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Bermuda Re/insurance Roundtables

“Property catastrophe is turning into much more of a fund management structure

where it’s not just your own capital that you’re managing, it’s third party capital, and that can help you get the kind of returns that you need.”

Do urban flood risks present unique challenges for the industry?

Driscoll: I wouldn’t disagree with that. If you get a loss in a non- urban area or suburban area it’s primarily going to affect residential programmes and the products themselves have a fair level of homogeneity. It’s also easier to calibrate the size of the loss. When you bring in an urban area, you involve meaningful commercial values, you bring in complexity, business interruption and concentration. From my perspective, business interruption in the context of this loss is a little bit overblown. It is rather different to the Thai loss.

It’s not a large manufacturing area—certainly there were some manufacturing losses—but it’s primarily white-collar firms. Contingency plans at the company, state, federal and municipality levels were quite effective and went a long way towards mitigating losses. Nevertheless, business interruption still adds complexity, and can create vast differences in commercial underwriting philosophy. If an urban area is impacted by an event, you increase the likelihood of flood, and when there is flooding it all too often highlights some firms’ inability to effectively manage risk.

Few: Business interruption clearly has the potential to really hurt

the industry, and if you look at the scenario in Japan, everyone worried about the contingent business interruption (CBI) coming from manufacturing losses. It wasn’t as significant as it could have been due to the global economy and the fact that there were other places, such as Thailand that could take up the slack. Then we faced a flood in Thailand and people started thinking: that’s now two high-

tech manufacturing locations that have been affected one after the other. There was considerable concern about CBI at that time.

Sandy is largely an office-type business interruption scenario; mainly

just extra expense. The costs involved largely concern relocating staff but the potential for business interruption is clearly obvious to any of us as underwriters and the industry needs to think much harder about collecting original data, particularly for CBI exposures, and also to think again about the size of limits that the industry is prepared to put out there. As an industry we’re not charging enough for this type of risk. The fact that it hasn’t happened to the extent it could, doesn’t mean that it can’t. That’s a burden we’re carrying.

Rentrup: There is demand for CBI coverage, but the question is

whether that demand is willing to meet the needs of those who will provide such coverage? The price expectations of buyers and sellers are far apart. The high degree of uncertainty is reflected in the price insurers and reinsurers are charging for cover, and even after the events (Thailand floods, Sandy, Japan earthquake) we have not really seen any great uptake of such coverage.

Few: There have been a few examples of CBI losses over time. If

you recall, Ericsson made a significant claim following a Philips plant failure in 2000. There have been examples of hi-tech manufacturing claims for relatively small parts of a supply chain resulting in an incredible concentration on one supplier or one small area of suppliers, and that’s a risk the industry might want to think more about. Despite the sheer scale of the loss in the Northeast, it hasn’t

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