RMS underscores the value of consistency in analytics

“A major reason why Moody’s bought RMS is that there’s something very powerful about the consistency of analytics that enables the future solving of a problem to occur,” Ben Brookes, VP of consulting services at RMS, told Intelligent Insurer.

Since the risk management company was acquired by ratings agency Moody’s last year, it has been integrating their products and services to help improve the re/insurance industry’s response to natural catastrophes.

“As banks and investment firms start to manage their climate risk, rather than just measure it, insurance is going to be part of that solution. It has to be. So you need to be able to do that in a way that is as sophisticated as the insurance companies do it today, and can be transactional and can be consistent,” Brookes said.

RMS has spent 30 years in the insurance industry creating that structural capability. After Hurricane Andrew in 1992, seven insurance companies failed, Brookes noted, whereas the Florida market today should be able to sustain significant loss impacts without its being a solvency issue, he said, “because people understand the risks that they’re facing”.

There are more risks emerging, he added, and climate change is a significant part of that in some perils, but the market has a strong foundation with analytics and an understanding of weather risk. It is “getting to grips with” climate risk and is projecting longer-term climate conditioning of its weather models.

RMS is also “componentising” some of the other drivers of risk, he said, such as social inflation, with “sensitivity tests” that can be done within a model to look at the “tons of white paper-type thought leadership around those issues”.

He stressed: “It’s not only climate change. We continue to build in high hazard areas. There are portfolio undervaluation challenges because the cost of rebuilding is changing all the time. It can be quite complicated to disentangle all that stuff.

“As modellers, our job has evolved from modelling the physical occurrence that causes the problem, to also modelling the human behaviour that wraps around all of that. It’s not easy to do.”

Over the last five years, there has been some loosening of wording around perils, he said. “Defining and selecting perils for policy documents is ultimately about discipline, and at the same time understanding what it is you’re underwriting, while making that a useful product.

“Our whole industry has come a long way from being mostly the place you go to get a claim paid, to being partners in risk understanding, risk transfer and in creating a more resilient financial circumstance for everybody,” he said.

“We’ve always had the slightly lofty statement of ‘models make markets’, in the sense that you have to understand a risk in order to insure it, but that has to be evolutionary. You have to start somewhere and you can look at accumulation management to understand risk and to begin to help that market develop.”

“Our market needs high-quality models, science, research and data, plus access to and delivery of them. That’s why we’re investing so much in our Intelligent Risk Platform—to be able to deliver those analytics in a very consistent way,” he concluded.