State of the Industry

Wow, has it been August since my last post?! Sorry to all of my devoted readers. (Insert sarcasm here)

It has been a rough two quarters for the insurance industry. AIG is now owned by the US government. Hartford and XL have lost 90% of the share value. Large brokers have posted earnings down 50% or more from the year before. We believe that much of the pressure on the Property Casualty insurers is a bit overblown. The media seems to latch onto the troubled assets within AIG, XL, Hartford and many Life Insurers. These toxic assets are downward drags on the parent companies, but the underlying property casualty insurance entities are doing well and are well capitalized. It's important to separate the two, since the States control the underlying insurance companies and their capital cannot be touched for losses at the parent level. We are actually quite bullish on the property casualty business, particularly if AIG can spin off their main insurance operations AIU, which would help stabilize the industry. So, what does all of this mean to you the insurance buyer? Well, that depends on your industry sector.

Let's first look at the traditional commercial coverage of property and casualty: Worker's Compensation, General Liability, Property, Umbrella and Auto coverage. We are still seeing aggressive pricing and coverage terms for our clients in the Technology, Life Science, and Financial industries. In fact, recent rate reductions in NY for worker's compensation last year have resulted in lower costs for certain geographic areas on this year's renewal. We do see a firming on pricing... a holding the line for these types of insurance. The less profitable underwriting results of 2008 coupled with diminishing investment returns will force higher rates over the next 12-18 months, but for these lines of business there is capacity and competition, so we believe it will remain flat to slightly up.

Now let's look at the Professional and Management Liability side of the industry which encompass Directors and Officers, Error's and Omissions, Product and Clinical Trial Liability, Crime, Fiduciary Liability. In general, the market is still soft for private company D&O, but we are beginning to see a firming on the price as the financial crisis continues to force bankruptcy and closures. If you are in the financial sector this has been a DISASTER as pricing has been up anywhere from 25-100%. Our hedge funds that had solid performance and low redemptions faced flat to 10% increases. Any blip on performance, a fund closure or massive redemptions have resulted in major increases for our hedge fund clients. The other professional lines, particularly E&O are still in soft market cycle and more and more players are creating downward pricing pressure. This is a good time to be a technology company as your costs are still in line with 2008.

My advice for this renewal period: get ahead of the curve. You will likely need to provide more information than ever before and underwriters will be looking to push the pricing, so being out early provides time to find alternatives if your incumbent insurers are not keeping your costs and coverage in line. It will also be important to ask about the financial stability of your insurer and make sure you have A rated companies from AM Best.

These are challenging times, but that means there is tremendous opportunity.

Regards,

Rick Maloy

When Will Insurers Get the Big Picture?

This has been an interesting week. I learned a great deal and that's always a good thing, except when you learn that your industry is still woefully behind the times. A serious snafu in policy issuance has got my goat this week.

In the early part of the 2000's we attempted to change the way that client information was delivered to insurers by centralizing it in one location that could be accessed by all: insurers, clients and brokers. Our technology worked, but alas we were 8 years too soon and the tech bubble burst...the beat goes on.

Eight years later there are a handful of insurers that have some solid policy systems that are helping to bring one of the most important but often overlooked services of our business into the present., but they are few and far between. What is it you ask? ACCURACY in issuing the policy and making sure all of the terms of the binder are actually on the policy.

Yes folks, the insurance industry still has people manually typing endorsements. It takes months to create a new policy, especially if you have negotiated manuscript terms. When you get the policy you better have your outside or in-house counsel check it...since it will be wrong. Why will it be wrong? Insurers have not invested in systems that allow for a collaborative platform for creating the policy at the point of negotiation. You have the equivalent of a third grade game of telephone...at the end the story is always different. This is an extremely dangerous game for you and your client. Dust off your E&O policy.

Let's hope the insurers get their act together soon before they get passed by for more efficient risk transfer mechanisms. Well that's my beef for today...I've gotta run...I'm going out to create a captive so that we are in control of terms, conditions, pricing and policy issuance for our clients. I guarantee it will be accurate and come from a platform that allows everyone to see the policy before it gets issued. We'll run circles around the competition.

Cheers.

In the News

AIG's huge 2Q loss shows credit market woes linger -- Thursday August 7, 12:52 am ET

Credit card thieves ran a polite, professional help desk -- August 6, 2008

ID theft ring attacked retailers on multiple levels, The attacks cost retailers and credit card companies tens of millions of dollars -- August 6th 2008

Cyber Security Insurance Protection

Hey folks,

Thought I would bring up a fun topic that has IT managers and CIO's up at night.

So what happens when you systems are breached? Did you lose client information? How about employee information? How about your own proprietary data? What is the cost of the disruption of your business, are you losing revenue? Are you now being sued by clients or employees as a result? What costs are associated with the remedy?

Your systems, data, proprietary models and investor information are the cornerstone of your business. How safe are they? We have talked through and asked questions about your backup systems and redundancies, but what happens in the event of true breach? Most of the property policies will cover just the damage to the servers or hardware and little else. The crime policy will provide protection if your employees breach the system, but what of the external hacker?

There are several players offering the coverage: Chubb, AIG, Hartford, Media Professional, and ACE to name a few. The following is a synopsis of the Chubb offering and many of the other markets have similar protections.

This is an often overlooked coverage and has major ramifications for an enterprise. Costs are in the $70K to $125K for $5MM in protection for a financial enterprise and less costly for software and life science companies.

CyberSecurity by Chubb
Chubb Specialty Insurance

Are your financial institution's computer systems impenetrable?

Even if you have the most state-of-the-art security controls, your customers, shareholders and corporate assets could be at risk. Spamming, hacking, pinging and denial of service are just a few of the fraudulent cyber-attacks that can bring your computer systems to a grinding halt.

CyberSecurity by Chubb for Financial Institutions offers a solution to the risks associated with doing business in today's technology-dependent business environment. CyberSecurity by Chubb provides insurance for direct loss, legal liability and consequential loss through six unique insurance coverages to help protect financial institutions from the emerging risks associated with e-business.

Cyber-risk and traditional insurance

The risk
Conducting business over the Internet, sending confidential information over networks or even just hosting an informational web site puts your financial institution at risk to fraudulent and criminal acts such as:

• Hacking into an organization's network and copying confidential information
• Unauthorized access into a financial institution's system to steal money or securities
• Using a fraudulent electronic signature to apply for and receive a loan online
• Hacking into a web site and posting lewd or false information on that site
• Launching a virus that destroys critical corporate data
• A spamming event that shuts down an organization's online service

Insurance gap
Does your institution relies solely on its fidelity bond or other traditional insurance products for protection against cyber crimes? If so, it may have some serious gaps in its insurance portfolio.

• Fidelity bonds protect from the loss of property as a result of first-party crimes such as employee dishonesty, forgery, theft, destruction or disappearance. Fidelity bonds don’t protect your financial institution from hacking, spamming, theft of confidential customer information, cyber attack, business interruption or electronic signature fraud.
• Property policies work well when addressing physical damage to insured property and the resulting business income and consequential loss if it results from direct physical loss or damage to tangible property. This means that your business could be inadequately protected against the financial impact of a hacker or cracker taking down your web site.

Our policy

CyberSecurity by Chubb for Financial Institutions is intended for all financial institutions, addressing their most vulnerable e-commerce exposures in one straightforward policy. The policy consists of six insuring clauses:

• E-Theft
  Designed to help protect from losses resulting from:

• The transfer, payment or delivery of funds or other property due to a cyber attack
• The misappropriation, copying or duplication of confidential customer information or records by hackers, crackers or employees who breach network security
• The physical loss or damage of stolen electronic media

• Denial or Impairment of E-Service
  Helps protect your financial institution when your system is subject to a cyber attack or fraudulently accessed, regardless of whether there has been direct physical loss or damage to tangible property. This includes system slowdowns or shutdowns caused by cyber attacks, such as worms or spamming.

• E-Communication
  Despite firewalls and encryption, it is impossible to guarantee that transactions over the Internet are 100% secure. This insuring clause applies to loss when an electronic communication is sent from your institution to another institution to initiate, authorize or acknowledge a monetary transaction, and the communication was either not sent by your institution or was fraudulently modified during the electronic transmission.

• E-Vandalism
  Hackers and crackers have made e-vandalism – the malicious vandalism of any data, instructions or communications within your system – an even greater issue to manage than property vandalism. E-Vandalism insurance helps your institution pay for the direct cost of restoring the integrity of your site in the aftermath of such an event.

• E-Threat
  In the past, kidnap, ransom and extortion referred primarily to people or physical property. Today, it can refer to threats made against your system that could result in taking your system off line or a breach in your network security (e.g., the release of confidential customer information). This insurance reimburses for expenses you incur to mitigate loss in the event of an alleged threat (provided the threat is technologically credible), rather than wait for the perpetrator to act on such a threat and risk any downtime. We will also pay for fees and expenses of any independent public relations consultant if your firm has been the target of such a threat.

• E-Signature
  In June 2000, the United States enacted the Electronic Signature in Global and National Commerce Act – allowing consumers and businesses to sign contracts online and know that their "electronic signature" is just as valid as a "wet signature." E-Signature helps protect your institution from direct loss resulting from accepting a customer's electronic signature on loan agreements secured by real property, such as a mortgage, and then discovering that the electronic signature is fraudulent.

Specialized claim service

We know that financial institutions require specialized claim handling due to the unique nature of the losses. E-business risks increase your need for claim professionals who not only have a deep knowledge of your industry, but know how to handle e-commerce claims. Chubb claim professionals offer the following:

• Our team of fidelity claim experts have a deep knowledge of your industry
• Our claim specialists understand technology and how CyberSecurity by Chubb responds in the event of a loss
• We provide local claim presence in field offices around the world
• Chubb's hallmark claim service means that your claims will be handled with empathy in a prompt and fair manner

Investor Fraud Insurance

This product is geared more to the hedge fund world and we have seen some traction mainly from the fund of fund and pension managers.

Protean (Lloyds), has launched a new product which provides protection from fraud for investors in hedge funds. Investors can either be individuals or companies (including fund of funds companies). This may be helpful to fund of funds, pension trust managers, or concerned investors within your fund. If any of your investors are looking for assurances this may be a product for them to explore.

The recommended limit would be set at the amount of the largest single fund investment in a portfolio. The approximate premium will be 20 basis points (0.2%) of the limit, yet this premium charge may be lower depending on the risk of the portfolio involved. For example, an investor has a $100M portfolio invested in 7 different funds. Of these 7 funds, 6 of the funds are investments of $14MM each and the 7^th fund is an investment is $16MM. The recommended limit would be $16MM. The premium would be approximately $32,000 (20 bps on $16MM) or lower (could be as low as 4 bps, or $6,400 in this case) but will likely fall somewhere between $6,400 and $32,000.

Our client base, and this distribution list, includes fund of funds and this is most relevant to them, but we thought it would be valuable for our pure hedge fund clients to know this product is available. It may be useful when dealing with investors’ requests for your insurance limits and coverage. This could be a practical recommendation for a concerned investor if they are not satisfied with your own protection.

Feel free to contact me with any questions. 646-722-9347 or e-mail me at rick@maloyrs.com

Weekly Links

A.M. Best Affirms Ratings of AXIS Specialty Limited and AXIS Capital Holdings Limited -- Tuesday August 5, 10:07 am ET

Markel Reports Second Quarter and Six-Month Results --
Monday August 4, 4:39 pm ET

Cyber losses cost Canadian companies $637,000 a year, says IT study -- 7/30/2008

OneBeacon 2nd-quarter earnings fall 62 percent, beats analyst estimates -- Friday August 1, 9:41 am ET

Fitch downgrades Security Capital Assurance, XL Capital -- 10:39 a.m. EDT July 29, 2008

Hartford Q2 operating earnings down -- Monday July 28, 8:49 pm ET

Navigators Reports Second Quarter Earnings -- Monday July 28, 4:05 pm ET

CNA Financial 2Q profit falls 17 pct -- Monday July 28, 12:27 pm ET