NEWS
Risk models can mute rising volatility, says Verisk
Risk models should allow the industry to make decisions based on facts, reducing the swings and cycle of the market.
While reinsurers and cedants may often attempt to shout prices up or down depending on their agenda, risk modellers attempt to build a calming and anchoring position in the middle of the fray, arguing with facts, even when their telling won’t win friends.
“Prices are being talked up or down, it depends on the market,” Bernhard Reinhardt, a director at Verisk in the consulting and client services in extreme event solutions, told Baden-Baden Today. The trick: to be rhetoric-deaf and “provide a consistent long-term perspective, an unbiased view—even if sometimes this view is not initially loved by market participants”.
Risk modelling firms such as Verisk know their forecasts for pending modelled losses should, by definition, fall short of pleasing everyone. “If on the high side, they’re not loved by primaries; if low, they’re not loved by reinsurers,” Reinhardt said. “We just need to stick to the data.”
For the 2023 narrative, Verisk’s key recent forecast looks quite reinsurer supportive. While reinsurers cite a string of $100 billion annual natural catastrophe insured loss tallies as sign of the new normal, Verisk is modelling a $133 billion annual average, with bigger losses possible.
“Our modelled average loss is $133 billion globally,” Reinhardt said. “Put in the tail events and we estimate that including exposure growth and inflation, the chance to see a $200 billion sum in the next 10 years is almost a certainty at 90 percent,” he said. “No-one should be surprised.”
Verisk is equally factual on other issues. On the impact of climate change, sometimes bantered about bluntly in the pricing or political arena, Verisk points to data that suggests demographic and property exposure growth tops climate change as a driver of higher losses by some distance.
Verisk attributed 4 to 5 percentage points of the roughly 7 percent annual growth in insured nat cat losses on record to just the demographic and property exposures: building more in more expensive places where storms used to travel less noticed.
“We just need to stick to the data.”
Bernhard Reinhardt, Verisk
Exposures make the difference
“Climate change contributes only about 1 or 2 points of this increase,” Yörn Tatge, Verisk’s managing director for Insurance Solutions, told Baden-Baden Today.
“We are not saying climate change is not going to make a big difference—it will—but what you should not forget is the exposures,” he said. “That’s what makes the difference in the insured losses.”
Some assumptions on climate change may be misdirected. “The impact on much-discussed hurricanes is not really black and white,” Tatge said. “People want simple answers, such as that warm sea temperatures make more conditions for more devastating hurricanes.” But it is not always that simple.
“We can’t jump on any bandwagon and try to be anybody’s flavour of the month,” Tatge said. “It’s the facts, not what the market wants to hear.”
Tatge recalled 2006 and the market after Hurricane Katrina. It was a period when the phrase “new normal” was used liberally. Yet the next decade was largely free of major hurricanes.
Comparing today’s market to 2006, Tatge believes that models, modellers and the data-driven mindset they’ve brought have tamed the pricing rhetoric and tamed the pricing volatility.
“It’s been 18 years. The learning curve is still there, but there is definitely progress,” Tatge said. Compare to post-Katrina or reaching back further he claimed, “the range of pricing cyclicity is lower thanks to using models to determine the long-term expected loss”.
“Despite it all,” Tatge said of the 2023 property-cat reset, “the volatility, the range of pricing was smaller now.”
Main image: Shutterstock / behzad moloud
