VIG Re looks to lessen underwriting volatility

The frequency of smaller losses can be far more problematic for some reinsurers than more infrequent bigger losses, especially if they have a diversified portfolio in Europe, Johannes Martin Hartmann, chairman of the management board at VIG Re, told Baden-Baden Today.

VIG Re’s core exposures in Central and Eastern Europe are currently floods, earthquakes and wind. He explained that such a diversified portfolio can be harder to manage as sophisticated risk modelling tools are not available for such risks.

“VIG Group has 50 insurance undertakings in 25 countries, and we at VIG Re bundle that, aggregate that, transform it and we retrocede. Sometimes we can have big exposures such as the earthquakes in Romania or Turkey.

“This means that, because of the diversification of the portfolio, in normal years, what is a greater concern for VIG Re are multiple smaller losses, which can have an impact—and even result in volatility—on our underwriting results.”

Hartmann said the frequency of cat losses, and how to mitigate them, is a concern of many industry players.

The predictability of results, especially on the underwriting side, is a big focus for VIG Re and the breadth of its portfolio can make this challenging. He noted that while peak risk events tend to be very accurately modelled, this is less true of smaller events and in some cases risk models for such scenarios may not even exist.

VIG Re is increasingly open to exploring the use of alternative structures and capital and how this might be used to reduce underwriting volatility caused by these smaller, local, natural catastrophe events.

“It’s very much experience-based—we would look to build a structure that mitigates the risk over time and agree on a price—it could a multi-year project,” Hartmann said.

From a buyer’s perspective, Hartmann said, one of his biggest concerns is the inefficiency of the reinsurance industry in its transaction costs and the number of parties involved in the chain.

“We will see a lot of customisation in many areas—this is where the models and insurance-linked securities might come in. Transactions will have to become more efficient going forward,” he said.