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Winning the Debate Be Sure to Argue Both Sides

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.

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Big Knockers Never Ruled (But now they are doomed!)

Growing up as a young healthy boy in Southern Ontario I had a passion for the finding the best knockers. They were not always easy to find and only the keen well trained eye could spot them either hanging around or lying right there at our feet. It was only as I matured into the late pre teens that I realized size was not the only criteria for winning the battle of the knockers or conkers as many a city folk called them. (Note: Conkers being derived colloquially from the word conk which means to hit on the head)

Why are they doomed? It is not for the lack of chestnut trees but rather the ever spreading morass of rules and regulations meant to keep us and our children safe from harm or these weapons of mass destruction. On a recent trip to the UK my wife’s relatives broke the sad news to me. It was now against the rules and regulations of UK society in most areas to play with knockers or conkers (you pick the word that best describes your nuts). The UK law makers believe it is unwise and thus unsafe to play with conkers for in battle pieces of the chestnut may fly off and puncture the player’s eye. Since it would be impossible to enforce the other option, making safety glasses mandatory for all youths playing with congers, we just banned congers and knockers.

Doomed like so many dangerous escapades of the youth. No longer could a youngster search for the perfect chestnut to be transformed with a simple but minimalist hole through it and a string attached into a weapon of mass destruction. Size did not really matter as the mid size, very firm, and less pulpy chestnut actually ruled over the big soft knocker. Ah, we do want to make this world a safer place. Doomed is the fun of conker versus conker in a battle to the finish. The upside is that there are more for the street chestnut vendors.

Not that I ever put HP Sauce on my chestnuts but I have used a lot of the brown liquid on everything from steaks to sausage rolls. HP Sauce to me was an icon of British taste. Once the Brits had cooked the flavour out of the meat the only thing redeeming was the fact the meat retained the ability to transport ever so effectively the HP Sauce to one’s mouth. It was and still is a great sauce. Many a savoury garnish has come and gone but the HP has never lost its favoured or should that be flavoured status. Now the Birmingham plant that produces the entire HP is closing and the sauce’s blending and bottling are moving to the European continent where Heinz feels the economies of production are better.

Everyone seems to be in a frenzy to change the decisions of learned men and women who see HP as just a food product and not as an icon of Britain. Will this mean the House of Parliament on the label will be replaced by some Dutch icon? Will the waters of Holland have the same chemistry as the waters of Birmingham? Since many see HP as synonymous with House of Parliament will the name change to EU Sauce? From my relatives to the highest ministers in Britain the uproar grows but sadly most deep down one cannot stop the mega corporations from doing their thing. Years from now, should the protests fail to garner Heinz’s reversal of policy, will we have forgotten HP as we pour EU all over our succulent steak?

After the loss of the conkers and knockers what is the mere loss of a sauce? A lot as these are all cumulative actions of the modern human and play havoc with the older generation. I can only hope the taste remains the same and the tears of 125 workers in Birmingham do not taint THE brown sauce passionately labelled HP. Sally and David please put some last bottles of Birmingham’s finest for my next visit.

Makes all the changes in the insurance industry pale in comparison. What could be more important than outlawed knockers and where a sauce is made?

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Blasé

“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 www.kpmg.ca .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.