Patrick's Masterclass - Video n°4
(French & English subtitles avalaible directly on YouTube)
Hi everybody 👋
I am Patrick.
We have addressed the issue of players, today we launch the game with the risks involved, some of them are pretty tricky.
Let’s start! ⏬
In the seventies
- Most of Non-Life policies did cover tangible assets against named perils.
- Mutualization and long-lasting statistics were used to fix a price for each type of risk.
- Each line of business (LOB) was supposed to stand on its own merits.
- Control of accumulations was easy as losses due to one event did affect one or 2 lines of business and only a single market (besides storm being the cross-border peril).
- Individual peak risks and Cat ones were not as challenging for reinsurers as today
- “Risks are increasingly connected and interdependent” Thomas Buberl CEO of AXA.
- Losses due to one cause may affect all lines of business across the world. (Covid 19). Cyber, Terror, PV, Cat Nat impacting CBI, supply chains may be other examples.
- Mutualization and long-lasting statistics do not apply for reinsurers’s peak risks.
- An assessment of accumulations is difficult, hence potential shortages of capacity.
- Asset value of S&P 500 cies: 1975 83% tangible assets (Property …) 2015 16%
- Different insurance products are needed to cover new risks on intangible assets.
Climate change: once a controversial topic today a trauma
- Cat events happen stronger and/or more frequent,
- Secondary perils” (floods& wildfire) did cost about 60% of the cat insured losses over the 3 last years. (source Swiss Re)
Risk appetite decreases from insurance and more recently, from reinsurance companies. Reduce the volatility of the book of business is the moto, especially for Cat Property. Every risk carrier tries to meet the return requirements from the financial investors which lead sometimes to drastic moves
Quick overview of some of these evolutions by Lines of Business
Most risks covered by non-Life insurance were material damages. The main peril insured was Fire. Business Interruption (BI) was rarely insured, even less Contingent BI.
- Main peril for Property retail business is water damage,
- Main peril for Property industrial risk it is BI/CBI rather than the direct damage.
Nota bene: the growing demand for a « non-damage related BI » Cover after Covid 19.
Nat Cat Cat property:
- 2 main types of perils: Wind and Earthquake.
- Others like Wildfire, Volcanic Eruption… were wrongly nicknamed « secondary perils ».
- Flood, sea Sturge, drought& subsidence claims were covered in some markets, considered in many others as uninsurable.
- Flood is part of the main perils. In some markets insurance companies design the extent of their reinsurance cover according to the flood disaster scenario.
- Is increasingly insured over the world with different solutions which may involve also private public partnerships.
- Germany suffered in 2021 with Bernd an insured loss topping 10 Bns € although less than half of the inhabitants were insured. In the seventies Dr Prölss, CEO Bavarian Re, declared that every time after a flood, talks took place among the industry and politicians about how to cope with this risk but after few weeks, calming down, nothing was done… After Bernd the issue has been reopened… for how long?
- Wildfire happening yearly from US to Australia through Brazil or Portugal cannot be considered as a secondary peril anymore.
- Drought causing agro, subsidence and wildfire claims (not to mention Life) has become another recurring challenge for our industry
- Verisk estimates
- The global average annual cat losses 3 Bns $ today against 99.6 Bns in 2020.
- The one in 100 years event: 345 Bns$ today (301Bns in 2020) roughly the same amount as the estimated worldwide reinsurance premium!
Man Made Cat:
- In the seventies Property insurance wordings, depending on markets, covered named perils or “all risks” whereby the all-risks type gradually prevailed including Strikes, Riots, Civil Commotion and malicious damage in the covers.
- Nobody had expected the riot losses that occurred
- During the « Arab Spring », or in US following the dramatic death of Georges Floyd
- South Africa following the imprisonment of the former President
- in France and Chile following an increase of prices…
This type of risk can happen everywhere, cause heavy losses, spread to many countries
I doubt that there is a specific proper priced premium related to the risk…
Terror & PV
- In 1975 the risk is already known following the dramatic assassination of Israelis athletes at the 1972 Olympic Games in Munich
- Today it has become a daily feature of our lives with immense potential of losses and victims as September 2011 has tragically revealed.
- In 1975 this Line of Business (LOB) growing along with the number of cars over the world was the N°1 non-Life branch in most markets.
- Today improved claims frequency, and stagnation of population in the mature markets has limited that growth reducing the weight of this LOB within the total non-Life volume.
- Tomorrow the development of autonomous electric cars will strengthen that relative trend downwards and impose radical changes of our industry.
- 1975 GTPL and Professional liabilities are not much developed over the world besides US
- It remains the case in emerging markets, but
- Liability lines have grown faster than Property, diversifying with new types of products like Environmental liability, Products Liability, D&O, Medical malpractice…
- Tomorrow: This trend up shall continue.
- The long tail character of these lines, the social inflation, the growing trend to go to court are a few of the challenges for risk carriers
- Clients demand for cover and expertise/advice increases.
Others Lines of Business
- Our Industry could meet with expectations of new industries: aquaculture, Space…
- Today : Cyber risks is a major challenge with all the uncertainties about accumulations scenarios on top of claims frequency and increased average claims cost.
- It is not an emerging risk but an exploding one!
- It is a Line of Business by itself with Property and Liability covers, Terror, ransomware…
- In 2017 a cat cyber risk scenario was estimated at 31 Bns $, with only 2bns $ insured. Both figures have grown since the gap remain huge.
- The demand for cover increases dramatically with the awareness of the risk
- Prices have gone up but not at the same pace as claims
- Players: Many reduce the cover and size of their commitments. Others want to take advantage of a market opportunity: increased demand and hardening conditions.
- Cyber insurance premium, about 10 Bns $ in 2021, should raise to 20 Bns$ in 2025. It may reach the size of Property premium by 2040. (source Swiss Re)
- Potential market loss scenario from a single major cyber attack: 40.7 Bns £ (source Lloyd’s)
- Work on risk prevention, claims mitigation
- Alternative solutions (ILS…)
- Traditional (re)insurance market.
- Private/public deals to make it insurable.
- New Mutuals built up by corporate cies unable to find sufficient solutions /capacity on the market like Miris Re created by 7 European industrial groups
Bye for now 👋
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