logo image
More Topics

Reset Filters

Helen Yates
May 20, 2019
The Future of Risk Management

(Re)insuring new and emerging risks requires data and, ideally, a historical loss record upon which to manage an exposure. But what does the future of risk management look like when so many of these exposures are intangible or unexpected?  Sudden and dramatic breakdowns become more likely in a highly interconnected and increasingly polarized world, warns the “Global Risks Report 2019” from the World Economic Forum (WEF). “Firms should focus as much on risk response as on risk mitigation,” advises John Drzik, president of global risk and digital at Marsh, one of the report sponsors. “There’s an inevitability to having a certain number of shock events, and firms should focus on how to respond to fast-moving events with a high degree of uncertainty.” Macrotrends such as climate change, urbanization and digitization are all combining in a way that makes major claims more impactful when things go wrong. But are all low-probability/high-consequence events truly beyond our ability to identify and manage? Dr. Gordon Woo, catastrophist at RMS, believes that in an age of big data and advanced analytics, information is available that can help corporates, insurers and reinsurers to understand the plethora of new and emerging risks they face. “The sources of emerging risk insight are out there,” says Woo. “The challenge is understanding the significance of the information available and ensuring it is used to inform decision-makers.” However, it is not always possible to gain access to the insight needed. “Some of the near-miss data regarding new software and designs may be available online,” says Woo. “For example, with the Boeing 737 Max 8, there were postings by pilots where control problems were discussed prior to the Lion Air disaster of October 2018. Equally, intelligence information on terrorist plots may be available from online terrorist chatter. But typically, it is much harder for individuals to access this information, other than security agencies. “Peter Drucker [consultant and author] was right when he said: ‘If you can’t measure it, you can’t improve it,’” he adds. “And this is the issue for (re)insurers when it comes to emerging risks. There is currently not a lot of standardization between risk compliance systems and the way the information is gathered, and corporations are still very reluctant to give information away to insurers.” The Intangibles Protection Gap While traditional physical risks, such as fire and flood, are well understood, well modeled and widely insured, new and emerging risks facing businesses and communities are increasingly intangible and risk transfer solutions are less widely available. While there is an important upside to many technological innovations, for example, there are also downsides that are not yet fully understood or even recognized, thinks Robert Muir-Wood, chief research officer of science and technology at RMS. “Last year’s Typhoon Jebi caused coastal flooding in the Kansai region of Japan,” he says. “There were a lot of cars on the quayside close to where the storm made landfall and many of these just caught on fire. It burnt out a large number of cars that were heading for export. “The reason for the fires was the improved capability of batteries in cars,” he explains. “And when these batteries are immersed in water they burst into flames. So, with this technology you’ve created a whole new peril. There is currently not a lot of standardization between risk compliance systems and the way the information is gathered Gordon Woo RMS “As new technology emerges, new risks emerge,” he concludes. “And it’s not as though the old risks go away. They sort of morph and they always will. Clearly the more that software becomes a critical part of how things function, then there is more of an opportunity for things to go wrong.” From nonphysical-damage business interruption and reputational harm to the theft of intellectual property and a cyber data breach, the ability for underwriters to get a handle on these risks and potential losses is one of the industry’s biggest modern-day challenges. The dearth of products and services for esoteric commercial risks is known as the “intangibles protection gap,” explains Muir-Wood. “There is this question within the whole span of risk management of organizations — of which an increasing amount is intangible — whether they will be able to buy insurance for those elements of their risk that they feel they do not have control over.” While the (re)insurance industry is responding with new products and services geared toward emerging risks, such as cyber, there are some organizational perils, such as reputational risk, that are best addressed by instilling the right risk management culture and setting the tone from the top within organizations, thinks Wayne Ratcliffe, head of risk management at SCOR. “Enterprise risk management is about taking a holistic view of the company and having multidisciplinary teams brainstorming together,” he says. “It’s a tendency of human nature to work in silos in which everyone has their own domain to protect and to work on, but working across an organization is the only way to carry out proper risk management. “There are many causes and consequences of reputational risk, for instance,” he continues. “When I think of past examples where things have gone horribly wrong — and there are so many of them, from Deepwater Horizon to Enron — in certain cases there were questionable ethics and a failure in risk management culture. Companies have to set the tone at the top and then ensure it has spread across the whole organization. This requires constant checking and vigilance.” The best way of checking that risk management procedures are being adhered to is by being really close to the ground, thinks Ratcliffe. “We’re moving too far into a world of emails and communication by Skype. What people need to be doing is talking to each other in person and cross-checking facts. Human contact is essential to understanding the risk.” Spotting the Next “Black Swan” What of future black swans? As per Donald Rumsfeld’s “unknown unknowns,” so called black swan events are typically those that come from left field. They take everyone by surprise (although are often explained away in hindsight) and have an impact that cascades through economic, political and social systems in ways that were previously unimagined, with severe and widespread consequences. “As (re)insurers we can look at past data, but you have to be aware of the trends and forces at play,” thinks Ratcliffe. “You have to be aware of the source of the risk. In ‘The Big Short’ by Michael Lewis, the only person who really understood the impending subprime collapse was the one who went house-to-house asking people if they were having trouble paying their mortgages, which they were. New technologies are creating more opportunities but they’re also making society more vulnerable to sophisticated cyberattacks Wayne Ratcliffe SCOR “Sometimes you need to go out of the bounds of data analytics into a more intuition-based way of picking up signals where there is no data,” he continues. “You need imagination and to come up with scenarios that can happen based on a group of experts talking together and debating how exposures can connect and interconnect. “It’s a little dangerous to base everything on big data measurement and statistics, and at SCOR we talk about the ‘art and science of risk,’” he continues. “And science is more than statistics. We often need hard science behind what we are measuring. A single-point estimate of the measure is not sufficient. We also need confidence intervals corresponding to a range of probabilities.” In its “Global Risks Report 2019,” the WEF examines a series of “what-if” future shocks and asks if its scenarios, while not predictions, are at least “a reminder of the need to think creatively about risk and to expect the unexpected?” The WEF believes future shocks could come about as a result of advances in technology, the depletion of global resources and other major macrotrends clashing in new and extreme ways. “The world is becoming hyperconnected,” says Ratcliffe. “People are becoming more dependent on social media, which is even shaping political decisions, and organizations are increasingly connected via technology and the internet of things. New technologies are creating more opportunities but they’re also making society more vulnerable to sophisticated cyberattacks. We have to think about the systemic nature of it all.” As governments are pressured to manage the effects of climate change, for instance, will the use of weather manipulation tools — such as cloud seeding to induce or suppress rainfall — result in geopolitical conflict? Could biometrics and AI that recognize and respond to emotions be used to further polarize and/or control society? And will quantum computing render digital cryptography obsolete, leaving sensitive data exposed? The risk of cyberattack was the No. 1 risk identified by business leaders in virtually all advanced economies in the WEF’s “Global Risks Report 2019,” with concern about both data breach and direct attacks on company infrastructure causing business interruption. The report found that cyberattacks continue to pose a risk to critical infrastructure, noting the attack in July 2018 that compromised many U.S. power suppliers. In the attack, state-backed Russian hackers gained remote access to utility- company control rooms in order to carry out reconnaissance. However, in a more extreme scenario the attackers were in a position to trigger widespread blackouts across the U.S., according to the Department of Homeland Security. Woo points to a cyberattack that impacted Norsk Hydro, the company that was responsible for a massive bauxite spill at an aluminum plant in Brazil last year, with a targeted strain of ransomware known as “LockerGoga.” With an apparent motivation to wreak revenge for the environmental damage caused, hackers gained access to the company’s IT infrastructure, including the control systems at its aluminum smelting plants. He thinks a similar type of attack by state-sponsored actors could cause significantly greater disruption if the attackers’ motivation was simply to cause damage to industrial control systems. Woo thinks cyber risk has significant potential to cause a major global shock due to the interconnected nature of global IT systems. “WannaCry was probably the closest we’ve come to a cyber 911,” he explains. “If the malware had been released earlier, say January 2017 before the vulnerability was patched, losses would have been a magnitude higher as the malware would have spread like measles as there was no herd immunity. The release of a really dangerous cyber weapon with the right timing could be extremely powerful.”

Helen Yates
May 20, 2019
Opening Pandora's Box

With each new stride in hazard research and science comes the ability to better calculate and differentiate risk  Efforts by RMS scientists and engineers to better understand liquefaction vulnerability is shedding new light on the secondary earthquake hazard. However, this also makes it more likely that, unless they can charge for the risk, (re)insurance appetite will diminish for some locations while also increasing in other areas. A more differentiated approach to underwriting and pricing is an inevitable consequence of investment in academic research. Once something has been learned, it cannot be unlearned, explains Robert Muir-Wood, chief research officer at RMS. “In the old days, everybody paid the same for insurance because no one had the means to actually determine how risk varied from location to location, but once you learn how to differentiate risk well, there’s just no going back. It’s like Pandora’s box has been opened. “There are two general types of liquefaction that are just so severe that no one should build on them” Tim Ancheta RMS “At RMS we are neutral on risk,” he adds. “It’s our job to work for all parties and provide the best neutral science-based perspective on risk, whether that’s around climate change in California or earthquake risk in New Zealand. And we and our clients believe that by having the best science-based assessment of risk they can make effective decisions about their risk management.” Spotting a Gap in the Science On September 28, 2018, a large and shallow M7.5 earthquake struck Central Sulawesi, Indonesia, triggering a tsunami over 2 meters in height. The shaking and tsunami caused widespread devastation in and around the provincial capital Palu, but according to a report published by the GEER Association, it was liquefaction and landslides that caused thousands of buildings to collapse in a catastrophe that claimed over 4,000 lives. It was the latest example of a major earthquake that showed that liquefaction — where the ground moves and behaves as if it is a liquid — can be a much bigger driver of loss than previously thought. The Tōhoku Earthquake in Japan during 2011 and the New Zealand earthquakes in Christchurch in 2010 and 2011 were other high-profile examples. The earthquakes in New Zealand caused a combined insurance industry loss of US$22.8-US$26.2 billion, with widespread liquefaction undermining the structural integrity of hundreds of buildings. Liquefaction has been identified by a local engineer as causing 50 percent of the loss. Now, research carried out by RMS scientists is helping insurers and other stakeholders to better understand the impact that liquefaction can have on earthquake-related losses. It is also helping to pinpoint other parts of the world that are highly vulnerable to liquefaction following earthquake. “Before Christchurch we had not appreciated that you could have a situation where a midrise building may be completely undamaged by the earthquake shaking, but the liquefaction means that the building has suffered differential settlement leaving the floors with a slight tilt, sufficient to be declared a 100 percent loss,” explains Muir-Wood. “We realized for the first time that you actually have to model the damage separately,” he continues. “Liquefaction is completely separate to the damage caused by shaking. But in the past we treated them as much of the same. Separating out the hazards has big implications for how we go about modeling the risk, or identifying other situations where you are likely to have extreme liquefaction at some point in the future.” The Missing Link Tim Ancheta, a risk modeler for RMS based in Newark, California, is responsible for developing much of the understanding about the interaction between groundwater depth and liquefaction. Using data from the 2011 earthquake in Christchurch and boring data from numerous sites across California to calculate groundwater depth, he has been able to identify sites that are particularly prone to liquefaction. “I was hired specifically for evaluating liquefaction and trying to develop a model,” he explains. “That was one of the key goals for my position. Before I joined RMS about seven years back, I was a post-doctoral researcher at PEER — the Pacific Earthquake Engineering Research Center at Berkeley — working on ground motion research. And my doctoral thesis was on the spatial variability of ground motions.” Joining RMS soon after the earthquakes in Christchurch had occurred meant that Ancheta had access to a wealth of new data on the behavior of liquefaction. For the first time, it showed the significance of ground- water depth in determining where the hazard was likely to occur. Research, funded by the New Zealand government, included a survey of liquefaction observations, satellite imagery, a time series of groundwater levels as well as the building responses. It also included data collected from around 30,000 borings. “All that had never existed on such a scale before,” says Ancheta. “And the critical factor here was they investigated both liquefaction sites and non-liquefaction sites — prior surveys had only focused on the liquefaction sites.” Whereas the influence of soil type on liquefaction had been reasonably well understood prior to his research, previous studies had not adequately incorporated groundwater depth. “The key finding was that if you don’t have a clear understanding of where the groundwater is shallow or where it is deep, or the transition — which is important — where you go from a shallow to deep groundwater depth, you can’t turn on and off the liquefaction properly when an earthquake happens,” reveals Ancheta. Ancheta and his team have gone on to collect and digitize groundwater data, geology and boring data in California, Japan, Taiwan and India with a view to gaining a granular understanding of where liquefaction is most likely to occur. “Many researchers have said that liquefaction properties are not regionally dependent, so that if you know the geologic age or types of soils, then you know approximately how susceptible soils can be to liquefaction. So an important step for us is to validate that claim,” he explains. The ability to use groundwater depth has been one of the factors in predicting potential losses that has significantly reduced uncertainty within the RMS suite of earthquake models, concentrating the losses in smaller areas rather than spreading them over an entire region. This has clear implications for (re)insurers and policymakers, particularly as they seek to determine whether there are any “no-go” areas within cities. “There are two general types of liquefaction that are just so severe that no one should build on them,” says Ancheta. “One is lateral spreading where the extensional strains are just too much for buildings. In New Zealand, lateral spreading was observed at numerous locations along the Avon River, for instance.” California is altogether more challenging, he explains. “If you think about all the rivers that flow through Los Angeles or the San Francisco Bay Area, you can try and model them in the same way as we did with the Avon River in Christchurch. We discovered that not all rivers have a similar lateral spreading on either side of the riverbank. Where the river courses have been reworked with armored slopes or concrete linings — essentially reinforcement — it can actually mitigate liquefaction-related displacements.” The second type of severe liquefaction is called “flow slides” triggered by liquefaction, which is where the soil behaves almost like a landslide. This was the type of liquefaction that occurred in Central Sulawesi when the village of Balaroa was entirely destroyed by rivers of soil, claiming entire neighborhoods. “It’s a type of liquefaction that is extremely rare,” he adds. “but they can cause tens to hundreds of meters of displacement, which is why they are so devastating. But it’s much harder to predict the soils that are going to be susceptible to them as well as you can for other types of liquefaction surface expressions.” Ancheta is cognizant of the fact that a no-build zone in a major urban area is likely to be highly contentious from the perspective of homeowners, insurers and policymakers, but insists that now the understanding is there, it should be acted upon. “The Pandora’s box for us in the Canterbury Earthquake Sequence was the fact that the research told us where the lateral spreading would occur,” he says. “We have five earthquakes that produced lateral spreading so we knew with some certainty where the lateral spreading would occur and where it wouldn’t occur. With severe lateral spreading you just have to demolish the buildings affected because they have been extended so much.”

ANTONY IRELAND
May 20, 2019
Underwriting With 20:20 Vision

Risk data delivered to underwriting platforms via application programming interfaces (API) is bringing granular exposure information and model insights to high-volume risks The insurance industry boasts some of the most sophisticated modeling capabilities in the world. And yet the average property underwriter does not have access to the kind of predictive tools that carriers use at a portfolio level to manage risk aggregation, streamline reinsurance buying and optimize capitalization. Detailed probabilistic models are employed on large and complex corporate and industrial portfolios. But underwriters of high-volume business are usually left to rate risks with only a partial view of the risk characteristics at individual locations, and without the help of models and other tools. “There is still an insufficient amount of data being gathered to enable the accurate assessment and pricing of risks [that] our industry has been covering for decades,” says Talbir Bains, founder and CEO of managing general agent (MGA) platform Volante Global. Access to insights from models used at the portfolio level would help underwriters make decisions faster and more accurately, improving everything from risk screening and selection to technical pricing. However, accessing this intellectual property (IP) has previously been difficult for higher-volume risks, where to be competitive there simply isn’t the time available to liaise with cat modeling teams to configure full model runs and build a sophisticated profile of the risk. Many insurers invest in modeling post-bind in order to understand risk aggregation in their portfolios, but Ross Franklin, senior director of data product management at RMS, suggests this is too late. “From an underwriting standpoint, that’s after the horse has bolted — that insight is needed upfront when you are deciding whether to write and at what price.” By not seeing the full picture, he explains, underwriters are often making decisions with a completely different view of risk from the portfolio managers in their own company. “Right now, there is a disconnect in the analytics used when risks are being underwritten and those used downstream as these same risks move through to the portfolio.” Cut off From the Insight Historically, underwriters have struggled to access complete information that would allow them to better understand the risk characteristics at individual locations. They must manually gather what risk information they can from various public- and private-sector sources. This helps them make broad assessments of catastrophe exposures, such as FEMA flood zone or distance to coast. These solutions often deliver data via web portals or spreadsheets and reports — not into the underwriting systems they use every day. There has been little innovation to increase the breadth, and more importantly, the usability of data at the point of underwriting. “Vulnerability is critical to accurate underwriting.  Hazard alone is not enough” Ross Franklin RMS “We have used risk data tools but they are too broad at the hazard level to be competitive — we need more detail,” notes one senior property underwriter, while another simply states: “When it comes to flood, honestly, we’re gambling.” Misaligned and incomplete information prevents accurate risk selection and pricing, leaving the insurer open to negative surprises when underwritten risks make their way onto the balance sheet. Yet very few data providers burrow down into granular detail on individual risks by identifying what material a property is made of, how many stories it is, when it was built and what it is used for, for instance, all of which can make a significant difference to the risk rating of that individual property. “Vulnerability is critical to accurate underwriting. Hazard alone is not enough. When you put building characteristics together with the hazard information, you form a deeper understanding of the vulnerability of a specific property to a particular hazard. For a given location, a five-story building built from reinforced concrete in the 1990s will naturally react very differently in a storm than a two-story wood-framed house built in 1964 — and yet current underwriting approaches often miss this distinction,” says Franklin. In response to demand for change, RMS developed a Location Intelligence application programming interface (API), which allows preformatted RMS risk information to be easily distributed from its cloud platform via the API into any third-party or in-house underwriting software. The technology gives underwriters access to key insights on their desktops, as well as informing fully automated risk screening and pricing algorithms. The API allows underwriters to systematically evaluate the profitability of submissions, triage referrals to cat modeling teams more efficiently and tailor decision-making based on individual property characteristics. It can also be overlaid with third-party risk information. “The emphasis of our latest product development has been to put rigorous cat peril risk analysis in the hands of users at the right points in the underwriting workflow,” says Franklin. “That’s a capability that doesn’t exist today on high-volume personal lines and SME business, for instance.” Historically, underwriters of high-volume business have relied on actuarial analysis to inform technical pricing and risk ratings. “This analysis is not usually backed up by probabilistic modeling of hazard or vulnerability and, for expediency, risks are grouped into broad classes. The result is a loss of risk specificity,” says Franklin. “As the data we are supplying derives from the same models that insurers use for their portfolio modeling, we are offering a fully connected-up, consistent view of risk across their property books, from inception through to reinsurance.” With additional layers of information at their disposal, underwriters can develop a more comprehensive risk profile for individual locations than before. “In the traditional insurance model, the bad risks are subsidized by the good — but that does not have to be the case. We can now use data to get a lot more specific and generate much deeper insights,” says Franklin. And if poor risks are screened out early, insurers can be much more precise when it comes to taking on and pricing new business that fits their risk appetite. Once risks are accepted, there should be much greater clarity on expected costs should a loss occur. The implications for profitability are clear. Harnessing Automation While improved data resolution should drive better loss ratios and underwriting performance, automation can attack the expense ratio by stripping out manual processes, says Franklin. “Insurers want to focus their expensive, scarce underwriting resources on the things they do best — making qualitative expert judgments on more complex risks.” This requires them to shift more decision-making to straight-through processing using sophisticated underwriting guidelines, driven by predictive data insight. Straight-through processing is already commonplace in personal lines and is expected to play a growing role in commercial property lines too. “Technology has a critical role to play in overcoming this data deficiency through greatly enhancing our ability to gather and analyze granular information, and then to feed that insight back into the underwriting process almost instantaneously to support better decision-making,” says Bains. “However, the infrastructure upon which much of the insurance model is built is in some instances decades old and making the fundamental changes required is a challenge.” Many insurers are already in the process of updating legacy IT systems, making it easier for underwriters to leverage information such as past policy information at the point of underwriting. But technology is only part of the solution. The quality and granularity of the data being input is also a critical factor. Are brokers collecting sufficient levels of data to help underwriters assess the risk effectively? That’s where Franklin hopes RMS can make a real difference. “For the cat element of risk, we have far more predictive, higher-quality data than most insurers use right now,” he says. “Insurers can now overlay that with other data they hold to give the underwriter a far more comprehensive view of the risk.” Bains thinks a cultural shift is needed across the entire insurance value chain when it comes to expectations of the quantity, quality and integrity of data. He calls on underwriters to demand more good quality data from their brokers, and for brokers to do the same of assureds. “Technology alone won’t enable that; the shift is reliant upon everyone in the chain recognizing what is required of them.”

Helen Yates
May 20, 2019
Living in a World of Constant Catastrophes

(Re)insurance companies are waking up to the reality that we are in a riskier world and the prospect of ‘constant catastrophes’ has arrived, with climate change a significant driver In his hotly anticipated annual letter to shareholders in February 2019, Warren Buffett, the CEO of Berkshire Hathaway and acclaimed “Oracle of Omaha,” warned about the prospect of “The Big One” — a major hurricane, earthquake or cyberattack that he predicted would “dwarf Hurricanes Katrina and Michael.” He warned that “when such a mega-catastrophe strikes, we will get our share of the losses and they will be big — very big.” The use of new technology, data and analytics will help us prepare for unpredicted ‘black swan’ events and minimize the catastrophic losses Mohsen Rahnama RMS The question insurance and reinsurance companies need to ask themselves is whether they are prepared for the potential of an intense U.S. landfalling hurricane, a Tōhoku-size earthquake event and a major cyber incident if these types of combined losses hit their portfolio each and every year, says Mohsen Rahnama, chief risk modeling officer at RMS. “We are living in a world of constant catastrophes,” he says. “The risk is changing, and carriers need to make an educated decision about managing the risk. “So how are (re)insurers going to respond to that? The broader perspective should be on managing and diversifying the risk in order to balance your portfolio and survive major claims each year,” he continues. “Technology, data and models can help balance a complex global portfolio across all perils while also finding the areas of opportunity.” A Barrage of Weather Extremes How often, for instance, should insurers and reinsurers expect an extreme weather loss year like 2017 or 2018? The combined insurance losses from natural disasters in 2017 and 2018 according to Swiss Re sigma were US$219 billion, which is the highest-ever total over a two-year period. Hurricanes Harvey, Irma and Maria delivered the costliest hurricane loss for one hurricane season in 2017. Contributing to the total annual insurance loss in 2018 was a combination of natural hazard extremes, including Hurricanes Michael and Florence, Typhoons Jebi, Trami and Mangkhut, as well as heatwaves, droughts, wildfires, floods and convective storms. While it is no surprise that weather extremes like hurricanes and floods occur every year, (re)insurers must remain diligent about how such risks are changing with respect to their unique portfolios. Looking at the trend in U.S. insured losses from 1980–2018, the data clearly shows losses are increasing every year, with climate-related losses being the primary drivers of loss, especially in the last four decades (even allowing for the fact that the completeness of the loss data over the years has improved). Measuring Climate Change With many non-life insurers and reinsurers feeling bombarded by the aggregate losses hitting their portfolios each year, insurance and reinsurance companies have started looking more closely at the impact that climate change is having on their books of business, as the costs associated with weather-related disasters increase. The ability to quantify the impact of climate change risk has improved considerably, both at a macro level and through attribution research, which considers the impact of climate change on the likelihood of individual events. The application of this research will help (re)insurers reserve appropriately and gain more insight as they build diversified books of business. Take Hurricane Harvey as an example. Two independent attribution studies agree that the anthropogenic warming of Earth’s atmosphere made a substantial difference to the storm’s record-breaking rainfall, which inundated Houston, Texas, in August 2017, leading to unprecedented flooding. In a warmer climate, such storms may hold more water volume and move more slowly, both of which lead to heavier rainfall accumulations over land. Attribution studies can also be used to predict the impact of climate change on the return-period of such an event, explains Pete Dailey, vice president of model development at RMS. “You can look at a catastrophic event, like Hurricane Harvey, and estimate its likelihood of recurring from either a hazard or loss point of view. For example, we might estimate that an event like Harvey would recur on average say once every 250 years, but in today’s climate, given the influence of climate change on tropical precipitation and slower moving storms, its likelihood has increased to say a 1-in-100-year event,” he explains. We can observe an incremental rise in sea level annually — it’s something that is happening right in front of our eyes Pete Dailey RMS “This would mean the annual probability of a storm like Harvey recurring has increased more than twofold from 0.4 percent to 1 percent, which to an insurer can have a dramatic effect on their risk management strategy.” Climate change studies can help carriers understand its impact on the frequency and severity of various perils and throw light on correlations between perils and/or regions, explains Dailey. “For a global (re)insurance company with a book of business spanning diverse perils and regions, they want to get a handle on the overall effect of climate change, but they must also pay close attention to the potential impact on correlated events. “For instance, consider the well-known correlation between the hurricane season in the North Atlantic and North Pacific,” he continues. “Active Atlantic seasons are associated with quieter Pacific seasons and vice versa. So, as climate change affects an individual peril, is it also having an impact on activity levels for another peril? Maybe in the same direction or in the opposite direction?” Understanding these “teleconnections” is just as important to an insurer as the more direct relationship of climate to hurricane activity in general, thinks Dailey. “Even though it’s hard to attribute the impact of climate change to a particular location, if we look at the impact on a large book of business, that’s actually easier to do in a scientifically credible way,” he adds. “We can quantify that and put uncertainty around that quantification, thus allowing our clients to develop a robust and objective view of those factors as a part of a holistic risk management approach.” Of course, the influence of climate change is easier to understand and measure for some perils than others. “For example, we can observe an incremental rise in sea level annually — it’s something that is happening right in front of our eyes,” says Dailey. “So, sea-level rise is very tangible in that we can observe the change year over year. And we can also quantify how the rise of sea levels is accelerating over time and then combine that with our hurricane model, measuring the impact of sea-level rise on the risk of coastal storm surge, for instance.” Each peril has a unique risk signature with respect to climate change, explains Dailey. “When it comes to a peril like severe convective storms — tornadoes and hail storms for instance — they are so localized that it’s difficult to attribute climate change to the future likelihood of such an event. But for wildfire risk, there’s high correlation with climate change because the fuel for wildfires is dry vegetation, which in turn is highly influenced by the precipitation cycle.” Satellite data from 1993 through to the present shows there is an upward trend in the rate of sea-level rise, for instance, with the current rate of change averaging about 3.2 millimeters per year. Sea-level rise, combined with increasing exposures at risk near the coastline, means that storm surge losses are likely to increase as sea levels rise more quickly. “In 2010, we estimated the amount of exposure within 1 meter above the sea level, which was US$1 trillion, including power plants, ports, airports and so forth,” says Rahnama. “Ten years later, the exact same exposure was US$2 trillion. This dramatic exposure change reflects the fact that every centimeter of sea-level rise is subjected to a US$2 billion loss due to coastal flooding and storm surge as a result of even small hurricanes. “And it’s not only the climate that is changing,” he adds. “It’s the fact that so much building is taking place along the high-risk coastline. As a result of that, we have created a built-up environment that is actually exposed to much of the risk.” Rahnama highlighted that because of an increase in the frequency and severity of events, it is essential to implement prevention measures by promoting mitigation credits to minimize the risk.  He says: “How can the market respond to the significant losses year after year. It is essential to think holistically to manage and transfer the risk to the insurance chain from primary to reinsurance, capital market, ILS, etc.,” he continues. “The art of risk management, lessons learned from past events and use of new technology, data and analytics will help to prepare for responding to unpredicted ‘black swan’ type of events and being able to survive and minimize the catastrophic losses.” Strategically, risk carriers need to understand the influence of climate change whether they are global reinsurers or local primary insurers, particularly as they seek to grow their business and plan for the future. Mergers and acquisitions and/or organic growth into new regions and perils will require an understanding of the risks they are taking on and how these perils might evolve in the future. There is potential for catastrophe models to be used on both sides of the balance sheet as the influence of climate change grows. Dailey points out that many insurance and reinsurance companies invest heavily in real estate assets. “You still need to account for the risk of climate change on the portfolio, whether you’re insuring properties or whether you actually own them, there’s no real difference.” In fact, asset managers are more inclined to a longer-term view of risk when real estate is part of a long-term investment strategy. Here, climate change is becoming a critical part of that strategy. “What we have found is that often the team that handles asset management within a (re)insurance company is an entirely different team to the one that handles catastrophe modeling,” he continues. “But the same modeling tools that we develop at RMS can be applied to both of these problems of managing risk at the enterprise level. “In some cases, a primary insurer may have a one-to-three-year plan, while a major reinsurer may have a five-to-10-year view because they’re looking at a longer risk horizon,” he adds. “Every time I go to speak to a client — whether it be about our U.S. Inland Flood HD Model or our North America Hurricane Models — the question of climate change inevitably comes up. So, it’s become apparent this is no longer an academic question, it’s actually playing into critical business decisions on a daily basis.” Preparing for a Low-carbon Economy Regulation also has an important role in pushing both (re)insurers and large corporates to map and report on the likely impact of climate change on their business, as well as explain what steps they have taken to become more resilient. In the U.K., the Prudential Regulation Authority (PRA) and Bank of England have set out their expectations regarding firms’ approaches to managing the financial risks from climate change.  Meanwhile, a survey carried out by the PRA found that 70 percent of U.K. banks recognize the risk climate change poses to their business. Among their concerns are the immediate physical risks to their business models — such as the exposure to mortgages on properties at risk of flood and exposure to countries likely to be impacted by increasing weather extremes. Many have also started to assess how the transition to a low-carbon economy will impact their business models and, in many cases, their investment and growth strategy. “Financial policymakers will not drive the transition to a low-carbon economy, but we will expect our regulated firms to anticipate and manage the risks associated with that transition,” said Bank of England Governor Mark Carney, in a statement.   The transition to a low-carbon economy is a reality that (re)insurance industry players will need to prepare for, with the impact already being felt in some markets. In Australia, for instance, there is pressure on financial institutions to withdraw their support from major coal projects. In the aftermath of the Townsville floods in February 2019 and widespread drought across Queensland, there have been renewed calls to boycott plans for Australia’s largest thermal coal mine. To date, 10 of the world’s largest (re)insurers have stated they will not provide property or construction cover for the US$15.5 billion Carmichael mine and rail project. And in its “Mining Risk Review 2018,” broker Willis Towers Watson warned that finding insurance for coal “is likely to become increasingly challenging — especially if North American insurers begin to follow the European lead.” 

NIGEL ALLEN
May 20, 2019
The Flames Burn Higher

With California experiencing two of the most devastating seasons on record in consecutive years, EXPOSURE asks whether wildfire now needs to be considered a peak peril Some of the statistics for the 2018 U.S. wildfire season appear normal. The season was a below-average year for the number of fires reported — 58,083 incidents represented only 84 percent of the 10-year average. The number of acres burned — 8,767,492 acres — was marginally above average at 132 percent. Two factors, however, made it exceptional. First, for the second consecutive year, the Great Basin experienced intense wildfire activity, with some 2.1 million acres burned — 233 percent of the 10-year average. And second, the fires destroyed 25,790 structures, with California accounting for over 23,600 of the structures destroyed, compared to a 10-year U.S. annual average of 2,701 residences, according to the National Interagency Fire Center. As of January 28, 2019, reported insured losses for the November 2018 California wildfires, which included the Camp and Woolsey Fires, were at US$11.4 billion, according to the California Department of Insurance. Add to this the insured losses of US$11.79 billion reported in January 2018 for the October and December 2017 California events, and these two consecutive wildfire seasons constitute the most devastating on record for the wildfire-exposed state. Reaching its Peak? Such colossal losses in consecutive years have sent shockwaves through the (re)insurance industry and are forcing a reassessment of wildfire’s secondary status in the peril hierarchy. According to Mark Bove, natural catastrophe solutions manager at Munich Reinsurance America, wildfire’s status needs to be elevated in highly exposed areas. “Wildfire should certainly be considered a peak peril in areas such as California and the Intermountain West,” he states, “but not for the nation as a whole.” His views are echoed by Chris Folkman, senior director of product management at RMS. “Wildfire can no longer be viewed purely as a secondary peril in these exposed territories,” he says. “Six of the top 10 fires for structural destruction have occurred in the last 10 years in the U.S., while seven of the top 10, and 10 of the top 20 most destructive wildfires in California history have occurred since 2015. The industry now needs to achieve a level of maturity with regard to wildfire that is on a par with that of hurricane or flood.” “Average ember contributions to structure damage and destruction is approximately 15 percent, but in a wind-driven event such as the Tubbs Fire this figure is much higher” Chris Folkman RMS However, he is wary about potential knee-jerk reactions to this hike in wildfire-related losses. “There is a strong parallel between the 2017-18 wildfire seasons and the 2004-05 hurricane seasons in terms of people’s gut instincts. 2004 saw four hurricanes make landfall in Florida, with K-R-W causing massive devastation in 2005. At the time, some pockets of the industry wondered out loud if parts of Florida were uninsurable. Yet the next decade was relatively benign in terms of hurricane activity. “The key is to adopt a balanced, long-term view,” thinks Folkman. “At RMS, we think that fire severity is here to stay, while the frequency of big events may remain volatile from year-to-year.” A Fundamental Re-evaluation The California losses are forcing (re)insurers to overhaul their approach to wildfire, both at the individual risk and portfolio management levels. “The 2017 and 2018 California wildfires have forced one of the biggest re-evaluations of a natural peril since Hurricane Andrew in 1992,” believes Bove. “For both California wildfire and Hurricane Andrew, the industry didn’t fully comprehend the potential loss severities. Catastrophe models were relatively new and had not gained market-wide adoption, and many organizations were not systematically monitoring and limiting large accumulation exposure in high-risk areas. As a result, the shocks to the industry were similar.” For decades, approaches to underwriting have focused on the wildland-urban interface (WUI), which represents the area where exposure and vegetation meet. However, exposure levels in these areas are increasing sharply. Combined with excessive amounts of burnable vegetation, extended wildfire seasons, and climate-change-driven increases in temperature and extreme weather conditions, these factors are combining to cause a significant hike in exposure potential for the (re)insurance industry. A recent report published in PNAS entitled “Rapid Growth of the U.S. Wildland-Urban Interface Raises Wildfire Risk” showed that between 1990 and 2010 the new WUI area increased by 72,973 square miles (189,000 square kilometers) — larger than Washington State. The report stated: “Even though the WUI occupies less than one-tenth of the land area of the conterminous United States, 43 percent of all new houses were built there, and 61 percent of all new WUI houses were built in areas that were already in the WUI in 1990 (and remain in the WUI in 2010).” “The WUI has formed a central component of how wildfire risk has been underwritten,” explains Folkman, “but you cannot simply adopt a black-and-white approach to risk selection based on properties within or outside of the zone. As recent losses, and in particular the 2017 Northern California wildfires, have shown, regions outside of the WUI zone considered low risk can still experience devastating losses.” For Bove, while focus on the WUI is appropriate, particularly given the Coffey Park disaster during the 2017 Tubbs Fire, there is not enough focus on the intermix areas. This is the area where properties are interspersed with vegetation. “In some ways, the wildfire risk to intermix communities is worse than that at the interface,” he explains. “In an intermix fire, you have both a wildfire and an urban conflagration impacting the town at the same time, while in interface locations the fire has largely transitioned to an urban fire. “In an intermix community,” he continues, “the terrain is often more challenging and limits firefighter access to the fire as well as evacuation routes for local residents. Also, many intermix locations are far from large urban centers, limiting the amount of firefighting resources immediately available to start combatting the blaze, and this increases the potential for a fire in high-wind conditions to become a significant threat. Most likely we’ll see more scrutiny and investigation of risk in intermix towns across the nation after the Camp Fire’s decimation of Paradise, California.” Rethinking Wildfire Analysis According to Folkman, the need for greater market maturity around wildfire will require a rethink of how the industry currently analyzes the exposure and the tools it uses. “Historically, the industry has relied primarily upon deterministic tools to quantify U.S. wildfire risk,” he says, “which relate overall frequency and severity of events to the presence of fuel and climate conditions, such as high winds, low moisture and high temperatures.” While such tools can prove valuable for addressing “typical” wildland fire events, such as the 2017 Thomas Fire in Southern California, their flaws have been exposed by other recent losses. Burning Wildfire at Sunset “Such tools insufficiently address major catastrophic events that occur beyond the WUI into areas of dense exposure,” explains Folkman, “such as the Tubbs Fire in Northern California in 2017. Further, the unprecedented severity of recent wildfire events has exposed the weaknesses in maintaining a historically based deterministic approach.” While the scale of the 2017-18 losses has focused (re)insurer attention on California, companies must also recognize the scope for potential catastrophic wildfire risk extends beyond the boundaries of the western U.S. “While the frequency and severity of large, damaging fires is lower outside California,” says Bove, “there are many areas where the risk is far from negligible.” While acknowledging that the broader western U.S. is seeing increased risk due to WUI expansion, he adds: “Many may be surprised that similar wildfire risk exists across most of the southeastern U.S., as well as sections of the northeastern U.S., like in the Pine Barrens of southern New Jersey.” As well as addressing the geographical gaps in wildfire analysis, Folkman believes the industry must also recognize the data gaps limiting their understanding. “There are a number of areas that are understated in underwriting practices currently, such as the far-ranging impacts of ember accumulations and their potential to ignite urban conflagrations, as well as vulnerability of particular structures and mitigation measures such as defensible space and fire-resistant roof coverings.” In generating its US$9 billion to US$13 billion loss estimate for the Camp and Woolsey Fires, RMS used its recently launched North America Wildfire High-Definition (HD) Models to simulate the ignition, fire spread, ember accumulations and smoke dispersion of the fires. “In assessing the contribution of embers, for example,” Folkman states, “we modeled the accumulation of embers, their wind-driven travel and their contribution to burn hazard both within and beyond the fire perimeter. Average ember contributions to structure damage and destruction is approximately 15 percent, but in a wind-driven event such as the Tubbs Fire this figure is much higher. This was a key factor in the urban conflagration in Coffey Park.” The model also provides full contiguous U.S. coverage, and includes other model innovations such as ignition and footprint simulations for 50,000 years, flexible occurrence definitions, smoke and evacuation loss across and beyond the fire perimeter, and vulnerability and mitigation measures on which RMS collaborated with the Insurance Institute for Business & Home Safety. Smoke damage, which leads to loss from evacuation orders and contents replacement, is often overlooked in risk assessments, despite composing a tangible portion of the loss, says Folkman. “These are very high-frequency, medium-sized losses and must be considered. The Woolsey Fire saw 260,000 people evacuated, incurring hotel, meal and transport-related expenses. Add to this smoke damage, which often results in high-value contents replacement, and you have a potential sea of medium-sized claims that can contribute significantly to the overall loss.” A further data resolution challenge relates to property characteristics. While primary property attribute data is typically well captured, believes Bove, many secondary characteristics key to wildfire are either not captured or not consistently captured. “This leaves the industry overly reliant on both average model weightings and risk scoring tools. For example, information about defensible spaces, roofing and siding materials, protecting vents and soffits from ember attacks, these are just a few of the additional fields that the industry will need to start capturing to better assess wildfire risk to a property.” A Highly Complex Peril Bove is, however, conscious of the simple fact that “wildfire behavior is extremely complex and non-linear.” He continues: “While visiting Paradise, I saw properties that did everything correct with regard to wildfire mitigation but still burned and risks that did everything wrong and survived. However, mitigation efforts can improve the probability that a structure survives.” “With more data on historical fires,” Folkman concludes, “more research into mitigation measures and increasing awareness of the risk, wildfire exposure can be addressed and managed. But it requires a team mentality, with all parties — (re)insurers, homeowners, communities, policymakers and land-use planners — all playing their part.”

NIGEL ALLEN
September 05, 2018
In Total Harmony

Karen White joined RMS as CEO in March 2018, followed closely by Moe Khosravy, general manager of software and platform activities. EXPOSURE talks to both, along with Mohsen Rahnama, chief risk modeling officer and one of the firm’s most long-standing team members, about their collective vision for the company, innovation, transformation and technology in risk management Karen and Moe, what was it that sparked your interest in joining RMS? Karen: What initially got me excited was the strength of the hand we have to play here and the fact that the insurance sector is at a very interesting time in its evolution. The team is fantastic — one of the most extraordinary groups of talent I have come across. At our core, we have hundreds of Ph.D.s, superb modelers and scientists, surrounded by top engineers, and computer and data scientists. I firmly believe no other modeling firm holds a candle to the quality of leadership and depth and breadth of intellectual property at RMS. We are years ahead of our competitors in terms of the products we deliver. Moe: For me, what can I say? When Karen calls with an idea it’s very hard to say no! However, when she called about the RMS opportunity, I hadn’t ever considered working in the insurance sector. My eureka moment came when I looked at the industry’s challenges and the technology available to tackle them. I realized that this wasn’t simply a cat modeling property insurance play, but was much more expansive. If you generalize the notion of risk and loss, the potential of what we are working on and the value to the insurance sector becomes much greater. I thought about the technologies entering the sector and how new developments on the AI [artificial intelligence] and machine learning front could vastly expand current analytical capabilities. I also began to consider how such technologies could transform the sector’s cost base. In the end, the decision to join RMS was pretty straightforward. “Developments such as AI and machine learning are not fairy dust to sprinkle on the industry’s problems” Karen White CEO, RMS Karen: The industry itself is reaching a eureka moment, which is precisely where I love to be. It is at a transformational tipping point — the technology is available to enable this transformation and the industry is compelled to undertake it. I’ve always sought to enter markets at this critical point. When I joined Oracle in the 1990s, the business world was at a transformational point — moving from client-server computing to Internet computing. This has brought about many of the huge changes we have seen in business infrastructure since, so I had a bird’s-eye view of what was a truly extraordinary market shift coupled with a technology shift. That experience made me realize how an architectural shift coupled with a market shift can create immense forward momentum. If the technology can’t support the vision, or if the challenges or opportunities aren’t compelling enough, then you won’t see that level of change occur. Do (re)insurers recognize the need to change and are they willing to make the digital transition required? Karen: I absolutely think so. There are incredible market pressures to become more efficient, assess risks more effectively, improve loss ratios, achieve better business outcomes and introduce more beneficial ways of capitalizing risk. You also have numerous new opportunities emerging. New perils, new products and new ways of delivering those products that have huge potential to fuel growth. These can be accelerated not just by market dynamics but also by a smart embrace of new technologies and digital transformation. Mohsen: Twenty-five years ago when we began building models at RMS, practitioners simply had no effective means of assessing risk. So, the adoption of model technology was a relatively simple step. Today, the extreme levels of competition are making the ability to differentiate risk at a much more granular level a critical factor, and our model advances are enabling that. In tandem, many of the Silicon Valley technologies have the potential to greatly enhance efficiency, improve processing power, minimize cost, boost speed to market, enable the development of new products, and positively impact every part of the insurance workflow. Data is the primary asset of our industry — it is the source of every risk decision, and every risk is itself an opportunity. The amount of data is increasing exponentially, and we can now capture more information much faster than ever before, and analyze it with much greater accuracy to enable better decisions. It is clear that the potential is there to change our industry in a positive way. The industry is renowned for being risk averse. Is it ready to adopt the new technologies that this transformation requires? Karen: The risk of doing nothing given current market and technology developments is far greater than that of embracing emerging tech to enable new opportunities and improve cost structures, even though there are bound to be some bumps in the road. I understand the change management can be daunting. But many of the technologies RMS is leveraging to help clients improve price performance and model execution are not new. AI, the Cloud and machine learning are already tried and trusted, and the insurance market will benefit from the lessons other industries have learned as it integrates these technologies. “The sector is not yet attracting the kind of talent that is attracted to firms such as Google, Microsoft or Amazon — and it needs to” Moe Khosravy EVP, Software and Platform, RMS Moe: Making the necessary changes will challenge the perceived risk-averse nature of the insurance market as it will require new ground to be broken. However, if we can clearly show how these capabilities can help companies be measurably more productive and achieve demonstrable business gains, then the market will be more receptive to new user experiences. Mohsen: The performance gains that technology is introducing are immense. A few years ago, we were using computation fluid dynamics to model storm surge. We were conducting the analysis through CPU [central processing unit] microprocessors, which was taking weeks. With the advent of GPU [graphics processing unit] microprocessors, we can carry out the same level of analysis in hours. When you add the supercomputing capabilities possible in the Cloud, which has enabled us to deliver HD-resolution models to our clients — in particular for flood, which requires a high-gradient hazard model to differentiate risk effectively — it has enhanced productivity significantly and in tandem price performance. Is an industry used to incremental change able to accept the stepwise change technology can introduce? Karen: Radical change often happens in increments. The change from client-server to Internet computing did not happen overnight, but was an incremental change that came in waves and enabled powerful market shifts. Amazon is a good example of market leadership out of digital transformation. It launched in 1994 as an online bookstore in a mature, relatively sleepy industry. It evolved into broad e-commerce and again with the introduction of Cloud services when it launched AWS [Amazon Web Services] 12 years ago — now a US$17 billion business that has disrupted the computer industry and is a huge portion of its profit. Amazon has total revenue of US$178 billion from nothing over 25 years, having disrupted the retail sector. Retail consumption has changed dramatically, but I can still go shopping on London’s Oxford Street and about 90 percent of retail is still offline. My point is, things do change incrementally but standing still is not a great option when technology-fueled market dynamics are underway. Getting out in front can be enormously rewarding and create new leadership. However, we must recognize that how we introduce technology must be driven by the challenges it is being introduced to address. I am already hearing people talk about developments such as AI, machine learning and neural networks as if they are fairy dust to sprinkle on the industry’s problems. That is not how this transformation process works. How are you approaching the challenges that this transformation poses? Karen: At RMS, we start by understanding the challenges and opportunities from our customers’ perspectives and then look at what value we can bring that we have not brought before. Only then can we look at how we deliver the required solution. Moe: It’s about having an “outward-in” perspective. We have amazing technology expertise across modeling, computer science and data science, but to deploy that effectively we must listen to what the market wants. We know that many companies are operating multiple disparate systems within their networks that have simply been built upon again and again. So, we must look at harnessing technology to change that, because where you have islands of data, applications and analysis, you lose fidelity, time and insight and costs rise. Moe: While there is a commonality of purpose spanning insurers, reinsurers and brokers, every organization is different. At RMS, we must incorporate that into our software and our platforms. There is no one-size-fits-all and we can’t force everyone to go down the same analytical path. That’s why we are adopting a more modular approach in terms of our software. Whether the focus is portfolio management or underwriting decision-making, it’s about choosing those modules that best meet your needs. “Data is the primary asset of our industry — it is the source of every risk decision, and every risk is itself an opportunity” Mohsen Rahmana, PhD Chief Risk Modeling Officer, RMS Mohsen: When constructing models, we focus on how we can bring the right technology to solve the specific problems our clients have. This requires a huge amount of critical thinking to bring the best solution to market. How strong is the talent base that is helping to deliver this level of capability? Mohsen: RMS is extremely fortunate to have such a fantastic array of talent. This caliber of expertise is what helps set us apart from competitors, enabling us to push boundaries and advance our modeling capabilities at the speed we are. Recently, we have set up teams of modelers and data and computer scientists tasked with developing a range of innovations. It’s fantastic having this depth of talent, and when you create an environment in which innovative minds can thrive you quickly reap the rewards — and that is what we are seeing. In fact, I have seen more innovation at RMS in the last six months than over the past several years. Moe: I would add though that the sector is not yet attracting the kind of talent seen at firms such as Google, Microsoft or Amazon, and it needs to. These companies are either large-scale customer-service providers capitalizing on big data platforms and leading-edge machine-learning techniques to achieve the scale, simplicity and flexibility their customers demand, or enterprises actually building these core platforms themselves. When you bring new blood into an organization or industry, you generate new ideas that challenge current thinking and practices, from the user interface to the underlying platform or the cost of performance. We need to do a better PR job as a technology sector. The best and brightest people in most cases just want the greatest problems to tackle — and we have a ton of those in our industry. Karen: The critical component of any successful team is a balance of complementary skills and capabilities focused on having a high impact on an interesting set of challenges. If you get that dynamic right, then that combination of different lenses correctly aligned brings real clarity to what you are trying to achieve and how to achieve it. I firmly believe at RMS we have that balance. If you look at the skills, experience and backgrounds of Moe, Mohsen and myself, for example, they couldn’t be more different. Bringing Moe and Mohsen together, however, has quickly sparked great and different thinking. They work incredibly well together despite their vastly different technical focus and career paths. In fact, we refer to them as the “Moe-Moes” and made them matching inscribed giant chain necklaces and presented them at an all-hands meeting recently. Moe: Some of the ideas we generate during our discussions and with other members of the modeling team are incredibly powerful. What’s possible here at RMS we would never have been able to even consider before we started working together. Mohsen: Moe’s vast experience of building platforms at companies such as HP, Intel and Microsoft is a great addition to our capabilities. Karen brings a history of innovation and building market platforms with the discipline and the focus we need to deliver on the vision we are creating. If you look at the huge amount we have been able to achieve in the months that she has been at RMS, that is a testament to the clear direction we now have. Karen: While we do come from very different backgrounds, we share a very well-defined culture. We care deeply about our clients and their needs. We challenge ourselves every day to innovate to meet those needs, while at the same time maintaining a hell-bent pragmatism to ensure we deliver. Mohsen: To achieve what we have set out to achieve requires harmony. It requires a clear vision, the scientific know-how, the drive to learn more, the ability to innovate and the technology to deliver — all working in harmony. Career Highlights Karen White is an accomplished leader in the technology industry, with a 25-year track record of leading, innovating and scaling global technology businesses. She started her career in Silicon Valley in 1993 as a senior executive at Oracle. Most recently, Karen was president and COO at Addepar, a leading fintech company serving the investment management industry with data and analytics solutions. Moe Khosravy (center) has over 20 years of software innovation experience delivering enterprise-grade products and platforms differentiated by data science, powerful analytics and applied machine learning to help transform industries. Most recently he was vice president of software at HP Inc., supporting hundreds of millions of connected devices and clients. Mohsen Rahnama leads a global team of accomplished scientists, engineers and product managers responsible for the development and delivery of all RMS catastrophe models and data. During his 20 years at RMS, he has been a dedicated, hands-on leader of the largest team of catastrophe modeling professionals in the industry.

Helen Yates
September 05, 2018
IFRS17: Under the Microscope

How new accounting standards could reduce demand for reinsurance as cedants are forced to look more closely at underperforming books of business They may not be coming into effect until January 1, 2021, but the new IFRS 17 accounting standards are already shaking up the insurance industry. And they are expected to have an impact on the January 1, 2019, renewals as insurers ready themselves for the new regime. Crucially, IFRS 17 will require insurers to recognize immediately the full loss on any unprofitable insurance business. “The standard states that reinsurance contracts must now be valued and accounted for separate to the underlying contracts, meaning that traditional ‘netting down’ (gross less reinsured) and approximate methods used for these calculations may no longer be valid,” explained PwC partner Alex Bertolotti in a blog post. “Even an individual reinsurance contract could be material in the context of the overall balance sheet, and so have the potential to create a significant mismatch between the value placed on reinsurance and the value placed on the underlying risks,” he continued. “This problem is not just an accounting issue, and could have significant strategic and operational implications as well as an impact on the transfer of risk, on tax, on capital and on Solvency II for European operations.” In fact, the requirements under IFRS 17 could lead to a drop in reinsurance purchasing, according to consultancy firm Hymans Robertson, as cedants are forced to question why they are deriving value from reinsurance rather than the underlying business on unprofitable accounts. “This may dampen demand for reinsurance that is used to manage the impact of loss making business,” it warned in a white paper. Cost of Compliance The new accounting standards will also be a costly compliance burden for many insurance companies. Ernst & Young estimates that firms with over US$25 billion in Gross Written Premium (GWP) could be spending over US$150 million preparing for IFRS 17. Under the new regime, insurers will need to account for their business performance at a more granular level. In order to achieve this, it is important to capture more detailed information on the underlying business at the point of underwriting, explained Corina Sutter, director of government and regulatory affairs at RMS. This can be achieved by deploying systems and tools that allow insurers to capture, manage and analyze such granular data in increasingly high volumes, she said. “It is key for those systems or tools to be well-integrated into any other critical data repositories, analytics systems and reporting tools. “From a modeling perspective, analyzing performance at contract level means precisely understanding the risk that is being taken on by insurance firms for each individual account,” continued Sutter. “So, for P&C lines, catastrophe risk modeling may be required at account level. Many firms already do this today in order to better inform their pricing decisions. IFRS 17 is a further push to do so. “It is key to use tools that not only allow the capture of the present risk, but also the risk associated with the future expected value of a contract,” she added. “Probabilistic modeling provides this capability as it evaluates risk over time.”

close button
Overlay Image
Video Title

Thank You

You’ll be contacted by an RMS specialist shortly.

RMS.com uses cookies to improve your experience and analyze site usage. Read Cookie Policy or click I understand.

close