29 October 2014 Insurance

Experienced players are becoming complacent

Some seasoned insurance underwriters are now relying too much on risk models, leading to widespread complacency when it comes to preparing for the next big cat event, Chris Donelan, president and CEO of Endurance Re US, told PCI Today.

He added that there is not enough fear in the industry—or at least not enough for the industry to anticipate so-called black swan events effectively.

More trepidation among insurers would help innovation and lead to more new products being developed.

“There’s no simple answer,” said Donelan. “Those in the industry may be too reliant right now on models that didn’t exist 15 years ago.

“It’s all much more technical, but the real risk is always the unmodelled, unthought-of risk. The black swan is something out there that you never thought would happen in your wildest dreams, but when it does, it becomes all so obvious.

“Everyone is aware of the potential pitfalls of making bad decisions,” said Donelan. “But they are also aware that there is only so far you can go.”

He explained that because balance sheets are not stressed, because of benign cat activity, it has become easy to sell products at a low price. This has led to complacency in the industry.

“Insurers have a feel for what is the right thing to do, but if you don’t have a lot of losses, the right thing may be a little different from what it used to be,” said Donelan.

“Trading works around an equilibrium: if it goes too far up there becomes another overreaction.”

Donelan observed that while there are large amounts of money waiting to come into the industry after the next big event, much depends on how the industry copes with that.

“Companies need to have enough capital to deal with the next big cat event and continue,” he said. “It’s usually the companies with the most capital that have the most to lose, but it’s not going to take a lot to turn their thought processes around.”

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