S&P: don’t be over-reliant on risk models

The re/insurance industry is too reliant on catastrophe models and needs to take greater responsibility for judging its own risks. The complexities of Hurricane Sandy, which were beyond the scope of most risk models, perfectly illustrated this point and the industry needs to learn the lessons of this experience.

That is the view of rating agency Standard & Poor’s (S&P), which has released a report on this theme entitled ‘Reinsurance Industry Leaders Discuss Lessons Learned From Hurricane Sandy.’

Denis Sugrue, director at S&P, says the industry is too reliant on risk models, especially given that the nature of catastrophe risks is changing.

“Events over the last 12 to 18 months have been much more complex than have been observed in the past,” he said.

In its report, the rating agency said that the legacy of Sandy will be less about fourth-quarter results and more about the lessons learned from the storm. It notes that the market appears to still be having trouble reaching a consensus about what total insured losses will be – highlighting how difficult it can be to plan ahead for these events and the limitations of risk models.

This means that re/insurers need to better understand their risks and the science behind methods of quantifying them. “Re/insurers need to continue to do their own independent research, as well as using good old-fashioned judgement and common sense,” he said.

But despite his concerns, Sugrue believes the industry does have an educated perspective on how to use risk models, whether using a single model or several. However, he believes re/insurers must take the time to adjust models to fit their own portfolio.