Don’t over-rely on capital models

Insurers are too dependent on capital models, believes Mo Tooker, president and global head of the property/casualty business of Gen Re, a Berkshire Hathaway company.

He explained that, as their balance sheets have grown, larger insurance companies are increasingly retaining more risk. But they should be wary about an over-reliance on models.

“Capital models have also played a role—the increased access to data and the sophistication of tools has led to new insights about capital efficiency,” he said.

“We remain very concerned that there is a general over-dependence on the models and believe there is an underappreciation, for example, of how tail events could have a significant impact on retention strategies and capital.”

Tooker said that he expects the reinsurance conference at Baden-Baden, much like the rest of the conference season, to be ‘noisy’ as industry participants jockey for their message to be heard above the din.

“Our strategy will be to avoid making general market prognostications and to let our customer-focused activities speak for themselves. We want to talk about the issues and challenges specific to each of our customers,” he said.

As the primary pricing environment becomes more challenging, Gen Re will seek to work with customers to help them compete in the current environment, said Tooker.

“We continue to invest in underwriting, risk management and claims solutions for our customers. One of the areas we are most excited about is our work around the human element in underwriting,” he added.

Tooker believes that the qualitative judgement that Gen Re applies to its quantitative models is an area that deserves significantly more attention.

“We are working with our customers to help them understand the pitfalls of not focusing on both the quantitative and the human element,” he said.