This product has far reaching implications. I’d sure like to hear more about it. I’d be interested in the guarantees that replacement policies will be issued and how it potentially relates to reinsurance placements.
The product sounds like an “credit swap” for insurance, essentially an “insurance swap”
Thomas – you are dead right, it is a credit swap. One would have thought that we have seen enough damage from credit swaps and derivatives to last the industry for a life time. It will be fascinating to find out who the insurer/s physically turns out to be.
That’s all we need is a second layer of folks going belly up and out.
first of all peter is a creative guy. Option structured deals have been utilized before but in different ways, more often in reinsurance. Programs have been structured to respond (drop down or DOC covers) related to failure to pay circumstances. Replacing a program in full especially in prof liab, could be challenging as you have follow leader terms, continuity of terms issues, etc and why replace the full program when the problem may be (likely) isolated? Further, while I am inclined to replace policies of an impaired insurer under todays circumstances because of credit risk, especially high profile and long tail policies, in the case of AIG the insurance subs remain fully operative and A rated supported by the state ins. funds and the large brokers still have them on the approved list. Did the clients activate the shadow policy mid-term and pay short rate penalty. Why not structure the shadow policy as a credit default product running on a parallel term only responding ‘failure to pay”, which is common for r/i recoverables. This would be much cheaper and less disruptive. mpc
Is this the mike cahill who I used to drink with???
Mike- U be surprise how inexpensive the Super Continuity is and although I am not in a position to disclose, I can assure you it is less expensive then a credit deal.
Also, I believe its important to understand that we do not “replace” the whole tower (keep in mind on the few we have done the Insureds buy over 100 million. We lock up half or so. The reason for this is once we get out of the “burn layer” (subjective in D&O), the pricing is more reasonable thus we feel we do not have to lock up. You should send us some business:)
I have been doing business with Taffae for 10+ years. This is not his first creative idea. he has been doing D&O/E&O for 25+ years and he knows the history and product better then anyone I know. He is a professional.
Exactly what this industry needs more of—out of the box thinking. Who would have thought a wholesaler would be this smart??? Taffae’s been around a while and he is well thought of in the underwriting community this is not his first new idea. He is fair and cutting edge. nice job!!!
Southwest is one of the best airlines in the industry. For them to approve of such a D&O program, I would imagine a lot of time, research and consultation with Mr. Peter Taffae went into it. Kudos to Peter for bringing this innovative new idea to Southwest and the D&O world. DING! You are now free to move your D&O program (within the next 10 months).
I can’t say I understand the exact terms of how this is different from other credit swaps but the question of the hour is just this: what are the reserve requirements, if it is supposed to act like insurance? That has been the problem with other derivatives and more to the point, do they add value or is it just another house of cards?
Let me add that what I am getting at is if this were to be widely marketed, others will want to cash in and that is how things get out of hand. Sounds like Mr. Taffae has found a niche for a useful program that transfers risk in an acceptable manner; good luck and hope that no one steals your thunder or runs it into the ground.
This is a very creative idea and I find it interesting that it comes from a small firm like Taffae’s and not one of the large brokers. What contingency plans have the large brokers made for their clients who have coverage with AIG? Probably none. This is obviuously a guy who understands risk from a number of prosepctives and is able to think outside of the box to the benefit of his client.
Well planned innovation to the D&O form. Anyone still considering allowing AIG to participate on a D&O program needs to structure the insurance tower with the modification that Mr. Taffae has devised. Congrats to E-Perils for bring significant value added to the table.
This isnt new. Bermuda insurers have been offering coverage for rating downgrades for years. There are a number of issues.
When the shadow contract is triggered the new premium will have to be paid. The old contract will be cancelled for a return premium. Well in many contracts, especially AIG, the minimum earned premium can be very high. Hence the client may get stung when cancelling and find they dont get a return.
Further still if the original contract insurer has had more than a rating downgrade, and some major financial issue, the chances of getting anything back at all is minimal.
This means the new contract, even if the premium was the same as the main insurer, when activated, the remaining premium retained by the bankrupt insurer cancels any real advantage.
Also apart from speed – having the ability to automatically get the coverage, whats the real point? afterall if the main insurer was downgraded it would take 24 hours to replace them anyway. with downgrades the claims on the main contract will ultimately still be paid so a simple cancellation and replacement is easy.
Another issue is the trigger for 12 months. Insurers would do this but if the account had a loss, or several losses, since they first reviewed the deal, its doubtful they will commit to an automatic trigger at the same terms and premium, unless its subject no losses. This makes it again quite pointless.
Finally there isnt many insurers that will bother to review a contract knowing that they probably wont get the main deal. Ok they get free money, but the few % probably wouldnt cover the cost of RMS, admin, and contract.
Its doubtful a client will buy it as inlike financial options. If the get downgraded, cancel and replace. Having it automatic is pretty useless.
Saying all that it is worth offering the option as obviously in an insurance placement you will have other carrers that got close but didnt win the deal. Its easy to offer it but will anyone buy it? No
Seems you coming from this with a property head on. While I agree with most of your comments I believe this can be sold and is being sold in a variety of business areas. We have been using Bermuda or more specifically Ariel Re for shadow covers. They actually approched us with the idea. Its worth pushing to sell as even though – yes you can replace a contract in 24 hours – the client does get piece of mind having the double cover.
We wont go into the fact that the back up insurance contract is probably reinsured by the same reinsurer as the first one. But thats an insurers problem.
NOW………… selling this as a reinsurance shadow. Thats an idea. With premiums into their $100m a option on that at 1-2%, now you are talking. Plus an insurer being of a far more savie mind set and need for that cover to be firmly secure, that could be an area to sell. Especially as everyone saw AIG as a temple, Munich Re, Swiss Re, hannover Re, no one is safe.
hmmm maybe I should have kept that idea quiet. Calling up some treaty reinsurers right now!
Other things we are selling more, same kind of thing, we have set a trigger for 12 months coverage for a ‘shadow’ policy at the same premium. WHY? It basically protects the client if they have a heavy loss OR the market hardens heavily. It guarantees that ‘shadow’ premium (which is always the same) stays at the same rate in the next year. These do sell as the market is so soft, plus financial clients like to tie in the fact they know for budgeting the premium will hold. If the incumbent tries to push prices up, well they get replaced automatically or have to keep prices down.
This differs in that it only triggers at expiry of the main contract but its placed early based on what the account was then, before a market hardening event or losses on that particular account.
Note assume you use this as well as Ariel is anothe one offering this one as well as other carriers.
This is superior to this idea as the client gets peace of mind they have the same premium for if that other insurer gets downgraded (they know they have cover for next year) BUT also if any other major insurer breaks down (that will lead to a hardening market anyway) BUT ALSO if that account gets heavy losses in the year its still protected to not get a rate rise.
Now thats the idea you want. No issue with MEP or anything here, and, it sells.
D
Sorry bit unclear there
Its basically a quote thats stays open 12 months and guarantees the same rate, whatever happens. There is no actual trigger as such they just have the option to go at the expiring rate no matter what happens on the account or in the market (subject TIV within +-5% etc) Hence they dont get a rate increase due to something totally unrelated like AIG crash (if AIG not even on risk), hurricanes, EQ, terrorist strike etc. They have peace of mind the pricing will stay and that insurance is available. Thats worth buying as the market right now is rock bottom.
This product has far reaching implications. I’d sure like to hear more about it. I’d be interested in the guarantees that replacement policies will be issued and how it potentially relates to reinsurance placements.
The product sounds like an “credit swap” for insurance, essentially an “insurance swap”
Thomas – you are dead right, it is a credit swap. One would have thought that we have seen enough damage from credit swaps and derivatives to last the industry for a life time. It will be fascinating to find out who the insurer/s physically turns out to be.
That’s all we need is a second layer of folks going belly up and out.
Pete
first of all peter is a creative guy. Option structured deals have been utilized before but in different ways, more often in reinsurance. Programs have been structured to respond (drop down or DOC covers) related to failure to pay circumstances. Replacing a program in full especially in prof liab, could be challenging as you have follow leader terms, continuity of terms issues, etc and why replace the full program when the problem may be (likely) isolated? Further, while I am inclined to replace policies of an impaired insurer under todays circumstances because of credit risk, especially high profile and long tail policies, in the case of AIG the insurance subs remain fully operative and A rated supported by the state ins. funds and the large brokers still have them on the approved list. Did the clients activate the shadow policy mid-term and pay short rate penalty. Why not structure the shadow policy as a credit default product running on a parallel term only responding ‘failure to pay”, which is common for r/i recoverables. This would be much cheaper and less disruptive. mpc
Peter formerly of A&A?
Mike – you got it, formally A&A NYC..currently consulting on off shore reinsurance and a contract writer for IRMI.
Pete
Is this the mike cahill who I used to drink with???
Mike- U be surprise how inexpensive the Super Continuity is and although I am not in a position to disclose, I can assure you it is less expensive then a credit deal.
Also, I believe its important to understand that we do not “replace” the whole tower (keep in mind on the few we have done the Insureds buy over 100 million. We lock up half or so. The reason for this is once we get out of the “burn layer” (subjective in D&O), the pricing is more reasonable thus we feel we do not have to lock up. You should send us some business:)
Best to your wonderful wife.
You guys are 100% wrong. There is no credit being extended and it has nothing to do with credit. It is insurance. Risk transfer
I have been doing business with Taffae for 10+ years. This is not his first creative idea. he has been doing D&O/E&O for 25+ years and he knows the history and product better then anyone I know. He is a professional.
Henry
Exactly what this industry needs more of—out of the box thinking. Who would have thought a wholesaler would be this smart??? Taffae’s been around a while and he is well thought of in the underwriting community this is not his first new idea. He is fair and cutting edge. nice job!!!
Southwest is one of the best airlines in the industry. For them to approve of such a D&O program, I would imagine a lot of time, research and consultation with Mr. Peter Taffae went into it. Kudos to Peter for bringing this innovative new idea to Southwest and the D&O world. DING! You are now free to move your D&O program (within the next 10 months).
I can’t say I understand the exact terms of how this is different from other credit swaps but the question of the hour is just this: what are the reserve requirements, if it is supposed to act like insurance? That has been the problem with other derivatives and more to the point, do they add value or is it just another house of cards?
Let me add that what I am getting at is if this were to be widely marketed, others will want to cash in and that is how things get out of hand. Sounds like Mr. Taffae has found a niche for a useful program that transfers risk in an acceptable manner; good luck and hope that no one steals your thunder or runs it into the ground.
This is a very creative idea and I find it interesting that it comes from a small firm like Taffae’s and not one of the large brokers. What contingency plans have the large brokers made for their clients who have coverage with AIG? Probably none. This is obviuously a guy who understands risk from a number of prosepctives and is able to think outside of the box to the benefit of his client.
Well planned innovation to the D&O form. Anyone still considering allowing AIG to participate on a D&O program needs to structure the insurance tower with the modification that Mr. Taffae has devised. Congrats to E-Perils for bring significant value added to the table.
This isnt new. Bermuda insurers have been offering coverage for rating downgrades for years. There are a number of issues.
When the shadow contract is triggered the new premium will have to be paid. The old contract will be cancelled for a return premium. Well in many contracts, especially AIG, the minimum earned premium can be very high. Hence the client may get stung when cancelling and find they dont get a return.
Further still if the original contract insurer has had more than a rating downgrade, and some major financial issue, the chances of getting anything back at all is minimal.
This means the new contract, even if the premium was the same as the main insurer, when activated, the remaining premium retained by the bankrupt insurer cancels any real advantage.
Also apart from speed – having the ability to automatically get the coverage, whats the real point? afterall if the main insurer was downgraded it would take 24 hours to replace them anyway. with downgrades the claims on the main contract will ultimately still be paid so a simple cancellation and replacement is easy.
Another issue is the trigger for 12 months. Insurers would do this but if the account had a loss, or several losses, since they first reviewed the deal, its doubtful they will commit to an automatic trigger at the same terms and premium, unless its subject no losses. This makes it again quite pointless.
Finally there isnt many insurers that will bother to review a contract knowing that they probably wont get the main deal. Ok they get free money, but the few % probably wouldnt cover the cost of RMS, admin, and contract.
Its doubtful a client will buy it as inlike financial options. If the get downgraded, cancel and replace. Having it automatic is pretty useless.
Saying all that it is worth offering the option as obviously in an insurance placement you will have other carrers that got close but didnt win the deal. Its easy to offer it but will anyone buy it? No
David,
Seems you coming from this with a property head on. While I agree with most of your comments I believe this can be sold and is being sold in a variety of business areas. We have been using Bermuda or more specifically Ariel Re for shadow covers. They actually approched us with the idea. Its worth pushing to sell as even though – yes you can replace a contract in 24 hours – the client does get piece of mind having the double cover.
We wont go into the fact that the back up insurance contract is probably reinsured by the same reinsurer as the first one. But thats an insurers problem.
NOW………… selling this as a reinsurance shadow. Thats an idea. With premiums into their $100m a option on that at 1-2%, now you are talking. Plus an insurer being of a far more savie mind set and need for that cover to be firmly secure, that could be an area to sell. Especially as everyone saw AIG as a temple, Munich Re, Swiss Re, hannover Re, no one is safe.
hmmm maybe I should have kept that idea quiet. Calling up some treaty reinsurers right now!
Yeah I was being overly critical.
Other things we are selling more, same kind of thing, we have set a trigger for 12 months coverage for a ‘shadow’ policy at the same premium. WHY? It basically protects the client if they have a heavy loss OR the market hardens heavily. It guarantees that ‘shadow’ premium (which is always the same) stays at the same rate in the next year. These do sell as the market is so soft, plus financial clients like to tie in the fact they know for budgeting the premium will hold. If the incumbent tries to push prices up, well they get replaced automatically or have to keep prices down.
This differs in that it only triggers at expiry of the main contract but its placed early based on what the account was then, before a market hardening event or losses on that particular account.
Note assume you use this as well as Ariel is anothe one offering this one as well as other carriers.
This is superior to this idea as the client gets peace of mind they have the same premium for if that other insurer gets downgraded (they know they have cover for next year) BUT also if any other major insurer breaks down (that will lead to a hardening market anyway) BUT ALSO if that account gets heavy losses in the year its still protected to not get a rate rise.
Now thats the idea you want. No issue with MEP or anything here, and, it sells.
D
Sorry bit unclear there
Its basically a quote thats stays open 12 months and guarantees the same rate, whatever happens. There is no actual trigger as such they just have the option to go at the expiring rate no matter what happens on the account or in the market (subject TIV within +-5% etc) Hence they dont get a rate increase due to something totally unrelated like AIG crash (if AIG not even on risk), hurricanes, EQ, terrorist strike etc. They have peace of mind the pricing will stay and that insurance is available. Thats worth buying as the market right now is rock bottom.
David-
Read the article (again). You just dont get it.