26 June 2014 Insurance

Risk transfer can boost economic success

Risk transfer could boost economic success if risks are identified and measured appropriately.

That is the view of Sebastian von Dahlen, chief economist at the International Association of Insurance Supervisors, Basel, speaking at the IIS annual conference in London.

“There are three parts to the dimensions of resilience and stability: environmental, economic and financial,” he said. “In order to be successful, we must appreciate the link between all three.

“We must identify, avoid and reduce risk if we are to strengthen financial, economic, social and environmental resilience. In order to do this, we require the support of stakeholders.”

Rob Jones, analyst at Standard & Poor’s, said that regulation was already deep rooted in the insurance industry and that further disclosure of information was the way forward.

“Regulation is already embedded into the insurance sector and sets a precedent for others,” he said. “Reinsurance companies and primary insurers have already been disclosing 1 in 100 and 1 in 20 events to us as a rating agency, but now it’s time for them to be publicly disclosed. We are already starting to see the inclusion of this data in investor presentations.”

Trevor Maynar, head of Lloyd's exposure management and reinsurance team, spoke of the important role of insurers, highlighting various disasters such as the 2011 New Zealand earthquake, the tsunami in Japan and the Thai floods, as evidence that “insurers help economies to recover”.

He also spoke of the importance of science. “To access capital we use simulated models which demonstrate the importance of science,” he said. “And as the quality of data grows, we have a further advantage to evolve our thinking.

“After an incident, we can rebuild safer homes – if regulation allows it – but how can we be regulated to protect risks?” he said.

Bernice Lee from the World Economic Forum agreed and said that the greater concentration of people living in one area has increased risks enormously.

“We now live in a greater concentration. When you look at the Thai floods, it’s no longer a local crises, it has serious economic repercussions too,” she said. “We must continue to create an ecosystem of change.”

However, despite the panel arguing that regulation plays a positive role within disaster risk resilience, one member of the audience questioned the positivity of regulation with regards to the refused Dutch Flood pool, proposed in 2013.

Jones said that while he couldn’t comment on the Dutch pool, he could give the example of The UK’s soon to be enforced Flood Re.

“Flood Re will take risk from UK insurers and use the capital in the fund to buy reinsurance. One of the stipulations within the programme, which I’m hoping will stay in, is the exemption of properties that have been built in known flood zones.”

The stipulation is designed to deter building in areas which will ultimately be hit, causing expensive payouts.

Another audience participant said that he had heard a lot about models, but not once had the panel spoken of modelling uncertainties.

“There are many forms of uncertainly within the insurance industry and we can’t capture them all. However, the variations between models can make uncertainty even harder to model, which is where initiatives like Oasis, a platform which allows a variety of different models to be used to ascertain an average outcome, come in,” said Maynard.

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