Re/insurers counting wildfire cost - Reactions Home PCI Rep Day2.pdf · blazes so far has been the Tubbs Fire which has impacted Napa, Sonoma and Lake counties. It is this fire which

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Contents

Re/insurers counting wildfire cost

The re/insurance industry is busy preparing itself for the fallout from another natural catastrophe as firefighters continue to battle the wildfires raging across vast swathes of California.

Insured losses from the wildfires are expected to run into the billions of dollars, with more than 5,700 homes and commercial buildings having now been destroyed. At least 40 people are confirmed to have lost their lives, although that number is expected to rise as hundreds remain missing.

Catastrophe modeller RMS has predicted economic losses from the

fires in Northern California that have hit the state’s wine growing region will result in economic losses of between $3bn and $6bn.

“Because of the high penetration rate of wildfire coverage in standard residential and non-residential policies, this range also represents an estimate of insured losses,” RMS said. “The range includes loss due to property damage, contents and business interruption caused by the burn component of the fires to residential, commercial, and industrial lines of business,” the modeller added.

The figure does not include

automobile or agricultural crop losses, nor damage caused by smoke or other possible post-loss amplification issues.

“Because of the impacts to the wine industry throughout the region, RMS notes the significant uncertainty regarding the long-term business interruption for this event, which could result in a higher total loss,” the firm stated.

RMS had previously calculated that some 15,000 structures were at risk representing approximately $14bn of total exposure.

Firefighters continue to work hard to battle the fires, but the re/insurance industry now has the task of tallying its exposure.

One of the most destructive blazes so far has been the Tubbs Fire which has impacted Napa, Sonoma and Lake counties. It is this fire which is responsible for the destruction of almost 3,000 homes and approximately 400,000 square feet of commercial property in the major wine producing city of Santa Rosa. The mayor of Santa Rosa said the fire had caused around $1.2bn of damage.

New BCRM process has been “smooth” .............3

Third Point Re considers property cat .......................4

Ireland and UK brace for Ophelia impact .................4

Lack of transparency exposes risks .......8

Insurtech firms born to be acquired .....8

Industry positive about flood reform ...............12

Insurtech will drive ILS growth .........12

Reinsurers impacted most by cat events ..........14

RMS puts $500m loss estimate on Nate ..................18

MetLife targets blockchain growth ..............18

Santa Rosa: entire neighborhoods have been reduced to ash and rubble

BRINGING OPPORTUNITY TO RISKADAPTATION + OPPORTUNITY = GROWTH

Continued on page 3

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NEWS


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AIR Worldwide said the average rebuild cost of single-family homes within the perimeter of the Tubbs Fire is about $450,000, although it also said there is considerable variability within that.

According to online real estate database Zillow, the average home value in Sonoma County is $678,700, while in Napa the same company gives the median figure at $582,800. In Mendocino, the average home value is $650,400.

Data from Zillow shows that homes in these three counties regularly sell for more than $1m.

In Santa Rosa, a key winemaking city some 50 miles northwest of San Francisco, entire neighborhoods have been reduced to ash and rubble. Zillow puts the average home value in Santa Rosa at $540,500. Several wineries have also been impacted by the wildfires.

“While there will likely be significant damage to plant materials and trellises, the vineyards will also experience other losses related to equipment, irrigation, and waste water treatment systems,” said AIR Worldwide, adding: “It can take up to five years to restore soils to the point where

scorched vines can again produce grapes suitable for winemaking. California is the fourth largest wine-producing region in the world with more than 1,200 wineries.”

Businesses including the Frey Vineyards, Oster Wine Cellars, White Rock Vineyards and the Paradise Ridge Winery have all been at least partly damaged by the fires.

The Fountaingrove Inn and the Hilton Wine Country Hotel have also been severely damaged or destroyed.

As of Sunday evening, there were 15 large fires burning across California, according to the California Department of Forestry and Fire Protection (Cal Fire). As of Sunday morning, some 217,566 acres have burned by the current 15 large fires. With close-to 11,000 firefighters battling the blazes using air tankers, helicopters and over 1,000 engines, some progress in containing the fires has been made.

“As progress has been made on several fronts, many evacuations have been able to be lifted,” the Cal Fire service stated, adding: “As of Sunday morning, nearly 75,000 people remain evacuated.”

That is down from the 100,000 people who had been evacuated the day before.

Seven of the 10 costliest wildfires in US

history took place in California. Of that 10, five occurred during October.

According to figures from Property Claim Services, wildfires in California have produced the four costliest in US history. The Oakland Hills Fire, which took place in October 1991, brought about insured property losses of $2.75bn in 2016 dollars. The next costliest was October 2007’s Witch Fire which generated property losses of $1.49bn in 2016 dollars, while the Cedar Fire, from October 1991, brought about property insurance claims of $1.36bn in 2016 dollars. l

New BCRM process has been “smooth”AM Best has said it has been “pretty smooth so far” following on from the release of its newly updated credit rating methodology.

The ratings agency unveiled its new methodology on Friday, and Matthew Mosher, executive vice president and chief operating officer for AM Best, said the response so far has been good.

“We’ve gone through all of the testing to see what the impact is,” Mosher told Reactions at the Property Casualty

Insurers Association of America’s annual conference.

“On a rating opinion basis, which can include one company or five companies, about 2% are impacted with one–third being potential upgrades and two-thirds being potential downgrades.”

The updated Best’s Credit Rating Methodology, or BCRM, utilizes a building block approach that the company believes provides greater detail and clarity to its rating process and analysis.

Mosher explained that AM Best remains in conversation with those entities whose ratings have not changed as a result of the new methodology to explain what his firm’s views are of that company’s building blocks.

“It’s been pretty smooth so far,” said Mosher, adding: “It’s good for us to get to the end of this and move forward with the new methodology. It puts us on solid footing in terms of better transparency in discussions with the company and their understanding of what the drivers are of the ratings.” l

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Wildfire loss estimatesLine of business Structures Value

Residential 14,000 $10.3bn

Non-residential 1,000 $3.2bn

Total 15,000 $13.5bn

Source: RMS

NEWS

4 | www.reactionsnet.com PCI REPORTER: MONDAY OCTOBER 16 2017

Ireland and the UK are bracing themselves for the arrival of Hurricane Ophelia with Aon’s Impact Forecasting warning there is a medium to high chance of significant local insured losses arising from the storm.

As of Sunday evening, Hurricane Ophelia was progressing north-northeast as a Category 1 hurricane. However, colder waters and strong wind shear meant the National Hurricane Center (NHC) had forecast the storm to gradually weaken and develop into a post-tropical cyclone later in the day.

Ophelia is expected to hit the southern coast of Ireland early on Monday morning, with the weather system then continuing to move across Great Britain before dissipating.

The NHC warned that there would be

direct impacts from strong wind and heavy rain as Ophelia moves across Ireland and the UK. Gale-force winds are expected to hit southern Ireland early on Monday morning, before moving northwards and across the rest of the country later in the day. Heavy rain of between two and three inches is also expected, with some parts of the country facing four inches of precipitation.

Marine conditions will also be dangerous, the NHC said, with storm surge expected to bring about significant coastal flooding near and to the east of where the center of the post-tropical cyclone makes landfall. Large and destructive waves will accompany the storm surge, Impact Forecasting explained.

The 2017 Hurricane Season is already an historic one, and it is certainly uncommon for a tropical system making landfall over Ireland. As JLT Re highlighted on Friday, Ophelia’s imminent impact is something of an anomaly.

As the reinsurance broker noted in its Hurricane Activity report, while 13 tropical systems have passed within 150 miles of western Ireland’s coastline, only 1951’s Hurricane Debbie developed into an actual storm.

It is just over 30 years to the day since the Great Storm of 1987 struck. That event, which hit the UK, France and the Channel Islands on October 15 and 16, 1987, brought about insured losses of £1.4bn. l

Ireland and UK brace for Ophelia impact

The mooted price changes in the property catastrophe reinsurance market will still not be enough for Third Point Re to make a move into the sector.

Since being incorporated in 2011, Third Point Re’s total return strategy has seen it focus on some of the less volatile lines of reinsurance while its investment manager Third Point LLC has targeted a superior level of returns.

Because of that strategy, Third Point Re shied away from writing property catastrophe cover as well as other volatile classes of business. But, as Robert Bredahl, president and chief executive of Third Point Re, told Reactions during the Council of Insurance Agents & Brokers’ Insurance Leadership Forum, the firm’s attitude to the sector has changed.

“We didn’t want to mix property cat with the investment strategy, especially as a start-up company,” Bredahl explained.

However, Bredahl confirmed the company would now consider making a play in the property catastrophe market, although pricing would have to increase.

“We’re now five years in and we’ve retained a bunch of earnings and we’re under leveraged in all respects, and so

there’s room for us to take more risk,” Bredahl said, adding: “We would consider writing cat if pricing adjusted to a certain level. I’m not sure what that level is, but it’s considerably higher than it is today.”

At the beginning of the month, the company said its initial net loss estimate for the catastrophe events that have hit in the third quarter is expected to be less than $10m. Its low loss estimate for the recent spate of natural catastrophes highlights Third Point Re’s limited exposure to such events.

General talk in the market suggests price rises of 20% may be demanded for property catastrophe business in the aftermath of Hurricanes Harvey, Irma and Maria, as well as the Mexico earthquakes, but Bredahl said such rises would not be enough to entice Third Point Re into the sector.

“These events haven’t caused a big enough price increase for us to get interested – we would need substantial further increases,” said Bredahl.

According to Bredahl, Third Point Re did consider playing a part in the back-up covers that were doing the rounds in

September, but that the prices being talked about were not attractive enough (various market participants have suggested back up covers were receiving rate rises of circa 100%).

“We monitored the levels to which back-up covers were done, and we just didn’t think the market responded as strongly as we had hoped. We had considered doing a little amount,” Bredahl said.

While property catastrophe pricing may not have increased to the level where Third Point Re may make a play, Bredahl said there has been a notable shift in attitudes to rates since the Monte Carlo Rendez-Vous.

“When I was in Monte Carlo, I didn’t think the environment was right for

any meaningful change in pricing conditions,” Bredahl said.

“It feels a little bit different now. Companies have had a chance

to recalibrate a little bit and get the word out. A strong message on pricing is out from some

leading reinsurers, and it wasn’t at Monte Carlo. I’m feeling

better about conditions improving than I did even a week ago.” l

Third Point Re considers property cat

How do you spell tomorrow?TMR. Tomorrow is about looking beyond profit to do what’s right. While other companies provide reinsurance, we provide confidence. We are there for you in your times of need. We think through your challenges with you. And then, when the time comes, we will catch you, because we know that collaboration, transparency and trust are the path to…tomorrow.

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SCOR Global P&C considers itself to be ‘underweight’ in the US: what are your plans to grow? Our long-term goal is to establish SCOR Global P&C as a tier one P&C reinsurer in the US, as we are in the rest of the world. Our current plan for the US is one of the four main business developments of our 2016-19 three-year strategic plan “Vision in Action”. We utilize market segmentation, with a focus on segments and clients where there is a natural fit. As an underwriting company we gravitate towards clients that also put underwriting at the core of their business. We strive to be a quoting and leading reinsurer, building the organization and resources to achieve this goal. We believe in patience and persistence, based upon a long-term view. We are on track to achieve our targets in the US, building relationships with new clients and solidifying existing ones. The AM Best upgrade to A+ provides us with further momentum to achieve our goals.

Large national groups in the US are a focus: what pressures are they under and how can SCOR Global P&C help?Clients that are influenced by AM Best recognize the need to receive reinsurance support from a reinsurer with the highest rating from AM Best. SCOR is now well established in this Top Tier of reinsurers with our A+ rating from AM Best. We have the strongest balance sheet in the US today with no legacy, and minimal long-tail reserves.

SCOR’s values, which influence our strategy, include continuity and consistency. We are in a business where deals are repeated over the years, through market cycles, where the long-term retention of the clients makes an enormous difference to financial outcomes. SCOR’s track record and financial strength ratings make it an attractive counterparty risk diversifier, particularly for clients

with whom SCOR is underrepresented compared with its peers.

Our team provides a client-centric focus, they are listeners and negotiators, with the objective of building the trust and respect of our partners for the long-term.

What about regionals – are you happy to maintain the status quo in this segment?Regional clients remain a very important core segment of SCOR Global P&C’s US portfolio But this should not be interpreted as complacency. While this segment of business may generally be viewed as providing a greater degree stability, we do not view our regional partners’ business environment as being any less dynamic than the rest of the market. Our team works hard every day to earn the privilege of being a trusted advisor to our reinsurance partners to provide them with traditional and also innovative solutions to their reinsurance needs.

Cyber is a growing market for primary insurers in the US: how is SCOR Global P&C supporting cedants and brokers in this area?SCOR Global P&C teams are involved in the development of new and evolving products, such as cyber liability. SCOR Global P&C’s cyber liability team is available to meet with our clients in order to exchange information and assist in the development of best underwriting practices. SCOR Global P&C is also involved in the development of a number of insurtech opportunities.

SCOR P&C Ventures collaboratively forms long-term partnerships with entrepreneurs to develop winning technology-driven insurers, distributors,

and risk management solutions. The team has a flexible mandate and can operate stand-alone or in support of SCOR Global P&C’s expert teams in underwriting, IT, risk modelling, claims, and other areas. We believe in close alignment of interest through long-term relationships, shared incentives, and minority equity participation where mutually desired.

SCOR is a member of several industry-wide initiatives including the B3i blockchain initiative, Oasis, the Rüschlikon Initiative, Plug and Play Tech Center, InsurLab Germany, and the Connected Insurance Observatory.

Overall, the US reinsurance market is very competitive, how can SCOR differentiate itself in this environment?The global and US reinsurance markets remain very competitive, but we see opportunity for ourselves in this segment. SCOR’s position as one of the few large global reinsurers provides advantages as many insurers are looking for deeper, more complex relationships with a select number of core reinsurers that are capable of trading across all lines of business on a global basis. SCOR’s focus on long term client relationships, combined with our flat management structure, allows SCOR to achieve a very efficient and consistent decision making process – which provides significant advantages versus our global peers.

The current nat cat activity does not change our approach to the market

or our clients. While there will be movement in pricing, terms and conditions, we remain committed to being an A+ core reinsurance partner that has the ability and desire to provide top tier

financial strength and service to our clients before,

during, and after such events. l

SCOR

SCOR steps up as US cedants seek continuityA combination of an A+ AM Best rating and first class service makes SCOR a compelling proposition in the US, says Frank Coglianese, US domestic chief underwriting officer at SCOR Global P&C.

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NEWS


Lack of transparency exposes risksThe utilization of multiple managers as well as a wide investment spread are exposing alternative capital investors to risks they may not have been expecting.

According to Simon Cloney, chief executive of Australian firm Steadfast Re, recent catastrophes in North America could expose many investors to risk that they had not anticipated due to the use of multiple managers.

Cloney has seen this occur in Australia, and now that the US has been hit by multiple catastrophes that will also impact the insurance linked securities market, he warned the same thing may happen.

“One of the things we‘ve noticed recently is that we’re getting a loss from too many different funds,” he said.

“We’re seeing investors coming in through so many different platforms through so many different ILS funds and

so many different sidecars, that when we present a loss to the market, they’re seeing the same loss come from everywhere, and maybe we’re going to see that here [in the US],” he warned.

According to the CEO, the use of multiple managers was the culprit when it came to the overexposure of investors to such risks.

“To me the question is, “why are they spreading their investments so wide?” Why aren’t they picking a manager and sticking with a manager, or picking a manager that has a particular strategy?” Cloney said.

“There is an issue of investors taking losses across different managers; I wouldn’t necessarily call it a spiral, but investors need to understand how much manager A overlaps with manager B,” agreed Peter DiFiore, managing director at Cartesian Re.

The relatively calm catastrophe period in the US over the past decade or so has

emboldened investors who have enjoyed modest returns on their investments with few instances of losses.

Following the impacts of Hurricanes Harvey, Irma, and Maria as well as several earthquakes in Mexico, that will change as at least one catastrophe bond was triggered in Mexico, with others likely to be triggered in the aftermath of the damaging storms.

“We’ve started to question whether conversations are going on between a pension fund and two separate managers about our contracts,” said Cloney, adding: “We can’t prove it, and we can’t know that it’s happened, but we’re sensing that maybe there shouldn’t be that much visibility; I don’t want to tell anyone how to invest, but you really should pick a manager and stick with that manager, and if they do their due diligence then they’ll work out the right place to take the risk.” l

Insurtech firms born to be acquired Most insurtech firms will end up being acquired by larger incumbents rather than developing into fully-fledged major industry payers on their own, according to top industry executives. Tom Hutton, managing partner at XL Innovate said: “I’m on the end of the spectrum where I believe that incumbents will acquire the leading insurtech companies.”

“I doubt I have an investment today that will become a public company.”

His firm invested in popular insurtech firm Lemonade shortly after the start-up began writing business in September of last year. Hutton, who is a board member of Lemonade, spoke on a panel discussion in New York alongside Ty Sagalow, a founding member of the firm and a veteran insurance executive who served as chief innovation officer at Zurich Financial Services.

“In this current chapter, I think that there are a few businesses that can be transformational to a much bigger balance sheet incumbent business,” Hutton continued.

“That business will probably pay a price

for the start-up that makes the start-up look like the winner, but in the end the incumbent will add so much value that it is clear that the incumbent is the winner.”

Mike Pritula, president of RMS agreed with Hutton. “With a Lemonade executive, and a Lemonade board member here, I’d say that at some point, maybe the brand is going to take, but Lemonade will end up inside an incumbent at some point,” he said. “The reason why the Lemonades of the world can create a really terrific brand so quickly, is

because we have no competition, the folks who are out there running the show have lousy brands,” Sagalow fired back.

Pritula was not convinced, stating: “I think Lemonade is the exception, I think the consumer side of these brands are caught up, especially when it comes to dealing with millennials. They’re marketing to the millennials, maybe one brand like Lemonade can catch up to them, but they’ve got it figured out.”

According to Lemonade, it managed to capture roughly 4.2% of the renter’s insurance market share in New York within less than a year of operation. In comparison, the long-storied Liberty Mutual has a 7.8% market share.

However, Lemonade remains a fledgling firm despite employing veteran talent such as Sagalow. Just two events (a fire and a tree falling on a house) drove its gross loss ratio to 140% earlier in the year, and accounted for nearly 40% of its total claims dollars for the first half of the year. The firm earned $433,000 in premiums for the first half of 2017. l

Tom Hutton

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GUY CARPENTER

Among all natural hazards, flood is the most costly and the most impactful on people.1 The Insurance

Information Institute estimates that only 12 percent of homeowners purchase flood insurance,2 and most of the purchases are through the National Flood Insurance Program (NFIP). The gap in flood insurance protection represents up to a USD 40 billion3 potential new market for private insurers in the United States. Private insurers have recently expressed “green shoots” of interest in writing flood insurance. Year 2018 could be an inflection point for private flood insurance, and there are likely advantages for first movers.4

The US insurance industry is actively seeking new opportunities for growth in a challenging market by identifying untapped customer needs. The potential flood market is over five times the size of the most often mentioned new market, cyber insurance. PwC recently estimated the cyber insurance market may grow to USD 7.5 billion by 2020, but warned that some potential business customers question the value of the policies.5 The tools that the insurance industry uses to understand and demonstrate cyber aggregation of risk are in their infancy; there is much more understanding around surge and flood modeling. Recent real-time catastrophic events in the Gulf of Mexico evidence the value of flood insurance right now.

Careful consideration of several issues is necessary for companies contemplating entering the flood insurance market: Can companies understand the exposure and aggregation risk? How much coverage to provide? What is the risk of anti-selection? Will people buy flood insurance? How does one start? Greater access to flood data and loss results and more reliable exposure modeling are enhancing the flood (re)insurance marketplace.

Several developments are helping carriers understand and monitor aggregation:

• Coastal surge is included as a sub-peril in hurricane models; modelers understand that flood is excluded from homeowner (HO) policies but allow the carriers to determine how much flood damage is paid due to difficulty in making the wind or flood determination.

• Inland flood models are now developing in the United States, supported by reasonable scientific understanding of riverine and precipitation patterns that underpin the dynamics of catastrophe models.

• All major catastrophe model vendors offer a US flood product and are working to complete any missing gaps in perils. Their models cover inland flood, hurricane surge and river flooding.

A deeper exploration of the risk of anti-selection needs to include Carolyn Kousky’s work6 showing an average claim rate of 1.27 percent outside of the Federal Emergency Management Agency’s (FEMA) Special Flood Hazard Area (SFHA) – areas viewed as having at least a 1 percent annual chance of flooding – suggesting that FEMA’s flood maps may require updating. This may reflect a less than fully refined rate plan, which FEMA began to address this year. More broadly, given the number of homes lacking flood insurance in the Houston area at Harvey landfall, Florida at Irma landfall and downriver of California’s Oroville dam, anti-selection concerns for flood insurance sound increasingly overblown. If the real concern is aggregation, this contrasts with the high reinsurer interest in the NFIP’s debut USD 1 billion reinsurance program. And with excess capital in the reinsurance business, there will be ample capacity to manage the severity exposure via syndication of risk.

Historically, there appears to be consumer reticence to buying flood insurance.

The Wharton School has a reasoned view,7 suggesting that mandatory flood insurance inside the standard HO policy is the most direct way to both get to the available market and avoid anti-selection. But with homeowner rates under scrutiny in most states, price increases for flood coverage are likely to create stresses for policy makers and insurance commissioners – even a mandatory coverage may not be feasible.

Putting it all together, is this the right time for companies to tackle opportunities for growth in flood? The risks of both coastal surge and inland flood are better understood than ever before and much work is still being done to bring extra clarity. Current tools to monitor and control risk accumulations map readily to flood applications. The market is massively under-penetrated and homeowner awareness of flood concerns post Irma/Harvey is increasing. l

Footnotes:1. Miller, S., R. Muir-Wood and A. Boissonnade (2008).

An exploration of trends in normalized weather- related catastrophe losses. Climate Extremes and Society. H. F. Diaz and R. J. Murnane. Cambridge, UK, Cambridge University Press; Stromberg, D. (2007). Natural Disasters, Economic Development, and Humanitarian Aid, Journal of Economic Perspectives, 21(5): 199-222.

2. www.iii.org/fact-statistic/facts-statistics-flood-insurance3. Estimating USD 6-7 billion adequate FEMA premium, 25%

purchasing, USD 7.5 billion non-SFHA HO market, 10% for private insurance coverage differential plus commercial flood market.

4. https://en.wikipedia.org/wiki/First-mover_advantage as well as the Harvard Business Review article: https://hbr.org/2005/04/the-half-truth-of-first-mover-advantage

5. www.pwc.com/gx/en/insurance/publications/assets/reaping-dividends-cyber-resilience.pdf

https://www.marsh.com/us/insights/research/united-states-insurance-market-report-2016.html

6. www.zurich.com/_/media/dbe/corporate/knowledge/docs/risk-nexus-august-2015-why-many-individuals-still-lack-flood-protection.pdf

7. Ibid

Flood insurance: The 2018 market opportunityBy Jonathan Hayes, Managing Director; John Kulik, Senior Vice President; and Steve Kelner, Leader, GC Analytics – US & Canada, Guy Carpenter & Company, LLC.

Jonathan Hayes John Kulik Steve Kelner

OPPORTUNITYThe global convergence of man-made and natural risk is creating demand for new products and “out of the box” solutions.

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Insurance linked securities can be utilized to cover casualty risks, but only through the use of insurtech which will drive future developments in the specialist sector.

“We’re getting into a new paradigm; when the first cat bonds were introduced they were covering a peril that had already existed. The models had already been developed to a certain point where everyone could feel very comfortable with it,” said Nick Lamparelli, co-founder and chief underwriting officer at reThought Insurance.

“This new paradigm that we’re in – we’ve covered all of the bases where insurance products already exist,” he added. “Nothing is going to get to the ILS side until we create a new product, and no product is going to get created until we can get a fronting carrier and a reinsurer comfortable that there is a non-actuarial approach to this that is going to work, and payoff.

“The emerging risks, we don’t have experience, cyber being one of them, in addition to a whole host of casualty risks that we have no experience with. The traditional actuarial models of developing products will not work,” Lamparelli said.

“Insurtech is absolutely a necessity, because when I keep hearing that we need to find new sources of data. Well, where is that data going to come from?” he asked.

“Technology really streamlines that. There is one model that I know of and work with, that can consume the entire corpus of medical and legal literature, and analyze it and create algorithms and models off of that.

“Where I see getting investors comfortable with the role, starts with creating the product and getting traditional outfits comfortable with it, and then it will feed up to ILS. If ILS is going to grow,

we’ve covered a lot of the buckets where insurance already exists, we have to go where insurance currently doesn’t exist and that’s a scary area with a lot uncertainty, and without technology we’ll never get there.”

According to Matt Streisfeld, principal for Oak HC/FT, any ILS manager that manages to get ahead of the curve as far as new risks will be at a distinct advantage over its competitors.

“If you are an ILS manager and you’re able to create your own product, and get that to market before it becomes more mature, that’s a competitive advantage,” he said. “You’re now marrying that tail risk that you may face before it matures, and I think that’s how you get investors more comfortable, as you’ll be able to price it more efficiently with a more attractive return on investment.” l

Insurtech will drive ILS growth

Following a blow to private market flood participation, David Sampson (pictured), the president and chief executive officer of the Property and Casualty Insurers Association of America, remains confident that comprehensive flood reform will occur, albeit with delays.

“Right now the operative bill surrounding a reform of the National Flood Insurance Program [NFIP] is the temporary extension of the existing program,” he said.

“There was a lot of controversy surrounding comprehensive reform right around the time Harvey hit,” he added.

“Our suspicion is that there will likely be another extension of the program prior to December 8,” Sampson told Reactions, noting the unlikelihood that the federal government would allow NFIP coverage to lapse in the wake of Hurricanes Harvey, Irma and Maria.

The Ross-Castor bill which would have allowed for private flood policies as well as NFIP policies to satisfy mortgage requirements was shot down by the

Senate last month, despite supposed bipartisan support (it passed the House of Representatives last year with a unanimous vote).

Still, industry executives were positive that the bill would pass, and help to further pave the way for private market participation.

“At some point this bill will pass; its popularity is why it hasn’t done so yet – it’s a bargaining chip,” said Stephen Weinstein, senior vice president, chief compliance officer at Renaissance Re, speaking at Reactions’ North America Re/Insurance Conference.

“Dennis Ross (one of the sponsors of the bill) will get it across the finish line,” Weinstein declared.

Sampson, who was not as sanguine as Weinstein, agreed that the Senate’s veto of the Ross-Castor bill did not spell the end of the issue.

“We’ll see that issue in

particular come back either late fall or early next year,” he said.

The NFIP was extended until December 8 from its original termination date of September 30 following the impact of Hurricane Harvey, which ended up being an extensive flood event.

Hurricane Irma hit roughly a week later, causing extensive flood damage as well.

Conservative estimates for the level of the NFIP’s debt have reached as high as $45bn following Hurricanes Irma and Harvey (not including Hurricane Maria,

and excluding $1.04bn for reinsurance program recoveries, and $1.5bn

cash on hand at the NFIP).According to PCI there are 5,700 properties covered by the NFIP in Puerto Rico, the main region impacted by Maria.

The Federal Emergency Management Agency has so far received 290 claims from the island. l

Industry positive about flood reform

Morristown, New Jersey • Irvine, California • Toronto, Ontario

Standard & Poor’s: A+ Stable A.M. Best : A Stable

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The Toa Reinsurance Company of America

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MV01_ToaPCI_AD_2017_Newsletter.indd 1 9/21/17 10:14 AM

NEWS


It will be the reinsurance market that bears the brunt of losses arising from Hurricanes Harvey, Irma and Maria

(HIM), as well as the Mexico earthquakes, according to Standard & Poor’s (S&P).

The recent catastrophes will likely wipe out annual earnings for the reinsurance industry as a whole, and trigger downgrades for those firms hit disproportionately by the disasters, the ratings agency believes. The firm has estimated third quarter catastrophe losses of more than $100bn, which would potentially be a hit to the capital of many firms.

In contrast, P&C primary insurers are not likely to see any ratings changes following the impacts of so-called HIM storms.

The catastrophe bond market has also been resilient to the impact of the recent storms, with the exceptions of the Kilimanjaro Re 2014-I Class B bond as its retention layer was significantly eroded from HIM and the $150m MultiCat Fonden bond’s class A notes which were a total loss following a trio of quakes in Mexico.

The lack of large losses in the catastrophe bond space is likely to trigger an influx of capital and interest in the space from curious onlookers, but while pricing increases are expected, there is not a general consensus on what that shift would look like, S&P predicted.

“We think an increase in rates in the alternative capital space is almost a given, although the amount of price increase will depend on the supply-demand relationship and may take some time to play out,” reads an excerpt from S&P’s report.

“There is sufficient capital on the side-lines to enter the market, in our view. However, it is implausible that such capital will entertain a similar price to that prior to the catastrophe events,” the report continues.

This is not to say that some primary carriers have not suffered significant losses, including American International Group which has so far published the largest publicly available loss estimate from the impacts of HIM at a maximum of $3.1bn.

Auto insurers were disproportionately impacted by Harvey due to the amount of

cars lost to flood waters in the aftermath of the Texas storm as well as from Irma, S&P said.

In response, some insurers have been looking to purchase additional back-up coverages, which are being priced at a 20% to 30% risk premium – an indication of how pricing will shift during the next renewals, according to S&P.

Most P&C insurers’ initial catastrophe budgets for the first nine months of the year have already been exhausted, and other disasters have already appeared on the horizon.

Still, reinsurers posted up noticeably higher loss estimates than their primary focused counterparts, with firms writing both insurance and reinsurance business experiencing a squeeze from both sides.

Everest Re was one such carrier that experienced total estimated losses of $1.2bn on both the primary and reinsurance sides for the third quarter of the year.

As a result, affected lines and geographies in the reinsurance space can expect to see double digit returns during the upcoming renewals, S&P believes.

Leading up to, and even after, Hurricane Harvey struck Texas, the general consensus was that the reinsurance sector would see rate decreases of up to 7% due to the state

of the market, but successive disasters have shifted that assumption.

But despite the catastrophe events, S&P expects primary carriers writing global business to push back against such steep rate changes, citing the recent catastrophes as US-specific events, and therefore only relevant to US exposed portfolios.

The impacts from HIM and the Mexico quakes are likely to reverberate through the larger global market, although the real question is how long the reinsurance market will be able to hold on to any price increase that it manages to obtain.

Catastrophe events for this year also did not end with Hurricane Maria.

The ratings agency did note that the hurricane season is still active for another month and a half, meaning there is still plenty of time for additional events to occur.

Hurricane Nate made landfall as a relatively minor Category 1 storm earlier this month, but was a reminder that the season is still active. Insured losses from that event have been estimated at $500m by catastrophe modelling firm Karen Clark & Co.

In California raging wildfires are already leading to mounting losses, as expensive property, including many leading wineries, have already been destroyed. RMS has so far estimated total economic losses to be $3bn to $6bn in the region. l

Reinsurers impacted most by cat eventsGlobal reinsurance capital stress scenarios

Source: Standard & Poor’s

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Today, the value of reinsurance goes beyond the traditional risk transfer mechanisms of the past. For Maiden

Re, it has come to include solutions that bring new technologies to our clients, advanced modeling resources to identify opportunities for helping our clients improve their profitability, and product initiatives that allow our clients to engage with their customers in more meaningful ways. That, in fact, was the motivation behind Maiden Re’s expansion of its Equipment Breakdown product to the Homeowners line.

In 2016, Maiden expanded into the Equipment Breakdown, aka Boiler & Machinery, line focusing on commercial risks. Based on the interest and feedback we received from our clients, it was determined that there was strong demand for a personal lines product. Whether it is a sophisticated home entertainment system, top of the line appliances, or emergency generator, there is greater demand than ever for homeowners to have protections for these new exposures. While warranty contracts are available in the market from different sources, homeowners are looking to their insurers to protect them via the convenience of their Homeowners policies.

“Building on our recently introduced commercial Equipment Breakdown product, the expansion into Homeowners Equipment Breakdown is another forward step in our commitment to support our clients with products that connect with their customers’ needs, while increasing their revenue stream,” explains Stacy Armstrong (pictured), Executive Vice President overseeing equipment breakdown and new product development. “Our product design and development approach provides our clients with a “turnkey” solution allowing quick execution and maximum flexibility to meet individual client needs.”

Maiden Re’s Homeowners Equipment Breakdown product gives our clients not only an additional stream of revenue, but also a more comprehensive product offering for their customers. The endorsement expands the Homeowners coverage to include expedited repair or replacement of many items including computers and computer-controlled equipment, boilers, home security systems, central heating and A/C systems, electrical systems, security systems, and most appliances from losses caused by or resulting from sudden equipment breakdown of electrical, electronic, mechanical or pressure systems. The annual premium for this coverage is nominal, with deductibles comparable to the typical Homeowners deductible.

More affordable and typically more comprehensive than warranty contracts that can have restrictions on the types of equipment, parts and labor covered, Maiden Re’s product provides coverage that can be offered to policyholders through a Maiden Re developed manuscript endorsement. All rates, forms and filing documents have been prepared for use in all 50 states, creating a “turnkey” product with minimal effort needed for product execution.

Flexibility is built into every aspect of the coverage, including the reinsurance structure and cession percentage. This feature means that insurers can determine the amount of risk they are comfortable retaining while relying on Maiden Re for as much or as little marketing, training, underwriting and claims support as they need. And to maintain an important touch point with policyholders, an insurer can handle these claims directly with its customers or turn over

some of the responsibility to Maiden Re.Providing an equipment breakdown

product however is more than just offering another product to our clients. It’s another way for our ceding companies to build on their relationship with their customers. In an age of ever increasing connectivity, insurers can be at a disadvantage. Often limited to low impact renewal notices or high stakes claim situations, the reasons to connect with their customers may seem few and far between. Interactions between a carrier and customer on new policies – such as increasing coverage or replacing an existing policy – can be critical in shaping long-term relationships.

In the years ahead, products that speak to customers – whether they broaden protection or provide increased convenience – are likely to be one of the most effective ways to engage customers and move the needle on customer loyalty. “Product initiatives like our Equipment Breakdown products have become a key component of Maiden Re’s client value proposition,” says Cass Kuhlke, Vice President and Equipment Breakdown product line leader. “In our continued endeavor to further build out our products to meet client needs, our latest product in development is Service Line. This is an additional endorsement for Homeowners policies that will be available before year end.”

Maiden Re, with our strong balance sheet and A rating from A.M. Best, will

continue striving to add value to the reinsurance relationship for our customers, through this, and other products we currently have under development. We strongly believe that the reinsurance relationship should be about much more

than just a transaction, and we view each agreement as the foundation of a long-term partnership. l

MAIDEN RE

Maiden Re expands its equipment breakdown to include homeownersInterview with Maiden Re’s Equipment Breakdown team.


We’d imagine that many risk professionals working with clients across the US, the Caribbean and Central America need a vacation. Hurricane Harvey’s landfall on August 26 saw new US records for tropical cyclone-driven extreme rainfall. Irma made landfall in Barbuda on September 6 as a Cat 5 hurricane with destruction across the Caribbean, and US landfall four days later. Two events with total estimated insured losses between US$60-$90 billion. Then Maria hit Puerto Rico on September 20.

Mexico experienced two earthquakes in less than two weeks. On September 7, an Mw8.1 earthquake struck off the coast of Chiapas State, the southernmost state in Mexico, and September 19, a Mw7.1 earthquake struck 30 miles south southwest of Puebla City.

As we struggle as a worldwide community to recover and rebuild, our industry needs to understand the impact on our book of business, and pressure to deliver becomes intense. Capacity to run the numbers, use the models, get the insight, analyze, react and adapt – is at a premium for many organizations even during a normal week. But everyone expects extraordinary effort during a single cat event, sweating the computers, processing the data into the late hours. But five or more events in just under four weeks?

In this situation, many organizations struggle with capacity. It’s back to basics; analysts taking three hours for one analysis, and no available servers to run additional analyses. Without the insight, the business is stuck. Analysts hate it, being reduced to data operatives, waiting to click-start another data run as another ends. And for fast-moving situations, such as Irma, shifting track from east, to central, to a west coast track along Florida, once you’ve analyzed the data, it’s out of date.

What might change if you had access to unlimited resources? Pushing your existing analytical tools into the Cloud will produce similar results, but with an improved

process and increased speed to results. What needs to happen is to orchestrate tools, models, storage, and computing power together to get you closer to real-time analysis.

Closing the gap in terms of “time to insight”, delivering a proactive response to all internal and external stakeholders is the goal, and the unprecedented flooding in Houston after Harvey provides a great example. During Harvey, clients benefited from the exposure management capabilities powered by the RMS(one)® platform.

Clients had Harvey hazard footprint automatically seeded into the client tenant, to deliver instantaneous access to analytic insights from the RMS US Inland Flood HD Model, providing insights to the extent and severity of the flooding, using high-fidelity hazard inundation mapping. Once logged into the application, our Exposure Manager clients can instantaneously visualize the Harvey flood layer along with their exposures – insights are literally delivered to a client’s web browser when it matters. They can use the RMS accumulation engine with the built in financial model to define their own damage assumptions for flood bandings and run analytics against their exposures. They can view total insurable value (TIV) and exposed limit at the portfolio level and can drill down into the location level output to identify contracts and exposures likely to be affected by this flood event.

With the RMS(one) platform integrated into your workflow, the processing grind, the hassle of just delivering the numbers has gone; the results are there, such as whether your business is looking at a capital or an earnings event. The ability to visualize the event’s impact on your exposure, share insights with key stakeholders using hazard maps, and drill into a scenario and ask questions, becomes priceless.

The RMS(one) platform is designed for cloud, with an architecture that takes advantage of the power and storage it provides. As both RMS and Microsoft recognize the myriad of challenges that limit business agility for (re)insurers, RMS(one) is well matched to the immense computational availability and scalable storage provided by Microsoft Azure – the world’s most-trusted cloud service, used by 90 percent of Fortune 500 firms.

The secure cloud environment, exceptional scalability and reliability, and extensive global footprint that Azure provides, ensures utmost security for a client’s data and risk analytics. Microsoft offers the most compliance coverage of any cloud provider, with rigorously adhered international and industry-specific compliance standards and unique data residency guarantees, to lead the industry for customer advocacy and privacy protection. Using Azure on a cost/usage basis also takes pressure away from clients to build and maintain their own high performance infrastructure.

With a platform such as RMS(one)® supported by the sheer scale, reliability and security of Microsoft Azure, this level of insight elevates business agility and provides clarity to the question “what does this mean for us” and most importantly, the analytic insights to proactively plan how you can support your clients in their time of need. l

Visit RMS in the Jackson Park meeting room at PCI.

The advantage of cloud solutions when “time to insight” is crucialBy Farhana Alarakhiya, vice president – Products, RMS (pictured) and Jonathan Silverman, director – Worldwide Insurance Industry Solutions, Microsoft.

RMS

Keeping your goals front and center.partnerre.com

NEWS


MetLife, which was one of few members of the R3 blockchain initiative, has partnered with IBM to launch a new business platform aimed at SMEs.

MetLife is further expanding its use of technology through the new IBM partnership in a tie-up that will allow for the integration of blockchain networks in order to complete future transactions.

The new business platform is designed to allow for the integration of blockchain networks at a later date.

It also includes cognitive computing, data analytics, and security capabilities.

According to MetLife, new offerings are necessary in order to service the $140bn US group benefits market.

“This new direction provides us with the opportunity to introduce to the market a unique business model unlike any other. The strategy represents innovation in our approach to growth and is a testament to the reality that every company needs to

become a technology company in order to survive,” said Marty Lippert, MetLife executive vice president and head of global technology & operations. “It brings together the best of MetLife’s insurance expertise and capabilities with leading IBM technology into a single, highly scalable, low cost insurance industry solution.”

The firm hopes to target small businesses specifically through this new partnership. Indeed, the firm plans to offer the new product to these smaller customers before being scaled upwards.

“Small business is an attractive growth segment for MetLife. We know from speaking to many business owners and brokers that they believe employee benefits are important in attracting, retaining and engaging talent,” said Michel Khalaf, MetLife’s president of US business and EMEA.

In addition to IBM, MetLife is also partnering with Majesco to help build out the platform.

This is not MetLife’s first foray into the blockchain space, as it joined the financial services blockchain consortium R3 last year alongside other insurers such as Ping An, as one of over 100 companies spanning a diverse range of financial services.

IBM itself has been a major player in providing blockchain solutions to the insurance industry.

The technology firm provided the underlying Hyperledger Fabric utilized by the Blockchain Insurance Industry Initiative (B3i), an attempt by the P&C industry to achieve similar levels of cohesiveness as R3 with hopes to roll-out industry wide blockchain enterprises.

That same underlying technology was utilized by American Insurance Group (AIG) in its own blockchain transaction performed in conjunction with Standard Chartered. AIG joined the B3i consortium alongside 23 other companies earlier this month. l

MetLife targets blockchain growth

RMS puts $500m loss estimate on NateUS insured losses arising from the impact of Hurricane Nate are not expected to total more than $500m, new data from catastrophe modeller RMS shows.

These $500m losses account for claims arising from wind and coastal flooding, RMS explained. The estimate also includes property damage and business interruption losses from wind and coastal flooding to residential, commercial, industrial and automobile lines of business.

The coastal flood losses include coverage leakage – an escalation in claims severity for wind-only policies in situations where wind and water hazards co-exist in residential lines of business, RMS explained.

The impact from inland flooding resulting from Hurricane Nate is expected to be minimal, and as such RMS has not included it in its estimate. Furthermore, the RMS estimate of $500m for Hurricane Nate does not factor in any losses that the National Flood Insurance Program may incur.

“RMS’ industry loss estimate is expected to be lower than the losses projected prior to Nate’s landfall,” said Tom Sabbatelli, senior product manager of the RMS North Atlantic Hurricane Models.

“Forecasts that projected the storm to strengthen to Category 2 intensity did not materialize and Nate ultimately made two landfalls as a Category 1 hurricane. None of the wind measurement stations analyzed by RMS recorded hurricane-force wind speeds at any point during the storm’s passage,” Sabbatelli added.

RMS forecasts that re/insurance claims from the 2017 North Atlantic Season so far amount to $75bn to $120bn. The damage from Hurricane Nate “is not expected to constitute a material portion of these insured losses”, RMS said.

The estimate from RMS is the same as that issued by Karen Clark & Co last Monday. According to Karen Clark & Co, the majority of insurance claims from

Hurricane Nate will arise from wind and storm surge losses to residential, commercial and industrial properties and automobiles.

Fellow catastrophe modeller AIR Worldwide had earlier reported that Hurricane Nate was tracking a similar path to that of 2005’s infamous Katrina. Hurricane Nate had originally formed as a tropical depression back on October 4, before being upgraded to a Category 1 hurricane prior to it making landfall near Biloxi, Mississippi on October 8.

It had gained force as it crossed Mexico’s Yucatan Peninsula and ended up causing at least 21 deaths in Central America as a result of landslides and flooding.

Lee Smithson, director of the state emergency management agency in Mississippi, told the AP news agency that damage from Nate was reduced because of the lessons that were learned from Hurricane Katrina. l

BRINGING OPPORTUNITY TO RISK

ADAPTATION + OPPORTUNITY = GROWTH

Documents

Re/insurers counting wildfire cost - Reactions Home PCI Rep Day2.pdf · blazes so far has been the Tubbs Fire which has impacted Napa, Sonoma and Lake counties. It is this fire which