Europeans Seeking Reinsurance Solvency again!

Solvency II is the updated set of regulatory requirements for insurance firms that operate in the European Union.

Based on this new European regime, Aon Benfield  reports in a press release [November 4, 2010]  that the formulas for calculating natural catastrophe capital requirements under the proposed Solvency II Standard Formula are outdated and ignore 15 years of evolution in the field of risk modeling. In response they are offering a suite of services to help re/insurers [game the system] make the most of the catastrophe requirements.

The basic calculation methodology being used under Solvency II overlooks these key aspects of risk and data modeling says Aon:

  • Location granularity (CRESTA zone data is insufficient)
  • No differentiation by occupancy (residential, commercial or industrial) or construction, age and height
  • Single damage function so no differentiation between buildings, contents and business interruption cover
  • No application of limits and deductibles

Unrelated to any of the above, it was released today [November 10. 2010] that:

Andrew Appel, chief operating officer of global broker Aon, will leave the company at year-end.

One should always endeavor to make the innocuous seem conspiratorial.  Of course one might argue that in the someone opaque world of global reinsurance the conspiratorial is at least mundane if not exactly innocuous.

Insurance costs hit home, for all of us – including the good neighbor and LA Insurance Commissioner Donelon, too

“One thing is certain.  The more we all spend on insurance, that’s less money that we spend on other things, like cars, and refrigerators, and clothing.  Until the problem is solved, our recovery will never be complete…”

WLOX reporter Doug Walker hit the road for a week in January to learn more about the insurance situation and found Insurance costs hit home, for all of us.

During my travels, I met a widow whose insurance bill has climbed from $2000 a year in 2004 to more than $7000 now.  Another homeowner was told his insurance was going up from $2400 a year to $6300.  He finally got a policy through an independent broker with Lloyd’s of London for $4000.  The list goes on and on.

Indeed, the list does go on and on and, as Walker points out, insurance cost is not just a Mississippi issue.  State Farm found that out yesterday and Rebecca Mowbray caught the story for the Times Picayune – Insurance Commissioner Jim Donelon rejects 19 percent statewide rate increase request by State Farm.

“This is an out-and-out rejection,” Donelon said. “We’re so far apart, we don’t feel like there’s a reasonable chance for compromise.”

State Farm, which is free to submit a new request, said that it was stunned and disappointed by the rejection…

If the request had been granted, State Farm would have been able to collect an additional $67.6 million from its customers in Louisiana. (emphasis added)

State Farm’s requested increase would have pulled $67,600,000 from Louisiana’s economy.  Calculated for the items listed in Walker’s post,  there would be  2380 fewer new cars purchased or 56,333 new refrigerators sitting in stores – or, worse yet,  the 781,403 school-age Who Dat’s would not be wearing a replica of Drew Brees’ Super Bowl jersey.

Donelon’s rejection is the culmination of a battle that has been brewing over the past year over State Farm’s use of a hurricane computer model that seems to project a need for much higher rates than its competitors. Continue reading “Insurance costs hit home, for all of us – including the good neighbor and LA Insurance Commissioner Donelon, too”

Is Chaney the Grinch who stole insurance industry’s Christmas?

He puzzled and puzzled till his puzzler was sore. Then the Grinch thought of something he hadn’t before! Maybe everyday doesn’t have to be Christmas for insurers who want higher rates for the shore.  Maybe Christmas…perhaps…means zones are no more!

They’re finding out now that no Christmas is coming! They’re just waking up, I know just what they’ll do. Their mouths will hang open a minute or two, then the Whos down in Whoville will all cry, “Boo Hoo.”

“We won’t take zone filings for the time being. I think the larger carriers have abused that privilege. We’re trying to bring some reasonableness to how they handle their rates.” Continue reading “Is Chaney the Grinch who stole insurance industry’s Christmas?”

Lets connect the damages verdict in Bossier to reinsurance, securitization via cat bonds and global finance

I sometimes pinch myself someone as financially sophisticated as Mr CLS posts with us on Yahoo Allstate. Before I get to his post there is one concept that must be understood in reinsurance. Under traditional reinsurance the ceding party (such as State Farm) gets to take a credit on their balance sheets for the risk transferred to the reinsurer for the amount of reinsurance purchased. A problem with Cat Bonds is the lack of specific attachment points in loss payments (unlike traditional reinsurance) means the collection of the cat bond trust proceeds is de-coupled from the amounts actually paid to the insureds for their losses making it possible for an unsavory insurer to both collect for losses via the Cat bonds and stiff their insureds.

So what happens when traditional reinsurance is then backed by Cat bonds for a homeonwers policy which was also bundled and sold via securitization (think life settlements)? Mr CLS asked that exact question this morning and as per usual he followed the money to Bermuda:

Securitization for HURRICANE risks ABOVE the Hurricane Storm Surge water line.

“If I couldn’t differentiate between wind and water, I could NOT pay”, said adjuster Matthew Thiele.

The final version said “When the investigation indicates that the damage was caused by excluded water and the claim investigation does not reveal independent windstorm damage to separate portions of the property, there is NO COVERAGE available under the homeowners policy.

So where is the “Transfer of risk” through securitization?

What was the “credit” taken on liability balance sheets or off balance sheets for this transfer of risk?

Would a balance sheet credit be taken (say in the securitized HO policy of Bossier) for:
a) $2,300 (the initial payment loss)
b) $93,480 (the supplemental payment 4 years later)
c) $650,000.00 (the full policy limits)

S&P rate Alpha Wind 2000-A Ltd’s $90 million

These HURRICANE securities provide $90 million of retrocessional coverage to ARROW RE, a wholly owned Bermuda reinsurance subsidiary of Goldaman, Sachs & Co. Arrow Re has reinsured a $100 million portion of an excess-of-loss treaty covering STATE FARM Group (State Farm) policies, primarily homeowners, in Florida. This securitization represents a 90% cession of that risk to the holders of the securities. Continue reading “Lets connect the damages verdict in Bossier to reinsurance, securitization via cat bonds and global finance”

$1.3 million reinsurance price fixing settlement announced

Attorney General Richard Blumenthal…announced a $1.3 million settlement with The Hartford Financial Services Group, Inc., resolving claims that it participated in several anticompetitive schemes that illegally inflated insurance and reinsurance costs nationwide. h/t Insurance and Law

The Hartford and Guy Carpenter have a different spin on the story.  Naturally.

A spokesman for The Hartford said in a statement by e-mail, “We are pleased to have come to an agreement with the attorney general’s office. The Hartford has been out of the property and casualty reinsurance business since 2003, and we agreed to this settlement to avoid ongoing expenses related to the case.

“We believe our participation in the reinsurance facilities was lawful. We settled to avoid the costs of litigating with the attorney general over a business that The Hartford exited years ago.”

In an e-mail response to the attorney general’s accusations a spokesperson for Guy Carpenter said, “Guy Carpenter shares the view expressed earlier today in a statement made by The Hartford that: participation in these reinsurance facilities was, and is, lawful.

“Guy Carpenter continues to believe that the Connecticut Attorney General’s complaint is unfounded. These facilities result in improved terms and pricing of reinsurance for small- and mid-sized clients.”

Back now to Attorney General Blumenthal’s release:

“The Hartford is making history by this first-in-the-nation settlement—and drawing back the cloak of secrecy of a series of illegal price-fixing conspiracies that inflated insurance costs by hundreds of millions of dollars nationwide at the expense of 170 insurance companies and their customers,” Mr. Blumenthal said. Continue reading “$1.3 million reinsurance price fixing settlement announced”

Jim Brown devotes a radio segment to the dysfunctional Louisiana insurance market and AIG’s insolvency

Yep he did. Keep pounding Jim, AIG policyholders need not also be bagholders too.

[youtube=http://www.youtube.com/watch?v=IEoK2BdDtj4]

Slabbed Daily July 22-24. Lets tie a few things together

ying-yangThere have been a good number of news tidbits that do not necessarily constitute a post here on Slabbed on their own but when taken together tie up several loose ends and lend context to a story that does merit it’s own post in Mike Chaney’s recent insurance forum held last Thursday and Friday here on the coast.  So let’s backtrack a week and shake us up slabbed insurance cocktail by beginning with Anita Lee’s coverage of day 2:

Gov. Haley Barbour joined the coastal insurance debate Friday, telling an audience he believes regional compacts would be the best way to regulate wind coverage in coastal zones from Texas to Maine.

Barbour introduced The Travelers Insurance Cos. president, Brian MacLean, to explain the company’s proposal for improving the coast insurance market. Insurers have pulled back from coastlines in recent years, leaving state-run wind pools to fill the void.

Wind pools were intended as insurers of last resort, but their market shares have grown to levels that experts agree are unsustainable. Insurance works by spreading risk, not concentrating it.

Haley has been conspicuously absent from the insurance scene refusing to comment on the litigation while offering cheap lip service to Gene Taylor’s multi peril bill. I suspect he and the State GOP has been searching for a way to throw a bone to the people on the coast that helped elect him while working hard to preserve GOP big business bonafides with the campaign money machine that is big insurance. Continue reading “Slabbed Daily July 22-24. Lets tie a few things together”

Slabbed Daily July 13: Presidential Daily Briefing Edition

There is a good and topical insurance news story today that caught my attention, especially since it relates to a post I did on the recently released National Association of Insurance Commissioners whitepaper on their recommendations for a national response to the problems related to availability and affordability of catastrophic property and casualty insurance. In that white paper the Commishes reported there was plenty of private market capital available to back the risks. Of course I think the Commishes are all wet on their conclusions and for some backing on that assertion I offer one of our favorite insurance people here on slabbed in support of my conclusions, Mr Warren Buffet himself. The Wall Street Journal (subscription required) has the story:

Berkshire Hathaway’s reinsurance business, a big profit center for the diversified company, has pulled back from one of the more volatile corners of the reinsurance market: catastrophic property damage.

In recent years, Berkshire Hathaway Reinsurance Group made a push into the profitable business, in essence writing insurance for other insurers that wished to offload some exposure to big losses like hurricane damage. Just a few years ago, Berkshire pulled in $2.2 billion in premiums on a year that saw no major storms.

But recently, Berkshire has become more cash-constrained. Its retreat in “cat” reinsurance suggests it has become more risk averse amid a recent downgrade to its credit rating, a series of hits to Berkshire’s bottom line and ongoing turmoil in the economy.

In May, at the company’s annual meeting in Omaha, Neb., Berkshire Chairman Warren Buffett said the company is “doing less natural risk in terms of hurricanes because…we don’t have as much excess capital as we had a couple years ago.” At the end of the first quarter, Berkshire had slightly less than $20 billion in cash, its lowest level in years. Continue reading “Slabbed Daily July 13: Presidential Daily Briefing Edition”

The Commish sets up a “Stakeholder” Meeting. If he’d only invited all the stakeholders…..

I’ve been hanging onto Anita Lee’s story from June 27th (H/t Editilla for the ease in finding the link) on Insurance Commish Mike Chaney’s upcoming insurance forum for almost 2 weeks now trying to figure out how to make all the puzzle pieces fit. Puzzle pieces? Now our readers are confused too but perhaps not as temporarily disoriented as I was left after seeing the Commish that same weekend being interviewed by WLOX’s Dave Elliot late that Sunday night. It was only this week that I figured out the Mike Chaney dichotomy to the point where I can convey the man’s fundamental contradictions and the differences between Mike Chaney the politician and Mike Chaney the ideologue. I’ll begin with Mike Chaney the politician and his upcoming forum designed to coincide with the National Governor’s conference scheduled for later this month in Biloxi as we visit with Anita Lee and the Sun Herald:

A wide variety of measures aimed at improving the coastal insurance market will be explored at a multi-state insurance forum scheduled on the eve of the National Governor’s Association conference.

Mississippi Insurance Commissioner Mike Chaney expects key stakeholders at the conference, including insurance commissioners from coastal states, insurance industry representatives and mitigation specialists. Chaney also hopes Gov. Haley Barbour, who is on the agenda, will bring coastal governors with him.

“It’s top-notch,” said Joseph Ammerman, a spokesman for the Mississippi Insurance Department, the host of the two-day forum July 16 and 17 at IP Casino Resort. “We’ve got a great lineup of speakers. The commissioner has been telling everybody who has agreed to speak, ‘We want answers.’

“We want to come away from this conference with some strategies about how to make things better on the Coast. We’re looking for solutions.”

I’d submit Mr Chaney and MID isn’t looking too hard for answers because the speaker lineup, while impressive, does not include a single consumer advocate. Mr Chaney is an industry guy who evidently doesn’t see the need for a consumer perspective at his forums. Mike Chaney the pol is always quick to take credit for the state funds given the windpool by the legislature to reduce premiums and that is what left me confused. You see, Mike Chaney the ideologue doesn’t believe in insurance subsidies for consumers nor any solution that involves governmental involvement beyond providing a free government backstop to for profit insurers …at least according to the 14th draft of the National; Association of Insurance Commissioner’s whitepaper titled: Natural Catastrophe Risk: Creating a Comprehensive National Plan. I’ll start with the AM Best story on the whitepaper before we delve deeper into Mssrs. Chaney and Richardson’s dissent: Continue reading “The Commish sets up a “Stakeholder” Meeting. If he’d only invited all the stakeholders…..”

more than one way to skin a cat – nowidocit

Chalk it up to the visit of one of my “grand dogs”  but cats of no kind were on my mind as I was reading the comment SLABBED reader CLS posted on the Allstate Finance Board:

One could say I was barking up the wrong tree with the few words I changed:

Dell State Farm, Nationwide, Allstate, USAA, and employees KNEW that they were NOT ALLOWED to sell cameras bill wind damge to the National Flood Insurance Program UNDER the [WYO] CONTRACT that COVERED Dell’s the Company’s sales and claims handling of the GOVERNMENT SALES Flood Insurance Program…hedge cat 5

Simply stated, there’s more than one way to skin a cat.  For example, you can cat a hedge or hedge a cat.

There is also more than one way an insurer can commit fraud:

Justice Pierce: I’m giving you – the example is 95 percent of the home is destroyed, the flood comes in and gets the other five percent and you know that. Does your interpretation of the word “sequence” mean you pay zero?

Mr. Landau: YES, your Honor.

Just change a few words and the story is the same.

When your interpretation of the word “sequence” means you pay zero on claims of wind damage and your policy excludes flood, then the hurricane reinsurance you purchase doesn’t transfer any risk – and that is NOT ALLOWED.  Not in any “sequence”.