In case you missed it

RMS sits at the intersection of technology, science and domain experience, giving us a unique perspective on what’s going on in the world of tech, modeling and computing. “In Case You Missed It” is our roundup of the latest developments from Silicon Valley to Bangalore that EXPOSURE doesn’t want its readers to miss. In this edition, Hemant Nagpal, director of model product management at RMS, picks his top three headlines from across Asia-Pacific.

01. Building Resilience

Southeast Asia is vulnerable to a range of natural catastrophes, including earthquakes, tsunamis, typhoons and flooding. Floods alone result in billions of dollars in damage each year; in 2015, floods in Myanmar displaced 1.6 million people and caused an estimated US$1.5 billion in losses and damages.

In 2019, the Southeast Asia Disaster Risk Insurance Facility (SEADRIF) program will launch — a regional catastrophe risk pool designed to provide participating countries in Southeast Asia with immediate rapid response financing after natural disasters. It will have an initial focus on Cambodia, Lao PDR and Myanmar.

Domiciled in Singapore, SEADRIF will make full use of the insurance ecosystem in the region, providing cost-efficient reinsurance capacity, structuring and modeling support for the pool. The World Bank is to provide financial and technical assistance with continued financial and political support from Japan. The Philippines are interested in joining SEADRIF as it looks to expand to other countries in the region.

At the national level, the program will help develop a national disaster risk finance strategy; at the regional level, the program supports the preparation
and implementation of the proposed regional catastrophe risk pool. Reducing reliance on disruptive national budget reallocations or uncertain humanitarian assistance will ultimately help to narrow the natural catastrophe protection gap in Southeast Asia.

02. PMFBY Growing Pains

The growth in India’s crop insurance market premium has been remarkable. The Pradhan Mantri Fasal Bima Yojana (PMFBY) government-backed agricultural insurance scheme launched in 2016 covers 47.9 million farmers and is now being implemented in 25 states. In 2015-16, premiums reached Rs 4,200 crore (US$612 million); it is up sixfold to Rs 24,352 crore (US$3.54 billion) in the last year. Loss ratios are predicted to hit 90 percent for the 2017-18 season, and GIC Re projects 10 percent premium growth for 2018-19. GIC Re leads 15 of 18 treaties in the domestic crop insurance market with a market share of 52 percent; five public sector insurers and 13 private insurance companies participate in the scheme.

Under the scheme, the farmers’ premium after subsidies has been kept low — between 1.5 to 2 percent of sums insured for food grains and oilseed crops, and up to 5 percent for horticultural and cotton crops. With the rapid growth of PMFBY, issues have arisen such as claims delays, and a two-year consultant contract has been awarded to the United Nations Development Programme (UNDP) to help overcome these problems.

03. Version 18 and Asia-Pacific

RMS has made its own news in Asia-Pacific as Version 18 (V18) launched on July 16 with a slew of new and updated models to provide the latest modeling insights to drive growth across the region’s varied markets. The expanded Asia-Pacific model suite includes new peril models for India flood, Philippines typhoon and inland flood and South Korea earthquake. This is in addition to the recently launched RMS® Japan Earthquake and Tsunami High Definition (HD) Model.

The first fully probabilistic flood model for the Indian insurance market covers the whole of India and includes pluvial and fluvial flooding, tackling a major loss driver for the country. A new Philippines model provides a comprehensive solution to model climate hazard for wind and storm surge, including an inland flood model that considers tropical cyclone and non-cyclonic rain.

And expanding this regional focus, V18 also includes important updates to the Australia Earthquake and Australia Cyclone Models, as well as to the India Earthquake Model.


What One Thing… Would Encourage Increased Innovation in the Insurance Industry?

In each edition of EXPOSURE we ask three experts for their opinion on how they would tackle a major risk and insurance challenge. This issue, we consider how (re)insurers can embrace new technologies, provide new products or collaborate more closely in order to solve the world’s risk problems more effectively. With insight from Tom Hutton, Stephan Ruoff and Eugene Gurenko


Tom Hutton

Managing Partner, XL Innovate

Continued innovation will result from the visible impact and success of a few high-profile ventures. And it will be maintained by a willing and supportive regulatory environment and a stable source of venture investment and liquidity.

Nearly 30 years ago, when RMS was started, there were no examples of successful insurtech venture stories to emulate. Most venture investors doubted that a tech company could achieve penetration and growth serving the insurance industry, known as a tech laggard. Meanwhile, carriers had little experience with risk collaborations, apart from their work with brokers. All of this presented quite a challenge.

Innovation in insurance will result from the visible impact and success of a few high-profile ventures

The current stream of insurtech ventures has grown out of success stories in financial technology (Lending Club, SoFi, etc.), examples of novel data and analytics for insurance customers, liquidity events in the space, investor support from traditional VCs and corporate venture arms, and media coverage. The insurtech conferences alone are mind-bending, with thousands of attendees and hundreds of exhibitors.

The next step in the innovation cycle will require a few breakout success stories from this new wave of ventures. Success stories can be measured in carrier impact (data and analytics), market impact (new distribution, new product), high visibility and, most of all, financial success. There are already a number of likely breakouts in this current wave, including the likes of Lemonade or Trov, and more. A similar analogy can be seen in fintech, where startups like Credit Karma, Square, Venmo and Kabbage showed the rest of the industry what could be possible early on.

So watch for these breakout companies and any acquisitions in the space. The rest will follow.


Stephan Ruoff

CEO, Tokio Millennium Re AG

The advancement of network and platform thinking would facilitate greater industry innovation. Technology has changed how (re)insurance business is transacted. We are seeing blockchain initiatives through consortia such as B3i and R3 and the Lloyd’s electronic placement platform “PPL”.

Through cloud technology and distributed ledgers, we have solutions that enable shared data platforms. However, we must learn from trading environments such as stock exchanges. Here, trading parties operate on a single platform where data flows easily, and which supports interaction between the various parties.

Our industry should develop a similar risk-exchange environment — a transactional environment that supports a consistent data approach and enables all parties to interact with data in a communal environment rather than each storing their own data on their specific platforms.

We must develop and adopt shared data standards so that risk can be consumed in a single data format

We must develop and adopt shared data standards so that risk information can be consumed in a single recognized format. This would prevent data duplication and reduce internal processing requirements and transaction costs. This could also reduce regulatory burdens, as developing an industrywide data language could spawn a more harmonious global market regulation on how data can be used.

Another key aspect is data mining through artifical intelligence (AI) to boost risk quantification and predictive analytics. With better data standards plus more widely shared platforms, more risk can be insured, thus further reducing the protection gap.

Our thinking must go beyond (re)insurance itself. At TMR, we have helped pioneer greater data consistency and network thinking to drive more interaction between insurance and capital markets to help match risk and capital pools. We believe such efforts create huge innovation potential.


Eugene Gurenko

Lead Insurance Specialist, World Bank Finance

In most countries, government still continues to play the role of the reinsurer of last resort. Such an open-ended commitment creates strong disincentives on the part of homeowners to acquire insurance coverage for natural disasters.

As government involvement in post-disaster compensation is not going away, the reinsurance industry has an important and innovative role to play to encourage the development and growth of the primary catastrophe insurance market.

Reinsurance capacity can be pooled to support the development of local catastrophe insurance markets

Primary insurers are always highly reluctant to offer catastrophe risk insurance products to consumers without unlimited reinsurance coverage. However, this is hard to find because of the initial small scale of such catastrophe insurance pilots, potentially high concentration of risk in the early stage of portfolio building and uncertain premium growth prospects. So how can these challenges be resolved?

One solution is for reinsurance capacity to be pooled to support the development of local insurance markets. The U.S. private flood insurance market, for instance, could be a great testing ground for such a concept whereby large reinsurers would provide earmarked guaranteed reinsurance capacity to any primary insurer that agrees to sell a preapproved (by a panel of reinsurers) flood insurance product at a minimum technical price. Such an approach will go a long way toward considerably raising the level of catastrophe insurance coverage provided by the reinsurance market without waiting for notoriously difficult shifts in government disaster compensation policy.

 


Efficiency breeds value

Insurers must harness data, technology and human capital if they are to operate more efficiently and profitably in the current environment, but as AXIS Capital’s Albert Benchimol tells EXPOSURE, offering better value to clients may be a better long-term motive for becoming more efficient.

Efficiency is a top priority for insurers the world over as they bid to increase margins, reduce costs and protect profitability in the competitive heat of the enduring soft market. But according to AXIS Capital president and CEO Albert Benchimol, there is a broader, more important and longer-term challenge that must also be addressed through the ongoing efficiency drive: value for money.

“When I think of value, I think of helping our clients and partners succeed in their own endeavors. This means providing quick and responsive service, creative policy structures that address our customers’ coverage needs, best-in-class claims handling and trusting our people to pursue their own entrepreneurial goals,” says Benchimol.

“While any one insurance policy may in itself offer good value, when aggregated, insurance is not necessarily seen as good value by clients. Our industry as a whole needs to deliver a better value proposition — and that means that all participants in the value chain will need to become much more efficient.”

According to Benchimol — who prior to being appointed CEO of AXIS in 2012 served as the Bermuda-based insurance group’s CFO and also held senior executive positions at Partner Re, Reliance Group and Bank of Montreal — the days of paying out US$0.55-$0.60 in claims for every dollar of premium paid are over.

“We need to start framing our challenge as delivering a 70 percent-plus loss ratio within a low 90s combined ratio,” he asserts. “Every player in the value chain needs to adopt efficiency-enhancing technology to lower our costs and pass those savings on to the customer.”

With a surfeit of capital making it unlikely the insurance industry will return to its traditional cyclical nature any time soon, Benchimol says these changes have to be adopted for the long term.

“Insurers have to evaluate their portfolios and product offerings to match customer needs with marketplace realities. We will need to develop new products to meet emerging demand; offer better value in the eyes of insureds; apply data, analytics and technology to all facets of our business; and become much more efficient,” he explains.

Embracing technology

The continued adoption and smarter use of data will be central to achieving this goal. “We’ve only begun to scratch the surface of what data we can access and insights we can leverage to make better, faster decisions throughout the risk transfer value chain,” Benchimol says.

“If we use technology to better align our operations and costs with our customers’ needs and expectations, we will create and open-up new markets because potential insureds will see more value in the insurance product.”

“I admire companies that constantly challenge themselves and that are driven by data to make informed decisions — companies that don’t rest on their laurels and don’t accept the status quo”

Technology, data and analytics have already brought improved efficiencies to the insurance market. This has allowed insurers to focus their efforts on targeted markets and develop applications to deliver improved, customized purchasing experiences and increase client satisfaction and engagement, Benchimol notes.

The introduction of data modeling, he adds, has also played a key role in improving economic protection, making it easier for (re)insurance providers to evaluate risks and enter new markets, thereby increasing the amount of capacity available to protect insureds.

“While this can sometimes raise pricing pressures, it has a positive benefit of bringing more affordable capacity to potential customers. This has been most pronounced in the development of catastrophe models in underinsured emerging markets, where capital hasn’t always been available in the past,” he says.

The introduction of models made these markets more attractive to capital providers which, in turn, makes developing custom insurance products more cost-effective and affordable for both insurers and their clients, Benchimol explains.

However, there is no doubt the insurance industry has more to do if it is not only to improve its own profitability and offerings to customers, but also to stave off competition from external threats, such as disruptive innovators in the FinTech and InsurTech spheres.

Strategic evolution

“The industry’s inefficiencies and generally low level of customer satisfaction make it relatively easy prey for disruption,” Benchimol admits. However, he believes that the regulated and highly capital-intensive nature of insurance is such that established domain leaders will continue to thrive if they are prepared to beat innovators at their own game. “We need to move relatively quickly, as laggards may have a difficult time catching up,” he warns.

“In order to thrive in the disruptive market economy, market leaders must take intelligent risks. This isn’t easy, but is absolutely necessary,” Benchimol says. “I admire companies that constantly challenge themselves and that are driven by data to make informed decisions — companies that don’t rest on their laurels and don’t accept the status quo.”

“We need to start framing our challenge as delivering a 70-percent plus loss ratio within a low 90s combined ratio”

Against the backdrop of a rapidly evolving market and transformed business environment, AXIS took stock of its business at the start of 2016, evaluating its key strengths and reflecting on the opportunities and challenges in its path. What followed was an important strategic evolution.

“Over the course of the year we implemented a series of strategic initiatives across the business to drive long-term growth and ensure we deliver the most value to our clients, employees and shareholders,” Benchimol says.

“This led us to sharpen our focus on specialty risk, where we believe we have particular expertise. We implemented new initiatives to even further enhance the quality of our underwriting. We invested more in our data and analytics capabilities, expanded the focus in key markets where we feel we have the greatest relevance, and took action to acquire firms that allow us to expand our leadership in specialty insurance, such as our acquisition of specialty aviation insurer and reinsurer Aviabel and our recent offer to acquire Novae.”

Another highlight for AXIS in 2016 was the launch of Harrington Re, co-founded with the Blackstone Group. “At AXIS, our focus on innovation also extends to how we look at alternative funding sources and our relationship with third-party capital, which centers on matching the right risk with the right capital,” Benchimol explains. “We currently have a number of alternative capital sources that complement our balance sheet and enable us to deliver enhanced capacity and tailored solutions to our clients and brokers.”

Benchimol believes a significant competitive advantage for AXIS is that it is still
small enough to be agile and responsive to customers’ needs, yet large enough to take advantage of its global capabilities and resources in order to help clients manage their risks. But like many of his competitors, Benchimol knows future success will be heavily reliant on how well AXIS melds human expertise with the use of data and technology.

“We need to combine our ingenuity, innovation and values with the strength, speed and intelligence offered by technology, data and analytics. The ability to combine these two great forces — the art and science of insurance — is what will define the insurer of the future,” Benchimol states.

The key, he believes, is to empower staff to make informed, data-driven decisions. “The human elements that are critical to success in the insurance industry are, among others: knowledge, creativity, service and commitment to our clients and partners. We need to operate within a framework that utilizes technology to provide a more efficient customer experience and is underpinned by enhanced data and analytics capabilities that allow us to make informed, intelligent decisions on behalf of our clients.”

However, Benchimol insists insurers must embrace change while holding on to the traditional principles that underpinned insurance in the analog age, as these same principles must continue to do so into the future.

“We must harness technology for good causes, while remaining true to the core values and universal strengths of our industry — a passion for helping people when they are down, a creativity in structuring products, and the commitment to keeping the promise we make to our clients to help them mitigate risks and ensure the security of their assets,” he says. “We must not forget these critical elements that comprise the heart of the insurance industry.”

 

 


What one thing would help... (re)insurers get closer to the original risk?

In each edition of EXPOSURE we ask three experts for their opinion on how they would tackle a major risk and insurance challenge. This issue, we consider how (re)insurers can gain more insight into the original risk, and in so doing, remove frictional costs. As our experts Kieran Angelini-Hurll, Will Curran and Luzi Hitz note, more insight does not necessarily mean disintermediation.


Kieran Angelini-Hurll

CEO, Reinsurance at Ed

The reduction of frictional costs would certainly help. At present, there are too many frictional costs between the reinsurer and the original risk. The limited amount of data available to reinsurers on the original risks is also preventing them from getting a clear picture. A combination of new technology and a new approach from brokers can change this.

First, the technology. A trading platform which reduces frictional costs by driving down overheads will bridge the gap between reinsurance capital and the insured. However, this platform can only work if it provides the data which will allow reinsurers to better understand this risk. Arguably, the development of such a platform could be achieved by any broker with the requisite size, relevance and understanding of reinsurers’ appetites.

Brokers reluctant to share data will watch their business migrate to more disruptive players

However, for most, their business models do not allow for it. Their size stymies innovation and they have become dependent on income derived from the sale of data, market-derived income and ‘facilitization’. These costs prevent reinsurers from getting closer to the risk. They are also unsustainable, a fact that technology will prove. A trading platform which has the potential to reduce costs for all parties, streamline the throughput of data, and make this information readily and freely available could profoundly alter the market.

Brokers that continue to add costs and maintain their reluctance to share data will be forced to evolve or watch their business migrate to leaner, more disruptive players. Brokers which are committed to marrying reinsurance capital with risk, regardless of its location and that deploy technology, can help overcome the barriers put in place by current market practices and bring reinsurers closer to the original risk.


Will Curran

Head of Reinsurance, Tokio Marine Kiln, London

More and more, our customers are looking to us as their risk partners, with the expectation that we will offer far more than a transactional risk transfer product. They are looking for pre-loss services, risk advisory and engineering services, modeling and analytical capabilities and access to our network of external experts, in addition to more traditional risk transfer. As a result of offering these capabilities, we are getting closer to the original risk, through our discussions with cedants and brokers, and our specialist approach to underwriting.

Traditional carriers are able to differentiate by going beyond vanilla risk transfer

The long-term success of reinsurers needs to be built on offering more than being purely a transactional player. To a large extent, this has been driven by the influx of non-traditional capital into the sector. Whereas these alternative property catastrophe reinsurance providers are offering a purely transactional product, often using parametric or industry-loss triggers to simplify the claims process in their favor, traditional carriers are able to differentiate by going beyond vanilla risk transfer.

Demand for risk advice and pre-loss services are particularly high within specialist and emerging risk classes of business. Cyber is a perfect example of this, where we work closely with our corporate and insurance clients to help them improve their resilience to cyber-attack and to plan their response in the event of a breach.

Going forward, successful reinsurance companies will be those that invest time and resources in becoming true risk partners. In an interconnected and increasingly complex world, where there is a growing list of underinsured exposures, risk financing is just one among many service offerings in the toolkit of specialist reinsurers.


Luzi Hitz

CEO, PERILS AG

The nature of reinsurance means the reinsurer is inherently further away from the underlying risk than most other links in the value chain. The risk is introduced by the original insured, and is transferred into the primary market before reaching the reinsurer – a process normally facilitated by reinsurance intermediaries.

I am wary of efforts to shortcut or circumvent this established multi-link chain to reduce the distance between reinsurer and the underlying risk. The reinsurer in many cases lacks the granular insight found earlier in the process required to access the risk directly.

What we need is a more cooperative relationship between reinsurer and insurer in developing risk transfer products. Too often the reinsurers act purely as capital providers in the chain and from the source risk, viewing it almost as an abstract concept within the overall portfolio.

The focus should be on how to bring all parties to the risk closer together

By collaborating on the development of insurance products, not only will it help create greater alignment of interest based on a better understanding of the risk relationship, but also prove beneficial to the entire insurance food chain. It will make the process more efficient and cost effective, and hopefully see the risk owners securing the protection they want. In addition, it is much more likely to stimulate product innovation and growth, which is badly needed in many mature markets.

The focus in my opinion should not be on how to bring the reinsurer closer to the risk, but rather on how to bring all parties to the risk closer together. What I am saying is not new, and it is certainly something which many larger reinsurers have been striving to achieve for years. And while there is evidence of this more collaborative approach between insurers and reinsurers gaining traction, there is still a very long way to go.


 


In case you missed it

RMS sits at the intersection of technology, science and domain experience, giving us a unique perspective on what’s going on in the world of tech, modeling, and computing. “In Case You Missed It” is our round-up of the latest developments from Silicon Valley to Bangalore that EXPOSURE doesn’t want you to miss. In this edition, Farhana Alarakhiya, vice president of products at RMS, picks her top three headlines.

01. Show your agility

Startups are bold. Disruption comes from their agile use of data. Data analytics is the first tool they use to assess the market, to pick out gaps and niches they can enter, learn and serve better. Their survival and success depends on insight that they can act on. And established players can learn a great deal from their approach to the market. In our discussions with clients, it is clear that agile and effective data use are prime drivers for innovation. So, I was interested to hear about a recent startup, profiled in Insurance Age.

Data-savvy language runs through an interview with Phoebe Hugh, CEO and co-founder of Brolly, which offers a smartphone-driven, free personal insurance concierge. She states that “a single view of the customer is unattainable by most insurers and brokers due to technology constraints.” She also warns intermediaries that “unless they evolve their proposition and differentiate themselves, they’re in real danger of being completely cut out of the process.” This is just one startup.  Incumbents can do this, and need to start exploring solutions that can help allow ‘startup’ thinking to gain data agility and break down technological constraints.

02. AI is the new UI

According to the “Technology Vision for Insurance 2017” report from Accenture, 75 percent of insurance executives believe artificial intelligence (AI) will transform or bring significant change to the industry over the next three years. Moving from buzzword territory into the business environment, 85 percent of executives say they will invest extensively in AI-related technologies over the next three years.

Everyone has bought into AI, but what will it do for the industry? AI all starts with analytics — big data that is addressable and accessible — then it requires analysis of the metrics that matter to you and your customer. AI and machine learning help you crunch data faster and pick up relevant patterns, predictive patterns. AI then comes into play, using your data analysis to provide cognitive muscle at scale to answer questions in real-time. Startup Tyche uses machine learning on casualty risk data to predict the riskiest 1 percent of policies that could account for 30 percent of claims.

But to bring AI to life, Accenture states that businesses must redesign their systems for analytics. Quality data is essential for AI as it continuously learns how data interactions should evolve, requiring connections between systems, interfaces and different points of interaction.

03. 2018 and GDPR

A compliance deadline looms on the horizon as the EU General Data Protection Regulation (GDPR) comes into force on May 25, 2018, replacing the already stringent privacy laws under the EU Data Protection Directive, which dates back to 1995. GDPR affects anyone involved with storing, controlling or processing data about EU residents, whether the organization operates inside or outside of the EU. Among other things, it requires organizations to report data breaches in a timely fashion and imposes fines of up to 4 percent of global turnover for failing to comply.

Insurers need to establish whether the data they hold is personally identifiable, which could lead to the identity of a single person. As with all compliance issues, avoiding the issue is not an option. As a recent KPMG white paper entitled “Ready for GDPR?” noted, the first step is to define your organization’s data privacy strategy, establish your preparedness and get your action plan in place.

There is a real opportunity for organizations to demonstrate how they respect the privacy of individuals — and in so doing, gain a competitive edge. Cloud service providers are ahead of the game. Microsoft, for instance, offers solutions to identify what data you have and then control who has access to it.

 


What one thing would help... close the protection gap?

In each edition of EXPOSURE, we ask three experts their opinion on how they would tackle a major risk and insurance challenge. This issue, we consider the protection gap, which can be defined as the gap between insured and economic losses in a particular region and/or type of exposure. As our experts John Seo, Kate Stillwell and Evan Glassman note, protection gaps are not just isolated to the developing world or catastrophe classes of business.


John Seo

Co-founder and managing principal of Fermat Capital

The protection gap is often created by the terms of the existing insurance itself, and hence, it could be closed by designing new, parametric products. Flood risk is excluded or sub-limited severely in traditional insurance coverage, for instance. So the insurance industry says “we cover flood”, but they don’t cover it adequately and are heavily guarded in the way they cover it.

A great example in the public domain was in 2015 in the Southern District Court of New York with New York University (NYU) versus FM Global. NYU filed a claim for $1.45 billion in losses from Hurricane Sandy to FM Global and FM Global paid $40 million. FM Global’s contention was that it was a flood clause in NYU’s coverage that was triggered, and because it was a flood event in essence their coverage was limited to $40 million.

Ten to 20 years down the line... we might find that we’re actually naked on cyber

Ostensibly on the surface NYU had $1.85 billion in coverage, but when it came to a flood event they really only had $40 million. So the protection gap is not just because there’s absolutely no insurance coverage for these types of perils and risks in these geographies and locations, but because the terms of protection are severely sub-limited. And I would claim that’s the case for cyber risk for sure.

The industry is very enthusiastic about its growth, but I can see, 10 to 20 years down the line, with a significant national event on cyber that we might find that we’re actually naked on cyber, as NYU discovered with Sandy. You could have a Fortune 50 company in the U.S. thinking they have $1 billion of cyber coverage, and they’re going to have an event that threatens their existence... but they’ll get a check for $50 million in the post.


Kate Stillwell

Founder and CEO of Jumpstart Recovery

My absolute fundamental goal is to get twice as many people covered for earthquake in California. That doesn’t mean they’re going to have the same kind of earthquake insurance product that’s available now. What they will have is a  product which doesn’t fill the whole gap but does achieve the goal of immediate economic stimulus, and that creates a virtuous circle that gets other investment coming in.

I wouldn’t have founded Jumpstart if I didn’t believe that a lump-sum earthquake-triggered cover for homeowners and renters wouldn’t help to build resilience... and building resilience fundamentally means filling the protection gap. I am absolutely motivated to ensure that people who are impacted by natural catastrophes have financial protection and can recover from losses quickly.

Developing resources and financial products that tap into human optimism can fill this gap

And in my mind, if I had to choose only one thing to help close the protection gap, it would be to align the products (and the resources) that are available with human psychology. Human beings are not wired to process and consider low-probability, high-consequence catastrophe events.

But if we can develop resources and financial products that tap into human optimism then potentially we can fill this protection gap. Providing a bit of money to jumpstart the post-earthquake recovery process will help to transform consumer thinking around earthquakes from, ‘this is a really bad peril and I don’t want to think about it’ into, ‘it won’t be so bad because I will have a little bit of resource to bounce back’.


Evan Glassman

President and CEO, New Paradigm Underwriters 

There’s a big disconnect between the insured loss and economic loss when it comes to natural catastrophes such as U.S. windstorm and earthquake. From our perspective, parametric insurance becoming more mainstream and a common and widely-adapted vehicle to work alongside traditional insurance would help to close the protection gap.

The insurance industry overall does a good job of providing an affordable large limit layer of indemnity protection. But the industry is only able to do that, and not go out of business after every event, as a result of attaching after a significant buffer layer of the most likely losses.

Parametric insurance is designed to work in conjunction with traditional insurance to cover that gap. The tranche of deductibles in tier one wind-zones from the Gulf Coast to the Northeast has been estimated at $400 billion by RMS… and that’s just the deductible tranche.

Parametric insurance is designed to work with traditional insurance to cover the gap

The parametric insurance space is growing but it hasn’t reached a critical mass yet where it’s a mainstream, widely-accepted practice, much like when people buy a property policy, they buy a liability policy and they buy a parametric policy. We’re working towards that and once the market gets there the protection gap will become a lot smaller. It’s good for society and it’s a significant opportunity for the industry as it’s a very big, and currently very underserved market.

This model does have the potential to be used in underdeveloped insurance markets. However, I am aware there are certain areas where there are not yet established models that can provide the analytics for reinsurers and capital markets to be able to quantify and charge the appropriate price for the exposure.


People and public places increasingly in the firing line

The attempted machete attack on the Louvre Museum in Paris on February 2 is indicative of the changing terrorism threat environment.

Attacks carried out by lone individuals targeting civilians with guns, knives and even trucks – as was the case in Nice and the Berlin Christmas market attacks – are on the rise in OECD countries. Seventy percent of all deaths from terrorism in the West since 2006 have been perpetrated by lone actors, according to the Global Terrorism Index.

This is in large part a result of significant improvements in counterterrorism and surveillance, which has increased the likelihood of complex plots being intercepted, explains Gordon Woo, catastrophist at RMS. The mass surveillance, which was made known to the public by NSA whistleblower Edward Snowden in 2013, has helped to foil a significant number of major plots.

This includes the 2006 liquid bomb plot, which could have surpassed 9/11 in impact if it had fallen through the cracks, thinks Woo. “Within the Five Eyes Alliance, all the major plots since 9/11 – those involving over half a dozen operatives – have been stopped. This would not have been possible without intensive surveillance.”

Because of high per capita spending on counterterrorism in many other countries, would-be attackers have followed the path of least resistance in their choice of weaponry and mode of attack, he explains. “Since 9/11, it’s become harder to get hold of fertilizer to make bombs, so terrorists have shifted attack mode from chemical energy through bombs and explosives to, for instance, kinetic energy stored up in moving vehicles. A 40-ton truck travelling at 30mph (as was the case in Berlin) can cause as much damage as a bomb.”

The property losses arising from lone actors with guns or knives, or marauding firearms attacks that focus on soft targets, are significantly less than those involving improvised explosive devices (IEDs). However, businesses are exposed in other ways. This includes the threat to their staff and potential business interruption losses.

In France, the GDP contribution from tourism fell by US$1.7 billion between 2014 and 2015 following the January 7, 2015 Charlie Hebdo shooting and November 2015 Paris attacks. “All the terrorism carriers and pools are trying to become more relevant and looking at what cover they can provide for business interruption or some kind of restriction on business because of damage to infrastructure,” explains Woo.

“Direct economic loss, such as from property damage, may be minor compared with the indirect economic drain from interruption to tourism and other businesses,” he continues. “Measures to improve resilience against indirect economic losses from terrorism require new insurance solutions.”

While smaller attacks focused on soft targets remain the most likely form of terrorism risk, the threat of a major, complex attack has not disappeared. Groups such as ISIL and AQAP (Al-Qaeda in the Arabian Peninsula) seek to inspire and radicalize lone attackers but maintain their goal of waging “spectaculars” against Western countries.

The return of experienced foreign fighters from Iraq and Syria could prove a significant challenge for security agencies and governments, noted the UK’s Pool Re in its 2017 terrorism outlook. It also anticipates ISIL’s so-called Caliphate will become more “virtual” as it continues to make use of the Internet and social media to influence and gain access to sympathetic individuals.


A different distribution of risk

RMS’s latest medium-term rate (MTR) forecast for North Atlantic hurricane activity in the next five years dipped just below the long-term rate across the U.S. – the first time since RMS introduced the MTR in 2006. This key insight into changing hurricane activity has important business impacts for (re)insurers.

“From a pricing perspective, I would expect the MTR to give insurers food for thought, particularly given the market-wide decline in hurricane risk pricing in recent years,” Tom Sabbatelli (pictured), senior product manager in the RMS hurricane modeling team, explains. “But it also might impact on regional reinsurance buying activity – buyers might want to factor these findings into their purchasing strategies for the northeast U.S.”

The change to the forecast has been brought about by a combination of warm North Atlantic sea-surface temperatures (SSTs) and the steering force of atmospheric pressure systems which are driving an above average risk of hurricane activity along the northeast U.S. and maritime Canada.

Comparison of MTR to long-term. Blue areas show medium-term hurricane risk below long-term average in eastern and southern U.S. Yellow areas show risk above long-term average.

“Above average Atlantic SSTs are expanding the area over which hurricanes can develop and intensify,” explains Sabbatelli. “They are also shifting that zone further east towards Africa, and by so doing extending the period that hurricanes can harvest the warm-water energy needed to intensify.” This eastward shift, in evidence in the MTR forecasts for the last five years, is also heightening the directional influence of high pressure areas such as the Bermuda High.

“These atmospheric conditions and SSTs,” he continues, “are creating a geographical corridor that is funneling a greater number of hurricanes between the U.S. eastern seaboard and Bermuda.”

This steering effect was evident in the storm tracks of Hurricane Irene in 2011, which barreled through the Caribbean and up the U.S. east coast, and Superstorm Sandy in 2012, which tracked along the northeast coastline. Bermuda is also taking the brunt of this shift, with hurricane activity well above average in recent years.

“It’s creating a distribution of risk different to what we have seen in previous inactive hurricane periods,” he says, “with above average risk for the U.S. northeast, and below average for hurricane-prone regions such as Florida and Texas.” While, of course, in absolute terms these hurricane hotspots remain much more highly-exposed than the northeast, (re) insurers should take note of the shifting regional contributions.


Validating the numbers 

The MTR forecast is based on the combined outputs of 13 statistical models spanning SSTs models, ‘shift’ models that identify periods of high and low activity in historic data, and ‘active baseline’ models that recognize the distorting influence of aerosol gases on hurricane activity in the 1970s and 1980s. Creating ‘what-if’ 5-year storm forecasts from 1970 to 2016 and comparing results with actual observations, the MTR forecasts have outperformed long-term rate forecasts on 75 percent of occasions.