CATEX Reports December 2016

Reports

Issue 64

December 2016

In this Issue

Taking a new look at the risks in front of us on government balance sheets

Trump economic plans could result in cash outflow to US; effect on rates uncertain

Tax jurisdiction criticisms; unfair and fair

New focus on SME's and Middle Market
Allianz CEO bemoans expense cutting and personnel reductions
Roger wonders whether Ziggy Marley saved him and Bermuda from trouble

Quick Bytes: Chedid wins award; London ILS set-up moving quickly; Aviva executive notes London flood miss; JLT on upswing; Citizens troubled by AOB abuse; new Russian reinsurer; alternative capital still has only 2% penetration in non-life reinsurance; Carpenter's Klein and model trains; Philip Morris prepares for the end of cigarettes

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James.Cogger@catex.com

Dear Colleague,

As we come up to the holiday season we once again note that for yet another year the rate optimism evident in Monaco in September has now reverted to a recognition that rates continue to decline.

We tired of speculating about the usual weather or seismic related "what ifs?" and looked this month instead at potential impacts on rates that could be caused by human events.

We noted a healthy debate about the possible effects on the global insurance market that the economic policies of the Trump administration and the fallout from Brexit could have.

We noted, too, that at least part of the motivation behind the Fairfax acquisition of Allied World is a bet on a big rebound in the US economy. We also noted too that insurers are getting serious about privatizing the vast amounts of risk currently on government balance sheets.

We saw some interesting comments from the CEO of Allianz about expense reductions. We also noted a shift in focus, or maybe it's more properly an expansion of focus, to so-called "middle market" or SME sized insureds.

Our regular Roger Crombie column is here too. Roger typically uses his end of year column to sort of "free form" and this time avowedly strays from the topic of risk. We think you will find this month's column to be especially good.

Finally, as we approach the end of a long year, that's been filled with more unexpected events than we can count, we want to wish all of you the best for the holidays. It's a good time of year to reflect on our blessings; spend time with family and friends; and get ready for the New Year. We wish all of you a happy holiday.

As always if you have any questions or comments about CATEX Reports, or want more information about CATEX, or our products, please feel free to contact me.

Thank you very much.

Sincerely,

Stephanie A. Fucetola

Senior Vice President/CATEX

Privatizing risk: an idea whose time has come

There has been discussion this month signaling that the insurance and reinsurance industry is serious about privatizing the vast amount of risk still on the books of governments around the world. The bad news for the traditional industry is that alternative capital is right behind them.

It was probably inevitable that after years of "low rates, broader terms and conditions, the unsustainable flow of net favorable loss development and anemic investment yields" insurers and reinsurers in particular seem to be turning attention to making inroads toward fully privatizing risk.

This is actually a big deal and not, contrary to what many think, relegated to developing countries. Consider that Aon Benfield's Impact Forecasting estimated that "roughly 50%, or $5 billion of the $10 billion US economic loss from Hurricane Matthew", will be covered by insurance or reinsurance. Hurricane Matthew made landfall in the populous east coast of the United States, an area not typically thought of as "underinsured." If insurance only covered 50% of the losses in the southeastern US imagine what the ratio would be if a similar event occurred in an area we do think of as underinsured such as Asia, Africa or Latin America?

Trans Re's Chief Risk & Strategy Officer Greg Richardson noted the significant economic benefits that can accrue if more of that risk, currently on government balance sheets, can be moved to the private sector. Richardson observed that many of the flood, wind and earthquake risks that are not privatized end up being paid for by taxpayers when claims appear. From an obvious societal standpoint wouldn't it be better to transform what is essentially a post-event funding mechanism to a pre-event funding mechanism?

Let's face it, in the event of a massive claim event, when the local or regional economy is threatened in a myriad of ways as a result of a catastrophe, the last thing taxpayers want to be reading about are prospective assessments and tax hikes to pay for overall losses. Shifting this responsibility to the private sector minimizes this risk and --just like for all reinsurance buyers --provides certainty in exchange for a steady, known premium flow.

Richardson believes that while many are focused (dare we say fixated) on risks like cyber and terrorism, there is a big opportunity for insurers just in privatizing the risks already on government balance sheets. How big? Richardson says "I think the economic benefits of fully privatizing risk are huge. They probably dwarf, quite frankly, terrorism and cyber in terms of opportunity."

He may well be right. Just examining the opportunity from the 50% estimate of economic loss caused by Matthew that was covered by insurance in an area generally thought to be densely insured should be a bit of a wake-up call.

This is not news though to the risk industry. Just last week the following quote appeared from Swiss Re's Kurt Karl. "Society is underinsured against earthquake risk," Swiss Re Chief Economist Kurt Karl explained. "And the protection gap is a global concern. For example, Italy is the 8th largest economy in the world, yet only 1% of homes in Italy are insured against earthquake risk. Most of the reconstruction cost burden of this year's quakes there will fall on households and society at large."

Certainly there are examples where privatization is occurring. We've noted how Trans Re and others have taken the first steps in covering US NFIP policies. We've also noted the success in Florida of the depopulation of the insurer of last resort, Citizens, which would pay claims partially fueled by taxpayers to private sector "take-out" insurers. The current low rates for Florida wind reinsurance are helping to make this depopulation possible.

Maybe this is an idea whose time has finally come. For years we've been hearing about new risks that will be coming onto the private global insurance market from emerging economies but, frankly, we probably don't see as many stories as we should about risks that are on the balance sheets of governments in developed economies. One might conclude, too, that with the political changes coming in Washington there may be a push to accelerate risk privatization.

Man-made uncertainty and rate levels

Speaking about those political changes coming in Washington we noticed this article in the Royal Gazette in Hamilton, Bermuda. The lead sentence was "Cuts in the corporate tax rate in the US in the wake of Donald Trump's White House victory would hit Bermuda, experts warned."

At an Ernst & Young conference in Bermuda, Michelle Seymour Smith, CEO of Arch Re, said "this is one that's coming to us sooner rather than later." Given the President-elect's well known position on penalizing American companies that shift business outside the US there is a concern says Seymour Smith that "We will see a huge influx of capital into the US, detracting from the Bermuda market."

Seymour Smith noted the potentially lower US corporate tax rates promised by the new Administration as being one factor that would assist in this "huge influx of capital into the US." Another factor that could also contribute to such a trend might be any type of profits repatriation legislation that would permit US companies to return overseas profits to the US.

The Arch Re CEO said that despite any influx of returned cash to the US "t he need for the Bermuda market doesn't go away and if the Bermuda insurance and reinsurance market was severely damaged American consumers would face higher prices for insurance products.

Per the Gazette article, Laura Taylor, managing partner at Nephila, speaking at the EY event said that lower corporate tax and penalties designed to keep business in the US would erode some of Bermuda's advantages. Taylor noted "We will all have to keep our game here on what we can deliver here because we won't have that easy win."

Finally, chiming in on the topic was Jonathan Reiss, CFO of the Hamilton Group who said "We offer a much greater efficiency to the insurance markets and I do believe if that goes away from the offshore world or it gets damaged, the price to the insured will go up."

We've read these warnings from Bermuda in the past. The ABIR and Brad Kading have done a good job letting people know that there exists a definite interconnectedness between any harm done to the Bermuda insurance and reinsurance industry and higher rates to American customers.

But this time, though, it would seem that at least some type of action will occur in Washington that could make American insurers think twice about offshore operations and incentivize a capital return to the US by either or both a lowered corporate tax rate and a repatriation window. If the net effect of these actions does in fact raise rates then Donald Trump will have done something for which the industry has been waiting to happen for years.

The same Ernst & Young conference also reflected a heightened concern about the effects of the British exit from the EU. The panelists noted that the UK financial regulator was one of the strongest advocates for Solvency II but that as the Brexit process unfolds, should the UK lose its seat at the EU table, Reiss noted " the UK having no voice in the EU is of concern to us. We are a British territory here. The EU is due to revisit Solvency II at the end of 2018 --how that plays out remains to be seen."

Bermuda of course has obtained Solvency II equivalence on its own but an Intelligent Insurer article headlined "UK deviation from Solvency II could adversely impact ratings" ten days earlier must have been on everyone's mind. That story featured the response of the ratings agency Standard & Poors to an inquiry from a UK government committee assessing Brexit options for UK insurers. S&P warned that the UK should be wary of deviating "too far from Solvency II in the way it regulates UK insurers, despite having the potential flexibility to do so following its exit from the EU."

The article notes that "Some firms have suggested that the exit from the EU may offer the UK an opportunity to adapt Solvency II rules to better suit the needs of its re/insurers. Willis Towers Watson, for example, has recommended a number of key amendments to reduce the complexity and cost of Solvency II without losing its overarching benefits."

We've written in the past about the complaints voiced by many as to the cost and effort associated with S2 compliance. It seems that some at least are thinking that a possible upside of a Brexit is the opportunity to revise the UK's Solvency II compliance scheme to make it less costly and less complex. S&P said, in response to the query posed by the government committee, that indeed, post Brexit, the Prudential Regulatory Authority (PRA) would be able to develop its own regulatory regime independent of S2 and implement solvency rules more appropriately reflecting the risk profiles of UK insurers.

However the "but" in this case--as to what followed next in the S&P response --was what provided the headline. S&P went on to say that although the UK would be able to implements its own rules "We believe that any significant deviation from Solvency II could put the UK's equivalence with S2 at risk. This would present a problem for UK-based insurers with operations in the EU."

S&P went on to observe that "This could lead to higher capital requirements or additional operational and expense burdens that might make these subsidiaries uncompetitive in the EU."

Whether those higher capital requirements or additional expense burdens will also mean higher rates we cannot say but we do know that when the word "uncompetitive" is used it generally means the cost of your product is higher than that of your competitor's.

The election of Trump and the British vote to leave the EU are connected on many different levels. We'll leave that discussion to the thousands of pages of political commentary that exist describing the populist impetuses motivating both. What we now notice is that there may be an uplift in insurance and reinsurance rates as a result of possible actions that could come from a Trump administration and a British exit. We think back then to our discussion of "known unknowns", "unknown unknowns" and "black swans" --all monikers used in connection of envisaging unforeseen events.

When we think of factors that might lead to higher premium rates we're wondering who, in Monte Carlo, for example, in 2015 some fifteen months ago, might have suspected that a significant factor that could lead to higher rates would not be a hurricane or earthquake but rather two self-inflicted events wrought at the polling booths of both the US and UK?

Adam McNestrie, at Insurance Insider, had a perceptive, tongue in cheek piece, in which he wondered about the rate optimism that always seems to prevail at the Monte Carlo meetings and that within a few short months it seems to evaporate by the January 1 renewals. The piece is unfortunately inaccessible as it ran as the daily Insider "Good morning" intro to the day's news.

Even Adam was inclined to take the "optimism" at face value and noted that if an observer sat "in the darker corners of Monte Carlo sipping drinks and talking to jaded executives in undertones; or even watched the body language of the reinsurers you could tell that 1 January was going to see a fresh round of rate cuts."

McNestrie no doubt was referring to a spate of stories, the latest being "Deutsche Bank says pricing will deteriorate further in reinsurance", that belied the optimism manifest in Monaco in September that rates may finally have reached a bottom. We can't help but wonder if those jaded executives in the darker corners of Monte Carlo back in September 2015 had quite been prepared for the effects of Trump and Brexit.

The so-called effects of Trump however may have other ramifications too. Just this week Fairfax Financial announced that it was acquiring Allied World for $4.9 billion. Prem Watsa, the CEO of Toronto-based Fairfax, said that at least part of the reason for the AWAC acquisition was the fact that "Allied World generates a substantial amount of premium with large US customers." He went on to say "We believe that the recent election of president elect Trump and the Republican control of both the US House and the Senate has the strong potential to make the business climate for growth in the United States great again, relative to the rest of the world."

Watsa's use of Trump's "Make America great again" slogan may have raised an eyebrow of any American who had hoped that the endless election campaign was over but what he said next was interesting. " We believe the United States may see significant growth in gross domestic product and businesses in the United States, including Allied World, will benefit from any such positive economic development," Watsa said.

One has to wonder whether even six months ago the attractiveness of US reinsurers would be such that very smart people would be intent on acquiring them based on the belief that the US economy is going to accelerate in a major way. The prospective economic pick-up, combined with Trump's stated intent to lower the corporate tax rate to 15%, were part of the reasons motivating Fairfax to do the deal.

Again, we wonder who could have envisaged this last year?

Taxes are in the eye of the beholder

Since we discussed repatriation, corporate tax and Bermuda in the preceding section we are compelled to at least note this story in which the global chartity Oxfam labelled Bermuda as "the world's worst corporate tax haven", according to a report. Oxfam's report, entitled "Tax Battles: the dangerous race to the bottom on corporate tax", defines a "tax haven" as a low-tax or no-tax nation with generous tax incentives.

Frankly, we were unaware that the organization, that we thought was focussed on famine relief and food supply, also was conducting review of national tax policies but apparently they did. The Oxfam study went on to claim that US multinational companies reported $80 billion in profits in 2012 more than, the report helpfully notes, their profits reported in China, Germany, France and Japan combined.

We're wondering if this news made it to the 66th floor of 721 Fifth Avenue in Manhattan where the President-elect is ensconced. If it did we can see why those reinsurance executives in Bermuda were wondering aloud about prospective huge inflows of corporate cash back to the US. To be fair there are many companies domiciled in Bermuda other than insurers and reinsurers, plus, to state the obvious, we're not sure we would agree with the categorization of the island as a tax haven.

Ross Webber, the chief executive officer of Bermuda Business Development Agency, offered a sharp rebuttal to Oxfam's claim. We also suspect that the Bermuda Monetary Authority and its CEO Jeremy Cox would take exception to Oxfam's claim too. The BMA has managed to implement a Solvency II equivalent regulatory scheme that has been approved by EIOPA meaning that Bermudian carriers can compete on an equal footing with EU carriers which are mandated to be S2 compliant. Achieving this equivalence was no easy matter and hardly an exercise that would be undertaken by a "tax haven". From where we sit the Oxfam report was a bit of an unfair shot that may have been based only on corporate tax rates without taking into account anything else.

Taxes are always a problem and nobody it seems is immune. Certainly taxes were a big focus of both the US presidential campaign and the Brexit referendum. People either think they pay too much or that other countries require their corporate and individual residents to pay too little, creating an unfair advantage weighted against more heavily taxed jurisdictions. One thing is certain though and that is with the new US leadership and the pending Brexit changes in England there will be changes coming in tax policy.

We mentioned that nobody is immune from tax issues and we point to this article. The murderous terror group al-Shabab operating out of Somalia ran into trouble with residents when the terror group tried to, guess what, impose taxes on them. Somali residents in the central state of Galmudug apparently reached the breaking point when al-Shabab presented a demand for taxes.

It must be bad enough living under an extremist regime controlled by the killers who perpetrated the 2013 massacre at the Westgate shopping mall in Nairobi but it seems it was the demand for taxes that caused residents to take up arms against al-Shabab killing 6 members of the terrorist group.

People, and business, take taxes very seriously. It will be interesting to see how all of this unfolds in the coming years.

Market doldrums point the way to an overlooked sector

There has been discussion this month about so-called "middle market" business and SME business. It was enough to drive us to dictionaries to ensure that we understood who might be referring to what. First RSA came out with a study saying that the SME market in the United Kingdom was vastly underinsured. A short time later Hamilton USA indicated that it was swinging its business orientation around to concentrate on the so-called "middle market" which is said to be worth some $70 billion in premium.

One of the highlights of the RSA study was that results of a survey of UK SME sized businesses revealed that some 28% of them said they would go out of business if faced with an unexpected bill for which they were not insured of 50,000 GBP or approximately $65,000 US. The implication is that UK SME's are under-insured from the standpoint of not having coverage, or enough of it, in areas that could lead to such an unexpected bill.

So what exactly is a "Small-Medium Enterprise" (SME)? Good question. There are a number of definitions apparently but per the RSA report some 99.9% of all private sector businesses were small or medium-sized in the UK at the start of 2016.

Then we noticed the Hamilton US story. Currently program business is thought to account for about 70% of total premium volume at the US platform of Hamilton Insurance Group but that will soon change.

New Hamilton US CEO Seraina Macia (formerly Seraina Maag) has pushed an emphasis on concentrating on "insureds with more than $25 million in annual revenue --or middle market or larger" for the future of the American platform. It is thought that this market comprises some $70 billion in premium in the US. More important, from Macia's perspective, is that this sector of risk apparently will allow Hamilton to use its partner Two Sigma's data science and analytics to gain an understanding of the underwriting risks superior to their competitors.

We can't help but see connections between Greg Richardson's urging to privatize risks currently on government balance sheets; Prem Watsa's belief that AWAC business will increase as the US economy increases; RSA's focus on UK based SME's as potential buyers of more coverage and the new focus of Hamilton US on the US middle market.

Clearly, insurers are well into the process of responding to the long period of declining premium rates, poor investment returns and a benign catastrophe claim period by mining new business much closer to home and much more within their grasp when compared to waiting for a hurricane or earthquake to strike.

We suspect that this is a positive development and one, which we hope, continues when and if CAT claims return to normal frequencies and drive up rates. Those insurers that are working on privatizing risks and exploring opportunities in the SME and middle market space will have developed long term, productive relationships that they might not have ordinarily bothered to explore in a scenario that saw heavy CAT claims and skyrocketing premiums. It can only work to their advantage and of course to the advantage of the insureds.

A different view on expense cutting

Given the climate of lowered rates, paltry investment returns and generally benign CAT claims one industry response has been to cut expenditures. That means reducing headcounts. We've seen this in many companies including Zurich, Generali, AIG and IAG. Certainly any reduction on expenses means that management will examine payroll costs which usually rank among the top expense items for any company.

That's why we were surprised to see the CEO of Allianz, Oliver Bate, say that cost-cutting regimes result not from a need to cut expenses to save a company but from management's failure to "mend the ship" and invest in a business in previous years. During Allianz's capital market day Bate made other comments to analysts too.

He said that those management teams that are cutting costs are effectively saying " we do not know what to do and so now we are firing thousands of people". He also said that " You will not hear that from Allianz" and noted that "You will not hear cost cuts from me unless we have our back against the wall."

That sound you hear next could be cheering coming from 142,000 Allianz employees worldwide who were no doubt elated to read the comments from the CEO of the Munich-headquartered insurer.

Bate's point is interesting though. He said that "Productivity has to be a job of management every day." and he is right. The problem though is that firms like Zurich, Generali, AIG and IAG would probably respond to Bate by noting that their backs were up against the wall despite having focused on productivity every day.

No one wants to institute layoffs but, realistically, a new management team that is called in to right the ship at a company has a clear mandate from the Board of Directors to take what steps are needed to return the firm to profitability. The new team also has no sense of "ownership" concerning any costly initiatives that they may need to dismantle as they didn't implement them or conceive them. And, unfortunately, the new team will indeed make the headcount reduction decisions in order to implement their own plan which is to return the company to profitability.

The Insurance Insider had a passage in the same article that was credited to Bate as well. He said that after management (old or new) implements their cost-cutting regime "management then unveils higher dividends and share buybacks to compensate."

Bate is an interesting person and apparently not afraid to say what he thinks. Far be it from us to comment on the thoughts of the CEO of an insurer with 85 million clients.

Roger's encounter with Ziggy Marley; a bullet dodged by Bermuda?

Roger Crombie

This being December, I shall venture, with the editor's kind permission, far from insurance and address a timely issue in a non-timely fashion.

Last month, the US almost elected its first female President. A female political leader is nothing out of the ordinary in many countries. At one point, both major parties in Bermuda were led by women. Pam Gordon became the first Madam Premier, and Jennifer Smith the second.

I met Ms. Smith for the first time on general election day in 1993. Politics is not really my thing. I'd only been a reporter for a few weeks, and was sent by the daily newspaper to carry out Charles Kuralt-style peregrinations around the Island, so that I wouldn't get into any trouble reporting facts.

A solid downpour of good "tank" rain had Ms. Smith pinned down outside the polling station in her constituency, wrapped almost head to toe in rain gear, under an umbrella. There wasn't a voter in sight.

As a rookie reporter, my knowledge of elections in Bermuda amounted to having the vague idea that there were two seats in each constituency, so I thought I'd start out with that and see where the Honourable Member took things.

Me: Do you hope to win both seats?

Ms. Smith: Of course we hope to win both seats.

Me: Thank you.

Not, perhaps, the best interview ever. My day ended better than Ms. Smith's, however. She lost; I wound up talking to new Members of Parliament and defeated war horses at three the following morning. In part, my report for the paper read: "Jennifer Smith was optimistic in the early going."

I had met Pamela Gordon some years earlier, under drier circumstances. This was long before she was appointed to the post of Premier or I became an actual reporter.

Ziggy Marley and the Melody Makers were playing a huge concert one evening at the National Stadium. Being completely unversed in newspaper malarkey at this stage, I forgot that I was supposed to be reporting on the show as a favor to the reporter originally assigned to the job and just enjoyed myself, hanging out, you know, the way one does.

My photographer asked if I wanted to interview Ziggy, Bob Marley's son. Sure, I said, why not? I was thereupon ushered into a tent in which a dreadlocked court hung on the Zigster's every word. I was pressed forward to interview the man himself. Although I wasn't really an interviewer yet, I knew better than to ask him if he hoped to win both seats.

Me: Do you like Bermuda?

Ziggy: Mon, ahm forder bitmon. Dis lovverli bakum, oo koo katchoob.

The Jamaican star was paying me an enormous compliment by conducting his end of the proceedings in the thickest Jamaican patois you can imagine, a language incomprehensible to all but lifelong adepts.

Mr. Marley had, however, chronically overestimated my hip. The interview therefore suffered, in a technical sense, from my inability to understand a word of what he was saying. As a result, I kept it pretty short. I asked a few questions, which he answered in what was, to me, utter gibberish. Then the room fell quiet and everyone stared at me. "Huh?" I asked.

Ziggy: Yanno tackem, no?

He'd rumbled my discomfort. He was referring to my not taking notes. To my not having a notepad or a pen, nor even a hat with a press card stuck in it at a rakish angle. The silence was intense, the suspicion dawning that I was a fraud who had lied my way into the tent just to meet the great man.

Me: (pointing knowingly to the side of my forehead): It's all up here.

Everyone in the tent roared with laughter, so I posed for some photos with my new friend Ziggy and left with my street cred fully restored, nay enhanced. As I emerged into the starry night, a beautiful young woman presented herself and asked if I could arrange an audience for her with the superstar.

The efficient bachelor misses nothing: this unusually attractive young woman wasn't wearing a wedding ring. "I can probably get you in," I said. "What are you doing after the show?"

She seemed a little taken aback by the question. "Going home with my children," she said.

Not realising that I'd struck out, like a train crashing at a hundred miles an hour I ploughed forward into the dirt. "What do they call you?" I asked smoothly. "They call me the Minister of Youth and Sport," Ms. Gordon replied in an even tone.

I introduced the Minister to Mr. Marley, and left.

In many ways, Bermuda should be grateful. Had I charmed Ms. Gordon off her feet and into a married condition - I like to think it could have happened - I would have become the Melania Trump of Bermudian politics.

**************************

Roger Crombie is an American Society of Business Publication Editors national award winner. An English chartered accountant who lives in Eastbourne, on England's South Coast, he writes and broadcasts news and opinion in the US, UK, Bermuda and the Caribbean, in print and online. His main beat is insurance and financial services, with 30-year sidelines in music and humour. All views expressed in Roger's columns are exclusively his own. Contact Roger at [email protected].

December 20, 2016

Quick Bytes

Farid Chedid, was named the MEA Industry Achiever of the Year by the publishers of Global Reinsurance and StrategicRISK. Farid founded Chedid Re in 1998 and now counts over 400 insurers as clients in 45 countries...The UK is wasting no time in implementing its London-based ILS market. You will recall that last month, shortly after Lloyd's Inga Beale said that Bermuda had "stolen" the ILS market, the UK government quickly released their draft regulations. Now the government says that the regulations will actually be in place before next summer which is faster than many thought possible...Maurice Tulloch, chairman of global general insurance at Aviva noted that the 2015 floods in Cumbria racked up over 7.5 billion GBP in economic damage but said that it was pure luck that that 14 inches of rainfall didn't hit a more populated area. Tulloch said "If 14 inches of rain had hit London and we had a full moon and a high tide, would the Thames barrier have worked? If it had failed we wouldn't be talking about a couple of billions --we would be talking about tens of billions and never mind the fact that the financial hub of the world would have been put out of business."...Figures provided by JLT Specialty USA claim that the broker has gained 22 private equity clients, 17 insurance companies and 5 hedge funds thus far in 2016. At least some of this new business is due to the expiration of non-compete agreements that bound some 55 brokers that JLT took from Aon over the past two years...The assignment of benefits (AOB) crisis plaguing Florida is threatening the financial stability of Citizens Property Insurance the state-created insurer of last resort. We've written about the AOB issue before; insureds sign away their policy rights to contractors in exchange for water damage remediation work performed at no out of pocket charge to them. Behind the contractors are the lawyers and when Citizens balks at the size of a repair bill the parties end up in court. There has been a 30% increase in lawsuits against the insurer in the past 12 months alone...A new state-backed reinsurer has begun writing business in Russia. The reinsurer, NRC, will benefit from a law that will require all Russian insurers to offer it a 10% line on all outward business. For long term contracts, post January 1, 2018, the NRC also has the right to participate...Lloyd's made a number of organizational changes earlier this month. Responses, as could be expected, run from the positive to the negative...Here's a number we thought was a misprint but it isn't. According to Swiss Re, "Of all risks covered by the global non-life reinsurance market the market share of alternative capital is less than 2%". Talk about room to grow?...We will keep the story of outgoing Guy Carpenter executive Chris Klein in mind in case we are entitled to an opinion at a future reincarnation discussion. Klein is leaving Carpenter next year and will spend his time indulging his passion for small-scale model railway locomotives. He is the director of a company called Ixion Model Railways which manufactures them...And, finally, Andre Calantzopoulos said that sales of a new kind of smokeless cigarette, that heats rather than burns tobacco, could prove successful enough that a phase-out period for cigarettes could be approaching. So? Well, Calantzopoulos is the CEO of Philip Morris International the manufacturer of cigarettes such as Marlboro, Chesterfield, Parliament, Merit, Virginia Slims and many more. He said "I believe there will come a time where I would say we have sufficient adoption of these alternative products...to start envisaging, together with governments, a phase-out period for cigarettes." Don't rush out to sell your Philip Morris stock just yet --according to Calantzopoulos even with any shrinkage in the size of the global tobacco market, Philip Morris estimates that there will still be a billion smokers globally in 2025. At the cost of about $10 a pack in the United States at least that still represents a nice revenue stream...Happy holidays.