An over-reliance of catastrophe model data could be generating some dramatic learning experiences for industry participants, according to key executives speaking at the 2019 Reinsurance News Monte Carlo Rendezvous roundtable.
Swiss Re’s Head of Property & Specialty Underwriting, Mike Mitchell, described what he considered a “somewhat slavish enthrallment to the cat model,” and added that recent loss experience seen across the industry has started to test some of the assumptions of those models
“What I anticipate seeing is a much stronger return towards a more technical basis of underwriting so the models are used in the way they were designed, which is to be supportive of sound underwriting and to be one part of the overall underwriting process, rather than replacing it,” Mitchell explained.
David Flandro, Managing Director of Analytics at Hyperion X, described the models as a tool, a common language; that they are “not the whole answer and require the feedback and underwriter scrutiny using learned experience.”
“I always wonder whether we’ll get to an agent-based modelling approach where you overlay a loss in a place like Florida and what really happens,” commented Ed Hochberg, Head of Global Capital Solutions at Guy Carpenter.
Ed Hochberg, Head of Global Capital Solutions at Guy Carpenter
Hochberg agreed that the models have a job as a common language, but don’t convey what really happens when a category 3 hurricane slams into palm beach.
“Like we saw when Sandy hit, when you don’t have power, you don’t have fuel, civilisation breaks down, basically.”
For Sean Bourgeois, CEO & Founder of Tremor Technologies, cat models when properly used deliver a rich and robust picture of loss distribution.
“As long as you are building a diversified portfolio with a clear understanding of how adding risk contributes to your portfolio, changes the shape of your portfolio, your tail risk exposure, etc., cat models can take you very far – and capture the lion’s share of technical underwriting considerations probably better than people can,” Bourgeois said.
Randall & Quilter’s Darren Bailey wrapped up the discussion by highlighting the perception from casualty that the class of 2019 underwriters hide behind their actuaries and that property natural catastrophe the market has become far too reliant on models.
“Whether that’s true or not, the next generation of underwriters need to embrace innovation, but certainly not solely rely upon benchmarks and technology to underwrite their portfolios,” Bailey said.
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