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The Players

Reinsurance looked like it was emerging as a significant part of the insurance landscape in Canada and for that matter in North America. Everyone wanted to be either a reinsurer or retrocessionaire. It looked like fun and a way to get relatively low cost premium income. There was no new expansion after 1990 and the best reisnurer had been bought by Swiss Re in 1988 so it was gone already. Look at the list of active reinsurers in 2003 and the volumes of risk they were paid to accept. The number is beyond the most optimistic of visionaries. Cheap prices by reinsurers and low risk tolerance by insurers plus the advent of the slogan “use of capital” all fueled the growth of reinsurers who then found themselves with almost too much business. Consolidation was fast and clean. Zap and you are down to less than half the active reinsurers. Even ERC who was a dynamo in Canada for 5 years ended its run for the gold in 2003 (officially in 2004).

I know of no person in the reinsurance business who would l have predicted in 1990 that such an astronomical percentage of life risk would be concentrated in so few companies by 2003. I now know looking back I should have had a bonus based on production with no cap!

Steve the editor again wanted to give his readers insight into reinsurance and how much the reinsurer played in the insurance sandbox. Today Steve and MO would probably have a monthly graph of reinsurance production and accompanying S&P ratings of the survivors.

Time to write the history of reinsurance from 1990 to 2005 (publishing in 2005 is closer to my timeline than 2004 for a variety of reasons). Now to find that publisher and first an editor. Steve how’s your time?



Marketing Options

December 1991

I cannot fathom why such small amounts of reinsurance on so few policies can raise so many questions from some agents and home office employees. Believe me; reinsurance should never be intimidating or enigmatic. One big advantage in Canada is that eh players are few. So few, in fact, that I hope to introduce them all to you in this single article today.

Every year the Munich Re office in Atlanta, Georgia, compiles new business statistics from reinsurers and retrocessionaires throughout North America. In the U.S.A., the list for 1990 shows 26 active reinsurers chasing a ceding company’s excess insurance (over the individual company’s retention). That same market place produced $20 billion less reinsurance sums assured in 1990 than in 1988, ending at $152 billion. There were only 5 fewer active reinsurers in 1991 and the inactive dropouts could be viewed as casualties of a very aggressive market that could not continue to sustain so many corporate entities.

The Canadian numbers pale in comparison but who north of the border ever found comparison flattering? Please tolerate the fact that the Canadian industry numbers will be in U.S. Dollars and, for the lack of a calculator, this poor author is taking the easy way-out. In 1988 the Canuck insurance industry sent nearly $13 billion of new sums assured to reinsurers and the number tumbled in 1990 to just over $10 billion (out of $92 billion for the whole industry). By whatever measure the reinsurance industry in both countries took a beating in market potential. Fortunately it is still ticking and cooperative as ever in trying to help life companies of all sizes manage the mortality risk. (It does other things but I’m a uni-dimensional visionary on a roll)

There are many and sundry excuses for the demise of the market growth but suffice to say the time had come. Cheap, cheaper and cheapest term had taken its toll on in-force blocks. Smoker and non-smoker discrimination extended the feeding frenzy for new products at even lower pricing, culminating in sums assured escalating at a pace that outstripped retention. Along comes the ‘A’ word and fear halts some retention changes. Now we top the early nifty nineties nirvana with financial scrutiny of direct writers until it almost becomes wiser to reduce retention and spread the volatility of risk.

Enough pontification on the unsolvable and back to the hard facts of numbers, the root of our rewarding enterprises. The Canadian reinsurance numbers are split among 11 active reinsurers and pseudo-reinsurers (those with split or multiple functional personas operating as reinsurer, retrocessionaires and/or direct writers.) In reality, the number of players hasn’t altered significantly over the years but it has in actual key players. Many (at lease two) key reinsurers have left the active market and there exists a strong groundswell of opinion they were legends in their own time but I would not want to solicit a quorum on that issue.

Fig. 4 reflects the composition of the Canadian reinsurance world and highlights the diversity of reinsurers who are still active according to the Munich Re study. During the five year study, three reinsurers have shared the honour of being the host with the most new business and, if the study were to be extended backward, they remain the “Big Three” – the loving nickname created over a decade ago by a significant, yet perennial, “Number Four”.

In alphabetical order the Big Three are the Canadian Re, the Mercantile & General Re an the Munich Re. These three companies are all related to large head offices or parents in Europe who have zillions of years of history behind them. The parentage is obvious for two of them and more obtuse for the third. Reversing the order to protect my income, as a retrocessionaire should, the Munich Re is part of the world’s largest reinsurer out of Munich Germany. The M&G (an affectionate acronym coined and perpetuated by the industry) is of English/Scottish lineage with a well known owner in the international sphere – Prudential of England. The third player comes from the clocklike precision of Swiss workmanship under the more global nomenclature of Swiss Re, a leading reinsurer in the markets of the world.

The habitual holders of positions four through eight inclusive are there both by design or the sheer magnitude of the final step to turn the Big Three into the “Big Four” (or five or six). There one must stop or all you have is a cluster of the “Nondescript Eight”. With due respect to the future, I remain fixed on the alphabetic listing of General American, Life Re, Lincoln National, National Re, and St. Lawrence Re. This is a diverse group of companies that refuse to fit a homogeneous description and each has distinct roles to play in prodding and, in time, shaping the reinsurance dimensions in Canada. St. Lawrence grew slowly at first with modest beginnings soon overshadowed buy aggressive and novel marketing innovations that catapulted it into the limelight. Its roots are in Montreal where it retains its license base and corporate head office. Likewise, National Re has its origins in Quebec, yet has played an influential role in both facultative and automatic reinsurance from sea to sea. Both of the foregoing reinsurers are talented users of retrocessionaires throughout the world, spreading the mortality and financial risk.

Lincoln National is one of the earliest licensed reinsurers in the Canadian market. It is part and parcel of the large U.S. Reinsurer out of Fort Wayne, Indiana. The definitive nature of its marketing efforts and positioning has remained ever constant. Life Re (formerly General Re) has had a sporadic involvement in the Canadian market seeking particular market niches that reflects its particular strategy. Their head office is in New York. General American, operating out of St. Louis, Missouri, is both a reinsurer and a retrocessionaire in the Canadian market. In the U.S., it is the second largest writer of new reinsurance volumes. In both its Canadian roles it has been extremely influential in the setting of pricing standards.

The remaining contingent of also–rans is best described as peripheral players who neither set market price nor support the aggressive nuances of the leaders and aspiring leaders of reinsurance.

As the reader’s eye moves to the chart of retrocessionaires (Fig.5), it becomes noticeable that the names become better known while the new sums assured drop quite considerably. Ignoring one mother of all reinsurance deals in 1988, the early noted pattern of the reinsurers is replicated in the retrocessionaires – the market size has dwindled. The real deal makers in this group number only five with volumes dancing through the years without pattern. Three large direct writing companies play an exclusive role as retrocessionaires, while General American actively and directly supports the niche reinsurers. Sun is a big company with a definite professional approach to retro business that some say it learnt from Manulife. In reality, the two were active as reinsurers in old traditional reciprocity deals for a hundred years. The sheer size of these fortresses of financial integrity (it’s annual review time) make them both natural retrocessionaires. Manulife was the first truly active solicitor of retro business on a whole sale basis and leapt to the forefront in the 1980s. Equitable has been somewhat more modest in its overtures to the Canadian reinsurers and, at times, people mistakenly think they are the Canadian Equitable to Kitchener/Waterloo when in reality they are the Equitable Society of America.

Other players come and go in this arena of big cases which is a function of capacity wishes that fluctuate wildly. There are not that many jumbo cases to go around every year and reinsurers are increasingly looking at the financial credibility of the retrocessionaires to ensure the long term support for behemoth policies that require retro.

All the players are front and centre with nothing to hide. Each, I am sure, would give details of their operations should you make a polite request. They are an innovative and gregarious group who only bear close control when food and drink entices unbridled articulation. I am not saying that all of their stories are candidates for a Pulitzer Prize but each is an interesting piece of literature.

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You’re Gonna What?

The Canadian life insurance industry for decades has been subject to the allure of “shopping” their more difficult risks to various reinsurers to obtain a lower underwriting assessment. “Shopping” is the art of taking all the known information available on a life and sending it to 1,2,3,4, or more reinsurers who say they are experts at finding a more optimistic appraisal of the persons health, occupation, avocation, aviation and/or travel plans. Inevitably insurers have found that one or more reinsurers’ optimism to be strong enough to accept the case without an extra premium or only a trivial extra. As this columnist has stated in previous articles, everybody wins — consumer gets policy at low price, broker gets commission, company gets gross premium, reinsurer gets thin premium, and retrocessionaire gets thinner premium.

A dependence has been cemented binding the insurer to the reinsurers that is unwavering. Every reinsurer supports this marriage and has no inclination to change the status quo. To withdraw competitive facilities of substandard specialists known as reinsurers is almost like withdrawing automatic bank machines. A better analogy is saying that this would be like taking the child who has mastered the two wheeler with training wheels and say you must now go straight to the unicycle!

Legends of reinsurance would cringe at the thought their efforts over decades were about to be erased by those reinsurers experiencing from a tight money policy and/or a misunderstanding of the consequences. After all, facultative underwriting is a labour intensive business requiring skilled personnel (see MO #— “Pusillanimous Underwriters”). A reinsurer could quickly reduce overhead by jettisoning the facultative underwriting service and thus improve the bottom line or reinvest it in more pricing actuaries. Lord knows we could also use more compliance staff to keep up with the sound business practices paper work.

I do not profess to understand what lurks in the minds of some reinsurance management in this insurance business of 1999. Perhaps they have found some revolutionary secret road to success. When I look at the facts of what the sacrifice would be I have to step back and somewhat stoically stand by the insurers who, to the best of my knowledge, want full facultative service from the reinsurers.

How big a market is the substandard, borderline standard and decline group of applicants for insurance? Big enough to sit up and notice the premiums attached are more than enough to fuel the salivary glands of marketing/sales officers. Buried in the CLHIA statistical issues are the numbers that are often overlooked or worse still end up on the wrong desk or filing cabinet. The following chart is a synopsis of the CLHIA report on issued policies.

The number of cases in the survey can be somewhat misleading given the participant companies in the survey can vary and the number of companies is shrinking (merging,, acquisitions, departures, etc.). If we ignore some of the subtle changes and concentrate on the trends I can draw better conclusions. The “face amount” is the amount of risk or coverage in millions (add six zeros or 000,000 for the mathematically challenged).

The numbers when viewed in terms of case count and sums assured over the seven years made me realize I had been preaching an untruth. The fallacy that the business declined and or rated had not changed for years becomes clear. Yes, by number of cases the old adage that about 4% are rated and 3% are declined but look at the other line of numbers. As an industry 6.2% of sum assured is charged an extra premium which is up from 5.1%. In the decline row the increase from 2.6% to 4.9% of business being turned away is quite remarkable. Combining these two categories of risk we are looking at $9.7 billion dollar of sum assured at even $3 per thousand translates to annualized premium of nearly $30 million dollars. The numerical significance is magnified by the perhaps 60,000 policyholders that may feel they were not treated fairly (equitably) by the insurance industry.

If those companies not in the survey magnify the above chart and my numbers the number of disgruntled consumers may be 70,000 and the premium impact rises to $36 million. I am old enough to remember when new premium income of $36 million was significant. I am sure there are many an MGA who would dearly love to control that premium!

For those readers who see the substandard, borderline standard (you know reinsurer likes standard and insurer likes 50 to 100% extra) and decline as “of no significance” can cease reading. For the enlightened few who are still with me, this is a large and potentially controversial group of consumers. To date in Canada we have been free of significant legal battles with individuals who are not acceptable at standard rates. I would like to believe that a relevant factor in avoidance of such a tumultuous path is the predominant use of all availability facilities to keep the price as close to standard as possible if in fact standard is out of the question.

Using a shopped or facultative program where three or four reinsurers try aggressively to outbid (lower price wins) the insurer as well as the other reinsurers keeps the standard group large, the substandard premium minimum and the declines to a minority. No where but in North America do we see such a large number of shopped cases (perhaps close to 200,000 in NA). South Africa is another country with this phenomenon but not having been there to give a speech yet I cannot speak from a first hand basis. We have a free market for sales in insurance and have kept legal encumbrances out of the pricing. In more and more countries companies are forced to accept all risks and only now are some of those countries saying maybe we should avail ourselves of the facultative opportunists.

The seller of our product be it agent or broker has benefited from shopping program. Cases that would disappear into the not taken bucket are in force, commissions paid, company has premium to cover already incurred costs of underwriting and requirements ad reinsurer is tickled pink (Steve is pink politically correct?). Telling the broker their cases will no longer be shopped if they are ratable or decline conjures up visions of veins popping and guns (figuratively only) being drawn. Thirty years of saying “we have sought the best quote from all the reinsurers to get your customer insurance at the lowest price” has warmed the hearts and pocket books of many brokers.

Can you make a lot of money from facultative underwriting. Some skilled reinsurers have specialized in this market for decades and at last glance they are all alive and well with stock values climbing as fast as potentially demutualizing companies only dream. IT is also a fact that most reinsurers started their existence through the facultative channel and grew into rich automatic reinsurers. So when I here through the grapevine that some reinsurers are about to abandon this segment and even throw cold water at it I say to myself “You’re gonna what?”. I cannot believe it is so.

To stretch a premise I see underwriters left without a major tool in their arsenal to get cases issued at low prices. I see brokers and agents left with lost sales and angry consumers who have a fair price one-day and perhaps a decline the next. I see consumer activist groups demanding equally (far different than equitably priced) priced products regardless of medical history. I see a fundamental change in Canada’s life insurance pattern. I also see reinsurers with lower cost, fewer staff and plain vanilla automatic regimes.

I won’t be the first down this new road that is being ploughed through our environment. I can’t condone what I feel is an abandonment of my friends who happen to be my customer. If the industry follows the new road I would have to follow and I would benefit financially from lower costs and fewer staff training and retention issues. I hope to be there to the end helping the last holdout to the shopping program. This is one time I will let someone else lead. And in the end who really cares if their reinsurer decides to get out of facultative underwriting.

I am still left scratching my head asking my peer reinsurers “You’re gonna what?”

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“It sure is a boring summer with nothing exciting happening in our business”, said the old timer who likes to feel the vibes of change. He of course was talking about the sleepy life insurance industry. He also has become so accustomed to rapid and exaggerated change plus unwelcome headlines that he no longer labels the now routine noteworthy.

Lets start with the KPMG Ethics Survey 2000 that I have read snippets of but since I am too frugal with my time I have not read every word. For those interested in the survey it is available at .It is full of all the great statistics of how ethics are not being nurtured and few companies give this a priority. My first reaction was to resurrect the “semper ubi, sub ubi” article from MO’s archives. Then I said to myself that that windmill has already been challenged. On questioning a friend of mine who is close to the MBA circuit and continuing education for executives I learn that ethics courses are in such great demand people are being turned away. I thought the ethics of an organization were instilled in new employees by the old guard and the leader. Has this become so specialized that it is now outsourced?

If one (the proverbial employee of nondescript features) has not learnt enviable ethics before entering the workforce can one ever learn? If one has not learnt ethical values from one’s first leaders can one ever learn? If the actions and verbal utterances of one’s current leader are not reflective and definitive of true ethical behavior can one ever learn?

Can a daylong course on ethics and a certificate hung on the wall equate to an insurers integrity being of high ethical standards? Something like two thirds of companies said they are implementing practices but there is some concern for the amount of time to fulfill those practices. Of the responding companies some 42% have a senior level manager that has the ethics conundrum under their list of to do’s. Training in ethics is provided by about 39% of the companies in KPMG’s survey. I am sure no company is spending more time than the Royal Bank conglomerate who just had the bad fortune of being at the very public end of intense scrutiny over in my opinion ethical behavior! Just imagine what has not been uncovered in our financial services industry. I take heart in the KPMG survey that included about 1.5% life insurers and I will imagine they are all on the higher ground.

Before the ink had dried on the above paragraphs I am stunned by the news my industry has taken a body blow to the kidneys with the Transamerica immediate and complete disclosure of their problems with a few staff. Could anything have been done in the midst of the burdensome acquisition of one company by another that would have at all costs maintained the sanctity of Transamerica’s reputation? Possibly not. The compliment goes to the leadership who immediately went public, took remedial action, avoided the pitfalls of mendacity and limited damage as best they could in the circumstances.

Dull summer? Not a chance. Our financial services industry has had a wake up call and the onus is on all participants to elevate ethical behavior to a priority. Training courses may keep the issue alive and actually instill the no nonsense importance of ethical conduct but if you have in your midst someone(s) whose ethical instructions in early life training leave a lot to be desired “you gotta problem mista”. Finding the rotten apple in a barrel of red Delicious only happens when you hand wash each apple.

In sharp contradictory contrast to the ethics survey is the Queen’s University School of Business survey of participating CEOs in Ontario. Of the top 12 challenges facing CEOs on the Queen’s list the only one that can be stretched to include ethics is the challenge of finding staff that possess the right personal qualities in addition to their technical skill.

This study would have warranted days if not weeks of public and private scrutiny had it been in the “old days”. Today it is just another study of our accepted practices that lean heavily on performance judged by numbers here and now, versus long-term implications of ethical versus unethical behavior. This should not be taken as ho hum! Rudimentary ethics emerges like zymurgy. Over decades and even centuries our “norm” has been forged like the fermentation of wine. Is being forthright always the same as never telling a lie? Is exaggeration in the same leak as abuse of information? Is a conflict of interest always a conflict of interest or does it depend on the consequences? I remain a student of the ethics debacle and hope that in time any doubt about the definition ebbs, which would mean I have found the holy grail (or at least someone let me glance it while there was still time). With age and an ever increasing scope of acquaintances I learn that the definition is now more elusive than ever since there remains no one definition of business ethical behavior. If there were would there be any employees in the tobacco business?

The prize awaits the person who can guarantee a test to weed out the ethical behavior that is not in compliance with the leaders which one hopes is in harmony with the Board and its traditions. The problem is whose ethical behavior is the model since it is on may occasions so subjective. We certainly do not want to leave it to the press to decide.

Next we have the more mundane within the insurance vill. The merger first here in our Canadian community of CU and NU (sort a sounds like canoe), which then transformed into parents saying sell the whole thing. Add to that the potential but soon stop of the sale of C.N.A. life operations globally, ING continuing to acquire NA companies especially Aetna’s financial services side and you have lots of excitement. Talk heats up that Canada and Clarica will be devoured by the likes of any number of large European mega companies in less than 30 months. Banks can come into the US life market. Royal Bank buys into the US life industry. Underwriters are being given signing bonuses of considerable sums plus salaries that finally distinguish them from senior clerks. Pricing actuaries who can make a product price plummet and a reinsurer pay dearly for the privilege of acquiring the risk are in demand that exceeds the demand for a Stanley Cup team in Toronto. Reinsurers are happy that so much risk is being transferred to them since it is their specialty.

News has come out that some of the insurance Web site sites are still not making money. Enormous losses abound but optimism runs rampant. The expectations are that everybody will be enthusiastically searching out sites to buy life insurance. The summer is full of growing e-commerce optimism for the public consumption but finally from under the terrible income statements comes the first glimmer of concern that life insurance is sold not bought.

A small string of words in The Poisonwood Bible on page 309 sort of sums up our life industry as we head towards the end of summer. In fact not even I could have written and been edited into such a distinctive combination of words.

“I am telling you what I’m telling you. Don’t try to make life a mathematics problem with yourself in the centre and everything coming out equal. When you are good, bad things can still happen. And if you are bad, you can still be lucky.”

We certainly have become numb to change and so blasé that even the pundits are bored. Guess we need to make some greater bad happen.