Realistic goals: Fewer vans, less paper

London is an amazing coexistence of the old and the modern. Where else can you walk from pubs that have been in continuous operation since the 16th century and walk across London Bridge to modern buildings like the Swiss Re building?

Lloyd's itself is a unique microcosm of this coexistence of the old and the modern. Lloyd's is as relevant today as ever before with operations expanding across the globe (China last year, Brazil just announced).

However, much of Lloyd's announced £15.95b 2008 capacity will be transacted by paper. See my December 2007 post (here) for more background. Lloyd's, other London underwriters and brokers all process through the "bureau" in a joint venture with Xchanging. New deals, changes to existing deals, accounting statements for reconciliation among brokers and underwriters, new claims and updates to existing claims are all processed centrally.

Much progress has been made to convert central processing from paper-based to electronic. The advantages are obvious - reduction in manual data (re)entry, reduction in the inevitable errors from manual (re)entry of data, and process efficiency which all translates to reduced time and cost of binding policies. Ultimately the client should benefit and Lloyd's and London should be on a more competitive level playing field with other insurance markets globally.

As I posted in December (here) the adoption of electronic processing of claims and accounting reconciliations is progressing significantly. With more and more electronic messaging using the ACORD standards and most via the Web Connectivity gateway, there is palpable momentum and there is no question that the bureau's vans carrying paper to offsite processing centers will soon be extinct.

Lloyd's now expects all new claims to be electronic by the end of March 2008 and other London underwriters are targeting the end of September 2008. Everyone is expecting to reconcile accounting statements electronically by the end of March 2008.

While new deal syndication (aka "placement") is going to be via paper this year, the market is expecting to build momentum to electronically communicate changes to existing deals (aka "endorsements") in 2008.

It might seem to make sense to start with the beginning of the process (placement) but this didn't work with Kinnect (£70m spent with no result) and the bond and equity markets moved to electronic processing of accounting first before the equivalent of placement was moved online. In fact online bond trading was just taking off when this author joined Bloomberg in 1994. It was great to be in the middle of that transformation and equally rewarding to be part of the solution here.

Forecast calls for gain

A.M. Best issued their 2007 summary and 2008 projections for the insurance industry, some facts are staggering:

Net Premiums Written were down 1.2%, the first decline since 1943. This is not the first soft market since 1943, so the degree to which premiums have fallen since 2003 is incredible. See my earlier post (here) for a picture of Advisen's data on this.

With $19b in underwriting profits in 2007 plus more and more money comes into the insurance industry, such as from capital markets players looking for diversification, Best reports that Policyholder Surplus was up for the 5th straight year.

We track the imbalance of supply and demand by using Policyholder surplus as the measure of supply and GDP as the measure of demand and can demonstrate where the current soft market is relative to past cycles.

Reading between the lines of Best's report (found here) the benign claims environment is the major factor in these profits. Until this changes, premium rates can continue to fall and there will still be profitable underwriters.

One interesting tidbit was a note by Best about whether enterprise risk management was helping -meaning that companies and their risk managers have adopted ERM and this is what is causing lower loss rates. We'll have to speak with our friends at RIMS to see if we can quantify this.

Bear Stearns subprime conference call with Kevin Lacroix

Yesterday (28th Jan) David Small, Bear Stearns' insurance sector equity analyst, hosted a conference call with Kevin LaCroix of the D&O Diary as a briefing on the status of litigation that will impact the D&O and E&O industries. Thanks to David for including Advisen on the call.

David Small explained a few points about his report of last week where the worst-case scenario for D&O subprime exposure was tripled to $9.3b:

• the estimate is gross, not tax-effected
• much of that will be reinsured, though what amount of that is insurable is not known
• with each insurance company defining Financial Institution coverage differently, assessing market share is tough, David says there's roughly equal market share between AIG, Chubb, Travelers, Lloyd's, XL and maybe CNA a bit below that

David then then introduced Kevin LaCroix who:

• is a partner in Oakbridge Insurance Services, an Executive Liability specialist wholesale broker, and Kevin works in their Beachwood, Ohio offices
• writes the widely-read D&O Diary found at http://dandodiary.blogspot.com/
• is a past President, a member of the Board of Trustees, and very active with PLUS

Kevin's full profile including contact details is found here

Kevin highlighted his tracking of 41 subprime-related Securities Class Action Suits (SCAS) (including 4 filed in Jan '08) and 9 subprime-related ERISA lawsuits. This data closely tracks Advisen's database of such lawsuits though we list more ERISA cases and also different types of subprime-related cases including fraudulent trade practice, shareholder derivative cases, underwriting malpractice, etc. with 173 in total.

Please contact london@advisen.com for more information about the Advisen database of subprime lawsuits, our complete listing of subprime write-downs, changes in premium due to suprime, market share by insurance company and much more.

Of the SCAS, Kevin noted concentration in the 6798 SIC (REITs) and banking & mortgage lending, noting that this rash of suits reminds him of the the S&L crisis with a broad array of targets, but high concentration in financial sectors.

Kevin pointed out that the full impact of companies not in financial sectors who have made investments and need to value them ahead of impending reporting deadlines will be very interesting, this could lead to a new wave of suits.

Moving on to claims scenarios, Kevin pointed out two cases which illustrate the unique nature of subprime suits:

1. the complexity of the case against MBIA with the complaint being about "CDO squared" deals with complex securities and complex transactions with intricate procedures for accounting and valuations before even getting to disclosure
2. State Street setting aside $618m "to address legal exposures" has been misinterpreted in the media as being for D&O exposures when no Ds nor Os were named and there are not allegations based on alleged violations of the securities laws so it is not an entity claim under a D & O policy so it's more to deal with the investments made

Moving on to assessing the size of the D&O loss, some cases will be difficult to win (pleading obstacles, hurdles), many losses won't be covered (many large banks self-insure or have side A only towers and side A doesn't cover) and an important part of this story will be the legal costs (see MBIA point above about complexity which means legal costs will be higher)

In terms of general trends in SCAS, Kevin cited recent NERA / CORNERSTONE reports showing a return to normal historical frequency levels. 2007 frequency was higher than 2006 even without subprime cases with activity in pharma, semiconductor, radio/telephone, prepackaged software all above 2006 levels, and those sectors aren't in subprime ground zero.

Kevin pointed to two recent trials JDSU (verdict for defendants) and Apollo Group (verdict of up to $277m for plaintiffs). Given that few cases go to trial, there is heightened interest in these verdicts but in Kevin's opinion, they don't point to an increased likelihood of securities lawsuits going to trial.

I thought it noteworthy that Cornerstone says 33-40% of SCAS are dismissed.

To put the subprime estimates in perspective, David noted that Enron was $7.2b and WCOM $6.1m D&O events (although not all of those losses were insured) and that from a severity perspective, this is much greater than back-dating but less than the corporate scandals (Enron/WCOM) as those huge companies went bankrupt while Merrill, Citigroup, UBS, etc. are still thriving businesses.

Kevin added that an important part of this story will be legal fees (Apollo said their fees in connection with their recent jury trial were $25m). Also, Kevin noted that this isn't a one-time event (noting that D&O is characterized by a series of one-time events), that lawsuits will continue through 2008 and into 2009.

In sum I took from the call that:

• losses are likely to be closer to those of the corporate scandals, greater than those of the options back-dating scandals
• $9.3b is the current estimate of a worst-case scenario, but that it's likely to be less as not all is insurable
• Kevin LaCroix agrees with Advisen's stated opinion that these cases are likely to be very hard to win, though legal defense costs are likely to be very high and when cases are settled the amounts will be high

Update on SocGen

At the AMRAE annual conference for risk managers in France, Michel Yarhi, the risk manager of SocGen said in a speech that SocGen believes their insurance policy covers some, but only a portion, of the rogue trader losses.

This is in conflict to what underwriter sources are saying. Remember, the first test for paying claims is whether they are "valid". This will be an interesting story to follow.

Today we covered (here) the shock among Davos attendees that this could still happen.

SocGen, subprime, lots of news

Kudos to Aon's marketing discipline. Within hours of the announcement of the SocGen fraud, they issued a report on the implications and promoting their product to cover just such an incident:

“Employee fraud, and in particular unauthorised trading, is insurable but the
challenge has been persuading some banks to admit such exposure exists...it will
be interesting to see how the take up rate of the unauthorised trading product
{marketed by Aon I presume} is influenced by today's news."

Our sources indicate that their D&O policy had a specific unauthorised trading exclusion, but with their stock taking a big hit and this perhaps being an indicator of lack of management oversight, a more run-of-the-mill case might be forthcoming.

Back to subprime, Clear Capital reported that certain Lloyd's syndicates were particularly exposed to subprime and reduced their price forecasts for their shares.

I was floored by Clear Capital's statistic that there have been 50 credit crunch-related notifications in Lloyd's already. Given that Advisen is tracking nearly 150 subprime-related lawsuits, 50 seems logical for the global insurance market, but not London, and not Lloyd's only. The source of this data appears to be a survey of London brokers. Anecdotally, I can count in single digits the number of subprime-related notifications in the London market.

This is why the RIMS Benchmark Survey is so popular, unlike other studies of premiums, it's the only one to be based on actual data versus what a subset of insurance brokers say they are seeing.

Not to be outdone, David Small of Bear Stearns found that the number of companies in the Russell 3000 that have lost more than 40% of their market cap through 2007 has jumped 7 times and thus revised upwards his potential subprime exposure figure from $3b to $9.3b.

Subprime explained

With the news of the market tough to take, the following is a light-hearted explanation of the subprime crisis:
http://www.youtube.com/watch?v=SJ_qK4g6ntM

Good summary of subprime litigation

Yesterday I spoke with a client, a well-respected Lloyd's underwriter, who started talking about just how complicated the unravelling of subprime is becoming. He noted that it's a spiral effect at Lloyd's just like the old days where one syndicate brings in the risk and then another reinsures the syndicate and then another reinsures them and then the original reinsures it thereby taking the risk back and nobody really knows. We're going to cover this story soon.

Meanwhile, we carried a terrific article by the Herald Tribune which summarizes the breadth and depth of subprime lawsuits.

IT as a leading indicator for litigation?

Listening to a podcast by InternetNews.com I was struck by a story about a forthcoming announcement by Hewlett-Packard and Clearwell about a new class of eDiscovery services.

Identified as a significant emerging IT market, eDiscovery is software that enables firms to recover, analyze and build relevant data sets of all digital files, e-mails, text messages, and instant messages relevant to litigation. IDC reports that the market will have double-digit growth each of the next 3 years and will be a $21b market in 2011.

This is a bullish indicator for the plaintiffs bar and means that Advisen's database of lawsuits will continue to grow exponentially.

Where in the world?

I was interested to note where visitors to this blog come from, a fairly representative picture of where insurance is transacted.

Product recalls, China & insurance risks

From toys to toothpastes to tires, the US Consumer Product Safety Commission issued a record number of product recalls in 2007. Over half of these recalls were for products made in China, whose imports have nearly quadrupled over the last decade.

Advisen issued a report today detailing the scope of the risk for insurance professionals assessing their exposure - many broker or underwrite clients doing business in China.

In 2006, trade with China totaled $288 billion with at least 460 of the Fortune 500 companies conducting business in China.

The rapid expansion of China into the global export market has also exposed grave regulatory flaws that have resulted in a surge of high-profile recalls and over 100 lawsuits filed thus far against Americans companies that do business in China.

American companies and consumers have very few avenues of legal recourse against Chinese manufacturers; over 90% of lawsuits filed against a Chinese company never reach a jury.

For more information on the report, contact me or click here.

Explaining the D&O soft market

Today Advisen carried an excellent summary by Business Insurance on the frequency of class action suits in 2007.

While the number of filings increased in the 2nd half of 2007, "the frequency of filings last year was 14.4% below the 194 lawsuits filed yearly on average from 1997 through 2006," according to their sources.

The question to be answered is whether the increase in frequency in the past 6 months is a change in trend or whether frequency will revert to the mean.

Comparing class action frequency with D&O rates will show a high correlation.

Soft market picks up speed

According to the latest data from the RIMS Benchmark Survey, commercial lines insurance prices fell and fell faster than before.

Advisen produces the survey for RIMS and uses data as reported by U.S. risk managers who buy insurance for corporations. Other surveys use anecdotal data while ours uses empirical data.

The chart above shows the composite premium index in black as compared to the D&O premium index in yellow and the property index in blue.

The chart to the right shows the quarterly rate of change.

There are a few notable data points:

1. The rate at which the composite premium index falls is steadily increasing meaning the soft market is showing no signs of abating.
2. Property rates had increased since the storms of 2005 but January policy renewals show the first decline since
3. D&O rates are plummeting

For the press release see here, for press coverage, see Insurance Journal and Business Insurance.

Web 2.0 and Insurance

Andrew Berry wrote a thought-provoking article for IRMI last quarter and I wanted to offer a couple of comments.

Readers should know that IRMI's stated mission is to be an "authority in providing expert advice and practical strategies for risk management [professionals]".

To summarize some salient points, Andrew explains how the web as a platform and software as a service is a key part of the newest generation of internet applications and Andrew even credits Advisen for being one of the first such providers.

He correctly points out that the insurance industry is slower to adopt technology and that firms are notoriously hesitant to contribute data and insight to the public domain in order to reap the rewards from looking at aggegated information from the whole industry. For example, Advisen benchmarking took years to get critical mass in terms of data.

Couple of comments. First off, I hope Andrew follows up his commentary on collaboration. Key to the success of web 2.0 applications is user-generated content and collaboration. The most-trafficked part of the RIMS.org website is its members forum.

How will other forms of web 2.0 tools help IRMI readers (risk managers) leverage the greater community to learn more? Some of the risks may be specific to particular companies, but there is so much overlap in how companies manage risk and implement ERM, that I see a huge opportunity for Advisen to help risk managers come together.

I'd be interested in Andrew's thoughts, especially about one of his conclusions, "The industry is still wary of the Internet and the potential disruption it could create for parts of the distribution channel".

Secondly, I noted his point that insurance-industry blogging is very popular and showed the following chart depicting it as much more popular than blagging in banking or real estate. And the data was summarized before this blog started, I can only imagine the spike when they next tally this data...

Subprime write-downs and lawsuits

Advisen continues to cover the subprime story and the potential for impact on the commercial lines insurance industry.

Last week we published a report detailing the 112 firms who have reported subprime-related write-downs totalling over $170b and cross-referencing that list against Advisen's database of subprime-related lawsuits. The Daily Telegraph covered our report today and their article can be found here.

The lawsuit database now contains 138 records, the top 5 causes are listed below as are the defendants with more than 2 cases:

Type of action and number of actions
Securities class action 41
Fraudulent trade practices 41
ERISA class action 13
Underwriting malpractice 12
Securities fraud 11

Defendant and number of actions
Bear Stearns 6
Citigroup 6
Fremont General 6
Merrill Lynch 5
State Street 5
Washington Mutual 5
Beazer Homes 3
Countrywide Financial 3
HSBC 3
JP Morgan 3

For more information please ring +44 (0)20 7929 6929 or london@advisen.com

Web Connectivity staffs up to meet demand

Web Connectivity, the market leading ACORD messaging provider (whom Advisen is proud to have invested in), has just hired a leading figure in oline messaging in the insurance industry.

Having implemented technology and change programs to enable underwriter connectivity, by joining Web Connectivity Les Cooper can help clients of all types in the London market catch up. The figurative train has left the station and we are delighted to welcome Les on board.

You can read the full announcement (here).

1 in 5, will there be more?

Advisen published a report to its customers today detailing the 112 companies who have announced write-downs due to subprime.

Notably, only 24 of these companies or 1 in 5 have seen lawsuits (mostly securities class actions). These suits could lead to Directors & Officers and Errors & Omissions claims so Advisen subscribers are getting a head-start on digesting this information.

Since claims are likely to be based around whether the firms adequately disclosed their true exposure to subprime, Advisen doesn't expect suits against all 112 companies, but the list keeps growing.

For more information about the report click here.

On the leading edge?

According to a recent article on blogging, around 5% of small businesses produce blogs. That seems incredibly low, but then again blogging isn't a relevant application for many types of businesses. It is, however, a perfect fit for Advisen, and the feedback on my blog has proven this.

Advisen offers information and analytic tools for commercial insurance professionals. Much of what we license to our subscribers is unique to Advisen. We publish price indices and other findings from our data and have a team of research professionals whose reports on trends in the market are applauded by leaders in the insurance industry.

Back in 2004, as soon as then-NY State Attorney General Eliot Spitzer announced an investigation into how brokers get paid by underwriters, Advisen immediately launched a blog to pull together source material, commentary and any information we could gather. We used this information to assess the impact on the industry and reported on it in Front Page News, our daily e-mail newsletter (found here). We ran surveys of risk managers to get their feelings. We were widely sourced in national papers when they covered the story.

It was a huge success in terms of creating awareness and building a larger brand footprint in our target market. We're about to launch another Advisen blog and I'm excited about it. I expect that the number of small businesses using blogging is much more than 5%, but if it's still that low, here's to being on the leading edge.

Scoop Hastie does it again

Q: Which trade magazine broke the story about the Spitzer investigations into the US insurance industry?
A: Peter Hastie of the Insurance Insider here in London.

Peter's innate talent as a journalist has him constantly ahead of his competition and in 2007 the Insurance Insider has owned the story of the convergence of the capital markets and the (re)insurance industry.

This is an important development that will continue to grow in significance. Just recently Goldman Sachs and Bank of America have funded Lloyd's underwriting syndicates and the trading volumes of Insurance Linked Securities (ILS) increases every quarter.

Peter has covered this story as segments of his existing publications and has now announced the launch of a dedicated bi-monthly publication. See the announcement below.

Advisen has worked with equity analysts for years and counts many brokerage firms as customers including Goldman Sachs and Bank of America. We see this development as a further opportunity to provide all players in commercial insurance with the information and analytics they need to make more informed decisions.

Peter's announcement:

New publication TRADING RISK tackles reinsurance convergence

Tackling the increasing convergence between the banking and reinsurance worlds is a new specialist publication, Trading Risk, which is launched this month.

Aimed at market professionals and investors in the two sectors, Trading Risk is launched by Insider Publishing, the UK-based publishers of The Insurance Insider and IQ magazine, on the 15 January.

The new publication comes at a time when the two sectors are increasingly coming together in the way risks, such as losses from natural catastrophes like hurricanes, are being financed.

Dedicated to this convergence, Trading Risk will examine and analyse major transactions such as insurance linked securities (ILS), exchange and OTC traded risk, loss warranties, sidecars and all non traditional forms of risk transfer.

Trading Risk is a bi-monthly printed publication, together with regular email bulletins sent to an audience of market professionals. It will also host two events in 2008 in London and New York where attendees will discuss and debate key issues with leading industry figures.

The editor of Trading Risk is Rebecca Bole, a former Lloyd’s underwriter and senior news reporter on The Insurance Insider, Insider Publishing’s main title. The publishing editor is Peter Hastie, the editor of The Insurance Insider.

-ends-

For further information on Trading Risk, please contact:
Amber Bates
Sales & Marketing Manager
amber@insuranceinsider.com
+44 (0)20 7397 0619