Inspiration

One of the most inspiring poems I have ever read and one which I can unhesitatingly say will make every one misty eyed.

[IF]

If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you
But make allowance for their doubting too,
If you can wait and not be tired by waiting,
Or being lied about, don't deal in lies,
Or being hated, don't give way to hating,
And yet don't look too good, nor talk too wise:

If you can dream--and not make dreams your master,
If you can think--and not make thoughts your aim;
If you can meet with Triumph and Disaster
And treat those two impostors just the same;
If you can bear to hear the truth you've spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to, broken,
And stoop and build 'em up with worn-out tools:

If you can make one heap of all your winnings
And risk it all on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breath a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: "Hold on!"

If you can talk with crowds and keep your virtue,
Or walk with kings--nor lose the common touch,
If neither foes nor loving friends can hurt you;
If all men count with you, but none too much,
If you can fill the unforgiving minute
With sixty seconds' worth of distance run,
Yours is the Earth and everything that's in it,
And--which is more--you'll be a Man, my son!

--Rudyard Kipling

I've received a lot of nice feedback from folks about this particular poem. I'm glad that I could contribute something useful to the Internet, even if the words are Kipling's and not mine. Enjoy.

International Underwriting

As January approaches , in the reinsurance world, there is the usual buzz about capacities (old and new), market trends on major renewals etc. The international market trends are closely observed by the Indian market reinsurance boffins to seek a guide for their own April renewals, being the beginning of the financial year and hence the season for major corporates to renew their reinsurance.

In the last 12 months of "de/re tariffing" the cost of insuring property risks have variously swung from a few tens of percents to many tens of percent till truce was declared and a nice round figure of 51% was agreed to - rather like a divine offering!

People felt that when a tariff market opens, traditional underwiters (read "developing/emerging" markets) will drop prices heavily in order to retain/gain market share - even if the bottom line is hit. Unlike mature markets which have seen boom and bust and would handle pricing matters more sensibly.

So it is instructive to look at Liability Insurances - a segment where there has been no tariff - though one suspects it is more out of neglect than intent!

But that apart, a segment of the industry driven by international reinsurance would logically exhibit greater stability. Or would it?

Various classes of Liability businesses have seen soft markets and overcapacity leading to drastic reductions in premium. And some innovative underwriting practices.

Like rating on turn over. On the principle that higher the turnover, higher the risk, you would expect international underwriters to load the premium similarly for an account. If the company has a 400 million turnover last year and paid 100,000 then when the turnover is 600 million the premium would increase and when it reaches a billion it would increase even more.

Now consider the practices of International underwriters.

On one end of the spectrum are underwriters who strictly rate on turnover with a clause which says that if the year has expired and you have achieved more than estimated the difference premium is payable. From the above example the premium would tend to increase 50% for the renewal and even more when turnover almost trebles.

At the other end are underwriters who rate on only closed accounting years. So even though you project 600 million or even a billion you will pay only for 400 million! This apparently is a strategy to "capture" the market. So the other end of the spectrum effectively undercuts the market by as much as 50%!

So much for international market norms. Makes you wonder why the poor PSU development officer is the butt of deprecatory humour when he is doing much the same - though without the jargon or the power point presentations.

Systemic Risk - Unplaced Reinsurance

One of the most fascinating aspects of the Indian Insurance market is the way Reinsurance operates. It is fascinating because of the change in process between the way Direct Insurance works. Most of the people in Reinsurance in India have spent a significant portion of their time in Direct Insurance and thus set the general culture which is carried into Facultative Reinsurance.


The Direct Insurance market is characterized by a lack of credit risk. Sec 64 VB of the Insurance Act broadly says that no risk will incept unless premium is paid IN ADVANCE. This means if you have a renewal or potential inception of risk on 1st January you have to ensure your cheque is released by 31st December and accounted for. Most buyers therefore delay release of the premium cheque in the mistaken belief that they are saving (interest?) cost. larger the risk and premium , greater the delay. What they are creating is uncertainty - especially when the risk requires facultative reinsurance support.


Problem is the Reinsuarance market works on Credit. You get between 30-90 days to pay your reinsurance premium. In the olden days most reinsurers were unaware of 64VB. So Insurers could take their time to remit monies. However in recent times reinsurers increasingly question the need for 90 days when Insurers have ALREADY got the premium!

But the more serious downside is when reinsurance is sought AFTER inception of risk, the cedant/broker is always playing a weak hand. More so , where the market conditions encourage Insurers to pick up risks on less than reinsurance quoted terms on the assumption that the reinsurers will support anyway - after all ; of what use a soft market if not to accomodate our sins?

But! Every once in a while for a variety of reasons but not uncommonly due to the fact that the terms sought by Cedants and the terms offered by Reinsurers are not exactly apple to apple various "structures" are tried before an equitable solution obtains.(Usually this means Reinsurers write a high excess some times charging more premium than Primary!)

And, God forbid, there is a major claim - then starts the usual rounds of trying to play the blame game and identifying scape goats till the proper sacrifice is made. Usually that sacrifice is the broker - a species barely tolerated in the Indian market by most stakeholders; though not always without reason.

Regulators have sought to curb the systemic risk by trying to limit DIC/DIL situations.But a simpler solution obtains....

When the NSE first started trading, settlement cycles allowed smart brokers to arbitrage their positions in various exchanges due to the longer cycle. Trade (T) + 7 meant a whole week to play the market. As cycles narrowed outright arbitrage opportunities reduced.

Borrowing from that principle but in reverse, how about a T - 7 directive for Facultative Reinsurance? Why not mandate that 7 days prior to inception/renewal of risk, certificates of reinsurance must be provided to the Cedant or the Cedant must insist on these. Unless a Cedant receives such documents or chooses to retain the risk to its own net account(per regulations) severe penalties will be imposed on the Cedants.Similarly all reinsurance accounts must be settled T + 15.

This will eliminate a huge Systemic Risk inherent in the Indian Facultative Reinsurance market. Better than trying to increase Capital norms in order to "elimiinate/prevent" non serious players. But of course this means a change in mindset; about treating all players equally. That needs a separate column!