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.