Thursday, January 28, 2016
Rising Stars: Top 40 Under 35 in Intelligent Insurer
We came across future rising stars in the industry, according to Intelligent Insurer these individuals are currently making waves in the industry. Future InsuranceShark's.
Careers in Insurance
If we had to recommend any industry for young people it would have to be insurance.
It has been estimated that the industry will lose about 500,000 people to retirement over the next 10 years. According to a study by McKinsey, "Insurers also have greater exposure to the aging workforce than most industries, due to a focus on experienced workers. The number of insurance workers 55 or older has increased by 74 percent in the last 10 years, compared to a 45 percent increase for the overall workforce. This means that 20 percent of the insurance workforce is near retirement age (compared to 15 percent of the broader financial services workforce). By 2018, this number is projected to rise to 25 percent."
This means that the industry should be hiring 50,000 entry level positions in preparation of its departing and aging workforce. However, the property and casualty insurance industry faces a few challenges in attracting high-quality talent: a poor reputation, a limited understanding among high school and college students of the industry’s career opportunities, and a limited pool of trained talent.
It is a goal of many industry groups as well as this blog to help improve awareness of this issue, improve the reputation, and promote the benefits of a career in insurance. Some of the benefits of a career in insurance include:
It has been estimated that the industry will lose about 500,000 people to retirement over the next 10 years. According to a study by McKinsey, "Insurers also have greater exposure to the aging workforce than most industries, due to a focus on experienced workers. The number of insurance workers 55 or older has increased by 74 percent in the last 10 years, compared to a 45 percent increase for the overall workforce. This means that 20 percent of the insurance workforce is near retirement age (compared to 15 percent of the broader financial services workforce). By 2018, this number is projected to rise to 25 percent."
This means that the industry should be hiring 50,000 entry level positions in preparation of its departing and aging workforce. However, the property and casualty insurance industry faces a few challenges in attracting high-quality talent: a poor reputation, a limited understanding among high school and college students of the industry’s career opportunities, and a limited pool of trained talent.
It is a goal of many industry groups as well as this blog to help improve awareness of this issue, improve the reputation, and promote the benefits of a career in insurance. Some of the benefits of a career in insurance include:
- The insurance industry has historically been more stability of employment than other financial services. Certain insurance products are required by law (i.e. workers compensation, auto insurance)and somewhat protected by recessionary pressure, therefore have not felt the impact of the traditional consumer cycle.
- This industry has so many options for various personality types, skill sets, and educational/cultural backgrounds.
- There are opportunities for introverts and extroverts in areas like actuarial and underwriting respectively. According to sites like Be an Actuary.org and DW Simpson a career in actuarial science is both lucrative and personally satisfying. "US News and World Report, the Jobs Rated Almanac, CNN Money, and others all agree: few other occupations offer the combination of benefits that an actuarial career can offer."
- For those individuals who want to experience all aspects of the industry as well as continue to learn about other industries, businesses, and be more social in their day to day job - Underwriting is a great career path. Some of the skills required for underwriting include passionate readers, learners, inquisitive individuals, and those who have diverse life experiences.
- There are also opportunities and career paths for individuals with passion towards marketing, legal, sales, management, claims, etc. An individual could work for a claims organization, insurance carrier, insurance broker/agent, reinsurance carrier, reinsurance broker, or even a reinsurer that insurers reinsurers.
- Travel - There are insurance and reinsurance hubs all over the world, in New York, London, Zurich, Bermuda, and outside these major hubs there is opportunity to travel across the globe.
- Diversity - The insurance industry like most industries experience success when embracing diversity of thought, diversity of individuals, and diversity in risks.
Hilary Clinton: 2016 Presidential Election and Insurance industry
An industry known for conservative and historic traditions, may have to consider conservative politics as well, as one of its major hubs is under attack from the leading Democratic candidate.
As reported by Business Insurance, Hilary Clinton recently announced in her tax proposal, ending the "Bermuda Tax loophole". Politics aside, it is the benefits of this tax policy that allows foreign capital to come to the US through countries like Bermuda and diversifies the risk. Should all of the US risks be insured by US companies we would lose the diversification benefits associated and large economic and natural disasters could all be borne by the US economy.
Some critics of this attack, claim it is Clinton's domestic insurance donors that are supporting this protectionist policy.
The current tax policy helps attract capital, as well as maintains lower costs to consumers. In an environment where loss costs are increasing, health care costs are increasing, severity is rising and decreasing margins, there is only so much left in an Insurance dollar that an insurer or reinsurer can they approach their respective cost of capital.
However, there are some new entrants into the market that have been called into question the intent of their interest in reinsurance. According to Bloomberg, "Ordinarily, hedge fund investors pay either the 39.6 percent rate for ordinary income on their profits or the 20 percent long-term capital gains rate, depending on how frequently securities are traded.. If they put money into a Bermuda-based reinsurer and have it invested in the hedge funds, any profits go to the reinsurer, which doesn’t owe tax on them. That allows the investors to defer taxes until they sell their stake in the reinsurer. Meanwhile, the money grows tax-free and the savings add up. Investing $100 million in a hedge fund that returns 10 percent annually for five years and paying the top marginal ordinary income rate on profits results in an after-tax gain of $50 million. If a Bermuda reinsurer holds the same investment, the gain is $77 million."
As with any industry there can be players that stretch the letter of the law, but to attack "active" law abiding Bermuda insurance companies could be a costly proposal to consumers and businesses.
More about this issue to follow as we get closer to the election.
As reported by Business Insurance, Hilary Clinton recently announced in her tax proposal, ending the "Bermuda Tax loophole". Politics aside, it is the benefits of this tax policy that allows foreign capital to come to the US through countries like Bermuda and diversifies the risk. Should all of the US risks be insured by US companies we would lose the diversification benefits associated and large economic and natural disasters could all be borne by the US economy.
Some critics of this attack, claim it is Clinton's domestic insurance donors that are supporting this protectionist policy.
The current tax policy helps attract capital, as well as maintains lower costs to consumers. In an environment where loss costs are increasing, health care costs are increasing, severity is rising and decreasing margins, there is only so much left in an Insurance dollar that an insurer or reinsurer can they approach their respective cost of capital.
However, there are some new entrants into the market that have been called into question the intent of their interest in reinsurance. According to Bloomberg, "Ordinarily, hedge fund investors pay either the 39.6 percent rate for ordinary income on their profits or the 20 percent long-term capital gains rate, depending on how frequently securities are traded.. If they put money into a Bermuda-based reinsurer and have it invested in the hedge funds, any profits go to the reinsurer, which doesn’t owe tax on them. That allows the investors to defer taxes until they sell their stake in the reinsurer. Meanwhile, the money grows tax-free and the savings add up. Investing $100 million in a hedge fund that returns 10 percent annually for five years and paying the top marginal ordinary income rate on profits results in an after-tax gain of $50 million. If a Bermuda reinsurer holds the same investment, the gain is $77 million."
As with any industry there can be players that stretch the letter of the law, but to attack "active" law abiding Bermuda insurance companies could be a costly proposal to consumers and businesses.
More about this issue to follow as we get closer to the election.
Wednesday, January 27, 2016
Shorting Catastrophe Bonds
Catastrophe Bonds are a way for insurers to access capital and secure a portfolio of risk. Insurers spread their risk to other investors by securitizing the potential obligations to pay out in the form of the CAT bonds. Investors receive a slice of the premiums through coupons, but these bonds' value is decreased in the event of a pay out by the insurer. There are various triggers and duration of these bonds depending on the underlying business.
Investors are more comfortable with this asset class. Investor comfort level is signified through the increased duration in the market, according to Artemis.
We are seeing an increased appetite from investors. According to Artemis, we have seen increased demand from the secondary market and investors looking to continue to rollover capital into these securities. "The catastrophe bond market reached a new high at the end of 2015, with the level of issuance during the year outstripping a record high level of maturities, resulting in the market reaching the end of the year with cat bonds on-risk standing at an all-time high, according to Aon Securities."
We have had an unique period of low Catastrophe loss experience in the recent years, coupled with low interest rate environment which we believe is driving the demand and decreasing spreads.
In these situations we are reminded of the following quote:
With duration of these bonds reaching a 7 year high (~3.61 years) and spreads over expected losses continuously decreasing, it may present an opportunity for contrarian trading strategy - i.e. shorting individual CAT bonds.
Investors opting to short these securities have to hold their position during the quiet Catastrophe periods but as soon as there is a hint of an event, the price of these bonds can start to drop rapidly as the potential payouts can be multiples of the initial investment (i.e. 6 to 1, depending on the coupon and when the event occurs). Others have discussed this strategy back in 2011 for example Roger Pielke, Jr.
Valuation of the individual securities is in the eye of the beholder but we ask the following:
Predicting a reversion to the mean of hurricane/CAT activity is a difficult position and a short can be costly when there is a non-event year but as we know, anything can happen with Mother Nature.
Investors are more comfortable with this asset class. Investor comfort level is signified through the increased duration in the market, according to Artemis.
We have had an unique period of low Catastrophe loss experience in the recent years, coupled with low interest rate environment which we believe is driving the demand and decreasing spreads.
In these situations we are reminded of the following quote:
- "Whenever you find yourself on the side of the majority, it is time to pause and reflect" - Mark Twain
With duration of these bonds reaching a 7 year high (~3.61 years) and spreads over expected losses continuously decreasing, it may present an opportunity for contrarian trading strategy - i.e. shorting individual CAT bonds.
Investors opting to short these securities have to hold their position during the quiet Catastrophe periods but as soon as there is a hint of an event, the price of these bonds can start to drop rapidly as the potential payouts can be multiples of the initial investment (i.e. 6 to 1, depending on the coupon and when the event occurs). Others have discussed this strategy back in 2011 for example Roger Pielke, Jr.
Valuation of the individual securities is in the eye of the beholder but we ask the following:
- The question remains what is the value of a CAT bond with no coupon due to loss activity and principle potentially going to pay losses?
Predicting a reversion to the mean of hurricane/CAT activity is a difficult position and a short can be costly when there is a non-event year but as we know, anything can happen with Mother Nature.
Zika Virus and pandemic risks in 2016
We said goodbye to 2015 which had some highs and lows and rang in 2016....Happy New Year!! Unfortunately 2016 is starting off with turmoil in the equity & oil markets, ongoing Flint, Michigan water crisis, Presidential political debates and the Zika Virus.
The Zika Virus presents some recent scare in the media as to how fast and how quickly it can be transmitted. The number of cases year over year have increased significantly. We are not here to agree or disagree about whether Zika should be classified as a pandemic.
According to Lloyd's, some have argued historical pandemic impacts would be reduced if they were to recur today. We have:
• Better drugs
• Coordinated response
• Influenza models
• Better communication methods
• Overall Healthier population
However there are counter arguments that suggest the impact could be worse now than in the past:
• Goods, Materials, and Services are traded on a global scale,
• Global travel is greater
• Larger population
• More concentration in cities
• Large pools of sick people
Of course a key factor on the impact of a pandemic is the strength of the pathogen itself: how easily it is spread, how infectious and what the case mortality rate is.
Pandemics may be inevitable and the economic impacts may be significant, but lets not forget the impact of a concentrated risk can have on a region even if its not a "true" pandemic spreading worldwide, just remaining in a local region.
Business will be interrupted, supply chain issues, property may be at risk, resources may become unavailable, home prices decline in the region, and economic loss potential is present.
Therefore, an opportunity for insurance...or to add protection...
The Zika Virus presents some recent scare in the media as to how fast and how quickly it can be transmitted. The number of cases year over year have increased significantly. We are not here to agree or disagree about whether Zika should be classified as a pandemic.
According to Lloyd's, some have argued historical pandemic impacts would be reduced if they were to recur today. We have:
• Better drugs
• Coordinated response
• Influenza models
• Better communication methods
• Overall Healthier population
However there are counter arguments that suggest the impact could be worse now than in the past:
• Goods, Materials, and Services are traded on a global scale,
• Global travel is greater
• Larger population
• More concentration in cities
• Large pools of sick people
Of course a key factor on the impact of a pandemic is the strength of the pathogen itself: how easily it is spread, how infectious and what the case mortality rate is.
Pandemics may be inevitable and the economic impacts may be significant, but lets not forget the impact of a concentrated risk can have on a region even if its not a "true" pandemic spreading worldwide, just remaining in a local region.
Business will be interrupted, supply chain issues, property may be at risk, resources may become unavailable, home prices decline in the region, and economic loss potential is present.
Therefore, an opportunity for insurance...or to add protection...
Blood in the Water? AIG property/casualty units downgraded to A2 by Moody's
The sharks are in the water...AIG is being attacked on all sides... by activist investors (Carl Icahn), by Moody's, who's next??
AIG has recently been planning restructuring plans to spin off its Mortgage Insurance unit to fend off some of the attacks but this news is related to other results. According to Business Insurance, “The downgrade of AIG’s main P&C units reflects persistent adverse loss development and weak underwriting results plus the ongoing challenge of setting reserves for long-tail casualty lines,” said Bruce Ballentine, Moody’s lead analyst for AIG, in the announcement. Moody’s noted that AIG took a $3.6 billion charge to strengthen its property/casualty loss reserves, effective in the fourth quarter of 2015, “continuing a history of reserve problems that included charges totaling about $7 billion in 2009-10.”
Will insured's and employees continue to see AIG as long term partner or swim for the shores?
The AIG stock is down 2% on the day.
5 Steps in the Risk Management process
Life is full of risk. Personal risks, business risks, missed opportunities, etc. Even living in a bubble has risk associated with it.
Understanding risk is one of the main benefits of the broker or agent model, these professionals provide a perspective and experience that an individuals or businesses doesn't always have, since their mind and time is spent in areas outside of Insurance and/or Risk management (for example growing their business or spending time with family). The focus and experience of this insurance professional have many benefits, but one is that the broker or agent understands the detailed steps of the risk management process.
There are five steps in the risk management process...
Understanding risk is one of the main benefits of the broker or agent model, these professionals provide a perspective and experience that an individuals or businesses doesn't always have, since their mind and time is spent in areas outside of Insurance and/or Risk management (for example growing their business or spending time with family). The focus and experience of this insurance professional have many benefits, but one is that the broker or agent understands the detailed steps of the risk management process.
There are five steps in the risk management process...
- Identify loss exposures
- An example includes establishing property or liability exposures that individuals or businesses are exposed.
- Review these exposures
- Estimate the significance of these exposures, essentially figuring out a cost and likelihood of a loss occurring. How much would an accident cost? how often would it occur?
- Explore risk financing or risk control techniques
- These can be examples such as insurance (risk financing) or avoiding certain activities or risks (risk control). There are additional risk financing and risk control techniques to explore, these are only 2 examples.
- Select the appropriate technique
- Then its up to the individual or business to select the most appropriate technique for them. The costs or opportunity costs must be weighed carefully. If insurance is relatively cheap compared to the risk control measure costs, its a valuable product.
- Monitor the results and revisit.
- The selections should be reviewed regularly, exposures can change as well as the best available techniques can change.
Individuals and businesses should be reviewing these steps with their broker or agent on a regular basis. Your agent or broker may provide checklist or questionnaires that focus your attention on common loss exposures, and will provide solutions to address your needs.
Everyone can spend time thinking about the things in life you want to protect or areas of your business at risk, and the principles above can be applied to determine your best approach, however, it is still good to get the advice of a professional.
How to Buy Insurance??
This is a difficult question and not a one-size fits all approach. The answers can vary depending on the risks and risk tolerance of the buyer, the product purchased, if an individual or business is asking the question, etc. For example, there are a variety of direct to consumer, phone or online approaches for personal lines carriers and if you are a business there are very similar channels to buy insurance. But the longstanding buying habits for personal lines and commercial insurance have traditionally been through a broker or agent.
However, buying insurance may change over the next few years....Usage based insurance, Peer to peer insurance, etc. are all being addressed and discussed by websites like Insurance Thought Leadership.
In the new age of disruption, new competition is entering the Insurance Sector to "disrupt" the traditional role of an insurance broker. At Bankrate.com they have addressed the topic under the heading "Will Lemonade be the Uber of Insurance?" Although we belief this is a powerful idea, presents opportunity for some disruption and the insurance industry is in desperate need of technology improvements, we suspect there will still be room for the traditional model as well.
However, buying insurance may change over the next few years....Usage based insurance, Peer to peer insurance, etc. are all being addressed and discussed by websites like Insurance Thought Leadership.
In the new age of disruption, new competition is entering the Insurance Sector to "disrupt" the traditional role of an insurance broker. At Bankrate.com they have addressed the topic under the heading "Will Lemonade be the Uber of Insurance?" Although we belief this is a powerful idea, presents opportunity for some disruption and the insurance industry is in desperate need of technology improvements, we suspect there will still be room for the traditional model as well.
- There is nothing new under the sun. This peer to peer model isn't new and is somewhat similar to the group captive model, which is far more established and requires brokers or advisers to source and evaluate risk.
- Technology platforms will need to work with regulators to ensure the appropriate capital behind the risks they insure. The 3 to 1 premium to surplus ratio has been a longstanding guideline for ratings.
- Acquiring scale in this platform is going to require multiple channels, possibly requiring broker channel.
- Automated and self driving vehicles may move the liability associated with auto usage to the product manufacturer and away from the individuals
- Most individuals don't view insurance as a product to take risks with especially when it comes to self-insurance, more often than not, its a topic they don't have a strong understanding and it protects their most valuable assets (i.e. home, car, jewelry, health)
For the time being, we still support the traditional channel - but recognize even the best of companies and sectors don't stay insulated forever in this new age of technology. There is obviously much more to be discussed about this topic as we anticipate future innovators entering the insurance space. We are excited to report will be updating/adding to this topic regularly.
The goal of this blog....
Insurance Shark is a blue-ocean for info about the Insurance and Reinsurance Industry, topics range from emerging risks for Property & Casualty both personal & commercial insurance to Life and Health insurance topics, we will address underwriting, finance, accounting, mergers and acquisitions, industry and market trends and the interaction of the insurance industry with the capital markets.
This blog is directed at consumers & non-industry insiders as well as Insurance industry insiders as a resource to maximize returns and find strategies to efficiently use their capital & avoid “Red Ocean” strategies.
For the insurance industry insider, we will cover insurance industry news, events, announcements, company news and investors’ briefings, innovations, products and services.
For the consumer, we will address topics like risk management, risk financing, strategy, how to buy insurance and the basics around understanding and quantifying risk. As we advance, we will have product recommendations for the consumer and direct links to products or consultants/brokers who can advise the business or individual on the best risk management strategies. The goal of this blog is to inform individuals and business about insurance products and services, about the insurance industry, decipher the insurance language, and discuss news and events in the industry...you may occasionally see some posts around personal finance and occasional investment analysis as the topics sometimes overlap.
This blog is directed at consumers & non-industry insiders as well as Insurance industry insiders as a resource to maximize returns and find strategies to efficiently use their capital & avoid “Red Ocean” strategies.
For the insurance industry insider, we will cover insurance industry news, events, announcements, company news and investors’ briefings, innovations, products and services.
For the consumer, we will address topics like risk management, risk financing, strategy, how to buy insurance and the basics around understanding and quantifying risk. As we advance, we will have product recommendations for the consumer and direct links to products or consultants/brokers who can advise the business or individual on the best risk management strategies. The goal of this blog is to inform individuals and business about insurance products and services, about the insurance industry, decipher the insurance language, and discuss news and events in the industry...you may occasionally see some posts around personal finance and occasional investment analysis as the topics sometimes overlap.
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