Posts Tagged ‘strategic planning’

Will a Financial Tsunami Hit the World’s Insurance Markets?

March 17, 2011


By now no one on the planet is a stranger to the disaster in Japan that continues to unfold as I write this.  A devastating 9.0 earthquake that triggered a massive tsunami has inflicted on northern Japan a disaster of biblical proportion.  Even now unfolding are potential disasters at 4 nuclear reactors impacted by the earthquake.  Fuel rods have been left exposed, the containment chambers cracked open, and radioactive gasses are leaking into the atmosphere.  The magnitude of the disaster continues to grow by the hour.  Deaths are conservatively being estimated at 15,000 people although there are whole towns that are unaccounted for and this number will likely climb.

As bad as this is for the Japanese people, it will soon have a ripple effect across the planet.  Japan is the third largest world-wide economy and its government, businesses and people are one of the largest investors in the United States.  Those investments are being called back to begin funding the rebuilding of Japan’s infrastructure.  With that lending capacity out of the market the cost of borrowing will start to rise.  Boston-based AIR Worldwide, an insurance catastrophe modeling firm, has estimated the insurance costs associated with just the earthquake to be upwards of $35 Billion.  The overall costs will go up when the effects of the tsunami and the potential for radioactive leakage from the troubled nuclear plants are factored in.   Herein lies the second impact on the global economy.

Insurance analyst had estimated that it would take a $50B event or combination of events this year to turn the insurance market away from its decade-long pricing slide and trigger a hard market response.    The last 4 months have seen a $10B earthquake in New Zealand and another $10B in losses associated with continued unrest in the Middle East.  The Japanese earthquake and tsunami will easily tip the scales above $50B in just the first quarter of 2011.  If indeed the analyst are right we may see an unprecedented increase in insurance prices due to capacity problems with the global reinsurance market.

Captive insurance programs have often served as a refuge when overall insurance market prices increase.  The critical aspect to involvement in a captive insurance program now is the timing.   In order to derive maximum value to a captive program you must initiate it ahead of the crisis.  Businesses that have historically been at the forefront of risk financing instability like transportation, energy, manufacturing and medical professional liability need to take immediate action if they want to mitigate the impact of this global shift in insurance costs.  Captives, and other alternative risk structures, can provide insurance capacity where there is none in the market.  They can also mitigate your exposure to rising insurance costs.

If you are interested in discussing how an alternative risk program can benefit your organization we have a team of consultants and advisors ready to meet with you.  Contact us at 440-264-9992 so that we can direct you to one of our team members.


The Broomball Coefficient of Anticipation

January 18, 2010

I graduated with my BS in Business from Lake Superior State University in Sault Ste. Marie, MI.  Located in the north-eastern most corner of Michigan’s Upper Peninsula, it is a place of serious winter and unless you figure out things to do when it’s cold out you will never venture far from your dorm for months at a time.  The history of broomball is sketchy, but it is enough to say that it is one of those ideas that creative folks in cold places hatch to have fun in an otherwise hostile environment.

Broomball is played on the ice and has goals similar to hockey.  The players wear tennis shoes and use what looks like a corn broom cut off at the stitches to direct a small ball into the goal.  The action is much like hockey with one notable exception.  Tennis shoes don’t get any traction on ice.  That lack of precision in movement contributes to a need for planning plays that goes beyond anything in hockey.  Beside the typical dynamics at play in any sport, now you have the reduced ability to execute precisely.  You must introduce a “factor” into each play that actually causes you to execute before the precise moment you would normally execute the play because the ice is slippery.  In order to figure out just how much anticipation is needed you spend a lot of time on your butt or sliding past the goal or shooting and missing altogether.

Sounds like the real world doesn’t it!

When you are planning risk transfer and risk financing mechanisms there are numerous financial, actuarial and catastrophic loss models that can help you to make sound decisions; but at the end of the day there is a lot which cannot be completely controlled.  I call this the “Broomball Coefficient of Anticipation”.

The reason why insurance is a prime example of this coefficient in action is that its modeling is almost exclusively retrospective.  Insurers price off of historic loss histories, expectations of future catastrophic loss are based on where they have happened in the past, essentially navigating forward by looking in the rear view mirror.  Don’t get me wrong, since none of us have crystal balls to predict the future we have to have something to hang out hats on and, at least statistically, the past has been a pretty good indication of future events.

If we were operating in an environment where we had the sure footing of a manicured baseball diamond or the turf of a football stadium or the pitch of a soccer field we could execute our plays instantaneously and with precision.  But in insurance we are playing on ice in our sneakers.  One of the tenets of the “Broomball Coefficient of Anticipation” is that if you wait until all the scientific loss models show its time to execute, it’s already too late.  That’s why you see the insurance industry as a whole constantly being reactive instead of proactive with just a few exceptions.

Of all the segments of the insurance industry, alternative risk is the most likely candidate to take the Broomball Coefficient and use it to best effect.  Captive insurance companies are the most efficiently capitalized, agile and responsive insurance mechanisms in the industry.  Because they are responsible for serving the needs of a single client or a very small clientele they can quickly execute on initiatives to meet strategic goals and can often do so in anticipation of need as opposed to in response to a need.

The only thing lacking to most captive insurers is a partner that knows how to execute while running full speed on ice in sneakers.

Email me at if you would like to discuss this more.

Ibi est Vox in Sermo

March 31, 2008

In conversation there is power. 

I want to thank everyone who visited the weblog in our inaugural week last week.  The emails and comments were very encouraging  and have convinced me that I need to continue posting about the fundamentals of captive insurance programs. 

Let me invite you to offer your own opinions, questions and additional thoughts to the postings.  I think the current insurance market is reaching rock bottom and now is the time to begin thinking strategically about how captive insurance initiatives can be utilized to the advantage of good risks in a developing hard market environment.  It is this type of collaborative effort that I want to strive for on this blog.

You can reach me by email at Our web-page is and our Bermuda captive management sister company, Cedar Management Limited, has a website at

I look forward to your continued interest. 

Supply and Demand- It’s Impact on Insurance Pricing

March 31, 2008


 Insurance is a supply and demand type of product.  In order to provide insurance coverage the insurance company has to pledge assets to support the losses on that insurance.  Depending on where the insurance company is domiciled there are different standards for how much surplus has to be leveraged to support insurance premiums.  Most US traditional insurers leverage their surplus between 1:1 and 2:1, premiums to surplus.  The limiting factor for overall insurance capacity then is how much surplus is available.  Surplus is contributed to insurance companies by investors, for the large part shareholders of the publicly traded stock insurers.  Shareholders are drawn to a particular investment because there is a good chance of earning a significant return from the investment.  Insurance companies connect these dots and then make decisions on which insurance segments they will deploy their surplus into in order to get the best return on investment.

All this works well for market segments that exhibit stable and profitable results overall.  But what if you are a good player in an otherwise iffy market segment?  In a soft market the differences between good and iffy are not as distinguishable, but in a hard market, where premiums are rising as a result of external pressures, insurers have to start making tough capital deployment decisions.  Remember they can only write insurance premium in an acceptable ratio to their surplus.  Markets that are iffy get the short end of the allocation stick and as a result the reduced capacity for that market makes the prices jump dramatically for that segment.  Think trucking, medical malpractice, tough workers compensation exposures, residential home-builders, product’s liability, coastal property, etc….Remember that we are not talking about all risk in these industries.  Let’s face it some accounts deserve the pricing they get, but there are accounts that represent excellent risk characteristics in every market, regardless of what that market’s averages are, and these are the prime targets for captive insurance involvement.

A captive insurance arrangement in essence creates capacity for its owner-insureds and it often does so in a regulatory environment that supports premium to surplus ratios that far exceed that of traditional insurance companies.  These leverage ratios can be as high as 5:1, making for a very efficient use of corporate capital to support risk transfer needs.

By further connecting underlying captive insurance capacity with reinsurance placements a significant amount of capacity can be created in a market segment that might not have had any reasonably priced capacity available at all.  The best accounts in a market segment can leverage their own investment in loss control and risk management in order to take control of their risk financing costs even in the hardest part of the insurance market cycle.