Mistaken identity: how to spot the ‘uninsurable’

During the Bermuda Risk Summit, three chief underwriting officers discussed the current unprecedented period of global complexity and opportunity that is forcing re/insurers to address their perception of what is “uninsurable”.

Christian Dunleavy, chief underwriting officer of Aspen Re and chief executive officer of Aspen Bermuda; Justin O’Keefe, CUO of global property at RenaissanceRe; and Charles Goldie, CUO of MS Amlin, explained what they thought uninsurable means now.

“With cyber attacks, pandemics and terrorism, it is hard to see the re/insurance industry being able to hold enough capital to manage the tail events that can arise from them,” Dunleavy said. “There are, however, good models for public-private sector solutions for some of these truly uninsurable perils.”

Climate change is not necessarily one of them.

“We’re in a period of increased uncertainty and there’s an increased premium associated with that in the short term, particularly around trying to understand the frequency-versus-severity of some of the perils.

“But climate is actually quite insurable. The industry has done that very well and can continue to. It’s as much of an opportunity as a threat in the short term,” he added.

Re/insurers in Bermuda are “made for that type of risk”, Goldie said.

“The smaller, shorter-term catastrophe issues fit just fine for us as an industry, but the broader question of climate risk is uninsurable because most people can’t define what it is.”

The industry has a tendency, he said, “to fall in love with the models” they have been using for earthquakes and hurricanes, and it fails to consider scenarios not covered by those models.

“When you’re looking at something that is five, 10, or 15 years out, what’s insurable? What am I actually paying out on? It’s a struggle for me to see what I can do in that situation.”

Pricing is secondary

O’Keefe said it is a mistake to focus on price when thinking about insurability.

“The first thing I look at, for something being insurable or not, is whether there’s data and whether that is quantifiable. Is there enough information for us to take the risk? Take price out of it because that’s the secondary area,” he said.

The primary concern ought to be whether a peril is systemic in nature, he said, meaning it could have multiple impacts across all portfolios.

The recent California wildfires were a good example of a peril that insurance companies mistakenly thought was uninsurable.

“With all the mitigation, sustainability and resilience that our industry has to offer, and public-private partnerships with local government agencies, there’s opportunity everywhere in how to price and assume the risk, in the right way—as long as the chief underwriters of large global reinsurers feel comfortable that we’re not taking on some systemic risk that is, potentially, the doomsday scenario for our capital base and investors,” O’Keefe said.

What about Florida?

The discussion was moderated by Chen Foley, head of Bermuda claims at Liberty Specialty Markets. He asked whether, as the mid-year renewals season approaches, Florida homeowner risk had become uninsurable.

Goldie said that market is “totally insurable” although it has some structural problems, adding that the real catastrophe in Florida was man-made. That market was “at an inflection point”, he said, because there have been no catastrophes for a number of years and, as a result, there are now solvency questions around some of the insurance companies’ clients.

“I suspect a lot of insurers are going be making decisions around the survivability of some of those companies, and also thinking long and hard about the payment terms on those contracts. That’s because, as the reinsurer of that contract, all of your risk is in the first six months, but your premium is generally spread out over 12 months,” he explained.

“There’s going to be a heightened focus around payment terms and client selection. But the question ‘is Florida uninsurable?’—no, not at all. It’s insurable and it has been insured for a very long time. It’s just in a difficult point in its evolution.”

A difficult renewals season

The big issue in Florida is “litigation, litigation, litigation”, O’Keefe said. RenaissanceRe was one of the largest supporters of the Florida homeowner market, with an almost 35 percent share in the 2000s, he said, but the company has “drastically reduced” the number of cedants it supports, and the amount of premium that it assumes, in that state. The reason for this is the wave of litigation, with Hurricane Irma claims still hammering the industry nearly five years on from the weather event itself.

“It’s going to be the most difficult mid-year property reinsurance renewal we’ve seen since 2006 or 2007,” he said.

The company’s new Atlantic hurricane model incorporates the latest sea-surface temperature information throughout the Gulf and the Eastern Seaboard of the US. The model uses “existing science” and not data based on information going back to the late 1800s, O’Keefe said.

“Unfortunately, it’s more storms, not fewer, and that means we expect more loss, not less,” he said. This underscores the need to work with local officials on policy so that litigation does not continue to waste time and resources, he added.

Dunleavy said the challenge for the Florida domestic market is that they are “uniquely, poorly positioned” for the most severe issues facing reinsurance right now.

“They are capital-light, reinsurance-dependent, and they buy very low, and that’s not a good place to be at June 1. Reinsurers are trying to move away from lower layers generally, because of some of the uncertainty around this kind of frequency issue.

“When you’re very heavily reinsurance-dependent, that puts you in a difficult spot. So I agree it’s going to be a very challenging renewal.”

A different type of inflation

Goldie referred to systemic risk in another context: inflation. “The extent of inflation is a new phenomenon in the last few months. We’ve moved from asking is this transitory inflation or is it systemic? It’s systemic inflation caused by supply chain issues because of COVID-19,” he said. The unprecedented scale of economic sanctions being set against Russia means the supply chain issue is now “on steroids”.

“Six months ago, you would have increased the trend factor by ‘x’, but I don’t think that flies at all now. You have to think through the things that are likely to be impacted by supply chain-driven, spiky inflation. That lands more on the property side than it does on the casualty side.

“We’ve suffered through social inflation and, in the US, there’s a big question mark over whether that’s still going on. We’ll learn about that over the next 12 to 18 months. But the standard actuarial model of ‘I was at x and now I’m going to use x plus three as a broad factor’, it’s a start, but it’s not a conclusion.”

Mining the data

Uncertainty from clients and shareholders is impacting multiple perils and multiple classes, O’Keefe said.

“That’s the big reform in the marketplace right now. How can we get more data in the room and more structured products to create more certainty. Whether it be climate or inflation or sanctions, the past is not helping us predict the future.”

To what cedants can expect, Dunleavy said that client selection will be important.

“It’s an interesting moment, because as reinsurers there is a lot of concern around modelling tail risk. It’s quite well understood that things are moving, but most companies are well capitalised and are in a pretty strong position for large-scale events.

“The focus is: ‘Hold on a second, we’re four or five years in, and nobody’s making any kind of return that they can defend to their investors and shareholders’. So the focus has shifted much more towards trying to focus on the tail risk, and trying to manage this frequency-severity aggregation on smaller claims issues,” he explained.

Dunleavy added that the industry was getting only a tiny fraction of value from the colossal amount of information it has. As to whether artificial intelligence could help with managing data, he replied: “I would be lying if I said we’d figured that out.”