Feb 1

Break Up the Auditors, Best’s Latest SRQ Mandate, The Next Big Crisis May Be…


We begin this year with a list of ‘one hundred year flood’ type events: Possible regime change in Egypt and, Major snow and ice events in the US.

With all this excitement, it is easy to lose track of some rather interesting items that can impact insurer investing.

First up is the nascent call to ‘Break up the Auditors’.

It is a movement starting in Europe, but still bears watching: The European Commission’s Internal Markets Commissioner, Michel Barnier, is floating the idea of imposing a break-up on KPMG, Ernst & Young, PwC and Deloitte, which between them mop up two-thirds of all listed company audits in the UK including all but one of the FTSE-100. This was followed by a similar call from public companies, including insurers Standard Life and Aviva. (a hat tip to Michael Smith at IFRS4Consulting for noting this).

Second is a more immediate focus for US insurers.

AM Best is scheduled to release its 2010 SRQ filled with challenging ERM related questions. For example: Do you have a Chief Risk Officer (or senior equivalent) who is responsible for coordinating ERM? How about a formal ERM committee?

Or, how about: If your company uses an EC (Economic Capital) model to quantify aggregate risk…do you use the EC model to make strategic business decisions? And, if your company does not use an EC model…describe how you determine capital adequacy and allocation of capital to business units, lines or risk categories? (Something tells me that saying you use the BCAR model for capital allocation will not be a good answer…)

Concerned about this and what it might mean for your company’s ratings today and in the future?

Undoubtedly, this will be one of the many items discussed at our Insurer Investment Forum XI in San Diego, March 30-31. Early bird registration for insurers ends February 11. Here is a link to the agenda and the conference ‘home page’ for more details.

Finally, there are many future paths that the global economy and financial markets may take. One rather nasty, though plausible, possibility comes from Oliver Wyman in their latest tome: “The Financial Crisis of 2015: An Avoidable History”.

Welcome to a world where the risk being forced out of the Western banking sector due to tougher regulation flows into a shadow banking sector (relatively unregulated institutions and pools of money). From there, investments are made in commodities and related sectors that increase in value like topsy before crashing. This would trigger sovereign debt restructuring. In other words, instead of sub prime mortgages unleashed on investors, it will be a commodities led bubble due to increased real demand (from growing developing economies) and increased investment demand (from institutional and other investors looking for ‘non-correlated’ inflation hedges).

OW unveiled this scare document at the recent annual meeting of the World Economic Forum in Davos. So, of course, it is getting some amount of notice in the press.

Just one question from this ‘peanut gallery’: If we all think a bubble will occur in a given sector and try to avoid it, how can it happen? I guess OW believes in the inevitability of some things.

Instead, I give us frail humans a bit more credit than that.

As far as inevitability, I will side with Ben Franklin who said, “Our Constitution is in actual operation; everything appears to promise that it will last; but in this world nothing is certain but death and taxes.”