The way property-catastrophe risk is managed needs an urgent recalibration as property values surge, and capacity exits the market, causing rates to harden—yet underwriters still lose money. The situation feels eerily similar to when Hurricane Andrew shocked the industry 30 years ago, triggering fundamental changes in how cat risk is managed.
That is the view of Frank Harrison (pictured left), chief executive officer of Holborn, who believes parallels can be drawn between events now and then. He describes this as a “societal” issue where too much onus is now on the risk transfer industry, which is unsustainable.
“I feel I am watching history repeat itself,” Harrison said. “Thirty years after Hurricane Andrew we are entering a similar crisis. Cat writers have experienced poor results for five years. People are questioning the models, the impact of climate change, property values. A fundamental change is needed in how we think about cat risk.”
To recap, before Hurricane Andrew the industry’s worst-imagined scenario in insured losses was some $2 billion. Andrew cost the industry $15.5 billion and triggered fundamental changes in how cat risk was modelled and insured. Even that was a narrow escape. “If it had gone 40 miles further north and hit downtown Miami, we wouldn’t be talking today,” Harrison said. “The industry would have collapsed.”
But history could repeat itself and the warnings are there. Harrison cites research by Assured Research which suggests the cat burden, as measured by US gross domestic product, has virtually doubled since the 1980s.
“That means looking at everything: the spread of risk, policyholder deductibles, the scope of coverage.” Frank Harrison, Holborn
“When you consider the extent to which GDP has increased, that is a big bill which, eventually, someone will have to pay,” he said. “Whether that’s the policyholders, the insurers, or the reinsurers, it is a big bill that is only increasing.”
One major problem, he says, is that homes and businesses, often entire cities, have been built “in harm’s way”.
“It has happened all over America, not just on coastlines, but inland as well. The values now insured are significant. I fear we do not understand the real risk.”
An imbalance has been created, Harrison says, where re/insurers have a disproportionate slice of the risk. The latter are now pushing back, especially on aggregate policies. This raises the question of whether the industry is under-reinsured. Examples of insurers going insolvent after a sequence of otherwise innocuous cat events could be seen as proof of this.
“The models suggest some of the frequencies of events we are seeing are almost impossible. In turn, this is causing reinsurers to back away and lose trust in the models. That takes us back to what happened after Hurricane Andrew. A recalibration is needed.
“That means looking at everything: the spread of risk, policyholder deductibles, the scope of coverage, risk modelling and capital requirements.”
“Experienced, determined brokers make the difference in a market such as this.” Nick Bellmont, Holborn
All about the uncertainty
That is the challenge. It is the job of Nick Bellmont (pictured right), senior vice president at Holborn, to find solutions—to help clients manage an increasingly difficult situation as capacity flees the market. Uncertainty, Bellmont believes, sits at the heart of the issue.
“People are feeling lost; they are unsure how to address these challenges. There’s a lot of fear involved. It is our job as a broker to help them through this, to solve problems.”
While there are no easy fixes, the road forward is simple. “It comes down to hard work and fortitude; what you might call elbow grease. And good communication with clients and the market. Equally, relationships and trust matter. That helps to calm the fear, which is driving behaviours. The reinsurers need to trust the data, trust the insurers.
“Our job is to ensure that trust is there and to work hard. As a broker, you must fully canvass the market, never accept ‘no’ easily, go the extra mile in transparently quantifying changes to clients’ portfolios, backed by sound math and a plan the reinsurer is confident the client will implement.
“It means going back to each reinsurer multiple times. It is painstaking work, but experienced, determined brokers make the difference in a market such as this.”
He adds that change is inevitable for clients. Rates will increase for many, as will retentions. But he emphasises that, by doing the basics well, anything is possible, as Holborn illustrated in the mid-year renewal when it placed its largest ever programme—indeed, one of the largest in the world.
“Yes, several reinsurers retrenched or pulled back, but we found others willing to increase and help us fill the order. It wasn’t easy! The reason this got done is solely due to the relationship this client has with its reinsurers. It’s a huge differentiator. Relationships matter.”
APCIA 2022, Hurricanes, GDP, P&C, Catastrophe, Risk Modelling, Insurance, Reinsurance, Frank Harrison, Nick Bellmont, North America