In the wake of Hurricane Harvey in the US and severe monsoon flooding in India, Munich Re Board Member Torsten Jeworrek has called on the market to urgently reassess and close the “considerable” global protection gap amid reinsurance market growth prospects. The industry needs to find innovative ways, in partnership with governments to access markets, he said at this year’s Monte Carlo Rendez-vous de Septembre.
Nat CAT losses remain largely uninsured worldwide, even among highly-developed markets.
Given that the US storm season was still in full swing at the time of the Rendez-vous, economic and insured losses from Irma and Harvey remain inconclusive, but AIR Worldwide has projected insured losses for Irma to be between US$25 billion and $35 billion. The CAT modelling firm expects property losses resulting from Harvey to be between $65 billion and $75 billion.
Address the protection gap
An Aon Benfield’s 2017 Reinsurance Market Outlook report noted that the US, despite being one of the most insured countries globally, had close to half of its economic losses from Nat CATs in 2016 that were uninsured.
CEO Eric Andersen said that it is unfortunate that much of Harvey’s devastating tab will be picked up by the US government and taxpayers, while the industry is seeing an “over-capitalisation” and new investors actively seeking access to diversified insurance risk. “The frequency of severe weather-related losses is increasing, and there needs to be a significant step-up in the efforts made to address the protection gap evident globally.”
In a similar vein, Swiss Re’s latest sigma report – “Insurance: adding value to development in emerging markets” – launched at the Rendez-vous, emphasised the need to use various approaches including microinsurance, public-private partnerships, innovation and technology, to better align risk-transfer solutions with consumer and business needs. This can help overcome barriers to the development of the insurance sector in emerging markets.
Countries’ insurance penetration rates alone was no guide to the development of its insurance mart, said Swiss Re’s Chief Economist Kurt Karl. “It sheds no light on how many people have insurance, nor does it say anything about how insurance makes lives better.”
Reinsurance to shine
The potential impact of Harvey and Irma will present a “massive opportunity” for the reinsurance industry to shine, said outgoing Willis Re CEO John Cavanagh at the broker’s global reinsurance marketing briefing in Monte Carlo.
Likewise, JLT Re Executive Chairman Ross Howard noted that now, more than ever, is the time for the reinsurance industry – which has never been better capitalised – to prove its worth to its clients by responding to recent events.
He added that it would take “a coalescence of events to really turn the market and balance sheet of the sector”.
The insurance-linked securities (ILS) market meanwhile, is slated to be tested by the storm season, but JLT Re Global CEO Mike Reynolds remained confident that the ILS market, having been integrated as part of the industry, will step up. “If we had any concern with their ability to respond, we would not advise our clients to build [ILS] into their reinsurance programmes.”
1/1 renewals to be stable
In light of recent loss events, market giants, including Swiss Re, said 1 January 2018 renewal rates are expected to stabilise, while Hannover Re Chief Executive Ulrich Wallin predicted pricing to flatten out and hold stable, given excess capacity and weak industry earnings.
On the other hand, SCOR Group Chairman and CEO Denis Kessler held a grimmer view that once the losses from Hurricanes Harvey and Irma are quantified, “the market will change” in that some firms will be badly affected or forced to exit the market.
However, he added that all the major reinsurers, including SCOR, are likely to be at ease as they are well-diversified, following lessons learnt from Katrina and Wilma in 2005.
Managing cyber exposure
The increasing prevalence of cyber risks was another hot topic explored during the Rendez-vous. While coverage for cyber appears to be a potential growth area for most players, Swiss Re CEO Christian Mumenthaler urged caution, noting the tremendous aggregation risks that come with its insurability.
Referencing recent cyber attacks, he said it is becoming clearer that significant damage can be inflicted on critical infrastructure such as the internet – that could even result in “another 9/11 event”.
While he recognised that the (re)insurers can play a big role in managing cyber exposure, the industry cannot carry the risk alone. Thus, a viable solution will require government-backed reinsurance mutuals similar to Nat CATs and terrorism covers. However, Swiss Re “remains very cautious” and will maintain a significantly underweight exposure to the business, given the lack of a “convincing solution to the issue beyond government support”, he said.
Connected risks
Meanwhile, there is an urgent need to address the issue of connected risks in today’s world, said Mr Suki Basi, Managing Director of Russell Group, on the sidelines of the reinsurance gathering.
Commercial organisations – along with their partners, suppliers and clients – are systemically exposed to cumulative and cascading financial, operational and reputational vulnerabilities. With the increasingly digital connectivity within and between organisations, a single negative event could wreak severe economic damages.
Initial key areas of concern, he added, include natural perils, credit, supply chain, cyber and political risks, of which the latter two have manifested in events such as the WannaCry ransomware attack, and closer to home, geopolitical tension in the South China Sea.
Elsewhere, Willis Re also reported on the growing concern among industry practitioners about “silent cyber” exposure – potential cyber-related losses stemming from silent coverage in insurance policies that are not specifically designed to cover cyber risks. An example would be a cyber attack on an industrial plant’s control system that causes an explosion, which could result in property damage or business interruption. M