Expanded industry loss reporting: an end to renewal propaganda

We’re looking back on yet another tough year for reinsurers. Thanks to Typhoons Faxai and Hagibis, 2019 has become the third consecutive catastrophe loss year that’s significant for the reinsurance and retro markets. Underwriters, actuaries, and modellers will doubtless have a wide range of lessons learned, but for me, it’s all about propaganda.

Once a catastrophe strikes, everyone needs ‘the number’ almost immediately. And they don’t have much to go on. Within 24 hours of both Faxai and Hagibis, my phone vibrated almost nonstop, with market players looking for anything they could use to develop some sort of view of the events—not that I had anything to give that early, frankly.

We all know that nature abhors a vacuum, but it doesn’t abhor opportunism. The early need for ‘the number’ creates the perfect conditions for companies to shape the perception of a particular loss event—behaviour that’s ever so useful with the annual reinsurance renewal looming.

In the case of Faxai—and certainly of Hagibis—propaganda successfully fanned the flames of chaos. The normally wide industry loss range furnished by catastrophe models was pushed further by some risk bearers on the one side hoping to push reinsurance rates higher, and on the other side by those hoping to trap collateral.

The silent majority

Meanwhile, a silent majority shook their collective heads over loss estimates seemingly calculated using a random collection of objects such as a dart, a list, a bottle of Hendrick’s Gin, and a cucumber (Hendrick’s requires cucumber even in loss estimation). Once the initial loss estimates stopped, the silent majority were faced with a serious challenge: how to defend their own well-reasoned views of the events’ industry losses despite ‘evidence’ contrary to their assumptions out in the public domain.

For example: a typhoon hits, and for all your analysis, you can’t figure out how the industry loss could exceed $8 billion. However, several companies—with limited views of the underlying risk—announce industry losses of at least $20 billion.

They publish their perspectives in news announcements, white papers, and interviews. Your board of directors sees this and wonders how your estimate can be less than half the industry average. Even if you have the best tools and assumptions in the market, you start the conversation on the defensive, and you could be forced to push your number higher ‘just in case’. Especially after Typhoon Jebi, nobody wants to be too low.

Eventually, of course, the truth comes out. Time cultivates accuracy in industry loss reporting. In markets new to loss reporting agencies such as PCS, or those markets not yet covered, there’s plenty of room for early obfuscation, resulting in near-term gamesmanship that’s anathema to an efficient market. In Japan, fortunately, we’ve been able to minimise the gaps in information that propaganda loves to fill.

While catastrophes in Japan have been the highest-profile cases of self-published industry losses as propaganda, the problem is far more pervasive. The Abu Dhabi National Oil Company (ADNOC) fire at its Ruwais refinery in 2017, the 2018 Ituango Dam loss, NotPetya in 2017, and the 2016 Jubilee/Tullow loss have all had wide ranges pushed into the market in the hopes of influencing a risk transfer outcome. The range on ADNOC is literally as wide as the programme itself, with the high end well above policy limits. Needless to say, we can’t allow this situation to persist.

The presence of a PCS Catastrophe Loss Index doesn’t completely counteract efforts to shape the narrative of a catastrophe, but it does dull the effect.

Instead of the question ‘why are you so different from the market?’ the more likely one is ‘why are you so far off from PCS?’. I say this of course in the spirit of great propaganda!