The month of January traditionally brings slew of “review of the year” articles in the insurance press. This month is no exception, but many in our industry may not be thankful for constant reminders of a 16-month period that saw natural catastrophe losses totaling more than USD 86 billion in insured losses and USD 48 billion of reinsured losses.
However, before pushing on with 2012, there are three publications that we think every practitioner should take a look at. The first of these is our own Willis Re 1st View Report. Published at the start of the month, this provides an invaluable and comprehensive review of recent reinsurance renewals.
The second publication is “Lessons from Recent Major Earthquakes”, a study published this month by Swiss Re. Swiss Re calculates that the cumulative catastrophic impact of earthquakes on society is devastating; seismic events caused economic losses of over USD 276 billion in 2010 – 2011. The report observes that much of the world is vastly underinsured against earthquake risk, and suggests that underinsurance is often due to low risk awareness in earthquake-prone areas.
The report goes on to highlights key underwriting lessons to be learned from the recent earthquakes, noting that although earthquake models have had a degree of success in estimating the physical impact of damage caused, secondary loss factors, such as liquefaction and particularly business interruption, add significantly to the size and complexity of claims for major earthquakes. Balz Grollimund, Head of Earthquake Perils at Swiss Re and co-author of the study, concludes that, “These factors should be considered more comprehensively in earthquake models.”
Cat Modelling for Mutuals
We welcome Swiss Re’s comments, which echo those we made in a specialist report for the International Cooperative and Mutual Insurance Federation (ICMIF), of which we are a proud supporting member. In a report entitled, “Taking a Broader View, Catastrophe Modelling for Mutuals”, we asked what lessons could be drawn from the turbulence generated by recent catastrophes.
Detailed lessons from these and other natural catastrophes will emerge over the next few years, and new geo-physical data, together with updated scientific thinking, will be incorporated into new catastrophe models. However, there are some broader questions that should be asked by those that rely upon models to help their financial decision making:
- Do you understand which perils are modelled and which perils are not modelled? What other methods are available to consider those perils that are not modelled?
- Are all of the lines of business with direct and indirect natural catastrophe exposure you offer covered by modelling? For example, Personal Accident, Workers Compensation, Third Party Liability etc.
- For a modelled peril, what is covered by the model? Even if something is included (e.g. earthquake), are all of the associated perils also modelled (e.g. tsunami, soil liquefaction)?
- What allowance should be made for associated perils that are not modelled?
These questions are pertinent to all who rely on catastrophe models, and as we head into a new year (which will hopefully see a smaller toll of catastrophes) we would be well advised to consider them afresh.