Reinsurance Tutorials #13 - Season 2
Hi everybody 👋
Today we will focus on Nat Cats and man-made events.
Let’s start! ⏬
If we take into consideration the blast at the port of Beirut in August 2020 or the floods in Germany and Benelux over the last few weeks, we would think at first glance that there is no link between those events. However, the two claim are both considered CAT events in terms of insurance and reinsurance and their effects are sometimes the same.
Indeed, we refer to them as national or international catastrophe events insofar as they are considered highly unusual disasters with very severe economic consequences.
This often means the deterioration and destruction of many homes or buildings. Obviously, billions of euros are at stake! Not to mention that these events may also be accompanied by major trauma for the local population, or may even wound or kill several people. In any case, these disasters are disproportionate and violent events, concentrated within a limited period of time. And unfortunately, these days, the media reminds us of how broad the definition of a catastrophe event can be!
As far as insurance and reinsurance are concerned, catastrophe events mainly impact property business but the damages they incur are not limited only to this line of business! Also, we may unfortunately sometimes register claims in casualty or marine for instance.
Getting back to our initial example, the main difference between the explosion in Beirut and the European floods lies in the origin of the catastrophe: Nat Cat, short for natural catastrophe, events are dissociated from man-made events, that is to say catastrophe events caused by human activity.
Nat Cat events
Let’s have a look at Nat Cat events at first!
Nat Cat events can have either a geophysical origin, such as an earthquake, tsunami or volcano, or a meteorological origin. Let’s name some classical perils:
- floods, as already discussed, and they can be different from one another! Flash floods, marine submersion, and so on,
- hurricanes, windstorms, tornadoes. Some areas are more frequently hit by these types of catastrophes, unfortunately for the local population. We should mention typhoons in Asia and hurricanes in the United States.
- hail episodes
- avalanches or weight of snow
This peril, although a major peril for insurers, is not always given much attention because, unlike other perils, its effects appear over the long term and are not seen as quickly as the effects of floods for instance rendering them less spectacular.
Of course, this list is not exhaustive. Mother Nature can be full of originality! Climate change is also a reality that insurers and reinsurers have to fully consider today. The increasing trend of the related Nat Cat events has become a real concern that needs to find new solutions.
Nowadays with the globalization, the concentration of insured sums has become a growing concern as populations gather in big cities. It has become that, in the event of a catastrophe, the amounts to be paid by insurers are much greater than in the past. Not to mention the general increase of the average cost of claims given inflation!
Some insurers are more exposed to these types of perils in several countries. And, this is all the more true for very local insurers that don’t benefit from geographical diversification. Consequently, they work on specific perils in close collaboration with reinsurers and software companies modelling and simulating CAT scenarios on their portfolios. The aim here is to better understand, monitor and measure the impacts of such events. As a consequence, insurance-linked securities or parametric solutions have begun to be developed and are starting to play an increasing role as the models improve. These specific tools are triggered by the occurrence of a natural catastrophe.
The impact of the same catastrophe can generate totally different losses for insurers depending on the market where it occurs. Indeed, in an underinsured country, economic losses may be important but insurance losses may not necessarily be as high. Of course, at first, we may think this applies only to poor countries. But some developed countries still have a low insurance penetration rate mainly due to a lack of risk awareness.
Man-made Cat events
Let’s now focus on man-made Cat events.
In the past, for this definition, we would only consider explosions and conflagrations, such as the Beirut blast mentioned earlier. However, today this definition refers to many other types of risks, such as:
- Strikes, Riots and Civil Commotion, or SRCC,
- Pollution accidents,
- Rail or aircraft accidents, bridge collapses,
- or even a Pandemic!
Up until 2020, the largest man-made Cat event was the World Trade Center terrorist attack, with tens of billions of dollars in insured losses. However, the Covid-19 Pandemic is now also being considered one of the world’s largest man-made Cat events although there is a thin line distinguishing it from a Nat Cat event.
Indeed, many consider this event man-made because of the impact of human activity on the spread of the virus that enabled those infected with the virus to infect others all around the world as they travelled by air, rail and other means.
You can easily understand the importance of the definition of a CAT event within a reinsurer treaty! Insurance and reinsurance companies truly need to measure the risks covered by each party and this can be very difficult.
In addition, there is no real reliable software system for collecting data and modelling as the task is too complex and problematic. The field of possibilities is huge as anything can happen in any part of the world!
A terrorist attack can occur in any of millions of specific locations or cities and an event of another type may even occur on a worldwide scale. This brings to mind cyber-attacks! Man-made Cats are less subjected to modelling precisely because of the wide range of possible events that can arise. This is not necessarily the case for natural catastrophes. For example, today we have more knowledge as to the possible location of an earthquake for instance.
Each year demonstrates how fast the world changes, in terms of frequency and severity of natural catastrophes, but also that man-made Cats, though maybe less frequent in the past, are sometimes (and unfortunately!) quite significant now.
You can bet that measuring the impact of a catastrophe has been and will remain a hot topic in the near future!
We have talked about Cat events impacting a lot of treaties so far. But let’s now have a look at the opposite, that is to say single risks. We will discuss in the next few videos about a different perspective of insurance and reinsurance.
Thanks for your attention!
Bye for now 👋
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