Rates need to reflect changing risk perception, suggests industry executives
The pricing of catastrophe risks in the insurance and reinsurance sector needs to reflect the increased severity and frequency of events, and the extremely costly third-quarter could lead to a change in risk perception, according to industry executives.
Historically, the occurrence of significant price increases across the reinsurance market happens at the same time as a clear change in risk perception, and with rates in both the traditional reinsurance and primary insurance market expected to increase on the back of high catastrophe losses, a change in risk perception could again be on the horizon.
The issue was discussed by AXIS Capital’s President and Chief Executive Officer (CEO), Albert Benchimol, during the firm’s Q3 earnings call, who suggested a change in risk perception was required, but that he didn’t expect the kind of market change that was seen in 2002, after the 9/11 attacks, reports Reinsurancenews.
“But I would say that probably many people in the industry, if you were to tell them they would have three $100 billion years in a 12-year period, they might find that surprising. So, I think the frequency and severity is an issue, and I think that we’ve all been lulled into a level of comfort by the fact that there’s been a lot of close calls, but they haven’t happened,” said Benchimol.
Adding; “And I think that we have too often ignored the potential losses that are very real in our industry, and our pricing needs to reflect both the increased frequency and severity that we are observing.”
Despite catastrophe losses prior to 2017 being relatively benign, the frequency and severity of events has been seen to be increasing. Climate change is widely viewed as a driver of increased frequency and severity of events, while rising asset values in catastrophe-prone regions, such as coastal areas, is just one factor driving up the costs of disasters, both to economies and the re/insurance industry.
“I think we are seeing what’s happening right now in Texas, Florida and Puerto Rico about the demand surge that could occur when you have large events happening within a short period of time. It’s one thing to have all the models, it’s another thing to be paying out the claims,” continued Benchimol.
In the past, huge rate increases (which reports claim could happen at 1/1 2018 for affected-lines but that only time will tell how meaningful any price hikes are, and how sustainable) have driven a change in the models used by the industry to assess and price catastrophe risks, as risk modellers utilise new data to try and create a more comprehensive and accurate perception of risk.
Speaking during Arch Capital Group’s Q3 earnings call, Chairman and CEO, Constantine Iordanou, addressed the potential for a change in risk perception.
“I think smart people are going to step back and look at the events, and say, should we change our mind about how risky this business is, and what kind of returns we should expect,” said Iordanou.
While Marc Grandisson, president (COO), Arch, added; “We need to know will there be some creep, some increases in loss reserve, in loss estimation in a few players.
Will there be some changes to rating agency perception of risk? Will there be some change to the modelling? There are a lot of things, unfortunately, that need to happen for everything to converge to one area, which was more the case in 2005,” said Grandisson.
The message from a number of re/insurance industry executives in recent weeks has been that heading into renewals, on the back of large losses, the marketplace is in a very different place to where it’s been in previous, similar loss years. Prior to the events in Q3 rates were already extremely low, especially when compared with previous soft market cycles, and the abundance of alternative reinsurance capital brings additional challenges to the renewals season.
It will be interesting to see if recent events drive a change in catastrophe risk modelling, and whether this leads to more accurate and effective pricing for the industry in light of the increased frequency and severity of events.
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