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25 September 2017 Insurance

A failure of models could turn the market

It is a question that has been on the lips of re/insurance executives for many years: what will it take to turn the market?

It is not an easy one to answer. Such has been the abundance of capital in the industry for some time, it would clearly need to be a big loss. But such is the enthusiasm of capital for the sector, it seems any capital losses would also quickly be replenished, dampening any hardening of rates.

The question has been tested to some extent by the reaction of the market during this hurricane season—especially when Hurricane Irma was approaching the US as a category 5 storm. A hardening of rates was discussed during more than usually tense discussions at the Monte Carlo Rendez-Vous.

Added to that, the number of earthquakes causing devastation in countries such as Mexico, Irma still coming in as one of the most powerful Atlantic storms on record before striking the US mainland and the devastating floods caused by Hurricane Harvey moved the debate into sharp focus.

Much of the rhetoric seems to have revolved around whether the events would be earnings events or capital events for the industry. Based on the latter, some executives believe they could trigger a turn in pricing—but not all.

Bill Churney, president of AIR, suggests that unlike Irma and Harvey, it would have to be more of an unanticipated loss that turns the market.

“A large catastrophe loss in a place such as Florida would either have to have unexpected consequences or be of a size that will be far larger than what we’ve seen or experienced with Irma, because Florida is probably the most well-modelled and understood regions for catastrophe risk in the world,” Churney says.

However, Mike Krefta, CEO of Hiscox Re & ILS, says the market is already turning, and that some price increases are starting to materialise.

“For me, the end of the year is more interesting than any individual event because the aggregate amount of loss by the end of the year is going to be quite substantial and above cat budgets for a lot of the carriers,” says Krefta.

“We’ve had a lot of catastrophe events this year. Two major hurricanes made landfall and there have been a number of earthquakes on top of attritional losses in the first half of the year. It would be surprising if pricing didn’t increase materially going forwards.”

Model failure

Other executives focus less on the size of a loss and more on whether it comes within the remit of the industry’s risk models—in other words, if something comes as surprise that could have a disproportionate effect on the market.

If a large catastrophe event—in the range of over $100 billion—were to hit a part of the globe that has not been modelled well, such as Italy, this could have a significant impact on the sector, according to Antonello Aquino, associate managing director at Moody’s.

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