Sunday, February 13, 2011

(No.136) Executives with Wellington's horse syndrome

The life insurance industry's management of certain key activities during the past 30+ years reminds me of nothing quite so much as the aphorism about the Duke of Wellington's horse at the conclusion of the Napoleonic campaigns: it had been everywhere, seen everything and learned nothing.

Two areas of the industry's activity which have often been mismanaged by its executives are the distribution and the reinsurance of individual life insurance. Nor have I seen aspects of its commercial activity misused more frequently to falsely demonstrate supposed executive leadership, vision and a desire to 'think outside the box'. Indeed I have watched life insurance company prospects -- and in some cases viability -- victimized by this or that senior executive's personal program of career management and financial self-aggrandizement.

As the revelations of the financial services meltdown during 2007-9 have revealed it is not difficult to create, for a time, a patina of financial success for some dubious corporate activity or process, one that is publicly burnished by followers among the financial services paparazzi, groupies who were largely blind (at least publicly) to the greed and incompetence of the corporate managers responsible for the sheen.

In the life insurance business one need look no further for cogent examples than life insurance sales success in recent decades, success dependent in whole or in part (varying with the company) upon the sale of under-priced and over-compensated poicies. And what has been a key support of this Alice-In-Wonderland approach? The provision of great gobs of financial support under reinsurance treaties with large international reinsurance companies competing for market share. The incentive for senior management of life insurance companies to pursue 'financial reinsurance' arrangements for corporate rather than underwriting objectives is a story by itself.

I have worked with, known and known of many executives suffering from what I think of as Wellington's horse syndrome. But I have also had the good fortune to know and be associated with many first rate people in the life insurance business although I wish more of them had occupied CEO, COO and CFO roles in their companies.

An interesting illustration of the sort of outcomes that can be a byproduct of Wellington's horse syndrome in the life insurance business has recently been provided in an article by Ross Morton. A Canadian, Morton has one of the widest and deepest understandings of the realities of the life insurance business of anyone I know -- and not only of reinsurance, his particular area of expertise. Among other things he has run a reinsurance company in Canada (for Storebrand), been a senior executive for a major retail company (Manulife) and a globetrotting expert for an international reinsurer (RGA).

He has written and spoken extensively about the business over the years. His article was for the Jan 2011 issue of Reinsurance News, a publication of the (U.S.) Society of Actuaries' Reinsurance Section. The article is entitled " Jumbo Limits: Compensating For Terrible Administration".

The entire article is well worth reading but I want to share a few excerpts from it with the readers of The italicized words within square brackets are mine.

" A long time ago," Morton wrote," reinsurance played a trivial role in the life insurance industry. In Canada 0.04% (rounded up, of course) of all life risk was reinsured in 1969. There was a slightly higher percentage in the United States .... reinsurance was a follower and minor player in the realm of life insurance risk taking. ... Content to beg or cajole a mere pittance of the premium pot the reinsurers fought each other for the privilege of table scraps.

"Administration of risk was lax and tardy but with most cedants [i.e., life companies reinsuring some of the insurance risk of the policies they sold and issued] keeping their full retention and reluctant to write policies larger than their retention [i.e., the maximum amount of life insurance risk in a policy the company would keep rather than reinsure], the penalty for such lackadaisical administration was trivial and easily manageable by both insurer and reinsurer. It helped that the largest of reinsurers routinely forgave blunders in insurance company administration ....

"As smaller insurers grew into large producers of risk through the advent of [life insurance] 'brokers", and as large [life insurance] companies became addicted to low reinsurance pricing, the amount of reinsurance ceded escalated by 2,000 fold in Canada and 1,450 fold in the United States by the end of the century. ...

"... the world of reinsurance administration deteriorated yearly from 1970 onwards and it took sheer catastrophe before a cacophony of voices raised up in horror at the absolutely poor risk management in both the cedant [i.e., the life insurance company passing on life insurance risk to the reinsurer] and the reinsurer. Everyone expected the proverbial shit to hit the fan, but everyone crossed their fingers and leaned on their optimism that carried over from their much praised pricing success. When the eventual eruption of issues came, there was more of the bad stuff below the surface that caused great embarrassment. ...

"Solutions were many and they ranged from better administration systems to real risk management practices. But one of the quickest solutions was to try to insulate oneself if you were a reinsurer from [the life insurance company] ... who was always tardy in appreciating the importance of reinsurance administration even when 75% of the risk [in a large life insurance policy] was passed off to one or more reinsurers! The hallowed jumbo limit was a quick and clean protective barrier to poor administration [in the life insurance companies writing the life insurance policies and then reinsuring them]. Our industry defines the jumbo limit as a limit placed on the amount of coverage that may be in force and applied for on an individual life for automatic reinsurance purposes. ...

"The reality is that in most cases the jumbo limit is there to compensate for poor administration and risk management [in retail life insurance companies that reinsure their policies]. ... Sloppy and much tolerated error-prone risk administration got our industry into this mess. ... Jumbo limits at the current levels are merely a Band-Aid on a gaping wound of a haemophiliac-like industry that lags in administrative excellence."



the article in Reinsurance News (Jan. 2011) by Ross Morton quoted in this column will appear on the website of the Society of Acturaries: www.

Ross Morton's website is:


Alastair Rickard