Is Offshore That Far from Shore?
March 2007
You really have to wonder where this marketplace
is going during the next few years. I still think there is a serious paradigm
taking place which will eventually have some rather interesting consequences
on how this industry conducts its business.
by Peter
M. Polstein
I find it amazing, that the 2006 Atlantic storm season, which dealt prognosticators
a fearful blow at storm assumptions, has left an indelible mark on some who
believe that market conditions not only have softened, but may well continue
to do so in the face of both insurers and reinsurers paying closer attention
to the management of model risk factors and their ability to monitor zonal aggregations
of risk. Please, who are they kidding!
With the continued apparent intervention of our government in the insurance
industry—which in my opinion has no business meddling with and no idea whatsoever
the ultimate price we’ll all pay for its intuitive insight—and the continued
movement of capital offshore, it is possible that our marketplace as we know
it, may be reduced to underwriting basic lines of business.
Why Move Offshore?
This industry, whether anyone wants to admit it or not, has seen a dramatic
shift during the past half decade of not only business, but the basis by which
business is conducted. There have been literally hundreds of newly formed entities
in a wide variety of offshore venues whose sole existence is geared to supporting
catastrophic business, or the support of these thought-provoking entities who
are involved in hedging their risk and the risk of others into the capital marketplace.
Then you have a slow, but continual group of insurers who are quietly installing
segregated cell, protected cell companies in many of the venues which are loading
up with newly acquired capital. Surely, they are not doing this for any other
reason than to employ substantially different methodologies of conducting business
outside of the traditional underwriting practices.
The basic question is why? The answer is not necessarily apparent, although
I have the feeling that we’ll all share in the answer sooner rather than later.
There is no question, that traditional underwriting of basic business throughout
the United States will undoubtedly continue much as it has in the past, but
those risks, where risk is a significant consideration, could well see the placement
of this business in a totally different framework.
We may well see a more substantial move by so-called middle market risk to
offshore underwriting facilities, as either single risk applications. Or it
is quite possible that risk retention groups, or more creative enterprises,
might find their way into this market. It is likely that there well might be
substantial tax advantages through the utilization of this marketplace which
have yet to be considered. The major risk buyer has used a wide variety of creative
off shore facilities, yet this potentially emerging marketplace may provide
some additional excitement in a variety of risk takers.
The Ramifications
What’s interesting in all of this is the potential for the amount of business
which can be underwritten. Last year, the American marketplace underwrote (if
memory serves me) something in the vicinity of $400 billion in gross written
premium. Bermuda, on the other hand, will underwrite something in the vicinity
of $115 billion. But Bermuda has in excess of $300 billion in surplus. Just
imagine writing at 2 to 1!
There are, in my view, some substantial problems which could result in this
potential surge of offshore business, primarily capitalization of the market,
regulatory issues, and my old friend, collateralization. However, all things
being equal, one would think that it would be appropriate for those who are
charged with the broking of business, and with the professional need to fully
understand the risks faced by clients, to be similarly charged with the knowledge
that if this marketplace is in fact moving toward this paradigm, that each and
every one has not only the knowledge, but the ability to move in that direction.
The Development of the Joint Catastrophe Pool
On a somewhat different note, but keeping with offshore, as recently as February
27, 2007, the World Bank in conjunction with 18 Caribbean nations has formed
what is the first Joint Catastrophe Pool which will be apparently centered on
Grand Cayman. Each nation shall provide a fee of $1 million per annum, for which
it shall be "insured" for some $30 million in immediate disaster funding.
The World Bank has a current fund of some $27 million in credits, with an
additional $10 million in reserve, and it is expecting to have "donations" from
the European Union of an additional $50 million. Apparently this will be in
place in time for the 2007 Atlantic storm season. What is interesting is that
funds will be available to each of the governments for the repair of storm damage.
One has to wonder, though, how this will be doled out, as these funds have nothing
to do with traditional domestic or offshore insurers, where placements may already
be in force, irrespective of sufficiency. Is it a step in the right direction?
Time will tell, especially how funds are managed.
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