JOHNSON: Well I don’t know that we have nearly the amount of knowledge, particularly. We know some things about the hazard there but we don’t know a lot about the construction types other than that they haven’t had building codes and there are tremendous issues around the implementation of construction -- just the basic techniques that are used and issues around the quality. There is going to be a lot of uncertainty that the models have had to assume there. Working on the Caribbean earthquake and wind models, we had very little data back when I was there because these are places that also aren’t capturing data. Insurance data is also of very poor quality. Companies down there that don’t have some of the same standards and practices that we do here. When you go to calibrate a model against claims and try to understand what damage was caused by some of these events, you’ve got tremendous uncertainty beyond just the hazard itself. You really don’t know what kinds of building the assets were in. You don’t know much about the policies themselves. You might just be getting reinsurance data that’s rolled up at an aggregate level and you have to make some assumptions about the building inventory and the distribution across an area. So there’s a lot of uncertainty.
It would be very difficult to judge the performance of a model based on this event in particular because it’s in Haiti, which is a very undeveloped area and has poor penetration.
McDONALD: Here’s a question for Brian and possibly for Sanjay: Have you seen much activity or exploration or any discussion of using cat bonds for terrorism risk?
GODHWANI: I have not on the terrorism side researched that side at all. I’ve seen it on the wind side and also on the quake side.
McDONALD: Brian, do you get many inquiries on that?
FINLAY: I have seen both. As Sanjay said, I have not.
McDONALD: This is a more general question: Do you think the recent influx of carries in the coastal insurance market – we have seen a number of smaller and newer players in some of those markets, property writers -- is that typical of cash flow underwriting? Do you think they’ll ultimately pull back from the coastal areas?
GODHWANI: My first comment is I don’t know if there’s a lot of cash flow underwriting going on today, given sort of the investment returns the marketplace is getting. The key here is to make an underwriting profit. People are coming in because there was an impression at least a year ago that after Ike and Gustav and so forth, that rates were going to go up. So there was going to be, along with the fact that the markets retreated and surplus decreased, that there was going to be substantial rate increase in the market. That’s usually why capital comes in and why insurance companies get formed, either in Bermuda or somewhere else. That’s the driving force behind the return.
McDONALD: We’re just about out of time. Let’s just go around the table for the benefit of our attendees. Roger, based what we talked about, what should people remember?
PIELKE: One of things that I’ve learned today is that the situation with wind and hurricane is really pretty good compared to some of the knowledge and ignorance and uncertainties in other issue areas. Hurricane management of risk and understanding of risk can certainly be done better. One thing I would recommend is understanding the performance of the models. I am surprised the industry doesn’t have something like a scorecard so that model performance can be evaluated over time. That would give it an additional quantitative basis for helping people to use the models.
That being said, everyone from the models to the insurance industry does really pretty good in the wind area. There are other areas where I think there’s a lot more risk and uncertainty.
McDONALD: Laurie?
JOHNSON: Certainly we’ve had some wakeup calls in Northern California, now Haiti. We have had a lot of new science introduced in the last couple of years with pretty strong prognoses of some large damaging earthquakes coming. Perhaps we’re in a cycle of earthquakes. We’ve had large magnitude earthquakes occurring across the Pacific Rim. I would caution people to think in this economic climate not only about their own situation and within their fortress of assets, but also look at the environment that they’re within. The public sector is really stretched right now. State and local governments are stretched. Our infrastructure has been something we’ve not kept up to date for a number of decades. The American Society of Civil Engineers gave it a rating of D, at a cost of $2.2 trillion to upgrade it.
You have to look around at what are you trying to protect and understand the environment. Think about the scenario, they way you want your business to perform post-event, what role insurance can play in your risk-management strategies and how you’re going to recover.
McDONALD: Brian?
FINLAY: My message would be: don’t be lulled into a false sense of security because we have now gone 10 years without a true catastrophic terrorist incident, or for that matter because you sit in a location that is not deemed a high-value target for terrorist activity. Be prepared.
McDONALD: And Sanjay?
GODHWANI: Expect the unexpected. Insure against the unexpected. No one expected or prepared for 2001. No one expected or prepared for the levees to fail in ’05. No one expected an Atlantic hurricane to hit the Rust Belt in ’08. It’s important that we’ve seen the frequency and severity of unexpected events increase. We should look to make partnerships with those insurance companies with the longevity and the financial stamina to be around after these unexpected events.
McDONALD: Thank you to the panel. Marilyn, thank you. I’m Lee McDonald with the A.M. Best Company. We will have a replay of this up at www.ambest.com/catrisk10. Our next webcast is on February 10 and that’s on the state of the medical malpractice market. That signup is at www.ambest.com/medical10. Thank you for joining us and we’ll see you next time.
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