Last week I was a speaker at the Financial Institutions Insurance conference in Munich, sharing the platform with Dr. Philipp Wassenburg, Global Head of Casualty Treaty Global Clients/North America, and Alexander Stampf, 
Head of Financial Institutions, both of Munich Re.

Philipp and Alexander are both great guys and have that wonderful and particularly European sense of excitement, professionalism and curiousity about what they do–they are interested in their jobs, rather than simply getting through them. And so many of the younger people at the conference were cosmopolitan, multi-lingual and utterly clued-up about the world and the world they live in, in particular. It was a real buzz, and I came away feeling very invigorated.

After the talk–we were the final slot on Day 2–Alexander took me to the Seehaus in the Englischer Garten for beer, spargel (asparagus) and ham, before I had to hot-foot it back to the rail station to get back out to the airport. Alexander and I share a loathing of commuting and will shortly form the Anti-Commuting Club to encourage the greening of inner cities and an increased use of bikes, local shops, community etc. Or something like that.

The beer is good at the Seehaus, too.

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This is what happens when you start meddling in the insurance markets for short-term political gain — the markets dry up and blow away. In the Gulf and southern states likely to be affected the situation is thus:

• Primary capacity is down by an estimated 30-40%
• Traditional RI capacity is down by about 10%
• There have been cutbacks in the State reinsurance fund
• Capacity from hedge funds has dropped by about 30%

Net result? If they can get it at all, putative insureds are seeing rate hikes of anywhere between 20% and 100%.

If we have a hard hurricane season, the whole area could get a severe stress testing.

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New York state insurance commissioner Eric Dinallo wants to found a New York Insurance Exchange.

Both state and city have suffered from the ravages of the downturn and losses to Wall Street, so the remaining dollars are looking for a new home. So a new RI exchange might seem like a good idea.

Well, yes, but (a) it’s been done before and (b) if Bermuda is the real place to beat the real issue is that taxation there is, what, 15% less than in NY.

So you could just reduce the tax rate in NY, for the same effect?

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Citi analyst Joshua Shanker said reinsurers might get rate increases of as much as 10 percent for 1/1 renewals.

Shankar cited the following factors:

* investment losses,
* large storms,
* accumulated casualty loss trends and
* financial difficulties faced by several of the industry’s largest commercial insurers and reinsurers

as explaining the position, to which I would also add the almost complete drop-off in alternate risk transfer products following the financial rout of recent months.

Perhaps this sort of reporting will do something to stabilise the mad swings we’ve been seeing of late in the share prices of even well-run carriers.

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As from 1/1 Amlin will be out of the credit insurance market (Source: FT).

While they only have less than 5% market share, it’s a further indication of difficulties in the sector, and perceived difficult times ahead for the wider economy.

CEO, Charles Phillips, said that while getting reinsurance for credit insurance was becoming more difficult, the underlying business is going to be tough to make money from in the longer-term.

This can’t be the last of this sort of announcement, and I suspect that the rising cost of reinsurance is going to become a growing feature of this renewal season. Of course, that is better news for reinsurers, though.

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CEO Jacques Aigrain told Swiss daily NZZ that rates in the reinsurance market are picking up again — “We are seeing that the conditions and margins in the actual reinsurance business are improving.” However, “lower returns on investment should be expected” he went on to say, though perhaps that didn’t really need spelling out.

Swiss Re recently posted a Q3 loss as it wrote down almost USD500m on investments for the quarter and reported a USD250m or so unrealised mark-to-market loss on credit default swaps.

There is some speculation that Swiss Re was more actively involved in some innovative products than competitors and it seems to have been hurt more than its competitors by the financial crisis. The very fact that
Aigrain said that CDS and financial guarantee business was not being continued tends to reinforce that view.

One wonders what further news may come out of the giant.

Source: Reuters.

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In the recent (24.10.08) case of Markel –v- Gothaer Allgemeine & Kontinentale the Commercial Court considered the nature and role of an agent in a dispute over a Claims Co-operation Clause. It’s an oddly fact-specific case, but there are some wider issues in play.

This was a summary judgment application by reinsurers (Markel) to dismiss a claim by the cedants (Gothaer and Kontinentale) in relation to an underlying claim on a D&O book. Markel’s basic case was that it was a condition precedent to liability that “the Reinsured shall upon knowledge of any circumstance which may give rise to a claim against them, advise the Reinsurers immediately, and in any event no later than 30 days”; that the cedant had known of the claim and had failed to notify the claim timeously; and hence Markel were entitled to decline cover.

The crux for present purposes is that knowledge.

Gothaer and Kontinentale were members of a German pool managed by VOV, a company incorporated by the pool members. This particular risk fell outside the pool guidelines, but Gothaer and Kontinentale agreed to write it if VOV could get them appropriate reinsurance. The contract was placed and the slip defined the “Reinsured” as “Gothaer Versicherungsbank VVaG and Kontinentale Versicherungs-AG as per VOV GmbH” (emphasis added).

That VOV knew of the circumstance was not apparently in issue, nor that technically there had been late notification. The debate was thus

1. “Is the definition of the Reinsured … an agreement between the Claimant [Reinsurers] and the Defendants [Reinsureds] that VOV would act as the Defendants’ agent for all purposes in connection with and relating to the Reinsurance?

2. Alternatively …, did VOV when receiving and giving notice of the…claim have ostensible authority to act as the Defendants’ agent for that and all purposes in connection with and relating to the Reinsurance by reason of the definition of the Reinsured in the Reinsurance?”

Markel argued that the phrase “as per” VOV was a definition of “Reinsured” and applied whenever the term was used in the reinsurance contract; and further that the only natural meaning of the phrase was that the Reinsureds were acting by VOV for all purposes connected with the reinsurance and that VOV was their agent for all such purposes.

Smith J did not agree. Indeed, he went on to say that the argument would have “absurd results”:

it would mean that the condition precedent was not triggered if the Reinsureds themselves knew of a relevant circumstance but VOV did not, and it would mean that the condition precedent would not be satisfied if the Reinsureds, not VOV, advised Markel of relevant circumstances. The Reinsureds would be in an impossible position if VOV ceased to exist or their business relationship with VOV otherwise ended during the currency of the reinsurance contract.

He also scotched a secondary argument by Markel that since the Reinsureds held VOV out as authorised to receive information on their behalf VOV’s knowledge was to be treated as their knowledge because of the ostensible authority thereby conferred on VOV.

The true issue, the judge said, was whether VOV as a matter of fact had knowledge of the claim in its capacity as the Reinsureds’ agent. But that was not before the Court on the summary judgment application, as you’d expect.

The main trial of the action is due to take place next month. I’ll be interested to see what happens.

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In a rather vulgarly titled (“Obama presidency is good new for the legal profession“) article, law marketeer Larry Bodine points to some areas that might cause renewed legal problems in the States under the new regime.

In particular:

Tort reform has been so effective that there are hardly any trials any more. The National Center for State Courts reported that the number of jury trials dropped 44% in the last 10 years. The movement has killed many areas of personal injury practice by limiting damages and making it difficult to file a cause of action to begin with. But the Republican party and its corporate support base for tort reform is shattered. Meanwhile the American Association for Justice (formerly ATLA) will actively work to make it easier to bring

* Product liability cases

* Class actions against pharmacy companies

* Limit companies’ use of federal regulations as a shield from litigation under state law

* Eliminate mandatory-arbitration clauses in consumer contracts.

He also points to a host of regulatory reforms about to hit the healthcare industry, and of course to where litigation from the credit crunch is likely to hit.

It’s a bit triumphalist, but he’s probably not a million miles off the mark.

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The new administration, struggling to deal with the largest deficit in over 50 years, will have to look into all sorts of ways to raise revenue and plug perceived holes.

One of those is to tax those evil offshore reinsurers who write US business but then, oh horror, reinsure it in Bermuda, one effect of which is to reduce their tax liabilities.

…[A] proposal to crack down on offshore reinsurers gained momentum in September with the introduction of House legislation by Rep. Richard Neal, D- Mass.

The Neal bill is backed by a coalition of U.S.-based insurers including the W.R. Berkeley Corp., the Chubb Corp. (CB), and the Travelers Companies (TRV).

Those companies claim that foreign-based insurers, including the ACE Group ( ACE) and XL Capital Ltd. (XL), avoid taxes on their U.S. business by reinsuring policies written in the U.S. to Bermuda-based affiliates.

“No one wants to impinge upon the free movement of capital. But we don’t want people to use the guise of risk-spreading to avoid tax,” said William R. Berkeley, Chairman and CEO of W.R. Berkely Corp.

Of course not. And if that happens to mean that WR Berkeley et al pick up a little more market share, too, well that would be incidental, though rather nice for domestic US carriers. Umm, except that this leads then back to another problem in that the industry generally believes that US carriers are uncompetitive compared to Bermudian companies, so any move to tax those offshore carriers would lead to a decline in capacity, which would in turn lead to price hikes

“Putting this tax on all U.S.-associated reinsurance products is likely to reduce the appetite of U.S.-exposed business,” said James Livett, a business process development manager with Alwen Hough Johnson Ltd. in the United Kingdom. “In a time of reducing margins and tightening of capacity in the international reinsurance market, adding an additional financial burden on reinsurers can only be detrimental to the capacity being offered by international players, as such rates for U.S.-exposed business will increase due to lack of meaningful competition.”

And presumably those increased prices for US citizens will be precisely something that the new President would rather avoid.

Which rather begs the question whether Obama has really thought through the full impact of this proposal. As Bermuda Premier, Ewart Brown, has said:

I think the Obama camp probably doesn’t have a full understanding how much Bermuda’s operation means to the US. That’s a little known component of this whole equation.”

Dr. Brown said that between 2001 and today, Bermuda-based companies had paid out $30 billion in claims for US catastrophic events and that he believed the tax haven label was “unfair” for the Island.

For a slightly less, um, measured view — or more heartfelt expression of belief, if you prefer — you might also want to consider this.

Whatever, it looks as if we may be in for some more or less radical changes to all manner of financial systems around the world. Times are set to become interesting.

Sources: CNN, and The Royal Gazette.

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There’s a wryly amusing article from Garry Booth over at the Lloyd’s Risk blog on the difficulties facing the market as seen from Baden-Baden.

The three elephants in the room to which he refers are: capital market meltdown, falling share prices, and global economic recession.

Primary insurers who want to maintain their current business model (ie stay in business) are suddenly more dependent on reinsurance than they have been for a long time. It is virtually the only form of capital relief left open to them given the state of the markets. They want to retain less risk, they want to buy more reinsurance.

But reinsurers live in the same world. They are less exposed to the markets, but they just got smaller as well. As well as taking a hit on the asset side of their balance sheet, they’re finding (to their astonishment in some cases) that losses from Ike just keep on coming.

Booth goes on to point out, tellingly in my view, that part of the problem is that reinsurers have not actually lost a bunch of money out of Ike, in overall terms. They’ve been well-prepared and are actually sitting on a ton of capital — which means that prices probably aren’t going to start going up in the immediate future.

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