Notes from Paradise (Island)

While softening conditions in many areas of the commercial insurance market have standard lines insurers competing for business in lines that have previously been the province of the excess and surplus market, leaders of the association representing managing general agents see opportunity in the current market conditions.

“It’s the old half full, half empty cup,” Euclid G. Black, president of Black/White & Associates Inc. in Henderson, Nev. and president-elect of the American Assn. of Managing General Agents, said earlier this week at the AAMGA’s annual conference at the Atlantis Resort on Paradise Island in the Bahamas.

With the “surfeit of surplus” in the current market, “everyone’s looking at new ideas,” Mr. Black said. “If you’re looking at the cup of opportunity, it’s brimming.”

Other top AAMGA officers offered similar views.

“Companies have surplus. There’s so much money out there and they’re looking for ways to use it,” said Scott M. Anderson, owner and executive vp of  the Concorde General Agency in Fargo, N.D.,  and immediate past president of the AAMGA.

“There’s always been a need to be flexible and adapt to changing market conditions,” said Bernd G. Heinze, executive director of the AAMGA in King of Prussia, Pa.

The association’s leaders noted that for companies looking to enter a new market, distribution can be one of the biggest barriers, and the MGAs are a proven commodity in product distribution. Also, many buyers are looking not just at rate, but service, they suggested.

Service, according to Thomas K. Albrecht, the AAMGA’s new president and vp at Southern Insurance Underwriters Inc. in Montgomery, Ala.,  ”is one thing that we control. When someone is out there in the market trying to choose, it’s often not just rate.”

I’ll be writing more about the AAMGA’s annual gathering in an upcoming issue of Industry Focus.

All in

A lot of folks in the industry have been offering opinions on Florida’s decision to rely on its state-run Citizens Property Insurance Co. and its state-sponsored Florida Hurricane Catastrophe Fund in order to bring property insurance rate relief to homeowners in hurricane-exposed areas of the state.

Many have suggested that state lawmakers are subsidizing development in high risk areas of the state, increasing the exposure to future storms while transferring the cost of insuring those properties to homeowners in lower risk areas. In fact,  those were among the points raised in a study by Milliman Inc. released this week that was commissioned by the Property Casualty Insurers Assn. of America.

Others, including Milliman and the PCI, say the state is engaging in a high stakes gamble, one that threatens to send Florida to the bond markets seeking tens of billions of dollars to pay claims should a one-in-25-year storm strike. Such a bond isssue would dwarf any previous single municipal bond offering, and could potentially wreck the state’s credit rating in addition to burdening taxpayers for years to come.

Okay, as if Florida lawmakers rolling the dice on a future hurricane isn’t enough, this morning I see this, an Associated Press report that the Florida Lottery says it won’t pay a $500,000 prize to the holder of a $20 scratch-off ticket because lottery officials say one of the numbers on the ticket is a misprint! According to the AP story, while the matching numbers on the card made it appear to be a winner, scanning its bar code indicated it wasn’t a winning ticket.

We got a release from Florida CFO Alex Sink the other day announcing the names of appointees to the Task Force on Citizens Property Insurance Claims Handling and Resolution, and I didn’t see anybody on the list identified as a state lottery official. Still, the situation gives one pause.

Everyone knows that even insurance companies that have been in the business for decades occasionally provide customers policy documents containing typos and misprints.

Follow the money

Private equity’s been much in the news this week, what with the news that New York-based Cerberus Capital Management will buy more than 80% of automaker Chrysler from DaimlerChrysler A.G.

In that case, much of the talk has centered on what impact the private equity investment might have on Chrysler’s future in terms of the possible sale of Chrysler assets, job cuts or management changes.

It was interesting, then, to hear a discussion yesterday on the impact the new capital that’s been entering the insurance business in recent years might have on the way the insurance industry does business. The upshot, according to the group discussing the issue, was that the new capital coming from private equity funds and others in the capital markets generally bodes well for the insurance business.

The event was the annual Harold H. Hines Jr. Memorial Symposium, sponsored by the Chicago Chapter of the Risk & Insurance Management Society Inc., the Insurance School of Chicago and Business Insurance.

Panelists included Tom Golub, president and CEO of broker Beecher & Carlson in Atlanta; Christopher M. Lewis, vp, alternative market solutions, P&C capital management at the Hartford Financial Services Group Inc.; and John J. Waller, managing director and co-founder of Chicago-based investment bank Cochran Caronia Waller.

According to Mr. Golub, those behind the new capital are “tough” in looking to get the returns they seek on their investments and will turn over management teams until they get it. But, that can benefit the insurance industry by bringing new talent into the business, he said.

And, he added, with the data the industry now possesses and improved technology increasing its efficiency, ”the industry’s really in a position to deploy capital well. . . and on the broker side I think it’s going to make it a better business.”

Mr. Waller suggested that the presence of the new capital entering the insurance industry–some of it admittedly not long-term, but rather more opportunistic in nature–suggests that insurance has finally gotten to the same point as other industries, supported by different tranches of capital, some permanent and some temporary, entering and leaving as the investment climate shifts.

“The financing of the industry over the past five years has dramatically improved and it’s better for everyone in the industry,” he said.

One area where the new capital doesn’t seem interested in playing, however, is terrorism insurance.

“Today we still don’t have a fundamental understanding of where a terrorism attack will occur, what kind of attack will occur and when it will take place,” Mr. Lewis said. “That is just not a risk that is insurable in the classic sense.”

“We have met with Wall St., hedge funds, private equity, they don’t want it,” he said.

“We’ve worked pretty hard with investment firms trying to come up with a TRIA-type company,” Mr. Waller said. ”And what you come up with is nuclear waste–nobody will touch it.”

“We couldn’t find smart money or dumb money willing to take it,” he said.

More fear than action

While businesses are increasingly concerned about the threat of political violence is increasing,  only 37% of those surveyed for a new Lloyd’s of London study believe they have a solid understanding of the risks their companies face.

What’s more, 22% of those surveyed said they don’t systematically assess the political violence risks their companies face. And 23% of respondents said their companies have no business continuity plan, while 14% said their existing plan has not been updated, despite the need to do so in the face of growing political violence exposures.

Lloyd’s conducted its study, Under attack? Global business and the threat of political violence, in conjunction with the Economist Intelligence Unit, surveying 154 executives from companies of various sizes and industries from around the world, then following up the survey with interviews of senior executives, terrorism experts and others.

The survey found that 37% of those companies polled had made decisions to avoid investments in some overseas markets as a result of political violence, while 23% of those surveyed said they have increased insurance levels and/or spending over the past five years in response to the threat. And 20% said the possibility of political violence led them to “not pursue an otherwise promising business activity.”

Lloyd’s said its survey showed companies particularly focused on four key emerging threats: supply chain risk is an increasingly important consideration for companies; the risk of IT systems becoming the target of cyberterrorism has led 40% of those surveyed to increase spending on IT security; “home-grown” terrorism has forced companies to tighten their procedures in such areas as employee vetting, choosing sub-contractors and selecting locations for operations; and an increased recognition of chemical, biological, nuclear and radioactive attack risk is leading companies to develop and test continuity plans for addressing CBNR exposures.

As companies look to address the political violence risks they might face, Lloyd’s says they aren’t always investing their time and resources appropriately. “The main reason seems to be that they are not doing enough to analyze and understand the real risks against their business,” the report said.

Most companies, 65%, rely on international news media as their source for information on political risks, Lloyd’s said, a “sensible start,” though “too few go any further,” with only 43% looking to local media in troubled areas for information and only 49% taking advantage of business-to-business information sharing and forums.

“Most worrying,” the report states, “only 39% have a mechanism for employees to feed information they have learned into political risk analysis, yet someone working long term in a strife-torn country will often have a better sense of changing risks than international reporters who jet in and out.”

Guarding the links

Back in Chicago following this year’s RIMS conference in New Orleans, and I’m going through my notes and the various business cards I collected, remembering the many interesting discussion I had there about a variety of industry trends and new business developments.

Among those conversations was one with Stephen W. Connor, vp of the Logistics Industry Practice at ACE USA in Roswell, Ga. It was actually a bit of a followup on a conversation we’d had at a prior RIMS about some of the issues involved with the development of the third-party logistics business and businesses’ increased reliance on them to provide needed supplies and deliver finished product.

One of the developments since we’d talked last, according to Mr. Connor, was an increased recognition among top executives of just how important a role those “3PLs” play in their businesses.

“I think one of the exciting things for everybody involved in supply chain and the 3PLs and the service industry surrounding 3PLs is that at long last C-level executives of corporate America understand and get that supply chain has a direct impact on their business and, more important, has a direct impact on their financials,” Mr. Connor said.

As corporations’ grow ever more reliant on third-party logisitics providers to support just-in-time inventory processes and deliver products from manufacturing sites around the world to consumers’ homes or offices in speedy fashion, the challenge of addressing the risks those 3PLs face is a complicated one.

In fact, a number of different exposures potentially dovetail in a 3PL, Mr. Connor said, among them property, wet marine, casualty and professional liability, as well as such risks as cyberliability and political risk. “Supply chain, it covers all areas,” he said.

Mr. Connor’s recently written a white paper on risk management in the logistics industry, which is available for download from ACE.

View from the top

A group of top insurance industry executives shared their views on everything from catastrophe modelling to optional federal regulation of insurance during a Leadership Panel Luncheon Tuesday at the annual conference of the Risk & Insurance Management Society here in New Orleans.

Asked whether there is “real science” to catastrophe models and insurers’ underwriting following Hurricane Katrina, Evan Greenberg, president and chief executive officer of Hamilton, Bermuda-based ACE Ltd., said, “There is a science and there is a framework.” That fact shouldn’t give insurance buyers excessive comfort, however, he cautioned.

“It’s a crude science and it’s an evolving science,” Mr. Greenberg said. “And those models probably are as good as the next cat season.”

While noting that there is an “evolution” in risk modeling and insurers’ use of such tools in their underwriting, Shivan S. Subramaniam, chairman and CEO of Johnston, R.I.-based FM Global, told the audience that what the models provide is a tool for helping insurers manage their aggregations of risk.

“The thing to remember is that models don’t predict disaster,” he said. “What they do do is predict what aggregations should be given a certain set of circumstances.”

On the subject of supplemental commissions and other forms of incentive-based compensation of brokers by insurers, panelists views were mixed.

Brian M. Storms, chairman and CEO of New York-based broker Marsh & McLennan Cos., said the subject is an industry issue, not just a broker issue. He noted that like others, Marsh is making a “significant investment” in the industry, through its investment in technology to facilitate transacting business between insurer and insurance buyer, for example. “That cost has to be shared,” he said.

Gregory C. Case, president and CEO of Chicago-based Aon Corp.,  said until his company understands what the definition of “supplemental” is, it can’t make a decision on whether to accept the method of broker payment offered by some insurers. But he stressed the need to make buyers aware of the value brokers provide, and the importance of talking about “value to price.”

J. Patrick Gallagher Jr., chairman, president and CEO of Itasca, Ill.-based Arthur J. Gallagher & Co., emphasized the benefit of “transparency” in the broker-client relationship, though Mr. Greenberg argued that “Transparency does not eliminate conflict.”

John Amore, CEO general insurance for Zurich Financial Services, said he thinks there is a need for flexibility and more than one type of compensation system “if you’re going to deal across different customer segments and different size brokers and agents.”

Regarding the debate over an optional federal charter for insurance in the United States, Martin J. Sullivan, president and CEO of New York-based American International Group Inc., noted that when his company goes to other markets around the world it meets with a single regulator, unlike in the U.S. where it currently faces different regulators in each state.

“We need one regulator in the United States,” Mr. Sullivan said, adding after a brief pause, “But I do love all my regulators.”

The executives discussed various other subjects as well during their 90-minute or so chat. I’ll be writing about the session more fully in an upcoming issue of Industry Focus.

Old trends, new beginnings

This year’s annual conference of the Risk & Insurance Management Society began in earnest Monday with the usual discussions of market conditions and various insurance industry companies using the event as an opportunity to spotlight new products or marketing campaigns to the assembled commercial insurance buyers.

Much of the discussion about current pricing trends reflected a split commercial market, with coastal property catastrophe markets remaining firm, while property insurance prices in non-cat prone areas show signs of softening, as do many casualty lines.

RIMS also is continuing to promote enterprise risk management to its members at the current conference, with the topic of an enterprise-wide approach to risk discussed in the opening session and serving as the subject of a session track during the week.

Broker Marsh Inc. is using this year’s RIMS as a backdrop for unveiling its new marketing campaign, focused on the “upside” of risk, the rewards to a business associated with properly managed exposures.

And for Travelers Insurance Cos. Inc., this year’s RIMS gathering is an opportunity to display its recently reclaimed red umbrella, recovered when Citicorp decided to sell the icon it had acquired with Travelers in 1998, and kept when it spun the insurer off a few years later.

Now, with its umbrella back, Travelers is set to roll out a new marketing campaign, and aired new television spots during a reception Sunday night. The TV spots are to air in upcoming months during major sporting events, in prime time and during morning news programs, giving plenty of play to the Travelers icon, which even after year’s of Citicorp ownership still enjoys a remarkably high unaided brand awareness for the insurer in market testing.