Archive for the ‘Wheel-Spinning’ Category

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So Moody’s downgraded Berkshire a while back, which prompted this misunderstanding from Felix Salmon:

Reinsurers used to feel that they needed a triple-A rating because that connoted utter safety: you could reinsure your catastrophe risk with Berkshire safe in the knowledge that the risk of Berkshire being unable to meet its obligations was significantly lower than the risk of, say, a hurricane hitting New York.

Felix went on to add this bit:

Update: My commenters are saying that insurers don’t hedge their counterparty risk to reinsurers. Either you trust a reinsurer or you don’t; if you do, you don’t hedge counterparty risk, and if you don’t, you don’t do any business with them at all. Maybe insurance regulators should be looking into this.

Felix’s commenters are correct in that the rating is a difference of type rather than one of degree. Felix doesn’t like this for some reason, which is beyond me. The issue is twofold: first, policyholder claims are senior to credit claims (this is why insurer ratings are higher than debt ratings) and, two, insurers go into ‘runoff’, not insolvency, and start negotiating with the holders of their liabilities (policyholders, not bondholders). Policyholder obligations are immense compared with bondholder obligations and the consequences of negotiating down bondholders are probably far worse. Why bother when you have a bigger, easier target? Especially for reinsurance companies.

One of Felix’s commenters directs us to the awkwardly named BRAVE Partners, LLP, who have written a paper on protecting reinsurers credit risks with some product they claim gets arond the CDS issue.  They have two key terms in the agreement, it seems: 1. pre-agreed IBNR calculation methods; and, 2. claim triggered only if the name is “unable to pay”.

I’ll leave #1 alone, even though it’s basically a promise to go to arbitration, and skip to #2. How do you define “unable to pay”?  Obviously a company has enough cash in the bank to pay one counterparty’s claims. What about the IBNR on all the other counterparties? Do you apply your magic formula from #1 to all of the company’s liabilities? Will they let you audit their entire portfolio to make sure they can’t pay? Sorry, guys. Nice try, at least.

Back to Berkshire, who has now sold part of its stake in Moody’s. I wonder what the temporal ordering of these events were. Did BRK tell Moody’s they were going to drop their stake and Moody’s responded or is this a retaliation for the downgrade?

All sorts of hat tips to Felix.


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Back to the wheel-spinning department, here is AIG’s crack team of researchers to tell us that clients want service. Boring, sure, but why the picture of the monkey? Well, this is a study of very rich people:

Brokers servicing high-net-worth (HNW) customers have demanded better service from insurers as well as a wider range of cover, according to research by AIG UK.

Well, I guess the market’s shrinking mighty rapidly for the HNW department, so maybe competition is going to increase, not that that point is really a part of the article, because that would require analysis. This one’s good, too:

Ann Owen, vice president for AIG UK’s private client group, said “For some time we had had anecdotal evidence that broker and client demands were shifting in this market…”

Shifting to wanting more service? And AIG has a department of people whose job it is to unearth these stunning insights?

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Ever felt like spinning your wheels for a while? If you love wasting time and energy for a cheap headline and no action whatsoever, then, please, step right up and conduct (another) climate change study on the insurance business. Don’t want to write one, but feel left out? Well, just report about it like it’s news! You get flashy headlines like this:

Climate change will dramatically alter global business and trade

and newsbites like this:

“Climate change will change the way we live and work, and will lead to greater competition for scarce resources, such as food and water. This is likely to result in increased economic nationalism and greater global insecurity, which will in turn add to the complexity and cost of doing business.

“Every organisation needs to have a clear understanding of its particular vulnerabilities and have in place a range of mitigation strategies. Their ability to understand what the impacts of climate change are going to be could not only protect them from threats but could also open up new business opportunities.”

What on earth does that all mean for you? No idea. Climate change is a nice re-euphamisation of Global Warming, and is maybe considered a little less accusatory. Or maybe the science isn’t qutie strong enough to say much of anything. Not that I particularly care either way.

I just think it’s ridiculous for people to spend resources examining these questions when they have absolutely no power over as individuals. But it doesn’t work unless we all unite!

HA! Since when has any large group of people consciously united for anything other than war!? You’re not up on your Hayek.

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