Fairfax and D&O / US Expropriation Risks

[MMM20]

On Intel's deal with the US government and potential implications for insurers: https://iansbnr.com/the-us-intel-investment-is-bad-news-for-insurers/

 

"This is about the easiest D&O suit that ever existed! You have a CEO who screwed the shareholders for personal gain and a derelict board that did nothing to stop him. I don’t know how big a D&O tower Intel buys, but I would guess it’s in the nine figures. It’s a total loss. And that may not be the end of it. There is plenty of speculation that Trump won’t stop at Intel. Each future seizure of equity is another limit D&O loss. This could easily get into the billions."

 

"Speaking of expropriation, let’s call this what it is. Just because Intel agreed under duress, doesn’t change the outcome. Lots of people take plea deals to crimes they didn’t commit or even sign false confessions because of the threat of something worse. We have now introduced expropriation risk into the US market. This will surely lead to political risk claims."

 

"I am not aware of contingent political risk covers, but I wouldn’t be surprised if there are bespoke contracts that pay out if a company is harmed by the government expropriating a competitor. After all, that is the definition of a political risk. Surely somebody writes cover for it? I do know the pol risk market is very opaque and there are likely some surprising coverages out there that are newly at risk. They may not be hit specifically by the Intel situation, but future government interference in markets likely will lead to losses. And obviously the rate on line charged for US risks is far, far lower than in global hotspots."

 

"Insurers are used to accepting uncertainty, so more political risk in the US isn’t something they can’t adapt to. However, the challenge is most other high severity lines have higher rates on line to account for the unknown. Lines like D&O, pol risk, trade credit, surety, etc. have very, very low ROLs but still high severity risk. Furthermore, there is a high risk of correlated frequency in these lines. D&O tends to spike in bear markets due to the frequency of severity. A concerted effort by the government to interfere with free markets could definitely lead to a new round of elevated frequency. Similarly, if first world countries begin acting like their third world peers, the level of political risk frequency would likely be something the market has never seen before. It’s one thing to manage exposure in Argentina. It’s quite another to manage a spike in events in the largest economy in the world."

 

How do we think about the magnitude of the risk to Fairfax? Sorry if this has already been discussed, but I couldn't find anything.

[anshulp]

I don't have much of an opinion / knowledge on this. But I did think this post by Ian is worth a read. Pretty Interesting . 

 

https://iansbnr.com/are-do-loss-ratios-headed-to-zero/