Reinsurance Tutorials #10 - Season 2
Hi everybody 👋
Today we start with a topic that is a prominent feature of our daily life: Cat events. They impact our “brave old world” posing new threats and challenges.
My part is to deliver an overview of the situation :
- As we see it today,
- As we forecast it and its ever-worsening trends over the long term.
Sylvie will address the concrete issue of Loss occurrence clauses, definitions of covers and events clear or unclear, and the ensuing difficulties between parties.
Clémence will analyze the issue of proportional and non-proportional treaties.
Laurent will explain the differences between Nat Cats and man-made events.
Let’s start! ⏬
Year after year, Cat events bring us new expressions:
- Protection gap
- Loss creep
- Secondary perils
- Climate change
- Insurable or uninsurable
- Private/public partnership
Before addressing these issues, let’s start with a simple question :
What is a Cat event? It depends!
- In Indonesia, more than 100,000 people fell victim to a tsunami. It was a tragic event but as there were no major financial consequences to the (re)insurance industry. It was not a Cat event.
- The World Trade Center attack, on the other hand, that caused 2,800 deaths was a huge Cat event and the trauma still affects people 20 years later
Protection gap
For any Cat event we see: Larger Economic losses than Insured losses.
- Respectively, 202 billion dollars more than twice the 10-year average of insured losses (at end 2019)
- The gap is bigger in Asia 91.6% than Europe 81.9% or the US 72.8%
The fact that a percentage of the economic losses is related to public works, infrastructures (bridges…) that are not always insured is one aspect. Insurance density is another.
- In France, we have had a Nat Cat (re)insurance scheme (managed by CCR!) since the eighties that reduces the gap substantially for French citizens
- Capital dedicated to reinsurance has increased over recent years but…
- The protection gap is broadening.
- It increased from 87 billion dollars in 2019 to 113 billion in 2020
- The reinsurance industry covered losses over the 5 last years without paying back the cost of capital: This is a major challenge for the future
- The claim potential has not been properly ascertained and paid for by insureds, insurance companies or their reinsurers
Loss creep
- Losses from Hurricane Irma in the US and Typhoon Hagibi in Japan are still increasing 2 years after their occurrence. This shows us that Property Cat events cannot be considered as short-tail events any longer
- Late notice of claims, increased cost of repairs due to the flow of demands, legal battles… These are new features of reinsurers we must deal with
- Covid 19 and the European floods in July show us that this topic is due to last well into the future and must be included in our pricing methods.
Secondary perils
- Insurance companies are very knowledgeable about storms and hurricanes and price them according to recently revised models but…
- Every year new events occur, Nat Cats or man-made events, that generate uncalculated or unexpected amounts of loss that, in some cases, are unprecedented, in terms of both severity and/or frequency
- Wildfires: Increased frequency and severity in the US but also in many countries from Australia and Greece to Portugal and Turkey
- In 2020, Georges Floyd’s death caused violence and damages of 1 billion dollars
- In 2021, the riots in South Africa depleted the Pool initiated in the seventies to cover PV (Political violence) as well as the SRCC (Strike, Riots, Civil Commotion) fund which had thus far been loss free causing heavy costs to reinsurers
- In 2021, European floods in July generated insured losses of over 8 billion euros, breaking the record in Germany
These events, either man-made or Nat Cats had not been modelled…
Climate change : the new obsession
Today:
- Worldwide reinsurance premiums amount to almost 300 billion dollars,
- Surplus funds dedicated to reinsurance are between 500 and 680 billion dollars
- A single Cat event can sometimes reach 400 billion dollars
- Cat losses will probably exceed 100 billion dollars
- A heavily reinsured 10-billion-dollar flood Cat event affecting Belgium and Germany combined with US Cat losses will bring the combined ratio of many reinsurers over 100%
- Climate change is not responsible for everything but it is an aggravating factor that will worsen in the coming years
Is this still insurable or not?
- Need to cover growth
- (Re)insurance industry capital to cover these limitations
- Price to cover these is insufficient and the increase that is needed is unaffordable to citizens and corporations
- Emerging Risks are going far beyond expectations and it is not easy to ascertain accumulations. This applies to Cyber, Pandemics, BI and CBI…
Private/Public partnership : a possible solution
- Over the years, pool solutions have been created to cover major risks: nuclear, pollution, Nat Cat not only in France, but in Iceland, Japan, Spain…
- Pool solutions can be applied to other type of risks: Agro, Pandemic…
- Risk mutualization: Nat Cat risks covered in France at an affordable price due to mandatory insurance. With Climate change that price will have to increase
Should the (re)insurance industry offer a limited cover at an affordable price?
The state would then pay the excess of what the private market covers
Should we follow the road of a two-step cover with:
- a minimum compulsory cover with or without support of the state
- above that, provide an additional premium with a broader and higher cover purchased by more concerned and/or wealthy insureds?
Another path for our industry is to contribute to a reduction in exposures through loss prevention advices to our clients and our own ESG responsibility.
Conclusion
I am afraid I have been provided more fears and questions than solutions.
Sylvie, Clémence and Laurent will study concrete issues in their tutorials!
Thanks for your attention!
Bye for now 👋
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