The significant increase in loss volatility for many property and casualty (P&C) lines over the past decade should be enough to demand more caution from re/insurers, regardless of whether or not this experience represents a ‘new normal’.
This is according to Kara Raiguel, President and Chief Executive Officer (CEO) of Gen Re, the global reinsurance subsidiary of Berkshire Hathaway.
Raiguel wrote recently that re/insurance companies should increasingly be asking themselves whether the recent uptick in global loss volatility is the result of random unrelated circumstances, or a newly establish status quo.
However, while it may be too soon for the industry to reach a definitive conclusion, she argued that it is not too soon for firms to start exercising more caution when it comes to managing their exposures.
“Quantifying these frequency and severity trends is easier said than done,” Raiguel noted. “We are pleased to work with many of our clients on ways to leverage various sources and data they have, and these efforts will be continuing. But in the end, often historical data points cannot tell us if a different future awaits.”
“We need to be in a constant state of readiness to review historical information, interpret new information as it is received, and dig deeper into the anecdotal stories, striving to connect the dots and form a sensible strategy before intolerable loss ratios tell us what we missed,” she explained.
Rising loss volatility has been particularly evident in commercial auto lines, as well as for fire and catastrophe risks in property lines, Raiguel observed.
The hurricanes of 2017 and 2018 set industry loss records, with several also qualifying for the top five in categories such as wind intensity at landfall, and inland precipitation rate.
Similarly commercial auto loss trends have been recognised and addressed for almost five years, but pockets of greater volatility in general liability are now becoming apparent, correlated to risk location and size.
“One of the greatest challenges facing an insurer is identifying an inflection point, when the fundamentals of the risk environment have changed,” said Raiguel.
“Insurers can miss the signs and fail to adjust quickly enough, or mistake randomness for a ground shift and overreact,” she continued.
“Even trickier is the fact that it will not be known immediately whether the response was appropriate. Only in the fullness of time can one get a better read on the trends and what is driving them.”
