Insurance industry `needs to act sooner rather than later` as Brexit

MARKET NEWS, DATA AND INSIGHT ALL DAY, EVERY DAY
MONDAY 27 JUNE 2016
ISSUE 4,629
Insurance industry ‘needs to
act sooner rather than later’
as Brexit fears become reality
•
•
•
Insurance stocks regain
some lost ground after
morning bloodbath
Brexit pushes passporting
rights to top of London
market agenda
Bermuda tempts UK
insurers with Solvency
II equivalence
p2-3
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Brexit pushes passporting
rights to top of London
market agenda
Non-UK firms expected to move European headquarters out of
London unless measures are agreed to retain passporting rights
Scott Vincent
Editor, news services
T
he future of London’s role as a
European base for international insurers has been thrown
into uncertainty following the
UK’s decision to vote to leave the EU.
London market insurers will be the
segment of the UK insurance sector most
impacted by the vote, given the role London plays as a centre for international
players that operate across the continent.
For firms with European headquarters based in London, their regional
business models are under threat from
the decision, unless the passporting
rights that allow them to operate across
the EU are maintained through new
trade agreements.
But with negotiations over the UK’s
exit not set to begin until a successor to
the prime minister, David Cameron, has
been named, the industry could be set
for a considerable period of uncertainty before it learns the outcome on this
critical issue.
While London will remain a hub for
specialty risks, the industry focus in
the coming months will be the extent to
which firms feel the need to transfer other parts of their operations elsewhere.
Many US and Asian firms use London as their European hub but this
practice will be under scrutiny following the vote.
In the run-up to the election AIG’s
chief executive, Peter Hancock, suggested his firm would likely move its European HQ out of London in the event of a
vote to leave.
A spokesperson for the insurer said
AIG Europe would evaluate options as
the negotiations take place. “AIG Europe has been actively contingency
planning. We will closely monitor the
progress of the UK’s negotiations with
the EU and participate in the debate
with the government and trade bodies
as appropriate.
“We will continue to evaluate our options as the shape of the future relationship between the UK and EU becomes
clearer,” the spokesperson added.
A spokesperson for QBE, whose European operations are headquartered
in London, said the group had planned
carefully for the referendum outcome.
“We do not anticipate any material direct impact as a result of the UK’s decision to leave the EU.
“The exit transition timetable is expected to take a minimum of two years,
providing ample time for any requisite
administrative transition and to ensure
our service commitments to QBE’s European customers is uninterrupted.”
There have been suggestions largescale redundancies can be expected
among large financial services businesses unless the passporting rules are
resolved in the UK’s favour.
Nick Elwell-Sutton, partner at Clyde
& Co, said: “Unless the financial services passporting rules are resolved
in the UK’s favour, then many large
financial services businesses are likely to relocate to within the EU, meaning large-scale redundancies would be
highly probable.”
Following the historic vote, Jonathan Howe, UK insurance leader at
PwC, told Insurance Day the business
models of some London-based insurers will come under scrutiny in the
near future. “These companies tend
to operate on a cross-border basis and
many have branches established in
Europe,” he said.
“Before the introduction of Solvency
II, there was a large-scale restructuring
process, where many firms converted their companies across Europe into
branches, with provided liquidity benefits under the regime.
“If we leave the EU and lose passporting rights, these models will be under
threat. Restructuring to convert these
A Remain
campaign
supporter
demonstrates
near the Houses
of Parliament
on June 24:
passporting
rights for UKbased companies
operating in
Europe are at the
top of the London
market agenda
following the vote
to leave the EU
© 2016 Matt
Dunham/AP
branches into subsidiaries will be an
expensive process.”
Howe said trade agreements to maintain passporting rights may be negotiated, but said it was too early to say what
they may look like.
“Insurers may opt to keep their European branch network but move their
headquarters into Europe. It is too early
to say where they might go, but it is hard
to look past the existing established insurance centres in Europe.”
One option for the UK would be to apply to join the European Economic Area
(EEA), which would provide access to
the single market through compliance
with relevant EU legislation. Norway
follows this model at present.
Switzerland, another non-EU member, obtains access to the EU single market through bilateral treaties but is not
a member of the EEA.
Charles Portsmouth, director at
Moore Stephens, said the insurance sector would be keen to retain access to the
EU through a trade deal.
“The future of our current EU passporting rights and their use by non-EU
companies through their London-based
European HQs to access the EU market
will be of prime concern to the insurance industry,” he said.
Guy Soussan, Brussels-based partner
at Steptoe & Johnson, said joining the
EEA was a potential solution to the passporting issue.
“Such a solution will, at best, enable
the UK to regain something akin to full
membership of the EU but with the disadvantage of not giving the UK much
ability to shape the future contours of
the single market,” he said.
www.insuranceday.com | Monday 27 June 2016
3
NEWS
Industry ‘needs to act sooner rather than
later’ as Brexit fears become reality
Rebecca Hancock
Reporter
S
ince the nation awoke on
Friday morning to the news
Britain would be leaving
the EU, insurers, reinsurers
and brokers alike have been trying
to come to terms with the news.
For months, players in the
industry have discussed contingency plans. However, how
developed these strategies are is
debatable, some have suggested.
Lawyers at Clyde & Co told Insurance Day while some companies had contingency plans others
did not as there was “a belief we
would be OK on the night”.
Stephen Browning, corporate
insurance partner at Clyde & Co,
said: “The industry needs to act
sooner rather than later”.
EU leaders said the UK must
swiftly engage in exit talks and
invoke art 50 of the EU treaties,
which sets a two-year deadline
for an exit.
Ivor Edwards, European head
of corporate insurance, at Clyde
& Co, said: “Two years doesn’t
give [the sector] a huge amount of
time in which to plan and become
operational. The industry needs
a moment of reflection to understand the implications of the
vote as at present it doesn’t know
which way to turn.”
London market bodies were
quick to assert the sector’s resilience and ability to respond to the
challenges and opportunities created by an exit from the EU.
Lloyd’s Market Association
(LMA) chief executive, David Gittings, said: “Lloyd’s underwriters
have a well-earned reputation for
being nimble and flexible in their
business activities; they are well
placed to steer a course through
these uncertainties and to take
advantage of the resultant opportunities as they arise.”
International Underwriting Association (IUA) chief executive,
David Matcham, said the London
insurance market was “resilient
and well positioned to respond”
to the result of the vote.
He said insurers had been preparing for the possibility of a
vote to leave for some time, with
contingency plans being drawn
up of how to respond to new
trading conditions.
“Clearly, the UK’s decision to
exit the EU presents challenges for
London market companies and
uncertainty surrounding the potentially prolonged nature of this
process will be problematic for
future planning. Our industry is,
however, experienced in responding to change,” Matcham said.
Meanwhile, Lloyd’s chairman,
John Nelson, also moved to allay
fears about the impact of the UK’s
vote to leave the EU on the Lloyd’s
market. Nelson said: “Lloyd’s has
a well-prepared contingency plan
in place and Lloyd’s will be fully
equipped to operate in the new
environment.”
He continued: “For the next two
years our business is unchanged.
I am confident Lloyd’s will stay at
the centre of the global specialist
insurance and reinsurance sector
and I look forward to continuing
our valuable relationship with
our European partners.”
Nicolas Aubert, chairman of the
London Market Group, said: “As
the future of the UK’s trading relations unfolds, we are confident
the market will respond to this
complex, challenging and unprecedented situation with the flexibility, agility and pragmatism that
is an inherent part of its DNA.
Aubert added: “The London market enjoys a range of benefits from
being part of international markets,
and we would like to see as many of
these benefits retained as possible
as part of the exit negotiations.
“We will actively follow the
progress of the UK’s negotiations
with the EU and, in conjunction
with market associations and
Lloyd’s, participate in the debate
with the government and any other relevant bodies.”
Many insurers stressed their
levels of preparedness throughout
Friday, insisting they can ride out
the storm caused by the leave vote.
Mike McGavick, chief executive of XL Catlin, said: “This is an
outcome we have been preparing
for and over recent months we
have worked across the business
to understand how a vote to leave
the EU may impact XL Catlin, and
in particular our UK and European operations.
McGavick said the group would
now be working on the various
operational and administrative
aspects relating to the UK’s withdrawal from the EU. “Fundamentally, we believe our strong global
network and footprint keeps us
well positioned to continue delivering for our clients,” he added.
German insurance giant Allianz
said it remained committed the UK
market. “In the medium- to longterm, we expect bilateral agreements between the UK and the EU
for a continuous and prosperous
relationship.” It added: “Owing
to our long-term investment approach, there is no negative implication for Allianz’s investments to
be expected. Our portfolios are not
materially affected by short-term
market volatility.”
Aviva said its analysis showed
an exit form the EU would “have
no significant operational impact
on the company”.
Zurich Insurance said it expects
business and market sentiment to
normalise over time following the
UK’s decision to leave the EU, Reuters reported.
The Swiss insurance group,
which has substantial operations
in the UK, said the UK is a key market for Zurich and it is “not going
anywhere”. However, the insurer
said it was too soon to say how an exit will affect Zurich’s business.
Reuters also reported Munich
Re’s chief economist, Michael
Menhart, as saying the UK’s Brexit
decision is not likely to impact the
insurance industry as heavily as
other sectors.
Rating agency AM Best said it
did not expect to take rating actions in the near term as a direct
consequence of the decision to
leave the EU. It said the implications for the financial strength
of insurers with regard to subsequent investment market volatility, currency fluctuations and
increased economic uncertainty
would “be closely monitored”.
The focus for the insurance industry will be ensuring the role
of the sector is a key part of any
discussions about a new trading
relationship between the UK and
the remaining EU member states.
Matcham said: “The IUA will be
working with the London Market
Group to ensure our industry’s
views are fully represented as developments continue.”
Insurance stocks regain some lost
ground after morning bloodbath
Bermuda tempts UK insurers
with Solvency II equivalence
UK insurance stocks regained some
lost ground on June 24 after the
morning bloodbath on the stock
markets, writes Michael Faulkner.
The listed Lloyd’s insurers
surged back after plunging more
than 12% on average as turmoil
gripped the financial markets to
be 5.3% down by early afternoon.
General insurers and European
carriers also trimmed losses.
This came as sterling plunged
to a 30-year low as stock markets
across the world witnessed savage selling. The FTSE 100 slumped
8.7% on opening, wiping more
than £100bn ($136bn) off the UK
stock market in reaction to the
UK’s EU referendum result.
The FTSE was trading down
1.75% at 6,225.98 by 3 pm BST.
UK-based re/insurers should consider redomiciling in Bermuda as
a contingency plan in the wake of
the UK vote to leave the EU, senior
figures on the island have said,
writes Sophie Roberts.
Ross Webber, chief executive
of the Bermuda Business Development Agency (BDA), told Insurance Day: “If you are a business
that wants to comply with Solvency II you might find the location of your group’s headquarter
becomes something you want to
seriously consider and Bermuda
is a strong contender.”
When the UK exits the EU, it
will need its regulatory regime to
be deemed Solvency II equivalent.
Several senior executives told
Insurance Day earlier this week
Among the listed Lloyd’s carriers, Lancashire Holdings led
the fall, dropping 20% as trading
opened before recovering sharply. By early afternoon its shares
were trading at 558.5p, down
4.37% on the previous day’s close.
Shares in Beazley plunged 15%
in the morning before trimming
losses to 7.8% to trade at 355p.
Hiscox’s stock was down 11% but
regained ground to be 4.7% down
at 968p by early afternoon.
Novae’s shares lost 4.8% in the
morning before edging up to 806p,
down 4.6% on the previous day.
But some felt particular pain.
Among the general insurers, Aviva’s stock lost more than one-third
of its value, falling 35% to 290p – its
lowest level for a year.By mid-after-
noon, the group’s stock was trading
at 370.3p, down 16.7% on the previous day’s closing price. RSA fared
better, falling 12% to 425.7p before
recovering to 469.1p – down 3% on
the previous day’s close.
European re/insurance stocks
also trimmed morning losses.
Zurich Insurance opened down
8.4% at €220 ($243.28) before climbing back to €228.20, down 5.2%. Munich Re opened at €142, down 19.2%,
then edged up to €151. Allianz was
trading at €128.20 by mid-afternoon
after opening at €121.40.
The Euro Stoxx Insurance Index
was down 9.1% at €200 by midafternoon.
The Bank of England said it
was monitoring developments
closely.
redomiciling to Bermuda could
be one way to go when considering contingency plans in the
event of Brexit – but as with many
others in the business world,
strongly believed this would not
be the case.
However, despite Bermuda’s
standalone Solvency II equivalence, losing the passporting
benefits the UK’s participation
in the EU afforded Bermuda was
a concern.
Speaking to Insurance Day last
week Greg Wojciechowski, president and chief executive of the
Bermuda Stock Exchange said:
“The treatment of Bermuda’s
passport to make risk work in Europe is something we would have
to look at.”
4
www.insuranceday.com | Monday 27 June 2016
www.insuranceday.com | Monday 27 June 2016
5
SPECIAL REPORT/PROPERTY
CATASTROPHE
Closing in on a pricing floor? Privatising flood cover in the US
Increased levels of loss activity, reserve strengthening and other pressures on reinsurers’
profitability are beginning to impose a degree of underwriting discipline on the market
David Flandro and Julian Alovisi
New legislation to increase the availability of insurance cover to homes located in flood hazard areas
will change the shape of the US flood insurance market
Graph: Risk-adjusted Florida property catastrophe rate-on-line index, 1992 to 2016
Brandie Andrews
JLT Re
Flooding in Nashville,
Tennessee in 2010: inland
flooding costs an average of
$25bn annually in the US
AIR Worldwide
300
T
he story is a familiar one:
excess capacity, historically low reinsurance
rates, stagnant premium
growth, lacklustre returns, a flurry of mergers and acquisitions
(M&A) activity and questions
about the future of the reinsurance business model. Nevertheless, amid growing incidences of
reserve strengthening, there are
early signs of a pricing floor, with
some lines of business and regions seeing rates stabilise for the
first time in years.
This backdrop actually describes the reinsurance market in
1999, just as it bottomed out after
five years of steep pricing declines
and was about to experience a prolonged period of hardening triggered by an equity market crash,
the September 11 attacks, a reserving crisis and a succession of landfalling hurricanes in the US.
The similarities with the present situation are striking. Today, the sustained headwinds of
modest premium growth, low
investment returns and reduced
reserve releases in an environment of excess capacity has led to
a spike in M&A deals as difficult
market conditions limit organic
growth potential. This period has
also been characterised by intense
market competition and falling
prices as a result of new capital
inflows from alternative capital
providers. And yet, recent major renewal cycles have offered
glimpses of market stabilisation
as the rate of pricing decline has
moderated from the double-digit
falls that were typical 18 months
ago, particularly in the US.
Renewal
The trend of rate stabilisation was
clear to see during this year’s June
1 renewal. The JLT Re risk-adjusted Florida property catastrophe
rate-on-line index fell 3.1% in
2016, compared to a fall of 8.5%
at June 1, 2015 and 17.1% in 2014.
JLT Re sees four key developments that contributed to the
clear trend of price stabilisation
at June 1:
• Evidence of converging pricing levels between traditional
and insurance-linked securities
(ILS) markets during the renewal, reversing the decoupling
trend that first emerged in 2013
when ILS investors deviated
away from price expectations
set by the traditional market.
• Pricing for Florida business
is approximately 38% down
on 2012 levels and only 17%
above the previous cyclical low
of 1999/2000, implying limited scope for further profitable
pricing reductions.
• Evidence of increased underwriting discipline amid margin
compression, deteriorating results and increased catastrophe
activity in the first five months
of the year.
• Stable demand for reinsurance
cover at June 1 (after a significant increase last year), as
reduced placements by some
state-backed insurers were offset by increased appetite within
the private market.
However, surplus reinsurance
capital continues to contain any
prospect of higher reinsurance
rates. At the end of the first quar-
I
200
100
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Source: JLT Re
ter of 2016, JLT Re estimated dedicated sector capital to be at record
levels having risen to $321bn
from $315bn at year-end 2015.
The result is a market awash with
capacity as reinsurance supply
continues to exceed demand.
That said, the growth in dedicated sector capital has slowed
in recent years. While total sector capital grew by 65% between
2008 and 2014, it has been more
static recently as traditional capital has declined slightly and
there has been a slowing inflow
of alternative capital. This has
contributed to moderating pricing declines.
Increased deployment of rein-
Miami, Florida: pricing for Florida business is down 38% on
2012 levels, with limited scope for further price reductions
surance capacity has also played
an important role as low pricing
levels have encouraged some cedants to reverse the trend of centralised reinsurance buying and
purchase more cover through localised placements. Efforts to accelerate the transfer of risk from
governments to the private market are also ongoing.
Building pressures
Squeezed reinsurer profitability
is likewise beginning to have an
impact as increased underwriting discipline takes hold. Recent
earnings announcements have
highlighted deteriorating results
for some carriers because of increased underlying loss ratios,
higher expenses and lower reserve
releases and the situation is likely
to continue. As a result, some reinsurers are walking away from the
most unattractive pricing.
An uptick in loss activity so far
this year has also had an effect.
Indeed, a series of catastrophes
during the first five months of
2016 resulted in one of the most
costly starts to the year since 2011,
with insured losses from major
events approaching $20bn at the
time of writing. Global reinsurers
are likely to take on a significant
portion of these losses, reducing
the buffer available to cover po-
tential wind-related losses with
the imminent onset of peak hurricane season.
Time will tell whether 2016
will mark a turning point for the
reinsurance market in the same
way as 1999. There are certainly
parallels between both years but
competition today is rife, so any
market turn is likely to be more
measured. Either way, it is now
clear 1999 was an optimal time
for buyers to secure reinsurance
protection before the rapid and
steep price increases that followed in the early 2000s.
Similarly attractive buying
conditions exist today. The current market environment offers
cedants a significant opportunity to lower their costs of capital,
increase franchise value, pursue
more profitable business and support new growth strategies. The
best time to buy reinsurance is before prices increase and, with an
uptick in loss activity, demand for
reinsurance increasing and early
signs of adverse reserve development, cedants should take advantage of the competitively priced
capacity on offer at present. n
David Flandro is global head of
strategic advisory and Julian
Alovisi is head of sector research
and publications at JLT Re
nland flooding causes more
property damage in the US
than any other natural disaster, some $25bn on average
annually. Losses are expected to
grow with continued development (especially in flood-prone
areas), rising property values and
increasing numbers of extreme
wet weather events.
Nevertheless, less than 25% of
homes located in special flood
hazard areas designated by the
Federal Emergency Management
Agency (Fema) have flood insurance. Furthermore, the vast majority of the policies that do exist
are written by the National Flood
Insurance Program (NFIP), which
is $23bn in debt at present.
The NFIP was founded by Congress in 1968 to provide flood
insurance to home and business
owners after the private insurance industry largely stopped offering coverage after a series of
damaging floods in the 1950s and
1960s. However, the programme
has resulted in a situation of significant adverse selection, where
a small percentage of covered
properties are responsible for a
disproportionately large number
of payouts. To provide “afford­
able” coverage, the NFIP has
never been subject to actuarially
sound rates, and as many as one
in five of the five million properties covered by the programme
pay less than half the price a private insurer would charge.
While the Biggert-Waters Reform Act of 2012 has aimed to decrease the mounting debts faced
by the NFIP by revising existing
rates, updating flood hazard maps
and encouraging the insurance
industry to offer alternative coverage, putting many of its measures
into practice has been fraught
with difficulties. One significant
hurdle relates to mortgage requirements. People seeking federally backed residential mortgages
in certain areas at risk from flood-
To take advantage of the
new opportunities that
NFIP privatisation may
offer, companies need
robust tools to properly
measure and price flood
risk at a detailed level
ing are required to purchase flood
insurance, and mortgage lenders
are required to accept policies
that are “similar” to NFIP coverage. Many mortgage lenders are
hesitant to accept private flood
coverage unless private policies
are written using language that
makes them virtually identical
to NFIP policies; in some instances
they refuse to accept private policies at all.
Sister bill
To help overcome this challenge,
US representative Dennis Ross
(R-FL) introduced a draft Flood
Insurance Market Parity and
Modernization Act to the House
of Representatives on June 25,
2015. US senator Dean Heller (RNV) submitted the sister bill in
the Senate. The bill was passed by
the House earlier this year and is
now awaiting the Senate. It shifts
the responsibility of determining
what coverage is “similar” to the
NFIP from the lenders to the state
insurance commissioners, who
understand policy wording nuance, and are already positioned
to protect policyholders. Policies
written by private companies
could be deemed acceptable and
approved for a state in which a
property is located, as long as
the insurance company is also licensed by that state.
Should the bill become law, as
is expected, insurance companies
would be able to expand the coverage endorsements acceptable
to banks and provide policyholders with the increased level of
protection they have come to expect from standard HO3 policies.
It would also allow the privatisation of the NFIP to commence,
either through endorsement protection or the addition of a new
basic peril: rising water flood.
Private insurers can, in many
cases, offer more comprehensive
coverage than the NFIP, which
does not cover basements or additional living expenses, and only
covers personal property on an
actual cash value basis (instead
of replacement cost).
Lower rates
Alternately, private insurers may
be able to offer comparable coverage at substantially lower rates.
The new legislation will provide
an opportunity for companies to
compete with the NFIP and each
other, creating a range of deductible and coverage options from
which customers can choose what
best meets their needs.
To take advantage of the new
opportunities that NFIP privatisation may offer, companies need
robust tools to properly measure
and price flood risk at a detailed
level, the same way hurricane
and earthquake catastrophe models have been used throughout
the industry for decades. In the
past few years, the introduction
of probabilistic flood modeling to
inform risk-based pricing and accumulation management, both on
and off established floodplains,
signals a new era for a peril that
has been avoided by the private
market for several decades. Coupled with impending legislative
changes to the private flood insurance market, the new tools will ultimately provide customers with
more choice in the much-needed
protection they purchase for their
homes and businesses. n
Brandie Andrews is vice-president
of regulatory and rating agency
client services at AIR Worldwide
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7
SPECIAL REPORT/PROPERTY
CATASTROPHE
European windstorms: clusters
of uncertainty
transformed this information
into storm severity estimates.
The extended historical catalogue reveals additional storm
clusters, such as the Hilaire-Prisca
windstorm series which ravaged
France, Switzerland and southern Germany in 1739. The episode
had been forgotten by almost everyone in the insurance industry,
but could provide a better understanding of the multi-century
return period for the 1999 storm
cluster in France. Additional original research also shows recorded
fatalities may provide a reasonable proxy for UK storm severity,
which could help researchers to
extend the data on storm clusters.
A peer-reviewed academic paper
has been published to share these
new findings with the academic
community1 and a number of industry players are already testing
and validating a clustered model
based on the data.
Insurance supervisors want insurers and reinsurers to account for the risk of windstorm
clustering under the newly implemented Solvency II capital adequacy regulations
Laurent Marescot
RMS
E
uropean
windstorm
clustering has become a
regular topic of conversation among insurers,
reinsurers, brokers, modellers
and supervisors. Despite all of
this discussion, however, different views quickly emerge when
it comes to assessing the impact
of windstorm clustering on insurance company balance sheets.
This much we can agree on: a
windstorm cluster occurs when
two or more cyclone events happen
close together in time and such clusters are a real, observed phenomenon. We all also agree clusters of
windstorms may have a very damaging effect on the balance sheet of
an exposed risk carrier. European
supervisors similarly believe storm
clusters can have a material impact
on loss estimates and associated
capital requirements.
Windstorms can occur close together in time simply because of
the natural variability of random
storm occurrence. They can be said
to be truly clustered only when
such storm clusters occur more
frequently than can be explained
by this natural variability. How-
ever, damaging storm clusters are
relatively uncommon. By far the
biggest hurdle faced by modellers
in characterising clustering is the
relative lack of available historical
data. Wind speed data exists for
fewer than half a dozen damaging
clusters of storms to have occurred
over the past 40 years in Europe,
compared to hundreds of individual storms.
In the winter of 1989/90 a cluster of eight storms, four of which
individually caused insured losses of greater than €1bn ($1.11bn)
at 1990 values, pummelled much
of western and central Europe.
In 1999, the storms Lothar and
Martin bombarded France just
Opening up
the model
While insurers
are beginning
to make use of
the advanced,
open platform
features of new
hurricane risk
models, there is
concern about
their ability
to understand
the models
well enough
to be able to
customise their
assumptions
36 hours apart. The UK experienced examples of storm clusters
in 2013/14 and last winter, when
series of low pressure systems
pounded the UK for many weeks.
These examples highlight the
variability of the phenomenon
and its potential impact on insurance industry: while the 1999
storms dealt heavy wind damage
to property in France and the
1990 storms created large wind
losses in many European countries, the recent UK storm clusters
did not cause extensive insured
wind losses (although the resulting floods were costly), despite
the proximity of multiple storms
in time and space.
Hurricane Sandy: hurricane
modelling needs to include
what the model users can do
with the models
Karen Clark
Karen Clark & Company
I
n the past, most of the advancements in hurricane
modelling have been improvements in the models
themselves. The models have become more detailed over time and
have been calibrated with actual
wind speed and claims data.
How the users interact with the
models has, however, remained essentially unchanged. Less attention
has been paid to giving model users more powerful capabilities and
more insight into loss potential.
That is now changing. Hurricane models are not just about the
science of hurricanes – they are
important tools for underwrit-
ing, pricing and managing hurricane risk. We know the models
will never be accurate no matter
how many scientists tweak the assumptions, so the question is: how
can the models be better tools for
helping to make important risk
management decisions?
Three “wishes” heard throughout the industry are: less volatile
loss estimates, higher visibility
into the key assumptions driving
losses and more intuitive and actionable risk metrics.
Newer, open hurricane models are addressing these areas.
Open models are improved and
advanced risk management tools
because they provide users the
opportunity to interact with the
model assumptions, offer more
powerful capabilities and provide
additional risk metrics for understanding and managing losses.
Better reflect
For example, open loss modelling
platforms such as RiskInsight give
full transparency on the reference model assumptions. Moreover, model users can customise
the assumptions to better reflect
their actual loss experience and
their own views of risk. Perhaps
most importantly, insurers can
lock down the model assumptions
Historical hindsight
With so few damaging storm
clusters observed in recent times,
there exists a persistent haze of
uncertainty over their frequency,
making model calibration much
more difficult than for other
wind catastrophes. To address
this data deficit RMS investigated records as far back as 1500
to learn where and when storm
clusters have happened. Much
was learnt from academic researchers who pored over scores
of historical sources that mention
wind damage, including newspapers, government reports, private correspondence and diaries
and other accounts. RMS then
for more stability in underwriting
decisions and strategies.
While insurers have already
started using these advanced
model features, there is some
scepticism about insurers’ ability to understand the models well
enough to be able to customise
model assumptions. Open models
do require a certain level of user
sophistication. However, model
users are already expected to validate the external third-party models. If insurers have the expertise,
data, and knowledge to truly validate the external models they are
using, then they have the expertise
to customise their own models using the new open platforms. Open
platforms enable companies to
leverage their own expertise and
proprietary claims data more efficiently and scientifically.
Some people are confused about
how open models work. Some
think “open” means every underwriter and decision-maker can
make their own “willy nilly” assumptions. That is not the case. A
designated team of experts – the
team currently performing the
model validation work – has the
responsibility for understanding
the science and analysing the relevant data to make the assumptions that will then be employed
Flooding in Lieser, Germany,
following windstorm Lothar in
1999: Lothar and Martin hit
Europe less than 36 hours apart
© 2016 Axel Seidemann/AP
throughout the organisation for all
decisions. And open does not mean
users have to make customisations
– open models can be used “as is”,
just like the traditional models.
Insurers also want tools that give
them more capabilities than the
traditional models. For example,
when an actual hurricane threatens the US coastline, the traditional
vendor models give relatively little
insight into the likely losses for an
individual insurer. Open platform
models can fill this gap with a customised module that automatically reads in tropical cyclone tracks
issued by the National Hurricane
Center and generates high-resolution intensity footprints for the
storms. These intensity footprints
can then be run against insurers’
detailed exposures to estimate not
only the total losses, but also the
number, values, and locations of
likely claims. When a major event
occurs, it is critical insurers have
all the credible information available to efficiently plan and execute
their claims handling activities.
Questions
The traditional models do not
answer all the questions senior
executives have with respect to
hurricane risk, such as:
• How much business can we
pean Winter Storms, which was coorganised by RMS. As a result, the
collaboration between industry and
academia continues to strengthen
and the ensuing research, we hope,
will soon further reduce uncertainty in modelling clustering.
Frequent discussions with supervisors, such as the Prudential
Regulation Authority in the UK
and Germany’s BaFin, reveal they
believe that European windstorm
clustering presents a unique risk.
Under newly implemented Solvency II capital adequacy regulations, they want supervised
insurers and reinsurers to account for windstorm clustering in
their capital requirements.
Until solid validation of a particular view is completed, however, identifying the best way to
model clustering may continue to
prove a challenge. As clustering
can significantly impact insurance company balance sheets, it
is a challenge that modellers need
to take seriously. Assessing the
impact for the UK, RMS models’
gross aggregate tail risk in the UK
would increase around 10%, a figure which can rise to 20% to 25%
for the net retained perspective.
As research continues and the
industry’s knowledge builds, modellers will be able to isolate factors
of uncertainty with greater accuracy and confidence. Meanwhile,
risk carriers should use all available information and analysis to
form their own view of clustering
risk. To help, modellers must offer
well-defined and transparent assumptions about the way clustering is implemented in models and
operationalise them in a manner
that lets users explicitly assess and
understand the impact of clustering on their risk portfolios. n
Laurent Marescot is senior
director of model product
management at RMS
1) Cusack, S: The observed clustering
of damaging extra-tropical cyclones
in Europe, Natural Hazards & Earth
Systems Science, No. 16, 2016.
Lloyd’s List
Global Awards | 2016
Keeping an eye on clustering
Member companies of the industry-backed risk prediction initiative and independent scientists
delved deeply into the topic of
clustering at the 2013 Workshop
on Trends and Variability of Euro-
Maritime intelligence |
Category
write in Texas, versus the Gulf,
versus the north-east?
• Where can we have a surprise loss?
• Where can we have an outsized
loss relative to our competitors?
• What would our losses be from
the 100-year hurricane anywhere along the coast?
The newer characteristic event
methodology was introduced to
answer these questions and to
provide better risk metrics for
underwriting. The characteristic
events can also provide the common currency reinsurers desire
to correlate the ceding company
losses in their portfolios.
Until recently, the industry has
been focused on the science of
hurricanes rather than the more
holistic area of hurricane modelling, including the packaging and
the tools and capabilities around
the models. Hurricane modelling
includes what the model users
can do with the models. This is
where the industry will see the
most significant advances and
these advances will lead to more
informed model users and better
underwriting, pricing and port­
folio management decisions. n
The Insurance Day
Maritime Insurance Award
Showcase your underwriting and
claims expertise, profitability and
new products that drive to reduce risk
and this leading award will be yours.
Enter now
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Karen Clark is president and chief
executive of Karen Clark & Company
LLGA-ID-Advert-154x217.indd 1
21/06/2016 09:44
Japanese mega-groups plan
further growth abroad
The three
leading groups
need more
international
exposure to
offset domestic
position
Graph: Japanese mega-insurers, fiscal* year results (¥trn)
n 2014
Tokio Marine
5
MS&AD
n 2015
Sompo
4
3
2
Graham Village
Shareholders’
funds
Net result
Investment
income
Underwriting
income total
Net non-life
written premium
Shareholders’
funds
Net result
Investment
income
Underwriting
income total
Net non-life
written premium
Shareholders’
funds
Net result
Investment
income
F
urther international expansion is on the cards for
Japan’s leading non-life
insurance groups, which
have been some of the biggest international buyers as they look to
escape an unhealthy reliance on
their domestic market.
Recently released year-end
figures show Tokio Marine,
MS&AD and Sompo all posted increased premium from
international operations and
they are expecting further strong
growth over the next few years.
Overall, fiscal 2015 – the 12
months ended March 31, 2016 –
saw Japan’s mega-groups record
an increase in net profit despite
an upturn in catastrophic losses
from typhoon Goni and others
and reduced investment income.
Japan’s stock market has been
highly volatile and with low or
even negative interest rates investors can expect very poor returns
for their money.
Driving the overall improvement was a much better performance in motor business,
benefiting from a combination of
Underwriting
income total
0
Net non-life
written premium
1
Global markets editor
*fiscal 2014 ended March 31, 2015 and fiscal 2015 ended March 31, 2016
Source: company filings/Insurance Day database
better rating filtering through to
the bottom line and a fall in the
accident rate.
Japanese insurers have worked
hard and successfully to deliver stronger profits since the
heavy losses of fiscal 2011, all the
more impressive an achievement given the transformation
they are undergoing. As well as
bearing costs associated with
merging previously separate companies, the groups are carrying
out a fundamental reorientation
of their businesses.
Overwhelming dependence on
the domestic market for both underwriting and investment is the
problem, and the insurers have
responded by increasing their
penetration of the Japanese life
sector for some domestic balance
and looking abroad for diversification and growth.
Tokio Marine has been the
Table: Account breakdown of mega-insurers, % of total premium
income, fiscal 2015
Tokio Marine
MS&AD
Sompo
Domestic
68.1
89.8
86.1
International
31.9
10.2
13.9
Source: company filings/Insurance Day database
most active, acquiring Philadelphia Consolidated and Kiln in
2008, Delphi in 2012 and US specialty group HCC for $7.5bn last
year. MS&AD has acquired Amlin
for £3.5bn ($4.87bn) and Sompo
has taken over Canopius for close
to £1bn.
More takeovers and organic
growth can be expected because
the groups still have a heavy
weighting to the Japanese market
(see table). When rating agency
Fitch changed the outlook on Japan’s sovereign rating to negative
from stable earlier this month, it
automatically did the same for
the outlook for 11 major Japanese
insurance groups, both life and
non-life, because of their domestic exposure.
Only Tokio Marine was not
affected because it derives
more than 20% of its business
from abroad. The HCC takeover
means the group should source
more than 35% of its total account from abroad this year,
with the North American market
accounting for about 65% of the
division’s revenue.
MS&AD has increased its international book by nearly 75% over
the past five years and is now entering a new phase of expansion
following the Amlin takeover.
International premiums are expected to total ¥900bn ($6.81bn)
in 2017, up from ¥462bn last year.
Sompo recorded a modest rise
in international premiums last
year but expects the total to rise
45.7% in fiscal 2016, driven in part
by expansion in South America.
The group is a big player in Brazil
where it owns Yasuda Maritima.
The struggle to turn a profit
from domestic non-life activities in the Japanese market have
also encouraged the leading
companies to be far more entrepreneurial and receptive to
new ideas than their reputation
would suggest.
As an example, MS&AD has
acquired UK company Box Innovation as a means to fast-track its
use of telematics. And this year
Sompo invested in Geodesic Capital Fund I, a $335m venture capital fund based in Silicon Valley
and looking to invest in start-up
companies in the consumer and
industrial technology centre. The
Japanese insurer has digital labs
in Tokio and Silicon Valley.
See Companies House tomorrow for full analysis of the Japanese market’s performance in
fiscal 2015.
XL shareholders
approve move
to Bermuda
from Ireland
Shareholders of global re/insurer XL Group have approved a
proposal to redomesticate the ultimate parent holding company
to Bermuda from Ireland, writes
John Shutt, Los Angeles.
The move remains subject to regulatory approval, other conditions
and sanctioning by the High Court
of Ireland, which is convening a
hearing on the proposal on July 20.
XL expects to complete the redomestication during the third
quarter. With the move, XL Group
Ltd will replace XL Group plc as
the parent holding company and
shareholders will receive one ordinary share of the new holding
company for each share held of
the current holding company.
Shares will continue to be traded on the New York Stock Exchange under the symbol XL.
Mike McGavick, XL chief executive, said: “Given, in particular,
our longstanding and substantial operations in Bermuda that
have been bolstered by the Catlin
Group acquisition, and Bermuda’s
position within the international
re/insurance market, including
Bermuda’s recent achievement
of Solvency II equivalency, we
believe a change in the country
of domicile of our parent to Bermuda will be advantageous to the
company and its shareholders.”
Perils revises EvaFrank estimate
down to £538m
Losses from flooding related to
windstorms Eva and Frank are now
expected to total £538m ($741.79m),
according to the latest loss estimate
from claims data aggregator Perils,
writes Scott Vincent.
The estimate marks a reduction
of £40m from Perils previous estimate of £578m, issued in March. The storms struck the UK between December 25 and January
14, causing significant flooding
and a small amount of wind damage.The floods mainly affected
northern England and south-west
and north-east Scotland.
Perils’ initial estimate suggested a loss of £526m.