A big loss will happen, rates will harden
The market will harden in the aftermath of the next big loss, which could be a lot worse than many in the industry predict, despite the high levels of capital waiting in the wings, Kaj Ahlmann, the managing director and global head of insurance strategy at Deutsche Asset Management, told Monte Carlo Today.
Ahlmann, previously of Employers Re, part of GE, said that little has really changed in the sense that capital will flow into the industry post-loss. He believes a big loss will cause the market to harden and disagrees with those who believe current market conditions should simply be considered a “new normal” for the industry.
“This is just the calm before the storm,” he said. “There will be some dramatic event sooner or later—it will happen. The ups and downs will continue. A big loss will happen and it will shift the market, especially given the size of the exposures that exist now.”
He said that exposures in some regions have increased quickly in recent years, meaning that a loss could be bigger than the industry has endured before.
“Flood and storm risk in the US is now enormous,” he said. “Coastal exposure has been expanding like crazy and the way the industry is assessing these exposures is not as sophisticated as it should be.”
Ahlmann agrees that there is a vast amount of capital ready to enter the re/insurance markets, especially in the aftermath of a big loss. This would dampen any spike in rates but, he argues, this dynamic has always been true.
“There has always been a tonne of capital out there, it is just a question of how it enters the industry, which route it takes. Is there more now? Probably, but the same has always been true in the aftermath of a big event. That doesn’t mean rates won’t harden and the cyclical nature of the industry will not return.”
In his role with Deutsche Asset Management, Ahlmann works with investors looking to participate in the re/insurance industry and with re/insurers looking to improve their own investment returns by considering new asset classes.
He said there is always interest and activity from investors looking to enter the industry but there are now tangible ventures he can discuss. “If you look at the returns, the industry looks pretty attractive to an outsider,” he added.
In terms of re/insurers seeking better investment returns, he said there is growing interest in investing in infrastructure projects and real estate.
There is a good supply of such opportunities in the US, Europe and Asia, all for different reasons, and they can represent a good opportunity for re/insurers taking a very long-term approach.
“Re/insurers are conservative with their investments and they are feeling their away around this market, but a lot more are willing to commit a small percentage of their assets to this type of investment. The nice thing is that it is pretty easy to understand infrastructure projects and real estate.”
AIR Worldwide targets protection gap as it updates models
Catastrophe risk modelling firm AIR Worldwide has updated its terrorism and crop models and will be updating a number of its other models in years to come.
“We have a rich pipeline of models over the next few years. We’re working on more model coverage for Australia and a New Zealand earthquake update,” AIR’s managing director of international operations Milan Simic told Monte Carlo Today.
2016 has been busy for AIR: the company has developed its US terrorism and crop models and expanded its models in South East Asia.
Today (September 12), AIR revealed the expansion of its terrorism risk model to support scenario testing for the US and 27 other countries. The model now supports accumulation modelling, deterministic modelling of conventional weapon attacks and probabilistic modelling.
“Modelling this complex and dynamic global threat requires a comprehensive solution,” said Rob Newbold, executive vice president at AIR Worldwide. “A complete terrorism risk analysis must include three components: accumulations analysis, deterministic analysis, and probabilistic loss analysis. Touchstone, our loss modelling platform, offers all three.”
AIR is also looking to help close the protection gap, the difference between economic and insured losses, across the globe. According to the company, $607.2 billion remains uninsured in Asia, with only $52.8 billion of economic losses insured.
“One way to begin to close this gap is to have governments identify areas where there is a gap and where they’d like to create protection for their citizens and infrastructure,” said Simic.
“The expansion of our models in South East Asia goes hand in hand with trying to close the protection gap, because if you’re going to write business in those countries then you need models to start,” he added.
The risk modeller is also active in the pandemic arena. In July, it revealed a collaboration with the World Bank on the launch of the Pandemic Emergency Financing Facility, a mechanism designed to protect the world against deadly pandemics.