Risk modellers consult crystal balls

Risk modellers consult crystal balls

As three of the largest risk modellers in the market, Karen Clark, RMS and AIR Worldwide are in a unique position when it comes to forecasting future emerging exposures in the market.

What do the heads of each of these firms believe is the greatest risk facing re/insurers in the coming year and beyond?

According to AIR’s president Bill Churney, one the biggest and oft overlooked exposures facing the industry, is catastrophic casualty risk.

“Compared to property risk, which continues to be subject to rigourous regulation and has traditionally been the primary focus of catastrophe models, the assessment and management of casualty risk has been largely ad hoc, perhaps because the exposure has not been well understood and has therefore been considered difficult to model,” he said.

“Similar to the situation with cyber risk, it is worrisome that many companies simply do not know what types of casualty accumulations are hidden in their portfolios. Liability events have the potential to cross many lines of business and produce catastrophic losses, especially in today’s interconnected global economies. Conditions that result in significant liability losses can be slow to develop and difficult to anticipate,” he continued.

Modelling for property risks has hit new heights in the past few years, with flood and terrorism risks now being modelled alongside storm surge and wind damage.

But models for casualty risks have been slower to come along.

Hemant Shah, chief executive of RMS, agreed that casualty risks were some of the largest facing the industry at the moment, with a focus on digital and cyber exposures in particular.

“More and more exposures are under/un-insured. And the gap is widening as all aspects of our society digitise,” he said.

“Assets at risk are increasingly systems at risk, and data increasingly defines the exposures and vulnerabilities that really matter.”

Shah also highlighted the differences in modelling a cyber risk when compared with a physical risk such as those facing some of the most earthquake prone regions on earth.

“In the physical world, we know that while Tokyo and San Francisco are both along tectonic boundaries, a single earthquake cannot shake both simultaneously. Without a credible basis for modelling cyber correlations, managing diversification and reinsuring/transferring accumulations, the market will not be able to scale to meet the latent demand for capacity,” Shah said.

“This transformation offers a tremendous opportunity for the industry, and cyber is already the fastest growing sector for many in the market.

“Insurers need to partner to ingest and analyse big data across several domains. From dynamic data about exposures and clients’ threat surfaces, to the systems and technologies deployed, to the capabilities and intentions of bad actors across the hazard landscape,” he said, pointing out what re/insurers could do to address the issue on their end.

However, even though property risks are extensively modelled by all three companies, and the market at large believes itself ready for a devastating storm. Karen Clark, president and chief executive of Karen Clark & Co, still believes that a catastrophic Florida hurricane is the most significant risk facing the industry.

“The largest risk facing the global re/insurance industry is a Florida hurricane. Had Irma made landfall in southeast Florida as a borderline Category 4/5 hurricane as it was at one time forecast to do, the insured losses would have approached $200bn. A strong Category 5 hurricane making a direct hit on Miami will cause losses of $300bn,” she said.

“But the most pressing risk is that a $60bn hurricane loss - similar to what a repeat of Andrew would cause today - will lead to major disruption in the Florida market. More insurers will become insolvent today than in 1992 - 20 domestic insurers could be put out of business by this size loss,” she warned, highlighting how devastating Hurricane Irma in particular could have been for the market.

“The current situation in Florida is the direct result of systemic risk due to over reliance on one metric (the “PML”) and the lack of differentiation between the more and less financially stable insurers (almost all Florida companies are rated “A” by Demotech). It can be addressed through newer models and risk metrics that provide a better line of sight on solvency-impairing events.”

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