Over the Top, But Not Off the Boil

November 20, 2006 By: Morton N. Lane, President  Inour April 2006 review of insurance securitization “How High is Up?” weoffered a view of an index of reinsurance price shifts over time. Thatperspective allowed us to observe that premiums were at historic highsand close to their tops. If anything, we were premature in thatassessment. The months immediately after our paper saw a frenzy ofpre-storm season activity which resulted in peak prices in June andJuly of this year. The question now at hand, however, is what prices to expect in the January 2007 renewals? Theindustry traditionally gauges renewal prices at its annual gatheringsin Monte Carlo, Baden Baden and the PCI Conference, and this year’sverdict seems to be that this will be a “hard” renewal, i.e., priceswill remain high. However, that has to be qualified. It certainly willbe hard compared to last January, but how hard will it be compared tothe mid-year activity? There the answer is more vague. Consensusappears to be that prices will not be quite as high as mid-year butwill remain strong – over the top, but not off the boil, so to speak. To read the full version of this article with graphs: Download the PDF Here <

 

How High is Up?

April 21, 2006 By: Morton N. Lane, President and Roger Beckwith, Vice President As this is written, there is a constellation ofhighs in the financial markets. The stockmarket is near a 5year high, gold is at a 25year high, US government bond yields are ata 4 year high, oil is at all time highs andreinsurance costs are at a 12 year high. Wecould have thrown in housing andcommodities for good measure, but whateveris in this constellation, we make the confidentprediction that it will not last. That isespecially true of the current high level ofreinsurance prices, especially if the upcomingstorm season is benign. Absent a quiet seasonall bets are off. As it is, however, the currenthuge increases in insurance rates is a signal toreluctant capital to “come on in, the water isfine”. As we reported in What Katrina hathWrought, Jan. 2006, capital markets haveresponded to the tune of some $20 billion bythe end of 2005. It was not enough, becauseperhaps of the attractions of other markets,and the welcome flags of high premiumshave been hoisted even higher. To read the full version of this article with graphs: Download the PDF Here

 

What Katrina hath Wrought

January 6, 2006 By: Morton N. Lane, President Itis now more than four months since those three wicked witches of thewest, Katrina, Rita, and Wilma, devastated the Gulf of Mexico and itssurrounding coast line.  Collectively, according to Property ClaimsService (Nov. 28), these storms caused over $50 billion dollars worthof insured loss and multiples of that in non-insured losses.  And, justas the physical landscape has changed but is slowly recovering, thefinancial landscape in the world of insurance has shifted and is beingrepaired.  Insured losses have rippled and are rippling through theprimary insurance market, the reinsurance market, the retrocessionalmarket and the hybrid market (i.e., cat bonds, insurance-linkedsecurities, industry loss warranties and the like).  Keeping track ofthese changes is not easy, but it is important.  Predicting the shapeof things to come as a result of change is, hopefully, easier thanforecasting a storm track, but the consequences for participants in anyof these markets can be just as severe. To read the full version of this article with graphs: Download the PDF Here

 

An Introduction to the Benefits…

June 2, 2006 By: Morton N. Lane, President; Jerome Kreuser The use of optimizing models for portfolio selection and construction in the context of insurance is relatively new. Investment portfolio managers regularly rely on optimization, but underwriters are much more likely to use good old fashion trial and error, with some admittedly quite sophisticated, simulation techniques to developing underwriting portfolio strategies. The unique characteristics of insurance risk, e.g. long tails, one sided correlations etc, did not lend themselves to early optimization models but, certain technical breakthroughs have advanced optimization modeling and insurance risk is now a potentially important application. Moreover, once adopted, optimization techniques have considerable informational benefits over simulation. The purpose of this paper is to illustrate these benefits. We do this in two ways. First by tracing out the numerical implications with a simple practical application; second, by introducing some of the algebra4 necessary to extract the benefits in more general and complicated cases. The techniques have been successfully applied in several large scale real situations and further technical details will be forthcoming in subsequent papers To read the full version of this article with graphs: Download the PDF Here <