Dave Matcham

Welcome Tax Relief

At last some good news from the UK Government on tax for London market companies. The recent pre-budget report proposes the introduction of an exemption for foreign dividends which should increase the demand for London as a financial centre. Essentially London operations with subsidiaries in tax havens such as Bermuda will not be subject to additional UK tax on profits of such subsidiaries, thereby encouraging re-investment into London.

The proposal has been warmly welcomed by the industry. There remain, of course, other tax issues to be discussed with the Government and to this end a new high level group has been formed to provide a direct dialogue between the industry and the Chancellor. Whilst previous groups of this nature have not produced meaningful reform, the Government is still willing to talk which gives us hope of further tax concessions for the London market.

The tax regime is just one factor by which companies choose to come to London. One should add the market’s process efficiency, regulatory framework, supporting infrastructure and availability of talent. Each area has its own initiatives for improvement but the tax area had seen less movement therefore this week’s announcement must be good news.

A Messaging Hub for London- Keeping it Simple

The last main strand of market reform, namely electronic placing is now seeing some real momentum. Whilst there continues to be many individual/bi-lateral initiatives, and, of course, a growing use of RI3K, we seem to have, at last, the gestation of a genuine cross market concept which seems acceptable from a cost and functionality perspective (many still remember Kinnect!). I refer of course, to the proposed Lloyd’s Exchange.

What is it you may ask? It was described quite simply as getting everyone to the table, talking the same language. Essentially it is a messaging hub which will enable any market participant to connect via the web to access basic information about a risk being placed. Brokers and underwriters are free to enhance the risk package as they see fit for their own systems.

The initiative is perhaps misnamed but it has certainly been led and driven by Lloyd’s. After Lloyd’s initial push it has now become a market project with brokers and the company market all gearing up to be involved as early as possible. IUA will contribute to the next phases of the project with great vigour and enthusiasm. We agree that the hub is a real catalyst to increasing e-placing and should show once again that London is increasing its efficiency and demonstrating its innovation to its clients and other markets.

We eagerly await the pilot in the first quarter of 2009.

A better CLASS of Claims Handling

Xchanging hold their annual conference this week, which promises to be a great opportunity for market reform progress and strategy to be discussed by all sections of the market. Much progress has been made since the conference 12 months ago and a widespread cultural acceptance of new processes and technology is clearly in evidence.

20 years ago, back in the days when I worked in the treaty department of Xchanging’s predecessor back offices, the first electronic claim was processed via the non-marine version of CLASS. Groundbreaking stuff – 20 years on, well over 1,000,000 claims have passed through CLASS. With the new repository in place and the market committed to use electronic claim files it presents a similar position to 20 years ago. At that time companies and brokers were preparing for major change, and it is no different this time around. With pressures of competition from other centres and the pressing need for efficient processes, company ECF usage will grow rapidly. We are already at 32% of all new claims – we aim to double that figure by the end of the year.

Hurricane Ike has presented a “live” example to test the resilience of the repository from both a technology and cultural perspective. Both seem fine at the moment however there is no room for complacency as the IMR reaches its own 1,000,000 claims files.

A New Member Company

During the recent turmoil, IUA received some very positive news. Torus, a new entrant to the market, agreed to join IUA. Anyone involved in association life will know that securing new members is both essential and exciting. This result doesn’t happen overnight – much preparatory work and discussion takes place with the prospective applicant to persuade and encourage them to join. Once they have made that decision it demonstrates a real test and vindication that our service offering is seen as valuable.

We often describe ourselves as “that extra member of staff” albeit a highly versatile and knowledgeable resource. We have already begun to work with Torus and look forward to a long and productive relationship.

Whilst we have well over 80% of London market companies, measured by premium volume in our membership, the job of securing members is, I suspect, never complete. We continue to talk to 5 or 6 more companies and remain optimistic that they will join. Our Board recently revalidated our strategic priorities and our Secretariat is very well placed to deliver cost effective services. And, we will soon have the results of our comprehensive member survey. This may well change our offering further – more news soon.

Continued Resolve

Since my last blog entry, so much seems to have happened in the global financial market. With Government rescues, subsidies, stock market volatility etc there are now the inevitable calls for greater co-ordination between regulators when considering global companies. There is a growing fear however that more oversight will be introduced that becomes overburdensome. In addition, recently the CFO Forum has asked for urgent amendments to accounting rules in the build up to 3rd quarter results, proposing that mark to market valuations be replaced.

There is clearly a need for governments to work together and for certain regulatory principles to be re-thought. Banking is the main focus but the insurance industry will be affected. The recent IAIS annual meeting spent much time on mutual recognition discussions and the crisis as a whole, concluding in a commitment to further enhance co-ordination efforts and move forward in development of supervisory standards. This is to be welcomed.

A recent report by the Market Security Team of Willis Corporate Holdings gave some encouraging news in that most general insurers have seen limited impact from the credit crisis, with limited exposure to sub-prime investments. Things could still develop adversely but the findings gave some cause for optimism.

Last but not least, what of the rating agencies – a tighter regulatory environment seems both inevitable and sensible.

Considerable resolve needs to be shown in these challenging times. With this overall fear or expectation of more regulation ahead and more potential “bad news to come out” (D Mahoney recent speech), it is vital for associations and regulated firms to be well prepared in their future consultations and representations to key regulators to ensure such regulation is balanced.

Financial Crisis: Maintaining Stability

I have mentioned before the traditions of the London market and its promotion by the offices of the Lord Mayor. One such occasion was held last week when the Lord Mayor hosted the City Banquet which was timed to coincide with the Chairman of the FSA’s last official function before retirement.

With over 300 senior bankers, lawyers and financiers in the room, not surprisingly the talk was of the week’s dramatic market events. The ongoing stability of AIG and various merchant banks plus the FSA’s ruling on short selling were much discussed. I admit that I had to ask what was “short selling”! Many people work in the financial instrument business, eg. derivatives, credit swaps etc but many more people working in London, me included, don’t really understand these terms nor their effect on the economy.

There was much talk of careful handling of the situation to enable London to retain its global position. There was a plea for no legislative or regulatory overkill but an expectation of changes. The events were global and London needed to be in the midst of the global solution.

The FSA chairman stated the need for greater realism about one’s risk management capability, greater openness on market position with counter parties and the need for deeper and more intensive supervision.

As always the event was well organised and enjoyable. A timely opportunity for wise words from financial leaders – now is the time to put them into practice.

Financial Markets Hit the Headlines

What a last few days for financial news! AIG’s falling share price and subsequent Government rescue, the demise of Lehmann Brothers and Bank of America looking to buy Merrill Lynch – all big names in the ever-merging insurance and capital markets industries. Add to that around $6bn - $10bn losses from Hurricane Ike, one has to pinch oneself to believe its all happening. People often ask what last surprised you in the market – one could almost quote a different thing every 2-3 months.

To reflect the growing linkage between the capital markets and insurance, many national regulators operate co-ordinated regulatory systems. This makes me wonder what changes are in store for the industry as these regulators reflect on the dramatic market developments. I note that EU Finance Ministers met recently to “fireproof Europe’s financial system from the troubles that have brought US lenders close to collapse”. Whilst I assume this is primarily focused on banks, the insurance industry may well be affected by regulatory changes as well as having to react to a growth of Director and Officers claims emanating from the financial institutions. I hope that any regulatory change is balanced between commercial and solvency purposes.

There was also speculation that the US Federal Reserve would not seek to rescue or assist troubled companies this time round. A guaranteed Government back-stop seems unlikely as it could encourage irresponsible behaviour however doing nothing could compound a further growing credit crunch and recession situation. As It turned out AIG obtained substantial support, not to do so could have caused even more problems.

Its hard to take stock and yet on the positive side US insurance regulators should vote next week on new reinsurance regulations which should greatly reduce collateral requirements for non-US reinsurers which in turn demonstrates a level of trust in international regulators and relieve unnecessary liquidity concerns.

As an avid reader of the trade press there seems a lot to digest at the moment. Our industry is very strong and secure and this resilience is certainly being tested at the moment.

What is in a Name?

As I sit amongst the reinsurance industry gathered together in Monte Carlo for the annual Rendez-vous, the mood is somewhat reflective. There is the usual talk of premium levels, retentions, capacity and the global financial situation but also various Christian names are prominent in renewal discussions. As an industry we like to refer to big losses by name or code. Andrew and Katrina is not a well-connected betrothed couple but two of the largest losses ever suffered by the Industry. Now the talk is of Hurricane Ike, last week it was Hanna and Gustav and possibly Josephine is round the corner although “not tonight”. At Monte Carlo three years ago we were already up to the letter “K” (Katrina) so things seem a bit better but the thought of four named storms in quick succession is certainly focussing the minds. Spare a thought for Haiti which seems to be in the path of all of them. Ike wrought significant damage over the weekend and is now battering Cuba and will probably make US landfall somewhere later in the week. These last black clouds may have a silver lining as the threat of further softening rates may be alleviated. The pressure on underwriting disciplines is enormous especially as investment returns and asset valuations are deteriorating.

The market is clearly resilient however – Gustav is estimated to be a loss of at least $5bn and this is deemed to be perfectly manageable. And yet, it will probably feature in the top ten Hurricane losses ever. One wonders therefore how big is a market changing event now? $15bn? $20bn? One can only speculate. Certainly two major losses in close succession would be catastrophic in many ways.

Of course we tend to more readily view these losses from a reinsurance perspective. Let us not forget the significant claims incurred by US primary insurers before reinsurance layers are touched – certainly multiples of the amounts which may be faced by UK insurers from last weekend’s major floods.

Monte Carlo seems more abuzz this year compared to last year, perhaps not surprising were the number of external factors to consider.

Reinsurance Regulatory Reform - A Cause for Optimism

The next few weeks could see both positive and negative developments for the reinsurance industry. On the positive side, the NAIC’s Reinsurance Task Force is now in drafting mode following the recent hearing in New York at which further substantive industry evidence was presented on their reinsurance collateral reform initiative. Conversely, we are in the midst of the US hurricane season and whilst neither Hurricane Dolly or Edouard seemed to have caused major damage or disruption, they are clear warning signs of the potential losses which could fall to the reinsurance industry. Some commentators have remarked that the mid-size catastrophes are barely denting catastrophe reinsurers and that there are various reasons for this, not least improved practices by primary carriers. This still leaves no room for complacency and anything which can place reinsurers in a better preparatory position such as an improved regulatory framework would be welcomed.

Having attended the recent Hearing, the London market should be pleased that signs of collateral reform are becoming crystal clear. The final version of the new credit for reinsurance law should see considerably reduced collateral requirements and a more streamlined regulatory environment. US regulators must however strike a clear balance between political sensitivities and regulatory policy decisions. This could mean that the new law which is enacted is treated as a transitional version before the optimal system of mutual recognition is apparent.

Such comments could only be dreamed of a few years ago. The regulators’ resolve is clear and we should see a much-improved system within a short space of time. Implementation will be key and talk of federal assistance to this end, whilst a little surprising, is probably wholly realistic.

"Interesting Mr Bond"

Two important events occur in the next few days. Tonight IUA hosts its summer party for members, press and other contacts. Next week the NAIC’s Reinsurance Task Force holds an interim meeting to substantially finalise the drafting and comment period on their amended credit for reinsurance requirements. Both events will be exciting – our party has a James Bond theme with our very own Bond villain lookalike; the NAIC meeting should hopefully result in final language which substantially removes existing villainous collateral requirements and also creates a better regulatory framework for reinsurance.

So, how many Bond references can I get into the summary of next week’s meeting content. The current proposal has much to commend it but we can’t yet say that “nobody does it better”! It still has elements of dual regulation and unnecessary inefficiency. The non US reinsurance market has been “shaken” by the rising collateral levels but the state regulations have now been “stirred” into action. Reform is now a question of when not if – hopefully early 2009 once the NAIC has completed its governance process during 2008. Unlike diamonds, 100% collateral is not forever and despite persistent cedent opposition, we were right to “never say never” that change would occur.

Reinsurance is a global business; one might say a “universal export”. The current proposal allows for a non US jurisdiction to be recognised as equivalent but still insists on a second pair of eyes via a port of entry state application. We would argue that this creates inefficiency and if it prevails it should be a point of registration not regulation. Port of entry states must be satisfied about the effectiveness of a foreign regulator. However, primary regulatory oversight by the foreign jurisdiction must be “for their eyes only”.

Also the new regime currently only applies to pure reinsurers, whereas much US business is written by companies who write insurance and reinsurance. We will be arguing for a widening of this provision to cover all reinsurers of US business.

Lastly, the collateral levels are still different for US and non US reinsurers, albeit the gap has closed. If a jurisdiction is duly recognised, its reinsurers should be treated equally.

This is a very short summary of our submission to the Task Force. Next week’s meeting will be critical to the long term policy thinking of NAIC. Luckily the drafting is complete and will not be an issue tomorrow morning – post Bond evening.