What causes sleepless nights? Earthquake risk

While much of the rhetoric around cat risks in recent years has centred on so-called secondary perils such as wildfire, severe convective storms (SCS) and flood, the most seasoned risk transfer executives name none of these as their biggest worry. In fact, the answer is a peril that rarely causes an insurance loss at all. But the ‘big one’ will come.

“Earthquake risk is what really keeps me awake at night,” says Eyal Shnaps, global property portfolio lead at TransRe. “We haven't seen a the ‘big one’ yet in the US but it will come one day. When it happens, there will be surprises. Even for more moderate earthquake events around the world, such as in New Zealand or Turkey, there were surprises. Click here to watch the full video interview.

“In Turkey, we discovered building codes were not enforced, so there was more damage than predicted. The recent earthquake in Myanmar caused severe losses hundreds of miles away in Bangkok, Thailand. Here in the US, we will have similar surprises, but on a much bigger scale.”

Shnaps was speaking exclusively to Intelligent Insurer in a video interview in the context of the mid-year renewals, and learnings as the industry moves towards the year-end renewal. He was asked what keeps him awake at night. He acknowledged the relatively low take-up rates of earthquake insurance but suggested political pressure or other factors could come to bear for carriers to cover it.

He also referenced the recent 8.8 magnitude earthquake in the Kamchatka Peninsula as a stark reminder that a big earthquake can happen at any time.

“Something like the Cascadia subduction scenario that last occurred around 1700, would just be devastating. It would be devastating to the communities and it would be devastating to the industry. It will be a very big number. I think there will be a lot of surprises. That is why it keeps me awake at night. That said, we’re in a unique position here at TransRe as part of Berkshire Hathway; we would still trade forward in that a scenario. So we have a little bit of a luxury of being able to sleep despite those concerns.”

He also commented on the market’s ability to bear growing levels of annual losses, which now exceed $100 billion of global insured losses as the norm. It is only a matter of time, he suggested, before the $200 billion mark is exceeded. Such high levels of losses would impact the market, but any reaction would be driven more by how unexpected they are.

“Higher losses are the new normal, even though the whole market is now much better positioned. Cat retentions have moved to more sustainable levels. And on the primary side, rates have been catching up to adequately fund those retentions.”

That said, he admits the market has not seen a true ‘big one’ in recent years. “There are potential monsters out there. We look at the models every day; there are single events which would represent $100 billion plus loss on their own. If and when that happens, there will be surprises. There will be parts of the models which do not capture certain things; pricing that was off. When that happens, some capital will decide to leave. There certainly will be dislocations when that big one happens.”