I may be opinionated but I am not one to have long drawn out debates on issues where the outcome could go either way. Debating with my parents over the “bed time” or use of the car were rarely won by yours truly. I learned the fine art of trying to set up a win while fighting a losing battle. Loving parents would remember my conceding to their wisdom as to when to sleep and when to drive, thus giving in to my next request strategically structured to look like a major concession compared to previous loss. Ever since my days in school on the debate team I have steered clear of taking a side artificially. I cannot fake my emotions. I like my emotions and passions to shine through whenever I speak and as a wise mentor once told me that implies arguing for only what you believe in strongly.
To get to where life reinsurance is today in Canada and to a degree in the world was there an evolution or a revolution. This was the question to be debated in the wisdom of the executive of the Canadian Reinsurance Conference (April 8th, 1999 Royal York Hotel). The CRC executive called on Bill Tyler of Lincoln Re (Fort Wayne, Indiana) and yours truly to be the combatants. Hugh Haney, ex President of Financial Life and sage consumer of reinsurance for decades, was to serve as referee. The two of us combatants were equally matched with 30 years insurance service although Bill’s was all under the brand of Lincoln and mine was via a myriad of wily tutors.
At the outset I took the stand that the only difference between evolution and revolution was the letter “R” at the start, so how could we have a debate. When you are as old as me you have seen the cycle repeat itself and from numerous decades of exposure the changes all become evolutionary at first glance. At second glance I thought there were spikes of revolution. The participants were to decide which side they sat on given a strict definition of each word Hugh dug out of his historical pleadings to MGA’s. This should be like debating which side of the anatomy the sporran is worn.
Bill and I quickly decided we were going to keep our beliefs to ourselves. We built our presentations not really knowing the opponents stand. All we knew was that the subject was to be segmented into four sub classes of reinsurance issues namely, “financial reinsurance”, “mortality”, “mergers and acquisitions”, and “technology”. From that early point on I knew I could be me, unencumbered by rules that stymied creativity. There was no prize for winning but I mentally saw myself as David against Goliath, Canada versus the USA, tradition versus “Off the Wall”, etc.
First on the agenda of topics was the financial reinsurance topic. Humour has a disarming impact on any audience. I started my dissertation with a picture from the 1800’s depicting a circle of the era’s business elite pointing fingers at each other with no clear indication where to start or finish. The caption read “Who has the people’s money?”. In a reinsurance context the question would be who has the capital (holds the reserves, puts the money away for the future, etc.)? The expertise in both ceded and assumed reinsurance have been fantastic at the art and science of maximizing limited capital for the benefit of all and for the most part in a fashion that has proved very prudent.
The original term for financial reinsurance was “surplus relief”. This term fell into disfavour in the 1980’s because of the abuse of the concept and the question of real transfer of risk for reward. Today’s financial reinsurance skill evolved slowly as the technology improved to analyze risk, personnel broke out of the traditional thinking and confidence emerged in the new concepts. The concepts included new terminology that only the most brilliant and abstract could dream up. Amongst the terms of today are securitization, counter party risk, Seg fund exposure, hedge fund and safe derivatives, CATePUTS, evergreen clauses and some deciduous trees, financial restructuring, regulatory arbitrage (=offshore), and of course the phrase “Do it through Barbados, Bermuda, Turks or Ross’ backyard”. Standing firmly behind these financially engineered marvels is the security of “class A-! Floating rate defeasance notes, paying a coupon rate of LIBOR 1.75% and rated AAA…” Certainly looks like the banks have had their input already on the world of reinsurance.
If the foregoing paragraph left you confused you now understand the position of 00% of the people who supposedly work in the assumption or ceding of insurance under the umbrella of “financial reinsurance”. Like most of us by the time you grasped the full intricacies of words and statements within the confines of “financial reinsurance” new words and statements would have emerged to keep you eternally perplexed like some of Joseph Conrad’s deeper novels.
Financial reinsurance has evolved from a simplistic usage of regulatory differences or oversights to one of complex legal, accounting and actuarial smarts. Someone once said that reinsurance from a financial perspective could be defined as anything where there is a 10% chance of a 10% loss. I would hasten to add that in life reinsurance that is a good definition but in the reality of health reinsurance results indicate a 90% chance of a 110% loss. A true revolution in the business would be recognized when health reinsurance is always profitable at least from a risk selection process.
The use of judicious financial reinsurance today has emerged as one of the main building blocks of many companies’ demutualization schemes or the rise and consistency of bottom line numbers. As capital management continues to be front and centre we are probably going to witness a further evolution of financial reinsurance albeit it may have a revolutionary new name.
After the vagueness of financial razzmatazz (I warned you the words would change) the debate or friendly sparring moved to the cornerstone a reinsurer’s success, mortality. Often presented as the core competency, mortality is nothing more than the educated wagering on how soon how many will lapse, replace, alter, amend, going on long term waiver of premium or, heaven forbid, die. No one in the insurance or reinsurance business has yet to open a Chinese fortune cookie to read “The mortality table you used today is too optimistic!” but we do stand the chance that the message could read “That wasn’t chicken.”
For decades and centuries our mortality continued and continues to improve. Every time we project the insured population death rate we do it with the comfort that every previous prediction was realized and in fact overly pessimistic. I gave thanks of course to the actuarial brethren gathered therein for their ability to frighten as they repeatedly throughout my career warned that this table is the lowest we will ever be able to go. The further praise for their reversal of opinion mere hours yet sometimes days later saying they have found a new and lower table. I have always wished I could go to the bush like that and bring back so many miracles.
I assured the by now encouraging with applause and laughter audience that regardless of point of view at the realities of today there was a multitude of silver linings in mortality. Actuaries for all their timidity have harkened a perpetual 1-% improvement in mortality per year. Morticians who I had just met returning from their equivalent to the Canadian Reinsurance Conference told me in strict confidence that their business is growing at 1% per year and will continue at that rate or more for years to come. I felt good that everyone could win.
For all the bleeding hearts in the audience I gave them solace with the pearl of wisdom that reinsurance pricing and subsequently insurance pricing were not the only prices to fall so far so fast in the 20th century. The cost of a transatlantic telephone call has fallen from $250 US in the 1930’s to less than 36 cents in 1998! And actuaries and management think we have seen competition to drive prices down. The evolution of the price and revolutionary pressures on our price are surely not new!
Mortality assessment by underwriters has been, as underwriters usually are, able to go both ways (focus on standard to decline folks). Some impairments or sub impairments have shown remarkable improvement to reflect the even more remarkable improvements in medicine. The myocardial infarction (big heart attack) in the 1970’s was rated at 300% mortality plus an additional $20.00 per $1000 of risk. That was on a 50-year-old male 3 years post infarction. Today some 25 years later the same risk is assessed at 200% mortality plus $10.00 per $1000. Medicine is so good today we can lower our ratings and give the best-impaired lives the better rates.
However all is not a downward spiral, as some would have you believe. The 30-year-old insulin dependent diabetic is now rated 300% mortality, up from 225% mortality 25 years ago. This is because we tend to define the various degrees of diabetes today and in doing so some are rated higher but many are rated lower. I just chose a good example to make my point and show the lower revolution was just an evolution of classification of risk.
At the same time as underwriters were for the most part slashing intelligently the extra premiums for various and sundry impairments to life the actuarial gurus were, as always, vying to get to zero faster. Reinsurance prices have fallen for the standard risk about the same as telephone calls over long distances. In 1976 the total cost of yearly renewable term premiums payable to a reinsurer were just under $100.00. By 1996 that same male 50 if they did not smoke (or could lie well) would pay just under $25.00. Our core cost of reinsurance was approaching 25 to 30% of the 1976 costs.
Combining the base standard rate with the myocardial infarction rating alluded to above and we fall off our comfortable pew in shock. In 1976 we would have collected (no interest factor) almost $450 per $1000 of risk over a ten year period. In 1996 the premium collected totals about $80! The number in 1999 is even lower but I refrain from using that price with deference to all those myocardial infarctions who may relapse in the stampede to buy at today’s tiny premium.
To put an exclamation point on my evolution point I enlightened the audience and reminded some of the older crew that the table they perhaps studied from was inappropriate for today. The Halley mortality or life expectancy table of 1687-91 said that a male age 50 could expect to live 16.8 years. For all recorded time actuaries have said mortality will improve by 1% per year. How is it that the 1980 British table only gives a 28-year life expectancy to the same 50-year-old male? That improvement of 11.2 years does not quite hit the mark if there truly was a 1-% improvement per year. Only 17 people, assumed to all be number crunchers, left the room at this point. Obviously they were rushing out to get my honorary FSA wallpaper revoked. Oh ye of little humour.
Quickly turning the audience’s attention to a new focus was blatantly foreseeable at this juncture. Mergers and acquisitions were next on the hit parade that sunny day in Toronto as the audience glamoured for more, more, more of the opinionated insight. I had no picture to visualize for the unimaginative that size matters so I merely stated that size matters today. Reinsurance was a $124 billion dollar industry in 1998 of which 75% was North American and Western Europe and 83% was nonlife. I would speak only of the remaining 17%, which seem to make the listening audience thankful because it would probably mean 83% less verbiage from yours truly.
All industries are going through the big is better phase be it automotive or banks or financial conglomerates. Why would anyone insist that this should not happen in insurance. We already have insurance leaders whose appetite for power is far greater than their current empowerment. As my Mother wisely said at times “their eyes are bigger than their bellies.” This M & A thing is not new even though we currently reflect on the loss of the following through one take over or another:
Those are the names of companies that went through merger, acquisition or sale of blocks. Everyone things that is all so new it is revolutionary. I pointed out to the audience that they collectively must be suffering from Alzheimer’s since that list was predated by the ongoing saga of company ownership consolidation for decades. Others led the way to extinction in one graveyard in Canada or another repository for old insurers, namely:
Each of those is a story undo itself, from purple Cougars (the car not the feline) to perverted offenders in leadership. As the audience was already morose I quickly moved on to at least say that many a reinsurance operation had also departed the Canadian scene in the same period. Cheers of applause from the cedants in the room were not heartening to me.
Reinsurers are endangered as the tree frog and harp whale. The following are amongst the dearly departed although some are basking in the warmer climates (the analogy is to more lucrative ROE countries):
Most were here in Canada for brief histories while others were so good like Storebrand the competition just had to buy them out of the market. I noticed not one tear from the audience from either the reinsurance brethren or the cedants. I do think I made the point that anything so insidious over 30 years cannot be labeled as a revolution.
Just to cheer the audience up since most made a lucrative living from the mortality trade I graphically showed how reinsurance has grown over the years tat I have been in it (not that I take full credit for reinsurance popularity today). In 1939 reinsurance accounted for .02% of all new sums assured (as well as about .02% of new premium). By 1969 (my first year in insurance) the new business going to reinsurers was under 4%. In 1999 it is predicted that new sums assured reinsured will hit the 50% mark. There are many that believe that the premium percentage is still mired at .02%! How long will it take for 50% of all in force sums assured are resident with the reinsurers and the dynamics within our business take a radical turn. Is this mortality outsourcing taken to its highest level?
Last topic to debate, although I thought I had won via humour 3 out of 3 so far was technology. I wanted to keep my options open to go both sides of the revolution or evolution debate so I continued to be vague to confuse the audience (something like writing for MO). A reinsurance opinion of technology is like the road sign I came across in Australia. In the middle of nowhere the road sign said “Emergency telephone 174 kms Ahead”. The message is correct but how much good does it do you if you are having an emergency. Reinsurance technology is similar in that the reinsurers views on technology are often insightful, well constructed, interesting to listen to but of now immediate use to the insurer who lacks money, people and inclination to implement.
The communication and transportation of paper with data or data without paper has gone through the phases of mail, express mail, courier, facsimile, compatible facsimile, back to couriers, bicycles, Internet and back to bicycles. In the end we still manhandle tons of paper between insurer and reinsurer. The reinsurer is somewhat narrowly focused on the paper and data they need and miss the point that reinsurance historically is a low priority item for most cedants.
As reinsurance gains in magnitude (remember the numbers a few paragraphs ago) will we experience a revolution in technology to shrink the tons to trickles.
I conclude with a picture of the evolution of man from ape to upright model citizen. Within the picture’s six forms of man (it was a man not a woman) I asked the audience to look around and realize the evolution continues with a few revolutionary mistakes.
Bill went back to Fort Wayne wondering aloud as to how he ever agreed to part of the non debate but happy that he was well received by hundreds of Canadians. Hugh went on to further consultancy, thankful that the debate was so mild mannered he could spend his time deep in thought about the evenings wine selection. Me, I went home to write the article while I still remembered the topic. I never did see the votes the audience submitted on our performance. Ah well, no news is good news.