EDITOR’S LETTER
Who said being a reinsurer was easy?
“The industry is clearly entering a new era in the way it assesses and considers risk.”
Once you get past the small talk around how good it is to be back in Baden-Baden and to what extent to consider environmental, social and corporate governance (ESG) metrics in your renewals, the conversation this week has quickly turned to the impact of the July floods that caused significant losses in Germany and Belgium.
This is not necessarily because of the scale of the losses themselves, although they were exceptional. Insured losses are estimated at €7 billion ($8 billion) by the German Insurers Association. On top of that, there could be up to €2 billion losses from Belgium and other additional losses from Luxembourg, the Netherlands, Switzerland, and elsewhere.
No, the focus on the losses is more because they came as a surprise to the industry—sort of. The extent of the precipitation was a surprise, where the rain fell was a surprise, the extent to which debris blocked bridges, causing more damage, was a surprise. There is now debate around whether flooding should be considered a secondary peril; as AIR Worldwide stresses, it is part of the pan-European flood models and flood is one of the main perils in Europe. But however you categorise the peril, the industry dislikes surprises.
Perhaps it is because the industry has become sensitised to unpleasant surprises. Several years of wildfire losses, especially in North America, have made the industry increasingly fearful that it is starting to lose its grip on understanding the true risks. Hurricanes are behaving in ways that defy historic models too. And on top of everything lurks the spectre of climate change.
A game-changer
There is no question that all of this has put the pricing of catastrophe business and climate change in focus. The frequency and severity of everything from flooding and hail to drought and wildfires are now under the microscope. The fear in the industry is that risk models, which lean heavily on historic data, are no longer adequate for pricing risk.
This is a game-changer for the industry. Underwriting has always profoundly relied on analysing historic information. The better the data, the more informed the underwriter—and the more accurate the pricing. That has been a fundamental of the industry since its embryonic form in Lloyd’s (the coffee house).
That points to a fundamental change that is needed in the industry. It is no use celebrating a hardening market, if the underlying risk profile is also changing faster. As Monica Cramér Manhem, president, international reinsurance at SiriusPoint, points out in this issue, the industry will need to re-underwrite select risks, especially flood.
She notes that, for this risk particularly, uncertainty is high and insufficient reinsurance premiums may have been charged due to these perils being misjudged as “non-peak”, and therefore added to coverage without sufficient premium for the risk.
“As a priority, the industry needs to implement price adjustments to accommodate the impact of climate change on those secondary perils. What is required here is the re-evaluation of pricing models to take into consideration the consequences of climate change,” she tells Baden-Baden Today.
Most risk-takers would probably agree. The industry is clearly entering a new era in the way it assesses and considers risk. For the first time in its history, and perhaps largely due to climate change, it may need to consider the future as much as the past when making big decisions. Who said being a reinsurer was easy?
Wyn Jenkins is the managing editor of Intelligent Insurer
Image: shutterstock.com / Love Solutions
