Speculating on cat losses is like gazing into a crystal ball

It is impossible to say how capital markets investors in reinsurance might react to heavy catastrophe losses, especially given that such products have not yet experienced severe losses and the fact that the structures of many insurance-linked securities (ILS) products have changed recently.

Torsten Jeworrek, member of the Board of Management and chairman of the Reinsur- ance Committee at Munich Re, says a shift in the kind of triggers used commonly by these products makes it more difficult to foresee the reaction of investors.

“The reaction of investors is difficult to predict given the absence of large natural catastrophe losses for capital market products and the recently changed product structures,” he told Intelligent Insurer.

“In the past, the capital market products were mostly index-triggered products that eased claims handling, but left the cedant with significant basis risks. Recently, a shift towards indemnity-based triggers has been observed.

“But the experience with triggered indemnity-based capital market products is very limited. I am convinced that the next large natural catastrophe events will show how sustainable the alternative capacity is.”

Jeworrek is, however, not anticipating that these markets will be severely tested this year. Despite some organisations predicting a worse than average hurricane season, he says Munich Re does not anticipate this and it is pointless speculating about such a scenario.

“I cannot speak for the industry as a whole, only for Munich Re, but our experts do not foresee significantly above-average hurricane activity for 2013, considering the average activity in the years since 1995 when the current warm phase started,” he said.

"Speculating about losses in a specific sea- son is like gazing into a crystal ball. You can have numerous hurricanes without landfall or a real big one which hits a large city. But, of course, we are prepared for any hurricanes that could occur – this is part of our core business.”

He believes the bigger talking points at the Monte Carlo Rendez-Vous will be the still tentative recovery of many of the world’s biggest economies and the challenges this creates for the industry along with what the effect growing levels of alternative capacity will have on the market and implications of some newly established broker facilities.

“I suppose that the challenging market en- vironment based on the only slow recovery of the global economy will be the main driver of the discussions,” he said. “Besides this, the influx of alternative capacity and the establishment of broker facilities will attract some attention. The extensive flooding in Central Europe and possible solutions to be developed by the insurance industry may also lead to interesting discussions.”

And Jeworrek also remains a big fan of the Rendez-Vous de Septembre as an event that he regards as useful and important to the industry.

“Monte Carlo is a very good opportunity for meeting a large number of important business partners in one place – cedants, reinsurers and brokers as well as financial services specialists and representatives of rating agencies. The Rendez-Vous de Septembre is a great forum for discussing matters of common interest, and an established kick-off event for the most impor- tant renewal season.” n

Munich Re, catastrophe losses, Monte Carlo, reinsurance

Intelligent Insurer