Wednesday, 27 February 2008

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.

Comments on the Lloyd's Annual Underwriting Survey

What does thr Lloyd’s Annual Underwriting Survey tell us?

1) Lloyd’s is committed to providing more information about its performance than its competitors do. Survey respondents cited such transparency as a major competitive advantage and I believe it's part of why Lloyd’s brand is one of the business world’s most powerful.

2) Subprime is a concern to all, not just the D&O guys. The majority of respondents write property, marine, energy, and reinsurance yet “Managing the Cycle” is the most important issue, and “Global Financial Market Instability” the most significant factor, facing the global insurance industry in 2008.

3) Head East – the greatest area of growth according to Lloyd's underwriters is in China and India. I think this should say “untapped area of growth” because I believe Lloyd’s could write a lot more North American risk than it does. The combination of relaxed rules about how brokers can bring risk to Lloyd’s and the ease-of-access through adoption of ACORD standards will make it far easier for brokers to include quotes from Lloyd’s in marketing run-of-the-mill U.S. risk.

4) On the subject of Lloyd’s Market Reform, there is great progress in going to paperless accounting and claims. The report cites 82% agreeing that there is “high commitment” to reform but I’d like to see Lloyd’s boost its market reform marketing efforts by conducting a study about the impact of adopting ACORD standards. For instance, is manual upoad/download sustainable as compared to integrating ACORD standards into the process? We at Web Connectivity have volunteered to conduct this survey.
5) There is one underwriter who should be removed from the premises – see the chart below:

Hitting for the Cycle

I find today’s markets confusing and contradictory.

Where are we in the cycle?

Clearly the insurance cycle is clear – we are in price freefall.

However, in the cycle of efficient markets, we are still writing the history of subprime and its impact on global markets.

Going back to the great quote (here) about the daily losers in the global game of subprime hide and seek, credit market insiders reveal that it’s worse than most know. I there is one constant theme across everyone I know on credit desks, it’s that the worst is yet to come.

Take the story I heard over Sunday brunch about how buyers of loans can’t buy performing loans without having to agree to take on the non-performers that could destroy their chances of good performance. In a rush against the clock, banks are hoping to off-load these non-performers before write-down Judgement Day.

So if it’s going to get worse, why is there price support in the capital markets?

Reading a quote by James Paulsen, Chief Investment Strategist at Wells Capital, a Wells Fargo company, I was struck by his assertion that the housing market malaise has not impacted consumer spending. He’s bullish on stocks. Further, he cites how the falling US Dollar is helping reverse a trend of net exports and that rising value from exports is having a material effect on GDP (appx 1.5%).

Another article in the same magazine talked more about what’s next - that eventually the write-downs will ebb (we estimate that will be at $440B and we’re only just over $260B); that some clever structured finance groups will find another match good investment money with need for good capital needs in a variety of good vehicles, that these vehicles will be securitized and that the bond insurers will have something new to back. Efficient markets win again.

Where are we in the impact of subprime on the insurance industry?

We’re in the denial stage. Advisen data shows clearly that pricing is not affected yet, even among banks buying D&O. As unbelievable as this is (and note that Aon published numbers showing an increase of 18% - see here), one savvy insurance insider told me today in London that the D&O market is not likely to change with the first claims but instead wait until the first reserves are hit. There’s just too much money chasing underwriting profits.

Much like the litigation and resulting D&O hard market came to life years after the investment impact of the corporate scandals of Enron and WorldCom, subprime will be a story for the insurance market in 2010 while the capital markets are onto something new.

As an information provider to commercial insurance providers we constantly review whether we are ahead of the information demand curve – are we providing what our customers need? Recent comments from brokers and underwriters indicate “a subprime fatigue” and one even said that there is “too much analysis”. These comments only make sense if profit-hunting will continue until it’s way too late.

Friday, 22 February 2008

Waiting for the Tide to Go Out

See the picture to the right of "Mason Power, Search Marketing Guy".

This quote from yesterday at the Search Engine Strategies conference captured the spirit of search marketing:
You don't know who is swimming naked until the tide goes out
This was to illustrate that without web analytics, you can't track what your customers want and where they are struggling to find it.
Further, Google Analytics apparently has automatic uploads to CRM systems. This level of sophistication means there's an incredible opportunity for Advisen to further raise the bar for insurance professionals looking to grow their book of business.
In a soft market (see posts here), the job is to increase efficiency by doing more without increasing your expense line and the tools & techniques I saw can definitely help Advisen help our customers.

Thursday, 21 February 2008

Search Marketing 101

It's been 7 years since I worked for which owned and operated the Search Engine Watch web site and related trade shows. I am currently attending the London show thanks to friend and former colleague Susan Leiterstein (contact info here), a VP of Sales at Incisive who bought the properties from

While online marketing is still <10% on average of corporate marketing budgets, it offers pinpoint performance tracking. While this has always been the case online, the breadth and depth of what's now available in analytics and benchmarking of online ad performance is incredible.

The big news in web analytics is that the cottage industry of analytics providers now has to compete with Google which has launched Google Analytics and Google Optimizer as FREE companion products to Google Adwords.

Advisen has so much to offer subscribers and I am amazed by how many simple tactics now exist that can help our subscribers find more of what they want and to help us find new subscribers.

This has all been sparked by high demand for our recent reports on subprime and other topics, as posted here. More to come on this subject.

Friday, 15 February 2008

Subprime Compared to S&L

In the second comparison of subprime to the S&L crisis I've heard recently (the other being by Kevin LaCroix of the D&O Diary as posted by me here), Navigant Consulting said that the rate of litigation filing is ahead of the pace of litigation filed in the S&L crisis. See Advisen's story on this report here.

Maybe it's just that it's Friday, but the math in their announcement doesn't seem to add up:
The number of subprime-related cases filed doubled during the second half
of 2007, from 97 to 181 (for a total number of 278) cases.

I suppose this means that they found 97 cases in 1H 07 and 181 in 2h 07. I've contacted Navigant for a copy of the report. 278 seems high, but perhaps their definition of subprime-related is different than ours. Advisen tracks subprime-related cases for the benefit of the insurance industry, our table currently shows 194 cases. For information, contact me or see

Insurance Industry Events

More than any industry I've worked in, insurance is relationship-driven.

Lloyd's in particular thrives on the trust between brokers and underwriters and buyers of insurance feel comfortable that their assets are covered based on a handshake.

This is both good for the customer and bad for those trying to document the policies involved. It's no wonder insurance litigation is so prevalent around claims. In fact, I've just hired a terrific new Sales Director (Colin Fennelly). In past positions Colin sold outsourced services to insurance companies to reduce the defense costs associated with this litigation, getting paid out of any savings found. It's an amazing economic ecosystem.

London has achieved a higher degree of "Contract Certainty" through recent reforms (see here for more), and the challenge of online processing of commercial insurance is still formidable. For example, how do you trade handshakes online?

Advisen invested in Web Connectivity which is the market leader in ACORD messaging software which is a key reason why Lloyd's and London market brokers and underwriters are moving accounting and claims processing online. Web Connectivity's growing client list and increased online volumes are highly correlated.

While the Lloyd's and London markets congregate in the square mile of postcode EC3 and meet socially all the time, and Bermuda is a close reinsurance community, the rest of the global insurance industry frequents industry events to meet with customers and trading partners. I was floored at the number of events Advisen is tracking. See list here.

I'm planning to attend the ACORD Conference in Las Vegas in May and the AIRMIC conference in Edinburgh in June and Advisen has a big presence at the year's biggest event - the RIMS Conference in April.

Wednesday, 13 February 2008

Long live the King (content)

I have worked for most of 14 years in businesses founded on business-critical content with embedded analytics to enable more informed decision-making. See my LinkedIn profile for a list including Bloomberg and

This week's Advisen report on the expected $3.6b D&O loss from subprime has been an important story for insurance professionals globally. It's not a matter of if, but when, the tide will turn in the insurance cycle and Advisen has proprietary data sets which enabled the prediction.

We charged for the report ($200 for customers, $500 otherwise) and this has led to an intensive review of how we charge for our content and analysis. Advisen's is a blended model meaning that there is free, ad-supported content and we have password-protected content.

Taking stock of where consumers are willing to pay for content, the most notable story is whether Dow Jones' is to remain a subscription service. See a post with interesting comments here.

First, Dow Jones made their editorials free ( while charging smaller fees for certain columnists. Second, in Davos Rupert Murdoch confirmed that there will still be subscription-only content and that, in fact, subscribers should expect a price increase.

While only 4% of Dow Jones' revenues, annual revenue is around $75m, the envy of internet content publishers. Estimates are that WSJ page view traffic would have to increase anywhere from 3 to 12 times to replace subscription revenue with advertising revenue (Lehman Brothers analysts said 2x-3x while Bear Stearns said 12x). Also, while traffic would certainly increase, the impact on the massive print revenues are what keeps for subscribers only (for now).

Search guru Danny Sullivan blogged (here) about how WSJ has (knowingly?) allowed access to subscriber-only content via Google News.

The New York Times gave up on its online subscription product Select awhile back and according to Eliot Pierce, Vice President, Strategy & Operations there, the Online Grey Lady has never looked back. Real Estate classifieds and advertising are strong. These are different content offerings, the WSJ boasts some of the best reader demographics available to advertisers.

Here in the UK, the Financial Times just announced a blended model for where "casual readers" get free access to 30 stories/month. And, oh by the way, FT content is no longer included in Factiva's subscription fees, it's now a big premium (see post here).

The and Bill O' both offer premium subscribers additional content and also online chat access to Bill and to analysts like Jim Cramer.

On the other hand I worked for Alan Meckler long enough to hear his many arguments about why subscription models don't work (this was before he built an images business). Certainly search engines don't find password-protected content, depricvng publishers of valuable traffic.

While business models and consumer take-up vary, there is one irrefutable truth: If you have content that is business-critical, consumers will pay for it. Our subprime report is a good example.

Tuesday, 12 February 2008

Advisen on CNBC

Dave Bradford and his report on why subprime will be $3.6b in D&O losses from securities class actions was featured on CNBC today. See the video here.

To get a copy of the report click here.

The Turn of the Phrase

From the Lex Column of today's FT about the writedown announcement by AIG:

Another day, another loser in the global game of subprime hide and seek.


Monday, 11 February 2008

Advisen Subprime Report: Impact on D&O and E&O

Advisen's report entitled "The Crisis in the Subprime Mortgage Market and Global Credit Markets: The Impact on D&O and E&O Insurers" will be published later today. Since announcing it by press release and on Front Page News last week:
  • Dave Bradford, co-founder and Chief Knowledge Officer of Advisen and the report's author, spoke at the John Street Club. Thanks to Bill Brown, current President, for the invitation
  • Advisen attended the PLUS conference in New York
  • Many voiced their incredulity at the data about FI D&O pricing going down and coverage terms broadening despite subprime

So Advisen has had excellent chances to test-market the findings of our report with the best and the brightest in the industry and our assertions have stood up well. Lehman Brothers is now using our findings in its latest report to clients.

Press coverage of the report can be found here. The full report is available to subscribers of the full Advisen information platform for $200, and to non-subscribers for $500 by calling Advisen at 212.897.4800, or emailing in the US, or +44 (0)20 7929 6929 or in the UK. As a reminder of why you would buy the report, the findings include:

  • A full list of the writedowns reported by 132 global companies
  • Details of the $2.7 trillion in market cap losses experienced by those companies
  • A cross-referencing of the 191 subprime-related lawsuits against the companies with write-downs that show that 76% of the 132 global companies have not yet seen a lawsuit
  • Full explanation of how Advisen predicts $3.6b in D&O losses, just from securities class action suits (other D&O events and E&O losses expected on top)
  • Market share of the top ten writers of financial institution D&O and E&O
  • The contribution of subprime losses to 2007 and 2008 loss ratios, and
  • The impact of the subprime meltdown on D&O and E&O pricing and coverage terms to date

Thursday, 7 February 2008

Part-time Risk Management

Large companies have dedicated Risk Managers with the largest companies having a team of 10 or so to manage risk at a corporate level and ensure best practices within each division.

What if you're a medium-sized business or small company? You're not likely to have a full-time risk manager and your staff that handles risk management as part of their role is likely to not have formal training in the art nor the science of risk management.

David Gamble, formerly the Executive Director of the Association of Insurance and Risk Managers (AIRMIC), has launched an online training course to help spread the gospel of effective risk management to these part-timers.

Advisen is delighted to announce a partnership with PRORIM, the name of the course (their banner is to the left) and we have begun promoting the course on our newsletter Front Page News.

Wednesday, 6 February 2008

D&O Losses from subprime to be $3.6b

D&O insurers are likely to suffer $3.6 billion in subprime-related losses.

David Small or Bear Stearns has estimated $9.3b as a worst-case D&O scenario. As I posted here and here, David uses a sensible methodology to generate this estimate.

Advisen is able to generate an estimate of what is likely versus what is worst-case. Based on historical securities class action settlement patterns and D&O program limits and retention data from Advisen’s Program Benchmarking database, data sets available only to Advisen allow us to generate this estimate.

Advisen will publish a report (see press release here), “The Crisis in the Subprime Mortgage Market and Its Impact on D&O and E&O Insurers,” on Monday, February 11 which covers how we arrive at $3.6b and details:

  • An updated list of subprime writedowns reported by more than 120 financial institutions across the globe,
  • Market cap losses experienced by those companies,
  • Subprime-related lawsuits filed against those companies,
  • An analysis of the 181 subprime-related lawsuits,
  • Advisen’s forecast methodology for subprime D&O and E&O losses,
  • Market share of the top ten writers of financial institution D&O and E&O,
  • The contribution of subprime losses to 2007 and 2008 loss ratios, and
  • The impact of the subprime meltdown on D&O and E&O pricing based on program data reported by risk managers and brokers, and on the results of a survey of 110 financial institution insurance buyers.

“The Crisis in the Subprime Mortgage Market and Its Impact on D&O and E&O Insurers” is available to subscribers of the full Advisen information platform for $200, and to non-subscribers for $500 by calling Advisen at 212.897.4800, or emailing in the US, or +44 (0)20 7929 6929 or in the UK.

Tuesday, 5 February 2008

Subprime investigator finds an informant

The Insurance Insider's coverage of Advisen's survey results yesterday (story here) included a mention to a story I hadn't seen:
Clayton Holdings, which provided due diligence to banks on some of the home
loans they turned into bonds, has agreed to co-operate with Andrew Cuomo in
exchange for immunity from prosecution.
Clayton describes itself on its website as "an information and analytics company serving lenders, loan buyers & bond issuers, servicers and fixed income investors in mortgage-related loans and other debt instruments".
According to an article in Advisen "Sources say one key issue AG Cuomo is looking at is underwriting "exceptions" granted by project managers working for Clayton on Wall Street accounts." Despite a share price drop of 87% since the beginning of the subprime crisis (see chart below), we are not aware of any lawsuits against Clayton.

The majority of subprime cases as tracked in Advisen's large loss database deal with not adequately disclosing and/or misrepresenting the nature of loans and CDOs. Evidence that firms knowingly did so would be a major boost to plaintiffs in subprime cases and increase the potential exposure for the D&O industry. This will certainly be tracked in the news including Advisen Front Page News.

Monday, 4 February 2008

Underwriters fighting an uphill battle

Prices for commercial insurance, notably for Directors & Officers liability coverage, move in a predictable cycle.

In today's market, D&O claims frequency and severity are both down and as a result, underwriting profits are up despite falling prices. These profits have enticed a rush of money into underwriting creating an imbalance of supply & demand.

With the subprime crisis resulting in $200b in write-downs and 178 lawsuits so far, it is only a matter of time for the inevitable impact on the D&O and E&O industry. A handful of claims notifications have been made already but the story is still playing out in the financial markets and not yet in the insurance industry.

Advisen monitors and reports on premium trends in North America, both on behalf of the Risk and Insurance Management Society as the administrator of the RIMS Benchmark Survey™, and in Our data showed that, despite having had 9 months to digest subprime, renewal pricing for D&O and E&O for financial institutions is falling just as it is for other industry sectors.

To confirm the findings of the empirical data collected from risk managers and brokers, we conducted a survey of financial institution insurance buyers. The results of the survey are available here and contain details on financial sector price trends and an unexpected trend in the terms of coverage.

Later this week Advisen will publish a more comprehensive analysis of the potential impact of the subprime mortgage crisis on the insurance market, covering reported write-downs to-date, subprime-related lawsuits filed to-date, an analysis of potential losses to the insurance market, and estimated market share of the major writers of financial institution D&O and E&O. To obtain a copy, call Advisen on +44 (0)20 7929 6929 or in the UK or +1.212.897.4800, or emailing in the US.

Friday, 1 February 2008

Subprime lawsuits now over 175

Updating a previous post (here) about the total number of lawsuits related to the subprime crisis, Advisen now tracks 177 cases, which includes 52 Securities Class Action cases. The pace of new filings is showing no signs of abating. Even the FBI is getting involved, see story here.