Loss prediction is an ongoing learning curve, says Swiss Re’s Sharon Ooi

It’s important for the re/insurance industry to stay ahead of the curve when predicting losses, learning from previous events that have been underestimated, Sharon Ooi, Swiss Re’s managing director, head of property & casualty underwriting Asia-Pacific, told SIRC Today.

“There is still a huge nat cat protection gap, where people who should be able to access insurance at a price they can afford are still not able to do so,” Ooi said.

“The types and extents of losses can have a significant impact as well. For us, being at the forefront of that, having better products and being able to predict these types of event and their extent will allow us to close this gap.

“It’s important that we as an industry stay ahead of the curve so we are not surprised by the extent of loss in some instances, or by the frequency in others.”

Ooi said that models are a key component, although it is important to be aware of their limitations. For Typhoon Jebi, for example, the vendor-based models estimated the losses at $6 billion a huge underestimate.

“It went from around $6 billion in loss to anything from $13 billion to $15 billion in loss,” she said.

“A large part of it was underestimation of wind speed. On top of that, the vulnerability of the buildings had changed over time: the last time Osaka had a similar type of storm was about 25 years ago.

“When Jebi hit, Osaka was reeling from an earthquake and significant flooding had occurred a one-in-50-year event. All these occurred within a few months of each other.

“Add to that the build-up to the 2020 Tokyo Olympics and this year’s Rugby World Cup and you have a confluence of events that would add another inflationary aspect to the loss.”

Learning lessons
She said that as such factors are understood following an event, many of them can be incorporated into models so they are considered when making estimates for future events. However, this is not enough on its own.

“A lot of other aspects cannot be put into a model, so you need a professional reinsurer who has a long-term view, and an R&D division, to work through these things and then say how the loss could end up. It’s not just model-based,” Ooi said.

“For Swiss Re it’s a matter of investment in the R&D, getting better data and working with clients on a longer-term basis to support them.

“We have to work through these things to say how the loss could add up, viewing it through the lens of past events,” she said.

She added that underwriting catastrophe business profitably requires an adequate risk view that accounts for long-term historical experience as well as current climate, environmental and socio-economic trends but policyholders do not always understand this.

For example, a reinsurer might look at an earthquake it expects to be a one-in-100-year event and analyse the premium so it charges 100th of the earthquake cost for a given year with the aim of building up a portfolio for it and covering the cost when that one-in-100-year event does occur. However, a policyholder who does not make a claim may question the pricing.

“What’s really important is that insurance as a concept exists because we have to be there to pay claims; having said that, when people don’t understand the concept, policyholders can expect a discount when they don’t claim against their insurance,” Ooi said.

“Many people have the concept that if they don’t make a claim they haven’t had value from the cover and they then expect a lower price for something they haven’t claimed against.”

She said an educational process is required to improve understanding around this aspect of pricing, and that the value of this type of cover has been proved in recent years.

“In the past five or 10 years there have been some of the costliest-ever insurance cat events since we have been doing business,” she said.

“Take the 2011 Christchurch earthquake a one-in-250-year event. About 20 percent of the GDP was paid out in claims for New Zealand and that helped with resilience, it helped rebuild and it shows the value of insurance and reinsurance.”