Flying the indifferent skies

July 26, 2007

I saw another interesting piece on the Knowledge@Wharton site today, this one offering a perspective that will come as little surprise to anyone who travels regularly.

The air travel experience these days is frequently bad to miserable, according to the article, and as bad experiences have become the norm airlines have largely stopped caring about customer service.

The piece, “Feel Free to Move About the Airport: Turbulence Continues to Roil the Airline Industry,” quotes Wharton Professor Serguei Netessine reflecting on the new reality of airline customer service: “Previously airlines worried about dissatisfied customers. Now I don’t think they worry about it because the customer service at all airlines is so horrible.”

For this year’s first five months, major airlines’ on-time arrival rate was just 73.5%, the lowest for the same period in seven years, according to the article. Meanwhile, complaints about airline service were up 49% from May 2006.

Not surprisingly, the Knowledge@Wharton article cites airlines’ reduced capacity as the culprit behind much of the decline in service. Airlines have cut capacity in an effort to operate profitably as demand for seats has risen. Coupled with airlines’ tendency to overbook flights in an effort to avoid flying with empty seats, and the American airline industry’s reliance on a hub-and-spoke model, problems tend to escalate quickly when bad whether or other factors force flight delays or cancellations.

Is there any cause for hope on the horizon? The Knowledge@Wharton piece notes that U.S. Department of Transportation officials are considering increasing the “bumping penalties” airlines are required to pay passengers bumped from their flights. And Congress has considered various “Airline Passenger’s Bill of Rights” proposals.

Ultimately, though, the piece suggests that some inherent elements of the airline business–its capital intensive nature and tendency to experience boom and bust cycles–along with an air traffic control system badly in need of upgrading and skies becoming ever more crowded with an increased number of corporate jets don’t bode well.

Perhaps the best we travelers can do is take the advice of a Department of Transportation air travel guide quoted in the article and when possible fly defensively, assuming that what can go wrong will and trying to allow for it in our travel plans.


A walk on the wild(life) side

July 24, 2007

Walking our dog, Algren, the other night, I found myself face-to-face with a lesson on the unpredictability of nature and the risk of unintended consequences.

Delivering the lesson was a very healthy looking coyote checking us out from the other side of a chain-link fence separating the park in which Algren and I were walking from a local cemetery. And while the coyote backed off a bit when Algren barked, she quickly showed she wasn’t timid, coming back up to the fence and even striking a play bow! I judged the coyote to be about Algren’s size–roughly 60 pounds–though a little longer legged and quite pretty.

As a city dweller, for many years wildlife experiences have largely been limited to pigeons and squirrels and the occasional rat. In recent years, though, as elsewhere geese have become more numerous in Chicago, and walks through our lakefront neighborhood or in the park have produced sightings of such exotica as possums and raccoons. Efforts to protect migratory bird habitat along the lake, meanwhile, have proven quite successful, increasing the variety of birds we see and hear, and even leading to various wading birds visiting the lagoon in the park district golf course that runs along the lake near our place.

This wasn’t my first urban coyote encounter. Late one fall afternoon a couple of years ago, as the sun sunk behind the high-rises on the west side of Lake Shore Drive, I did see a coyote on the lakefront golf course, first mistaking it for a scrawny German shepherd, then recognizing its true identity as I got a bit nearer. That one never let me get too close, though, unlike our friend in the cemetery, though this latest one could have been smart enough to recognize the security provided by the fence between us.

As in other cities across the country, coyote sightings have become more frequent in Chicago in the past couple of years. The story of one that walked into a downtown Quiznos sandwich shop several months back and settled down in the beverage cooler got a lot of play, and today’s Chicago Tribune had an account of an attempt to catch another coyote in Lincoln Park yesterday that turned into a Keystone Kops-style comedy.

It says something about the unpredicability of nature that this species that once was native only to western North America and was the target of eradication efforts has proven resilient enough to not only survive but to expand its habitat to essentially cover all of North America south of the tundra, and to find a perfectly happy home, evidently, in a most unnatural setting–the modern American city.

As for unintended consequences, they seem to exist on several fronts. One are suggestions by some wildlife biologists that man has helped foster the coyote’s spread in several ways, not the least of which is by dramatically cutting back the population of coyotes’ principal predator in the wild, wolves, allowing them to dramatically expand their numbers.

And I think about a story I read somewhere a few years back that raised the possibility that the coyotes that managed to survive efforts to eradicate them were largely the smartest of the bunch. If true, with evolution taking its course and their primary predator largely removed from the mix, maybe what we’ve got now is a species of super-coyotes, taunting us with their big brains.

Certainly the one toying with the Chicago animal control folks Monday seems to fit that scenario. And I suspect the one I encountered Friday night who’s found the neighborhood near Wrigley Field a nice place to live might as well.

Last thoughts from Berlin

July 23, 2007

I’m back in the office after a week’s vacation following this month’s International Insurance Society seminar in Berlin, and thought I’d offer some final thoughts from that event.

With Solvency II factoring heavily in many discussions during the global insurance executives’ gathering, and companies’ efforts to address risk being a key component of Solvency II, risk management was a topic that came up frequently during the Berlin gathering.

A case in point was a discussion involving Wilhelm Zeller, chief executive officer of Hannover Re, and David Greenfield, chief financial officer of Axis Financial, in which both offered some thoughts on their companies’ risk assessment and risk management efforts.

Mr. Zeller noted that at Hannover Re, the risk management effort is focused on protecting the company’s capital, stabilizing and optimizing results and allowing the German-based reinsurer to profit fully from hard markets. Risk management at Hannover Re is not meant to protect any given year’s earnings, he said, nor is it intended to “protect the mere survival of the company.”

He outlined the “risk hierarchy” as viewed by those involved in Hannover Re’s group risk management program. At the top is reserve risk, followed by exposure risk, mispricing risk, investment risks and other balance sheet risks. To manage the top risk in that hierarchy, reserve risk, the company conducts multiple reserve risk assessments and makes extensive use of external consultants, Mr. Zeller said. “We feel that we can’t get enough input.”

In terms of exposure risks, events like Hurricane Katrina force the company to adjust its assumptions, Mr. Zeller said. That means recalculating the prices required to meet certain risks, he said. “If you can get it in the market, then you stay in the market. If you can’t get it and you are disciplined. . .then you exit,” Mr. Zeller said.

In discussing his company’s risk management efforts, Mr. Greenfield said some of Axis’ more significant risk management strategies include selective diversification, defined tolerance levels and a strict risk selection and management process.

“We’re not afraid to eliminate a previously profitable line of business that is showing greater competition in order to devote our capital to better opportunities,” Mr. Greenfield said.

Asked about the impact stock market pressures can play in companies’ decisions regarding reserve adjustments, Mr. Greenfield alluded to a seemingly very real disconnect between Wall Street’s emphasis on quarterly results and the longer term nature of the insurance business.

“We can spend all afternoon talking about the value of quarterly reporting in the insurance business, where sometimes it takes years to find out whether you’ve made a profit or not,” he said.

I’ll be covering this year’s IIS seminar more extensively in the next issue of Industry Focus.


July 11, 2007

I enjoyed listening to a very good presentation this morning on some of the opportunities and challenges offered by microinsurance.

The talk, at the annual seminar of the International Insurance Society in Berlin, was presented by someone very much involved in the microinsurance effort, Nelson Kuria, managing director of the Cooperative Insurance Co. of Kenya.

Microinsurance is seen by proponents as one tool to help address global poverty, helping emerging businesspeople, entrepreneurs and the working poor to protect their income, the assets they’re just beginning to accumulate and their well-being. We ran a cover story on the topic in the June issue of Industry Focus, noting that a number of major insurers and reinsurers are becoming involved in the effort, seeing it not just as an opportunity to do good, but a chance to do good business.

Aside from micro-health insurance efforts, microinsurance products have thus far proven profitable and sustainable, Mr. Kuria said. But, he noted, for the effort to be successful, insurers have to consider a market that could generously be described as skeptical of insurers’ sales efforts, and make sure they take the steps needed to build a trusting relationship with those new insurance buyers.

“You’re dealing with a highly sensitive sector of the population and a sector that is skeptical of insurance,” Mr. Kuria said. It’s not unusual for the working poor in many Third World or emerging market countries to view those selling insurance as “con men or con women,” he said.

In those markets, even a $5 claim “can be a matter of life and death,” Mr. Kuria said. “So delaying a payment does a high disservice to the development of microinsurance.”

And while insurers are still working on crafting a sustainable micro approach to health insurance, Mr. Kuria noted that the potential value of health insurance to microinsurance buyers “is not micro,” but hugely significant to improving the quality of life.

“The challenge here,” Mr. Kuria cautioned, “is if you come with the same exclusions that are used in conventional health insurance you’re not going to go anywhere.” If you present the buyer with a list of exclusions, he said, “you will be con men.”

The challenge for insurers venturing into microinsurance is to build products that will be simple and sustainable, and will encourage buyers to renew their policies.

And, Mr. Kuria noted, “This is not the kind of market segment that is given to dealing with bureaucracy. They are not patient, so you’ve got to be flexible.”

I’ll post more later from the Berlin gathering, and will cover this year’s IIS seminar in greater depth in an upcoming issue of Industry Focus.

What’s Knut think?

July 9, 2007

With top insurance executives from around the world gathered in Berlin as the European Union prepares to release a framework directive on its Solvency II proposed risk-based capital regime for European insurers on Tuesday, it’s little surprise the new insurer capital adequacy approach was the subject of considerable discussion today at the 43rd annual seminar of the International Insurance Society Inc.

While most of the European industry panelists addressing the issue praised Solvency II as a step towards needed regulatory harmonization in an increasingly global market and, potentially, a source of competitive advantage for European insurers, attendees responding to an instant poll at the end of the day were less certain the measure will live up to its hype.

Asked whether Solvency II was likely to reduce the amount of capital their companies would require, 47% of those at a session on the proposed regulatory measure responded “no.” The results clearly perplexed Karel Van Hulle, head of the European Commission’s unit on insurance and pensions.

Mr. Van Hulle was a participant in this afternoon’s IIS Solvency II panel, during which he predicted that Solvency II’s emphasis on risk management would reduce capital requirements for E.U. insurers that demonstrated quality risk management efforts.

Mr. Van Hulle said he was disappointed with the poll results because a goal of Solvency II is to reduce capital requirements in exchange for better risk management.  “Does that mean you think you can’t do that,” he asked conference attendees.

While they weren’t sure Solvency II would benefit them by reducing their capital requirements, 56% of the insurance executives participating in the instant poll said they thought the new regulatory regime would improve the international competitiveness of E.U. insurers. A smaller percentage expect the regime to benefit consumers, with 43% saying Solvency II would benefit insurance buyers vs. 33% who said it wouldn’t and 22% who predicted no change.

And attendees were nearly evenly split on whether the measure would lead to increased consumer trust of insurers, with 35% saying yes, 30% saying no and 30% anticipating no change.

While IIS attendees appeared somewhat uncertain Monday about the anticipated benefit of Solvency II, there appears to be less ambiguity in Berlin about Knut, the celebrity polar bear cub at the Berlin Zoo. A visit yesterday found a huge queue waiting for a glimpse of the cute little Eisbar gnawing on his handlers’ forearms during the afternoon hour he was made available for public viewing.

And, while Knut is still pretty darn cute, it’s clear he won’t be a cub forever. He already appears to be considerably larger than in most of the photos and posters you see inviting visitors to the zoo.

Timely topic

July 5, 2007

I wonder if there will be much discussion of pandemic risks at next week’s annual seminar of the International Insurance Society. I suspect the subject will come up.

The possibility of an avian flu pandemic likely would have been a topic for discussion at a gathering of the world’s top insurance executives in any case. But, of course, as insurance industry leaders prepare to head to Berlin for next week’s gathering, the subject became even more timely Thursday with German officials indicating they are raising their assessment of the threat of avian flu in the country.

According to a Reuters report, they took the step after the announcement today that more birds there were determined to have died of the H5N1 bird flu virus.

The Reuters account noted that France Thursday also confirmed its first cases of bird flu in more than a year. Last year 13 European Union countries had bird flu cases, the news service said. And the disease continues to spread in Asia, killing two in Vietnam recently.

All in all, pandemic risk is one more timely topic for discussion at next week’s IIS meeting.

On the subject of this year’s IIS seminar, I will be traveling to Berlin tomorrow to cover next week’s meeting, and plan to post to the blog from there. Until then, auf wiedersehen bis Berlin.