“ Recent crises have highlighted the fragility and dangers of models when they are used blindly.”
“It is both reassuring and dangerous,” he said. “Recent crises have highlighted the fragility and dangers of models when they are used blindly.”
Dr Susana Corona, head of natural perils at Asia Capital Reinsurance
Group, agrees. She used the example of the recent catastrophes in Japan and New Zealand to highlight the discrepancy between modelled and actual losses.
“We have seen some perils that have obviously not been taken into account, the tsunami in Japan for example,” she said.
“Here the modellers were able to pull something together after the event
and figure out an approximate level of damage. In New Zealand, the story is different. The modelling of liquefaction losses was not nearly as severe as was actually observed.
“The modellers will tell you that if you take into account the standard
deviation, the losses would have been right. However, this is not the way we work,” she said.
While acknowledging the shortcomings of using catastrophe models,
Bill Kennedy, chief executive of global analytics and advisory at Guy Carpenter & Company, pointed out that models did still provide a valuable resource to the industry, as long they were used with care and in conjunction with one another in order to mitigate the risk of inaccuracy.
“We believe these [catastrophe] models are very useful in assessing risk
exposure, and it is no surprise that they have become essential tools for any insurer underwriting catastrophe loss coverage,” he said.
“However, these models reflect highly imperfect science and carry
levels of uncertainty far greater than their influence would suggest. Guy Carpenter has begun to encourage clients to take a multi-model approach when assessing total portfolio risks.”
RATE RISES As one might expect, another dominant theme at the Rendez-Vous was that of the current soft pricing across most lines.
According to many delegates, it is now underwriters and their senior management who will have to take responsibility for moving rates upwards. In the opinion of Manfred Seitz, managing director of Berkshire Hathaway Group’s International Reinsurance Division, this goes for both the primary and reinsurance sectors.
Seitz believes that the industry cannot wait for change to happen, but
must occasion that change itself. “There have not been enough visible signs of a market. But we’re all
involved in this industry; we cannot just sit back and wait for the market to change. We have to do something about it, because it is not going to help anybody if the market stays where it is.”
34 | INTELLIGENT INSURER | October 2011 The view that rates must rise was echoed by Flagstone Re’s chief, David
Brown, who believes that there will have to be some rate rises at the January renewals.
While Brown does not believe that there will be rate rises across all
lines of business, he does believe that catastrophe-affected areas and those that come under the recent revisions to catastrophe models will experience rises.
“There is generally a recognition within the industry that when events happen, rates need to go up,” Brown said. “If you look at what happened in Japan with the renewals, there was recognition there. And certainly in Australia and New Zealand, we have seen rate increases already on contracts which have been renewed since the losses.”
Victor Peignet, chief executive of SCOR Global P&C, also agreed that
rates should rise. “There is an absolute overall consensus that we are not going to have a brutal increase, but there will not be a decrease. We will see different sorts of increases depending on the client’s needs.”
CAPITAL & CAPACITY A key problem that many within the industry believe is standing in
the way of rate increases is the amount of capital and capacity floating around in the sector.
Dennis Sugrue, associate director at rating agency Standard & Poor’s,
believes that despite the intense catastrophe activity experienced in the first quarter, the industry is still well capitalised, to the tune of $35 to $40 billion, which will make it hard for reinsurers to push for the rates increases that they still desperately want.
With respect to the issue of capacity, Alistair Lockhart-Smith, managing
director of JLT Reinsurance brokers, believes the lack of attractive investment opportunities elsewhere is keeping capital flowing into reinsurance from investors and therefore maintaining bullish levels of capacity.
“This means some new money coming into the industry,” he said.
“Investors are certainly not withdrawing it.” David Cash, chief executive of Endurance Specialty Holdings, believes
that the current soft pricing is attributable to an oversupply of capacity. However, like Lockhart-Smith, Cash is hopeful for the future and believes that either a market-changing event, such as a Hurricane Katrina or the events of September 11, 2001, or a recovery in the world economy, will mean that excess capital is used up and that demand will increase.
“I expect opportunities in emerging markets such as Asia to drive this
as world economies improve. I also expect US property values to grow in the short term,” he said.
DIVERSIFICATION Until that happens, insurers and reinsurers will be looking for ways to mitigate the current challenges.
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