insurance industry practices that use Advisen for our database of large losses and for our wordings comparison analytics.



To subscribe to Advisen Front Page News Europe click here.

To learn more about how Advisen helps law firms help their clients call +44(0)20 7929 6929 in London or +1.212.897.4820 in NY.

Complaints about Capacity at Lloyd's

Advisen Front Page News Europe ran a story today entitled "Some of Lloyd's Biggest Underwriters are Crying Foul Over Bloated Capacity" which piqued my interest.

The story by AM Best details the soft market in commercial lines insurance pricing, which I have covered here, but what interested me was the public statements by the heads of two of the largest Lloyd's Managing Agents.

The background is that Lloyd's total capacity is forecast to be down 2% in 2008 and yet some of the largest players are instilling their own underwriting discipline and cutting capacity further. From the article:

Even before the Lloyd's announcement, many Lloyd's underwriters in the fourth
quarter last year were announcing 2008 capacity cuts well above 2%. Liberty
Syndicates cut its capacity by 9.5%, R J Kiln cut 2008 capacity 14%, and Hiscox
reduced capacity for its Syndicate 33 by 20%.

Quotes in the article from the head of Catlin and the head of Hiscox expressed disappointment in the move by Lloyd's. What struck me is that Lloyd's doesn't mandate a minimum that Hiscox nor Catlin nor any syndicate must write, so why the complaint?

How it works: Lloyd's sets a maximum capacity that any syndicate may write - the aggregate was that which was lowered by 2%. How it's changing: Rolf Tolle pointed out that Lloyd's will no longer announce this number in advance and will instead report previous year's performance only - in keeping with competitors' practices.

What is really behind these complaints, then, is that these managing agents are not happy that there are new entrants at Lloyd's. Syndicates have increased from 66 to 75 in 2008 (including 5 Special Purpose Syndicates (SPS's) and Managing agents have increased to 46 in 2008 (see here).

With new money in from other underwriters, and from the capital markets (Goldman Sachs, Bank of America), current Managing Agents don't like the increased competition.

You can sign up for Advisen Front Page News Europe here and follow this and other stories from the commercial lines insurance industry in Europe and globally.

Capital Markets & (Re)Insurance - Unstoppable Momentum?

Some further data highlighting how the convergance of the capital markets and the (re)insurance industry is picking up steam:

According to today's edition of Trading Risk, 2007 Catastrophe Bond issuance was 49% above 2006 issuance and 251% above 2005 issuance.

Also in the news today, Lehman Brothers, which reports (here) 70% market share in issuance of US Life Insurance, Reg XXX/AXXX/Embedded Value insurance linked securities and claims to be the "leading trader of catastrophe bonds in the secondary market", hired Stephen Matanle from Marsh.

Steve was very senior at Marsh and had a long and distinguished career of 32 years with Marsh including (from the press release) "the role of Global Placement Leader. He had previously been Chairman and CEO of Marsh Global Broking."

Last fall Lehman launched Libero Ventures which markets itself as leading the charge in "Reinsurance Financing" which it defines here. The main points of differentiation are in the structure (cedants can opt for multi-year deals and take an equity stake in the Notes created by Lehman) and the origination (Lehman Re acting as principal to speed the process).

As Michael Spencer, ICAP's founder and CEO, pointed out in Trading Risk, the secondary market for these instruments must become more liquid, but tapping Matanle and his proven deal-making ability is big news for Lehman and the whole new issue market of insurance-linked securities.

Report from a Subprime Conference

Lexis-Nexis subsidiary Mealey's ran a conference on litigation from subprime yesterday. Advisen's Anne Wallace attended and reported:

It looks like we are facing a bigger nightmare than first thought. Less
D&O risk, but a larger E&O and Fiduciary Liability and an additional
EPLI with regards to whistleblower charges.

Advisen's estimate that subprime will be a $3.6b D&O event just from securities class action suits (see here) was discussed as were the worst-case estimates from Bear Stearns and Lehman Brothers (who can't track the insured amount).


Look for Advisen to announce a webinar series on the broadening underlying exposures (beyond subprime to other credit markets) and where litigation will go and how this will impact on the commercial lines insurance industry. Meanwhile you can follow our coverage on Front Page News (subscribe here).

Another Lloyd's Survey

Lloyd's recently released the results of its annual survey of its underwriters citing their concerns for the upcoming year, see my comments here.

Today I read about a survey measuring satisfaction with Lloyd's as related by 506 brokers, reinsureds, insureds and coverholders. The results are on page 3 of the .pdf document found here - overall satisfaction increased from 7.6 out of 10 to 7.8.

It's noteworthy that the results show good scores for turnaround speed in all areas except contract documentation and staying informed during a claim - noteworthy because these are the most important to the client. The reform agenda is working to improve these areas with contract certainty and electronic processing of claims.

The case is made that there is an uptick in overall satisfaction which can be attributed to the gains made in modernizing the processing of policies at Lloyd's. I support the assumption because of the significant progress made in processing accounting messages and claims online instead of by paper.

To evidence this progress, see the story on the same page which cites the Market Reform Group's report that 70% of accounting messages and 92% of claims are now processed online.

In terms of the impact this reform is having on brokers, one of the big 3 brokers uses ACORD messaging (the Web Connectivity gateway) and told me this week that the ROI from online processing of accounting and claims is already being felt in their bottom line.

U23D

This is not some new fashion faux pas, Sarah & I saw a concert movie last night - shot in 3D and shown in a London IMAX theater.

U23D is the first movie of its kind, the technology is simply unreal and we both loved it (we both happen to be big fans of the band).

Brokers & Cycle Management

My earlier post (here) talked about risk managers reacting to the furious soft market (isn't there a term for an modifying adjective that contradicts the object and is my grandmother rolling over in her grave to get her ruler to rap my knuckles?).

See images of the soft market above - the first is rates for Directors & Offices (D&O) cover showing 4 years of declining premiums. The second is the rate of change for every quarter in the past 4 years - note that the 11% decline in Q4 2007 is the 2nd biggest in these 4 years - meaning the soft market is showing no signs of abating.

I have posted many times now about underwriters managing the cycle through "underwriting discipline" (see here and here and here).

In looking at developments in the broker market, Jardine Lloyd Thompson's (JLT) results today (here) showed top-line and bottom-line growth. This is noteworthy because most brokers fees are a percentage of premium and as the soft market erodes premium, the broker looks for other ways to grow. JLT did a lot of right-sizing to achieve these profits.

What are brokers doing?

The COO of a London market broker told me he'd taken out all of the cost he could and growth would need to come from new revenues. His Board was looking at consulting services to provide clients wth even greater advice in enterprise risk management.

Going back to JLT, our friends at the Insurance Insider wrote (here) that they felt JLT and competitor Thompson Heath and Bond (THB) were looking for new revenue by launching underwriting divisions. See press releases for JLT here and THB here.

It's going to be very interesting to follow these developing stories - will Thistle Underwriters (JLT) and Unicorn Underwriting (THB) be soft-market panaceas or more disruptive innovations for the industry. Advisen Front Page News will follow this story - subscribe here.

Cycle Management

Financial Week published a great article (here) about the soft market and declining commercial insurance prices, citing research by Advisen and the RIMS Benchmark Survey and a quote from Dave Bradford, Advisen's Chief Knowledge Officer.

The article is written with buyers of insurance in mind and is a thoughtful explanation of the forces at play that are driving lower pricing namely the lack of losses such as storms and other catastrophers as well increased competition to take a slice of the profits that the insurance industry has generated each of the past 2 years.

I noted that Aon has responded (here) to Advisen's research on D&O rates for banks and other financial institutions impacted by the subprime crisis.

For all my posts about insurance pricing see here and to learn how Advisen benchmarking of limits and rates can help show insurance pricing by industry, by type of company, by coverage type, please call +1.212.897.4820 in the US or +44(0)20 7929 6929 in London.

Answering Gargamel – Part II of II

To further the discussion of how the insurance industry is evolving, it’s important to put into context what commercial insurance is transacted online.

ACE, among others, offers D&O quotes on its website. This is driven by a matrix of basic exposure assumptions as maintained by ACE underwriters. The key is that this commoditisation of D&O is only available for small clients, to get a quote from anyone, including ACE, you have to speak to an underwriter which means you have to go through a broker.


No insurance underwriter is prepared to provide online quotes for large, complex risk. There’s no liquidity, no exposure benchmarks to use, it’s not like adding spreads to treasury bonds and deriving pricing. Just like new issue pricing in the bond markets, new issue insurance pricing is more art than science.

This is why the adoption of technology is evolving late – just as I was nearly done with implementing online trading solutions for the secondary bond market before we drafted the first prototype for new issuance.

That being said, it’s sad that there is still paper in the process and I applaud the progress made by those firms at Lloyd’s who have made online accounting and online claims processing such a success. The majority of this success is made possible by simple, yet deep, integration using ACORD standards.

Mr. Gargamel I apologize for the delayed response, but I hope I’ve addressed your points. Thank you for the thoughtful comment to Part I of this response (see here).

Answering Gargamel – Part I of II

I admit to poor form in spending more time trying to (unsuccessfully) identify “Mr. Gargamel” who posted a thoughtful comment to a post (here) than in addressing the many and important issues in the comment.

The crux of his comment is the pivot point of who is boss in the insurance industry – He Who Pays Premium, Places Premium or Writes Policies for Premium.

If you agree that the impact of the internet has been to empower the consumer (who now dictates the terms of engagement for the purchase cycle of many products), then why hasn’t the commercial lines insurance industry evolved to this model?

Personal lines insurance products have – they are all transacted online, competition is fierce and comparison sites are hugely successful.

What’s the difference in commercial lines whether in the US, Bermuda or on Lime Street?

I compare the commercial insurance industry to the syndication of new bond issuance. Although Bill Hambrecht has launched an auction site to connect companies raising capital through IPO or secondary offerings to investor capital, this is both new and relatively insignificant.

Ford issues paper through Merrill, Morgan, Lehman & Goldman because of distribution – these houses can provide valuable analysis AND provide a wide network of significant buyers. There is no comparison site for this large issuance and there is little to no activity on the insurance equivalent – RI3K.

For these reasons, I disagree with the sentiment from the comment that “traditional agency channels will almost certainly decline”.

PS - Adoption of ACORD standards will not by itself empower the Risk Manager, the influence dynamic will not shift from the brokers and underwriters. Instead, adoption of efficient placement using ACORD will help take unnecessary cost out of the process and these savings should be passed on to the client. Call the management team at Web Connectivity to learn more.