Patrick's Masterclass - Video n°3
(French & English subtitles avalaible directly on YouTube)
Hi everybody 👋
I am Patrick. Today we keep on with our quest to fill the puzzle and find our way in the maze.
Once upon a time only one tutorial would have been enough to deal with the players at stake.
Our world is more complex today.
Let’s start! ⏬
1) LLOYD’S 1975:
- Lloyd’s is (since 1688) a specific body working only through brokers who has moved from underwriting marine insurance to all types of (re)insurance risks over the world
- The fame and position is unique with 7 666 registered underwriters writing any kind of risk with fund providers, the Names, committing their assets without limits.
- “Those were the days” with a corporation of white men in dark as shown in this photo showing the board members at that time!
- Has dramatically changed overcoming dangers of bankruptcy following ensuing losses
- In 1991 (500 Mios £), 1992 2Bns £, 1993 2.3 Bns £ … (LMX crisis due to Piper Alpha, Property Cats, asbestos& environment losses…).
- In 1996 the newly formed Equitas took over 1992 and past liabilities which Lloyd’s could not close allowing for a new Lloyd’s
- In 2001 following September 11th, Hardly 100 Names with unlimited commitment remain, no new one is allowed to join on this basis. 3000 names stay with capped liability, about 15% of the Lloyd’s capacity
- There has been a concentration of syndicates, about 80 down from around 400, the weaker, worst performing disappear, the remaining ones are bigger and stronger
- Is under tighter than ever control of the Central Body (underwriting, results, solvency…)
- Works on a radical modernization of processes, tools, partners with high-tech companies to make it “better, faster, cheaper” (utilizer une typo qui ressemble à celel des Daft Punk Harder better Faster Stronger) John Neale Lloyd’s CEO meaning that the old prehistoric (re)insurance animal Lloyd’s will, unlike the monsters of the past you can only the bones of in museums, enjoy a strong revival!
- 1975: Bermuda was mainly known as a mysterious triangle! Appeared on the radars
- In 1986, the 1st wave of cies created to face the shortage of traditional capacity for US Casualty business
- In 1992, 2nd wave following the shortage of traditional Cat Property capacity
- New waves appeared in 2001 and 2006 after new Cat capacity crisis. These cies were bringing capital, new tools and solutions, ILS, ILW, side cars…what was called globally ART
- Tail winds: business favorable environment, strong links with financial investors, attraction of high skilled resources, agility to surf on challenges were keys for
Today’s success Bermuda is a decisive player in all aspects of (re)insurance:
- Thousands of captives
- Insurance and reinsurance cies
- Dedicated ART and legacy cies.
- 42% of Lloyd’s capacity, 36% of global Cat capacity and 124 Bns$ of global capital. (source ABIR)
Tomorrow: Singapore the new Bermuda?
- Parallel to the shift to Asia of the world economic power and global insurance industry
- Singapore has entered the race as a financial hub with fiscal advantages for ILS,
- Singapore invests in financial services, forecasts to hire 3000 to 4000 employees yearly
- Hong Kong tries to be an alternative and some others might follow soon.
3) RATING AGENCIES
- I have learned quickly about Swiss re, Munich Re, Kölnische Rück (the oldest reinsurance cy in the world, now Gen Re), Lloyd’s …
- Rating agencies were hardly known, but in the States
- Balance sheet study was my duty to assess the quality of a client, a competitor.
- Reading balance-sheets is for happy few addicts
- Rating agencies have a decisive power: you must be well rated.
- Any change down by one notch in your rating is a potential threat on your book of business, relationships whatever the good links you may have built over years.
- This spiral down can bring you out of business in a very short time.
- Their importance is such that the evolution of capital models has shaped how reinsurers are structured and how capital is allocated
- Initially big 3 US ones, more have emerged in the meantime.
4) SUPERVISORY BODIES AND REGULATIONS FROM GOVERNMENTS
- Supervisory bodies were more controlling the split by type of invested assets than insurance risks.
- Solvency 1 rules applied were quite basic.
- Control of reinsurers, if any, was not sophisticated allowing creations of crook cies (Daiichi Mutual Re, Kobe re….)
- Reinsurance, international by nature, could develop over the world along with globalization without too much of trade barriers
- Trade barriers have increased a lot adding costs for (re)insurance cies
- Supervision has improved to a high standard, although not yet everywhere.
- Emergency of new risks, increase of volatility of others lead to a continuous adaptation of supervisory bodies, who control both sides of the balance sheets.
- Control of reinsurance cies is tighter and now includes: ESG compliance a major factor both for Controlling authorities and rating agencies , and a difficulty between Fiscal authorities and Supervisory Bodies remains: technical reserves have to be prudent to protect the insureds but not oversized to avoid taxes on profits!
Nota bene : Frontings.
- Increased regulations, solvency requirements, obstacles to outside penetrations have led to the development of fronting arrangements to bypass these rules.
- It produces fees for the fronting cies, give them additional gross capacity allowing required market capacity to be completed and allows players to keep on working and diversifying their book.
- It may also be felt as an artificial obstacle to the adequate pricing of risks.
5) MODELLING COMPANIES
1975: not on the map
- My reinsurance teachers did not tell me about models.
- I have not found the term « model » in the famous book « Reinsurance and Principles « from Dr Gerathewohl CEO from Munich Re, published in 1982
- There was awareness about exposures, control of these, PMLs but hardly anything more.
- 1987 Karen Clarke created the 1st modelling agency AIR (now Verisk) in 1987
- A string of Cat losses from 1988 to 1992 gave a push for this approach with the creation in 1989 of RMS (just taken over by Moodys) and in 1994 of Equecat (now Corelogic).
Today: modelling cies are a costly but a necessary integral part of our industry
- Modelling cies face competition from dedicated teams of brokers and reinsurers.
- Market Loss estimates are swiftly produced by competing Cat modelers with wide differences casting sometimes a doubt on their reliability.
- Pricing of risks and treaties requires exposures data’s, modelling information.
- Every year new models and updated ones are developed, unmodelled events happen, others appear not modeled accurately.
- Models: a necessity for risk carriers including investors
Bye for now 👋
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