2017 cat losses revealed ‘surprising’ differences in reinsurers’ exposures: S&P

The natural catastrophe losses of 2017 revealed some “surprising” disparities in reinsurers' exposures and their estimated return periods, according to a new report by S&P called ‘Are Global Reinsurers Ready For Another Year Of Active Natural Catastrophes?’

The rating agency noted that estimated return periods ranged from below 1-in-10 year to up to 1-in-60 year for the 2017 annual aggregate loss among reinsurers. S&P estimates that hurricanes Harvey, Irma, Maria (HIM) to be close to a 1-in-40 year North Atlantic wind annual aggregate loss.

It said that it believes the differences in return periods arises as a result of portfolio specificities, for example location, type of exposure, concentration/diversification, reinsurance/retrocession, gross/net limits, and attachment points.

“Nevertheless, the wide range of estimated return periods comes as a surprise,” the report said. “Indeed, as highlighted by the low level of correlation between US wind exposure and experienced return periods, our view is that the distribution dispersion is not only explained by exposure variations.”

It suggests that, as although most reinsurers rely on third-party vendors or internally developed catastrophe models to form their own view of risk, significant uncertainty and disparities in modeling assumptions and adjustments in the industry. “To an extent, return period estimates reflect the level of conservatism embedded in the probabilistic modeling of a reinsurer's exposure,” it said.

S&P noted that, in its rating analysis, it will typically assess the extent a reinsurer has the capacity to adequately model these complex risks as part of its enterprise risk management (ERM) assessment.

“We will use the experience from events as those suffered in 2017 to review the effectiveness of reinsurers' risk modeling and processes as well as ERM scores and risk position assessments. Secondly, the level of prudency in loss estimates affects the estimate of return periods that might be revised as loss reserves develop and claims are paid,” it said.

The report also noted that a number of reinsurers have taken defensive actions to reduce their exposure to extreme events. For more than a third of reinsurers, absolute net exposure to a 1-in-250-year aggregate loss has reduced by more than 10 percent. “Exposure shift would typically be informed by tolerances and could be acted upon relatively rapidly by increasing retrocession purchases for instance, as some primary insurers did by buying reinsurance cover in the midst of the 2017 catastrophe season,” the report noted.

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