RMS warns on short-sightedness

The 2022 reinsurance renewal season could be the season of short-sightedness: so many new perils, so many recent major events, so many unprecedented conditions that reinsurers and cedants could fight it out over terms without ever looking at the longer-term drivers and challenges.

That is the message which Vivek Bajaj (pictured), managing director for Europe and Asia-Pacific at risk modeller RMS, brings to Baden-Baden in 2022, albeit with a heavy dose of concern that participants are too wrapped up in the latest perils to notice.

“Some say ‘may you live in interesting times’. The problem is that times can almost be too interesting for our own good,” Bajaj told Intelligent Insurer.

The list of unprecedented market conditions is long and has developed in unprecedented rapid succession: heightened inflation followed by entrenched high inflation, a war in Europe and outsize events such as Hurricane Ian. These all came hot on the heels of several years of unprecedented losses from so-called secondary perils.

“The urgent and extremely important thing is what is going to capture the attention,” Bajaj said. “That’s what is happening with Hurricane Ian. But what about organising your business to deal with them?”

Market hardening is the least anyone should have expected, he says. But market reaction has already gone well beyond responding by looking at rates alone.

“Natural catastrophe in P&C is going through a lot of churn right now,” Bajaj said. He cites the retraction of capacity by several reinsurers and the exit from the line by Axis Capital, as signs that the accumulation of the unprecedented has passed prior thresholds.

“We are seeing a reset of the market. But a reset represents a massive opportunity,” he said.

New models

Into that vicious circle of near-sightedness and over-reaction, RMS is hoping to sell something beyond event and risk models that may serve as more of a guide as to how climate change will impact major events.

RMS has been owned by rating agency Moody’s since September 2021. Bajaj describes this a “much more natural home”, given their shared history in putting data analytics to use in creating added value for clients.

“We have made significant investment around nat cat perils in European markets,” Bajaj said, citing a high-definition European flood model now in place. A European windstorm model is expected early 2023, followed by a European severe convective storm model.

RMS now claims to be offering “a climate change view of those perils” to tell the macro story of how climate change determines frequency, severity, and the emergence of new perils, such as US wildfire, which has been in the RMS model stable for years. “Clients can see the impact of climate change on such events,” he said.

Once the model has taken a wider lens, “you can write business against it” rather than skipping from shock to shock of the next major event. “It’s reactive,” Bajaj said of the standard market reaction. “Another event, and now we all have to determine if we still have capacity,” he quipped.

“Rather than get spooked by mega events that cause you to batten down the hatches or stop writing business, it is worth taking account of these models and invest; it opens the door to write more business and cover more risk effectively.

“The smart players are doubling down right now and looking for opportunities to engage with the market.”

It may seem a long gap from natural to manmade catastrophe, but RMS suggests that the modelling of these risks can keep an equal pace.

The modelling is younger than for nat cat, and the risk has evolved through various forms faster than the more stable collection of natural catastrophes, but the segment gains have proved real. The degree of potential destruction is certainly not dissimilar, he said.

Insurers will tell you that their forays into cybersecurity services have made all the difference, arguing that inside views can lead underwriting.

RMS will retort that you start from the modelled data and you bring your security service data back into the loop, or you are still running blind.

“It not just one or the other: it is both in parallel,” Bajaj said of the inputs from models and security services. “Confidence from the model is a hygiene factor—once you have that, the relationship with that client can grow.

“If you aren’t taking that multiple view of risk to inform your game, you are in a guesswork strategy which can be very risky.”

It fits with Bajaj’s wider belief that all insurers need to move from monolithic models to “home-grown views of risk”. Data is only an initial ingredient to combining insights from across fields.

“It’s who can combine insights better rather than who can create better insights in their own ivory tower,” he concluded.