Commercially available catastrophe models are still not properly reflecting the impacts of climate change as an evolving phenomenon, according to RenaissanceRe’s Kevin O’Donnell.
Speaking on an earnings call following the release of RenRe’s Q2 results, O’Donnell addressed a variety issues, including the poor historic performance of cat models.
The reinsurer fell to a net loss of $325 million in the second quarter of 2022, as the macro financial market environment drove a negative investment result, somewhat offset by a solid underwriting performance in the period.
But O’Donnell says he remains confident in RenRe’s management, pricing and portfolio construction of cat risk, in contrast to many other firms that rely on vendor models, which he says “inadequately capture the growing influence of climate change.”
“Some perils, while vendors may have adjusted their views to reflect recent experience, we believe that they have not robustly captured the physics of climate change,” O’Donnell explained on the call.
“From a risk management perspective this means that the vendor model outputs are likely to underestimate the risks that insurers and reinsurers are managing.”
“This could cause companies to expose more capital than intended and their returns for managing cat risk will be lower than expected.”
O’Donnell further acknowledged that many investors may be questioning whether the entire re/insurance industry truly understands the potential impact of climate risks, whether it is being correctly incorporated in the industry’s evaluation of risks and most critically, whether it is appropriately reflected in rates.
By comparison, he asserted that RenRe has invested “considerable resources” into modelling and understanding climate change, backed by data-informed science.
“This enables us to steadily increase our current view of risk to reflect the present day impact of climate change,” O’Donnell continued. “As a result, we believe our models are better predictors of the impact of climate change on loss costs.”
He added that the company’s Renaissance Exposure Management System (REMS) provides it with an additional competitive advantage in underwriting property catastrophe risk.”
“All our risks must be underwritten and modeled through REMS, which is continuously updated to fully reflect the best understanding of the physical parameters of shifting weather patterns,” O’Donnell concluded.
“This ensures that our underwriting decisions are based on an elevated view of risk that fully reflects climate change and gives us confidence that we are being paid appropriately for the risk we are assuming.”
