In This Issue
· How “limited” should your Bordereau Reporting System be?
· 2011 was a year of record natural disaster insured losses
· Are reinsurance and commercial insurance rates increasing?
· Survey of global rate movements
· Market looks to add policy management & accounting to Bordereau Management Systems
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Poor Choices Today Will Cost Dear Tomorrow
The market is finally moving for bordereaux. Lloyd’s requirements and Solvency II are forcing underwriters to track and carry out analysis on their bordereaux from their delegated books. Underwriters in turn are squeezing their brokers and producers for bordereaux in a timely manner that better conform to developing standards. Coverholders are starting to come under pressure to conform and are generally seeing binding authority renewals that include either implicit or explicit expectations of bordereaux format and quality.
The vendor community in turn is reacting to this market movement with the arrival of an array of offerings which, by and large, attempt to address format requirements and underwriters' desire for better quality.
There is, however, one key difference between many of the product offerings on the market and ours. Failing to appreciate that difference and to act on it may result in systems needing to be replaced in a very short time, even before the costs of the system and training can be recouped.
Our system, unlike the others on the market, allows the full panoply of data coming in from coverholders to be held in one database. This permits review on a risk by risk basis. Premiums, claims, locations, and endorsements can all be tracked and analyzed risk by risk. Ignoring that feature now may result in the need for new systems and that may cost you dearly, in terms of time and money.
In delegating underwriting authority you are giving another individual or organization the authority to price and accept business on your behalf. The bordereau informs the ultimate carrier what business is being bound on their behalf. The tightening regulations are effectively saying you need to look at what is being bound on your behalf and you need to track it. By tracking and simple processing of these bordereau the current box ticking requirements are met but, unfortunately, a big opportunity can be missed.
By using sophisticated processing software the same process can deliver a full reconstruction of the underlying book of business to the level of each risk, location, premium movement, claim and claim movement. The entire book is held in one database, a feat that is probably not achieved by the coverholder, and often not for the business the ultimate carrier is writing on a direct basis. By collating the book (and all delegated books of business) at this underlying, disaggregated level a world of opportunity opens up for monitoring, and identifying potential problems, reporting at an aggregate level and analyzing/reporting across portfolios by specific factor(s) or parameters.
Today, with the CATEX Bordereau/Program System, this actuarial dream is a system reality. Tomorrow, it will enable better pricing, better selection, better feedback to coverholders, and in short it will drive your business.
The underlying delegated portfolio, if processed using these enhanced system techniques, sits on the carriers’ platform in the same way as if they have written it directly. With more sophisticated coverholders the position can be updated real-time taking away the need for bordereaux altogether.
Ask yourself if you are implementing a system that is under-delivering and putting your systems choices into a strait jacket for the next few years. If you are not implementing the CATEX system the answer is probably Yes.
2011: Record year for Losses from Natural Disasters
Munich Re just released its annual tally of insured losses indicating that the $105 billion insured loss due to natural disasters for 2011 was an all-time record. Munich Re also noted that the global economic losses from catastrophes in 2011 was $380bn a figure that is also a record. So how does all of this figure into premium pricing for reinsurance and big commercial insurance policies for 2012 especially when reinsurers covered about half of the $105 billion in losses?
At first glance you would think that it means prices will rise and the so called “soft market” must be over –but not so fast. Premium prices are going up but it depends where the risk is and what you’re insuring it against. In some cases the increases are dramatic but in other cases increases are below even the rate of inflation.
Complicating the situation further is that the traditional renewal cycles for large reinsurance treaty contracts is staggered. Most of Europe, Australia and North America renew on January 1. Asian contracts typically renew on April 1 and certain big Bermuda contracts renew on July 1.
One final caveat before we try to interpret the limited amount of data that’s been made available and that’s this: reinsurance carriers remain well capitalized. Reinsurers could point to the natural disasters and raise premiums but since the industry as a whole continues to enjoy adequate capitalization inevitably the reinsurer who prematurely raises rates would lose customers to reinsurers who are underwriting the risk based on expected loss with their strong supply of capital in mind. This is a game where getting out in front means you lose. Which is why the “whether rates are hardening” discussion is always of interest.
Reinsurance rates in North America reportedly have increased only 5-7% on treaties that renewed or incepted on January 1. Press reports claim that commercial property & casualty rates reportedly increased about 1% during the month of December 2011 with smaller accounts seeing larger increases than large accounts. Workers comp rates saw increases of 3% and GL went up 2%.
Australia and New Zealand
Think for a minute about the earthquake losses from the February 22, 2011 Christchurch, NZ earthquake in which both IAG and QBE had heavy exposure and saw their reinsurance layers penetrated. Add to that the devastating floods in New South Wales late last summer in which QBE in particular decided to pay flood claims even though homeowners did not have flood insurance. The Australian public, led by the Prime Minister, raised a hue and cry over the plight of flooded home and business owners being left (excuse the wording) high and dry by their failure to have purchased flood insurance. Some insurers made ex-gratia flood claim payments to policyholders without flood cover.
Willis Re estimates that catastrophe premiums in Australia have risen from 40 to 75 percent. The increases in New Zealand for CAT reinsurance are jumping from 80 to 150 percent. Press reports indicate that Insurance Australia Group (IAG) and QBE have apparently already seen increases (up to 35% in some instances) on their January 1 catastrophe treaty renewals.
To add insult to injury, a severe hailstorm struck Melbourne, Australia second largest city with over 4 million people in its metro area on Christmas Day. IAG has already seen more than 20,000 claims from that storm in less than two weeks and, yes, the date of loss will be in 2011.
Japan and Thailand faced significant losses in 2011. The Japanese earthquake and tsunami events are estimated to have cost $40 billion in insured losses. The Thai floods are estimated to have incurred $10 billion in insured damage. Prices in Thailand and Japan have increased as much as 50% already with most of the renewals to come on April 1st. Increases have not been seen in other countries as of yet.
Premiums for catastrophe policies in Western Europe have increased only by about 2.7% which is less than the 3% rate of inflation in the EU.
Thus far it would seem that reinsurers are significantly raising rates only in countries that have seen large losses and in lines of coverage that have sustained heavy claim activities. This seems a little counter-intuitive given the monstrous size of the 2011 insured loss bill from natural catastrophes. Luckily, though, according the James Vickers at Willis, reinsurers are starting 2012 with the same amount of capital that they had when 2011 began. So long as capitalization remains strong no one market will want to get too far out in front by raising rates on their own.
James Vickers notes though that “Capital is what ultimately drives pricing” and that if the European sovereign debt crisis worsens it could force markets into writedowns on their investments in sovereign bonds as well as equity writedowns should global stocks tumble. If the capital base of markets begins to erode that could be the starting pistol for broad-based, significant rate increases.
Keep in mind though that a “write down” doesn’t necessarily mean that a market has sold its investment but has only marked it to market. Insurers don’t invest their capital blindly and the long term upside of the vast majority of their investments could well remain positive. For example, should a Solvency II mandate require insurers to mark a whole portfolio to market rates it could provide justification to increase premiums to replenish capital and leave insurers still owning the investments that will probably, eventually, still be profitable. Keep an eye out for markets clamoring to mark to market their portfolios.
The iPad and iPhone applications, through which users can access report information from the CATEX Bordereau/Program Management System, have proven popular. We have been responding to requests from a number of system licensees who want to provide their underwriters with real time risk performance information through their mobile devises and I-Pads.
Bordereau system licensees have begun to explore use of the robust document upload and manager center on the CATEX system as an alternative policy management system. The fact that it’s web-based (SaaS) and tied directly into the risk and location information being tracked by the bordereau reporting system eliminates data transfer steps.
A desire by several clients to consolidate all the business processes of an agency onto one system has prompted numerous reviews of the Pivot Point Agency Management System. The Agency Management System includes the bordereau reporting system and the policy management system –and overlays both on the immensely powerful transaction and accounting Pivot Point SaaS foundation.
We’re working with several clients on directly interfacing with their current agency management systems to automatically feed the risk and location information right into the CATEX Bordereau/Program Management System. We’re seeing good results in beta testing and will soon be able to offer frictionless, automated, two-way data transfer from selected agency systems to the CATEX system.
(A Quick “Byte”!)