Strategic underwriting key to tackling climate-induced volatility

In the face of rising and increasingly complex climate change-induced natural disasters, the key to broadening insurability lies in disciplined underwriting and proactive risk prevention, according to a panel of senior industry executives speaking at the Intelligent Insurer’s Re/insurance Outlook Europe 2023 conference, in Zurich this week (June 19 and 20).

A session titled ‘Adjust underwriting decisions to tackle the increase in nat cat events due to climate change’, explored how the industry can leverage more reliable, accurate modelling in underwriting, optimising the use of available tools, and tapping into the expertise of brokers and third parties, to improve decision-making in a volatile property-cat market.

The session featured Paul Hertelendy, chief underwriting officer of Echo Re; Martin Bertogg, head cat perils at Swiss Re; Stefan Beine, president of Zurich Reinsurance at Sompo International; and Vivek Bajaj, managing director – EMEA at Moody’s RMS.

Panellists suggested that strategy comes first when it comes to tackling the emerging systemic risks, followed by tools, technologies, and novel modelling techniques.

“Strategy is always much more important than the tools and technology,” Bajaj emphasised. “In our business, risk and opportunity live very closely together. On one hand, you can be seen as very innovative if you make the right bets. And on the other hand, you can be seen as having a completely mismatched strategy if you decide the other way around.”

He elaborated: “If you look at current market conditions, the hard market is here. It’s been here for some time now, and perhaps is likely to remain at least for the short-term going forward. That provides an opportunity for some of the major players who are quite sure of their strategy. Others might choose to exit certain lines of business, which again opens opportunities for others to double down and claim that space.”

Bertogg dismissed the notion of a failing business model, stressing the disciplined utilisation of existing tools and technology over new inventions. “Our business model isn’t broken. Therefore, it’s not about new models and technology, as much as it is about disciplined use of what we have.”

Beine echoed his sentiment, arguing “technology is one aspect, but climate is an entirely different matter. Climate change isn’t about the immediate future or the next renewal. Our appetite has not massively changed. Going forward, there are a number of things we need to talk about when we incorporate climate change. The first is data, do we actually understand what this data is. Then we talk about models – how far do they go, what do they represent today and how reliable they are. And how can we make them better.”

The panellists concurred that a robust risk management strategy is vital in maintaining a balanced portfolio, ensuring appropriate underwriting at suitable levels, and preserving financial stability.

“The question, however, is how do we consider climate change or can we do that at all? I’m not entirely sure that explicitly we can do that,” Beine said. “To me risk management is where you have the entire story.”

Hertelendy, on the other hand, highlighted the difficulty posed by the industry’s “acceptability of change”, asserting the need for a focus on risk prevention while also keeping affordability in mind.

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