Posts Tagged ‘USA RiskGroup’

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.

Education is Key to Execution

January 8, 2010

Education is the key to being able to effectively implement and execute a sophisticated risk management regime like a captive insurance program.  This doesn’t only apply to the accounting and insurance professionals that are involved in the day-to-day operations of these types of programs.   It also applies to the risk managers who represent companies that own them and to insurance producers that help to set them up.

There are several venues to learn about captives and how they are used.  The International Center for Captive Insurance Education (ICCIE) provides an online platform of coursework that leads to the Associate in Captive Insurance (ACI) designation.  I am on the faculty for this program and it is an excellent course of study for accounting, insurance and business professionals to get a solid foundation of captive insurance concepts.  You can find more information at http://www.iccie.org/

Several associations provide annual conference opportunities that are full of great educational content.  The Vermont Captive Insurance Association, the Bermuda Captive Conference and the Cayman Captive Conference are all venue-oriented educational experiences and are excellent for delivering timely information on emerging industry issues.

For more general insurance and underwriting educational topics there are several continuing education websites that can provide the ongoing training needed to maintain licenses and credentials.  I sponsor one of these websites at http://cedarconsulting.360training.com

Finally, industry service providers organize conferences that have client education as their primary purpose.  USA Risk Group (www.usarisk.com), the largest independent captive services company, sponsors an annual educational conference for captive industry participants.  This type of conference is typically more focused on the practical nuts and bolts issues of captive insurance and the smaller group results in better access to speakers and service providers.   The conference is highly rated by participants.  This year’s conference will be held in Charlotte, NC at the Ballantyne Resort, May 26th-27th, 2010.  You can contact me by email at dennis.silvia@cedarconsulting.net for specifics on registration for this event.

Education in and of itself is worthless.  It’s not in the knowing, but rather in the application of the knowledge that yields results.  These educational opportunities will give you what you need not only to understand the concepts of captive insurance but to apply them to your circumstances.

Execution is always the factor that divides the successful and the wannabe.  Gain the knowledge you need but don’t forget to deploy that knowledge in a meaningful way to solve risk related problems for your organization.

New Sheriff in Town

April 29, 2009

Depending on which side of the fence you live on you either see underwriters as the scourge of the industry because they get in the way of your producing business or they are the saviors of the industry because they are the gatekeepers protecting the company from risk.  This has been an age old battle and frankly I’ve always seen it as beneficial, helping to make sure that insurance companies write as much good business as they can get their hands on.  If producers want to write everything and underwriters don’t want to write anything then somewhere in between is a healthy balance that allows for something to be written profitably.

The compromise that a risk underwriter can strike with a producer when considering an application for insurance is predicated on the theory of large numbers and the recognition that over a large enough book of business and time that a measured approach to risk consideration will yield profit.  Sometimes they will get it right and sometimes they will get it completely wrong, but on average it will work out.  Risk underwriters are allowed to make a certain number of  mistakes and still be seen as successful.

There is a new underwriting Sheriff in town now and this one isn’t allowed to get it wrong, ever, and its causing a lot of consternation in the alternative risk and captive insurance arenas.  Credit underwriting has long been like a camel poking its nose under the traditional insurance tent.  Granted, there is a correlation between credit worthiness and risk quality and it should be considered as one of the underwriting criteria, but because of the current financial crisis it has taken on a life of its own particularly in risk sensitive programs.

In large deductible and captive insurance programs the insurance company providing coverages  must consider the credit worthiness of the risk taker as a part of the overall risk they are assuming.   These risk transfer programs have elements of both underwriting and credit risk.  Balancing the underwriting of risk has been dealt with effectively over the years by recognizing that if you prudently insure a large enough pool of risk that you will end up winning over time and making a profit.

Credit risk is still a relatively new stand alone discipline and as a result it is still trying to get its footing on what has been a slippery economic slope.  Unlike their risk underwriting associates, credit underwriters don’t have the flexibility to get it wrong.  Credit underwriting to this standard would be like a risk underwriter looking for loss picks in the 90% actuarial range.  It stops being a pooling mechanism at that level and the client might as well completely self insure.  Combine this with the enhanced regulatory and compliance environment that we find ourselves in and we have a big problem when it comes to deductible and captive insurance programs.  Rather than assume a measured degree of credit risk this new breed of underwriter is seeking full collateralization of every deal. Its a bit like the joke that a banker won’t loan you money until you can prove that you really don’t need it.

The solution to this problem is for insurance credit underwriters to embrace the theory of large numbers and to recognize that they can assume a measured degree of risk and on an overall book of business end up being whole.  They, and their managers, must be willing to accept some degree of loss as a part of their cost of doing business.  Until that happens alternative risk program development will languish for all except those that don’t really need it!

Who can you trust?

January 19, 2009

At a time when the nation is being wracked by economic problems its difficult to decide who you can place your trust in.  The very companies that were the pillars of our economic strength have been exposed to reveal that  their foundations have been eaten away by the termites of greed and self dealing.

We can’t just limit our concerns to specific companies either.  Entire industries-of-trust have been impacted.   One of the trust industries that impact our day-to-day lives the most is insurance.  Insurance in particular is an interesting example of a trust relationship.  In exchange for a relatively small premium the insurance company promises to pay subject losses.  It can make this promise because it can figure out how many losses will occur in a particular population of insureds and can charge an appropriate premium to be able to pay for those losses.  Premiums are invested until they are needed to pay losses and at the end of the day a profit is realized.  A symbiotic balance is struck.  Society is served by transferring the risk of loss and stockholders of the insurance company are served because they see a return on their investment.

The breach of trust in the insurance industry is not that the fundamentals have failed us, but rather that they have been ignored.  Management, in many cases, has put aside their responsibilities to stakeholders and have focused on what was best for themselves.

You would think that what is happening to our economy would be a damper to any kind of growth, but that has not been the case in the captive insurance industry.  My consulting practice is an affiliate of USA Risk Group and they reported 13 new captive formations during the month of December alone.  In my practice I am continually fielding questions about how a captive insurance initiative might be helpful for a company’s risk management strategy in the current economic environment.  This may seem inconsistent with what we hear on the news every day, but let me offer some thoughts on why this may be perfectly in sync with our economic woes.

When we are answering the question, “Who can you trust?” the most obvious answer is  you can trust yourself.  Captive insurance is a means of self insurance that allows a company to employ the basics of insurance pricing, claims management and investment control so that they all benefit the company.

Whenever there is a disastrous loss in the insurance market there is always a flurry of new insurance company formations immediately following.  We saw it with Hurricane Andrew, 9/11 and KRW (Hurricanes Katrina, Rita and Wilma).  After each of these events billions of dollars of insurance capacity was created because of the opportunity to compete with insurance companies that had legacy claims issues that they needed to price for.

I think the most recent disaster, albeit man made, is seeing a similar flurry of activity, but this time it will be at the grass roots level.  Companies will be asking the question, “Who can I trust to deliver consistent insurance and risk management services?”  The answer will be, “ourselves”, and the method will be captive insurance.

Bermuda Captive Conference- Cedar/USA Risk Group Announcment

June 17, 2008

All this week the captive community has descended on the Southampton Princess for the Bermuda Captive Conference.  In its fourth year now the conference is well attended with about 500 captive professionals.   The conference includes a specific track for Healthcare captive issues which is curious since for many years Bermuda neglected this market segment, essentially putting Cayman into the healthcare captive business.  Perhaps this is an indication that Bermuda is now welcoming this segment into the ranks of the largest global captive domicile with nearly $30B in captive insurance and reinsurance premium during 2007.

My own company, Cedar Management Limited and Cedar Consulting LLC had a big announcement just before the beginning of the conference.  We have reached agreement with USA Risk Group, Burlington, VT for them to purchase a controlling interest in our companies.  The original partners of Cedar will retain a significant ownership percentage and the companies will continue to trade in the US and Bermuda under the Cedar name.  We are very excited about the opportunities that this presents for our company and our clients.

More news from Bermuda to come over the next few days.