Firms on the wrong side of the environmental movement have seen an enormous amount of suits filed against them, and plaintiffs have sought compensation from many forms of insurance policies, including directors & officers insurance.
Advisen Front Page News (here) carried an interesting article this week from the Chief Counsel to ACE Professional Risks, Carol Zacharias, who recapped the state of play in climate change litigation and how it increases the exposure to companies and their directors and officers.
Excerpting from the article:
The new cases address the adequacy of a company’s assessment of the financial consequences of climate changes and the adequacy of disclosures to shareholders of that financial impact. Since questions regarding disclosures to shareholders raise the prospect of management liability exposure, these developments present liability risks to directors and officers that should be considered.
So I searched Advisen's large loss database for "climate change disclosure" and found a match on a case where Xcel Energy settled with the Attorney General of New York. Excerpting from our case profile:
Attorney General Andrew M. Cuomo today announced the first-ever binding and enforceable agreement requiring a major national energy company to disclose the financial risks that climate change poses to its investors. Cuomo's agreement with Xcel Energy (NYSE: XEL) ("Xcel") comes as many power companies, including Xcel, are investing in new coal-burning power generation that will significantly contribute to global warming emissions.
Certainly climate change disclosure is not going to decrease under the Obama administration.
To get your hands on this case or other cases you want to follow, click here and indicate you want everything we have on climate change or whatever search criteria fits your needs.
Insurance executives ask their heads of claims the same thing: "How many Securities Class Action Cases (SCAS) were filed?" There's no industry standard definition and Advisen, our friend Kevin LaCroix at the D&O Diary (blog here), and other service providers like NERA or Cornerstone have varying counts.
NERA and Cornerstone make their money by serving as expert witnesses during trial and pre-trial stages. NERA and Cornerstone collect data as a byproduct of this business.
Advisen makes its money collecting data and licencing access to this data on a one-time or continuous basis. Data and predictive models are our core business and we are dedicated to the commercial insurance industry so our output is tailored to their specific needs.
So the answer to the executive's question is "Depends on what you define as a SCAS" but, more importantly, SCAS is only one part of the exposure to liability insurers. In fact, in Q1 2009, SCAS dropped to less than 40% of all securities filings. Advisen tracks shareholder and other derivative suits and cases involving breach of fiduciary duty and securities fraud.
Advisen tracks filings in US federal and state courts and collective actions and other cases filed in overseas courts against US and non-US companies.
In summary, there is no standard definition of "securities class action suit." But for management liability professionals, the more important question is"How many and what types of lawsuits are likely to result in claims under D&O, E&O or fiduciary liability policies?" Advisen tracks and reports on all manner of suits, filed in state, federal and foreign courts, that are likely to result in losses to companies and their management liability insurers. The Advisen database is the most complete, accurate and timely of its kind.
Today Advisen released the findings of its quarterly securities litigation review and the report is available free of charge here. The headline is that filing activity was up significantly from 2008 rates, but the pace can't be sustained and will likely level off over the year.
The executive's follow up questions are "how many of these companies do we write policies for" and "what do we need to reserve". Reserving capital erodes profit so frequency is not popular, but frequency of filings is only part of the picture.
The elephant in the D&O room is whether these cases will yield insured loss. Advisen has already written (see here) about how defense costs are going to eat significantly into the policy limits but that for many reasons, this increased frequency is unlikely to result in an increase in claims paid.
D&O and E&O professionals would benefit from reading the report (here) and seeing if their clients are on the list (here).
The Chief Investment Officer of Stanford is the only one against whom criminal charges have been filed...so far. Her assets and the assets of Stanford being frozen, she isn't finding takers for legal representation on contingent fees.
In today's news (story here) she sues Lloyd's for coverage under Stanford's D&O and Company Indemnity policy seeking $5m in actual damages and to get the media to cover the story and try to embarrass the Lloyd's Managing Agents involved, $40m in punitive damages.
Paraphrasing from what I've been told by law firms involved in bankruptcy protection and unwinding these matters, the following is how I understand it to go. Do you the readers agree with what I've been told?
The law firm defending the Stanford group in its bankruptcy goes to court and as the first act, asks for estimated legal fees (big sum) to be set aside in escrow.
That law firm then discusses all of the claims for money against Stanford with the claimants to do an off-the-record assessment of the merits.
The cases are ranked by the anticipated outcome (from must pay to no chance) and then the lawyers for the claimants are notified of their standing (again off the record). The lawyers for the claimants have their own assessment of the merits and they either proceed to settlement or an actual review of the merits through court. But guiding the discussions is the fact that the assets available (net of legal fees) is always a small fraction of what's been claimed in lawsuits.
The D&O or E&O insurance firms are in very close contact with the bankruptcy law firm and when the cases are ranked, they act. If these insurance companies are to pay the legal fees and then not get anything returned if fraud is proven, they are wasting money so they wait for the first assessments of the merits.
The tough part for everyone involved (including information outlets like Advisen) is that there is no transparency to the real horse-trading here. And because everyone knew that Lerach was straightforward and predictable as a deal-maker, the D&O or E&O guys could reserve accordingly. But with the new bumper crop of Lerach wannabes, it's anybody's guess.
This week the Insurance Insider wrote about D&O insurance exposure in Lloyd's and the London insurance market to the ponzi schemes in the US.
Quoting from the recent Advisen report on Securities Litigation and the D&O Market, the article lists the proliferation of 2009 litigation (433 Madoff and 9 Stanford not to mention another 70 subprime and credit crisis-related cases). You can buy a list of this litigation here.
Apparently the law firm which represented Enron in its bankruptcy made almost as much as Milberg who brought the class action. This means both sides are racking up big legal bills before even getting to a judgment on the merits of the case.
Therefore these cases are going to lead to use of D&O coverage for mounting legal fees and when merits are judged, it's more likely that significant E&O or Professional Indemnity claims are paid. Core D&O claims are less likely to be paid as the losses were so "systemic" - how could any D or O be more culpable?
Similarly with the ponzi schemes, if you're bringing a case against the Ds&Os, where's the money to go after? Ruth Madoff only has so much jewelry and the rest of the Madoff business isn't worth $50b. Instead and in addition, go after the funds and pros that fed Madoff.
On this point, I remember a ponzi scheme that raced through UVM while I attended. The guys at the top of the pyramid fully knew that it would collapse under its own weight but that so long as they got out at least twice they would be playing with other people's money until the inevitable collapse.
While I'm happy to see Madoff's staff and family (was there really a distinction?) getting indicted like his accountant (all of these people had to be in on it), I am waiting to see how the scheme can be unwound to find the people who gave Madoff money at the beginning of the Ponzi scheme. These are the crooks Madoff is pleading guilty to protect.
On the insurance coverage of ponzi litigation, there could be negligence in due diligence on the part of feeder funds and investment professionals who put their clients into Madoff recently, and that could be covered under E&O insurance. But criminal charges will be overwhelming when they unearth Madoff's true accomplices - those with Madoff at the top of the pyramid. I doubt any insurance company would honor their E&O.
Talking about the market, Mr. Degnan predicted that "2009 will see dramatic hardening across all lines, all sectors" because of deteriorated combined ratios, investment return, rate reductions and poor yields in the market. Chubb CSI saw Q4 rate increases, the first in 18 quarters.
Countervailing measures are there:
forecasts like the above seem rational, but the insurance industry doesn't act rationally
the economic implosion reduces exposures and it's hard to raise the top line when demand shrinks
Speaking of the credit crisis, Mr. Degnan thought the "hyperbolic forecasts" of big losses were way overblown. Citing high dismissal rates and other measures he discussed in Chubb's last earnings call, Mr. Degnan thought the $10, 15 20b numbers are overblown. Was he subtly asking Advisen to revise its forecast?
In the Q&A he was asked about direct distribution and said it had been seriously reviewed at Chubb but Chubb is "strongly committed" to working with brokers who provide a significant "value add".
I had the opportunity at an industry function to hear a terrific speech by Chubb's Vice Chairman John Degnan (see bio here). As a former New Jersey politician and lawyer, and as head of most of Chubb's operations, he's a very effective and entertaining speaker with good stories.
Mr. Degnan started with the experience of the last two days testifying in front of Congress in Washington and forecast that "by the end of this year there will be a Federal Systemic Risk Regulator" and that while insurance is not likely to be covered in phase I, regulation is moving to the federal government from the states.
Mr. Degnan compared the relative pain for European insurers trying to do business in the US and how they have to open in 50 markets, not just 1 market and wonders if they will take countermeasures at some point for US firms operating in Europe.
Analyzing recent testimony by NY State Insurance Superintendent Eric Dinallo (bio here) that NY regulation saved the markets from AIG's implosion, Mr. Degnan called it a "truism" because they only regulate the insurance company subsidiaries and not the rest of the holding company such as the Financial Products division that caused the implosion.
Mr. Degnan also reminded the audience of Mr. Dinallo's approval of $20b in AIGsubsidary dividends going to the parent before the federal government bailout. While noting that this might have been politically motivated (saving jobs in NY), it was ironic nonetheless.
Mr. Degnan said that before Chubb got out of credit derivatives in 2002 not one state regulator had asked Chubb about these, and that state regulators aren't equipped to regulate this type of thing. "Federal Systemic Risk Regulation is happening" and while "systemic" is hard to define, there may be a role for the ratings agencies and wondered whether it would be more than solvency regulation.
Noting resistance to this movement, Mr. Degnan said insurance agencies are so numerous and such effective lobbyists and that agencies favor the state system. I assume this is because agencies compete in niches such as geographical areas that global or national brokers don't serve as well.
Noting that he's a Democrat, Mr. Degnan told the audience to be very aware of "economic populism" in Washington and while the industry might enjoy federal oversight, it might watch what it asks for.
Noting that trial lawyers own Democrats, Mr. Degnan warned of the ascendancy of the Trial Bar. Citing one of the "very few" positives from the George W. Bush years, Mr. Degnan cited good legislation that kept the trial lawyers down (e.g. District Attorneys outsourcing to trial lawyers). "Even the stimulus bill had pro-plaintiff language." Part II tomorrow.
Always good to see clients, friends and even some folks who admitted to being readers of this blog. We're in the process of redesigning www.advisen.com and will be featuring blog posts from Dave Bradford and me among others and pull in from other favorite commentators.
Dave presented at PLUS about the correlation of bankruptcies and D&O loss and the audience really seemed connected to this important topic. The findings Dave presented were a small part of the research Advisen can conduct and we are looking for equity partners in the project.
This means firms with interest in getting a securities litigation risk score for all U.S. public companies based on their risk of bankruptcy should contact me. By joining others in the initial funding partners will be the only recipients of these risk scores. mpower@advisen.com if interested.
VJ Dowling who I enjoyed meeting at the Allied World party (they have a company rock band which did some good covers), provided a bit of color to Dave about the performance of Odyssey Re (see earlier post about trailing twelve month market cap performance for commercial insurance companies).
Apparently Odyssey's CEO has said he'd love to claim underwriting genius but it was the brilliance of their chief investment officer who foresaw the credit crisis and bet accordingly. If you look at the chart he must have been selling what Joe Cassano at AIG was buying.
We all know stocks are down and that the financial services sector has been hit the hardest, but I thought it interesting to note the relative performance of the commercial (re)insurance underwriters.
The chart shows that amazingly there are 2 firms in Odyssey Re and Navigators that are up in market cap in the last 12 months.
Unsurprisingly, the firms most in the news including AIG, Hartford, XL & Swiss Re are the firms losing more than 80% of market cap.
I believe the prices reflect investor's opinions of the investment performance and exposure to credit insurance more than underwriting performance, but those underwriting loss ratios will be a big driver of market cap growth as the big claims from subprime and the credit crisis make their way through the system and reserves are set.
E-mail support@advisen.com to get charts like this and other insightful data and analytics.
Advisen has just published a 38-page report on securities litigation and new challenges to Boards of Directors and the D&O insurance market. Securities class action suits – which were a minority of securities suits filed in 2008 – no longer are a reliable barometer of public company D&O insurance trends.
Methodologies used by the D&O market to price trends in the past are no longer relevant. The Advisen report goes well beyond anything published by other researchers to break out all forms of securities litigation that might trigger Directors & Officers or Errors & Omissions coverage and details shortcomings in D&O claims management that are contributing to higher defense costs.
To help readers track potential exposure by company, Advisen’s report includes the list of companies facing lawsuits in 2008 and the list of companies facing multiple lawsuits over the past thirteen years.
The information contained in Advisen’s report is not freely available on the web or in any other source and is more complete and relevant than reports from other sources which charge far more for their reports.
Among my favorite quotes in the report from an Advisen customer is “We miss Bill Lerach”.
The Advisen report contains new research but follows a series of Advisen research papers detailing the impact of the subprime and credit crisis on the D&O market. The running tally by Advisen now shows more than 660 major lawsuits from this global economic trauma including 148 securities class actions.
Chad Roth has done a terrific job getting to know the markets and market players and below are Chad's notes from today's NY chapter meeting which touches on new and interesting hot topics in the D&O market with some comments in CAPS about ideas we have. Feel free to share your ideas or needs in this area so we can help. Thanks, Mason
I attended this morning's RIMS Chapter Meeting focusing on D&O. The moderator of this session was Brian Wanat (Aon). The panelist were Mike Price (HFP), Tony Galaban (Chubb), Mike Smith (AIG), and Scott Meyer (ACE).
Here are a couple of thoughts / notes I jotted down during the session.
- With all the FI issues out there, portfolio management seems to be a big topic. Making sure your book is diversified is necessary to weather subprime. I was thinking Advisen should try and put together some type of e-mail that describes some of the off-line work we can do w/ to help senior management at carriers better understand their book and explain it to their superiors. Taking some of the data Advisen can provide and then tying it in with their loss info could be kind of powerful. Any thoughts? TWO THINGS WE CAN DO: (1) WE CAN RUN THEIR POLICYHOLDER LIST AGAINST OUR VARIOUS INDUSTRY/FINANCIAL FIELDS TO IDENTIFY THOSE CLUSTERS OF COMPANIES MOST LIKELY TO REPRESENT ACCUMULATION RISKS. I'M NOT EXACTLY SURE OFF ALL THE KEY INDICATORS WE SHOULD BE LOOKING FOR, BUT I SUSPECT OUR CLIENTS HAVE SOME IDEAS. (2) LOOKING ACROSS LOBs, MSCAd's RELATED CASE FEATURE CAN BE USED TO MODEL ACCUMULATION RISK.
- Red Flag: A red flag that the markets seem to be looking at is large debt payments due in 2009. Typically in the past a company might refinance their debt before these large payments. Given the current credit environment, they might not be able to refinance or it may be it a higher rate. It may be a fun little exercise to create a list of the companies with the highest debt payments due in 2009. Maybe release that list in conjunction with the PLUS D&O Symposium.
- Counter Party Risk: They were saying how some risk managers are starting to ask more questions about the carriers they use. They want to make sure that those carriers will be around to pay their claims. It seems like they have lost faith in the rating agencies.
- Defense cost is still a hot topic. Underwriters are curious as to who the outside counsel is on their risk and the relationship. I'm not sure what we can do here, but this topic is not going away. It would be interesting if we could do some analysis of the counsels involved in MSCAD cases. DEFENSE COST IS GOING TO BE A MAJOR PART OF OUR FORTHCOMING REPORT ON 2008 SCAS ETC. IN THE NEW ENVIRONMENT, PLAINTIFFS FIRMS ARE BRAINSTORMING NOVEL NEW THEORIES AND ARE FILING MORE CASES IN STATE COURTS, WHICH WILL MAKE IT MORE DIFFICULT TO CONSOLIDATE CASES INTO LARGE CLASS ACTIONS. AS A RESULT, DEFENSE COSTS ARE LIKELY TO SKYROCKET.
Chad M. Roth Advisen Ltd. +1.212.897.4792 desk +1.917.428.8966 cell croth@advisen.com
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.
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.
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.
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.
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.
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.”
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.
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.
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.
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.
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,' "
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.
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