Regulatory changes pushing insurers to use models in-house

Regulatory changes in Latin America are pushing local insurers to leverage catastrophe risk models in-house, making them better able to compete with global insurers who have long had access to models.

Mark Szretter, manager of client relations for Latin America at AIR Worldwide, told FIDES Today that, as local insurers begin to use models in-house—as opposed to relying on outsourced data and services—the demand for “deep bench” support services means that modelling firms are better positioned to support them.

“Local insurers are better able to own the risk and work with local insurance regulators,” Szretter says, adding that the insurers are also better positioned to execute risk selection, pricing, and reinsurance management.

An uptake in the usage of modelling/analytics is being observed in Colombia, Peru, and Mexico, driven by regulatory changes and growing sophistication in these markets.

Risk-based capital requirements will drive resilience, but also will increase the demand for sophistication among local insurance operators, he warns.

“Partnering with the right risk analytics experts can help firms navigate these challenges, as understanding how these models work can put firms at a material advantage over market peers,” Szretter notes.

Significant catastrophic loss-causing events will continue to occur across Latin America.

“As populations and economies continue to grow this exposure to risk grows and changes due to complexities of changing engineering practices which affect the building stock, resilience measures, and risk transfer initiatives,” he adds.

Szretter expects models to play a key role in how societies, and important role-players in the re/insurance industry, manage this risk.

Local insurers can prepare for future challenges by learning about and beginning to use analytical tools to better assess exposure to catastrophe risk, says Szretter. He adds that these insights can then be incorporated into underwriting, regulatory, and risk management practices inside the business.

“Begin with learning how to interpret and interrogate modelling results. Firms that learn to do so gain a significant informational advantage,” he states.

Building a culture
Szretter believes that a culture of risk management needs to be developed further in the region.

AIR is supporting clients and other local companies with training and education in order open up the “black box” of modelling, and make transparent the way these tools work.

Many insurance companies are dealing in exposure that doesn’t capture an address-level geocode, warns the executive. To address this, AIR is making investments in research and improvements to its own industry exposure datasets, to help clients improve their catastrophe-modelling accuracy.

In the future, Szretter expects better insurance products to become available and the provision of easier access for customers, all enabled by integrated catastrophe modelling services.

He adds: “Catastrophe risk analytics tools need to be scientifically rigorous and deployed via the most current, nimble, flexible technologies to put the right answers in the right hands at the right moment.”

The significant insurance protection gap across the region is another challenge AIR must contend with.

“AIR is supporting the quantification of risk which is ‘step 1’ to establishing a basis for designing new insurance products for new segments of the economy,” he says. AIR is also supporting public resilience and risk transfer initiatives in the region, including FONDEN in Mexico, and the Alianza del Pacífico (Chile, Colombia, Peru, and Mexico).

“Based on feedback from industry peers and colleagues, it seems regions such as Asia are facing similar challenges,” says Szretter. In Asia, there’s poor exposure data quality generally, although like Latin America, it’s improving in certain countries.

Both regions are facing a low, but increasing, adoption of analytical tools at the local insurer and broker levels, along with a protection gap.

Szretter concludes: “Analytics can help us to identify how large the insurance gap really is, and identify, on a true-cost basis, strategies for bridging this gap with new products or other mitigation strategies.”