Mondale Smith, President and COO at EMC Re, has stressed that reinsurers must pay close attention to how weather trends have altered in recent years, and has warned that “tackling 2021 exposures with a 2011 mindset is a recipe for disaster.”
Speaking in an interview with Reinsurance News, Smith discussed how EMC Re is managing its exposures in light of the growing costs of secondary perils and severe weather.
In response, Smith says the company is shrinking its list of secondary perils and expanding its list of primary perils, while also rethinking its traditional approaches to modelling.
“Effectively, we’re beginning to pay closer attention to things the industry has historically deemed a secondary peril due to the increased frequency of severity in losses,” he told Reinsurance News. “Our biggest risk is to ignore the global weather trends over the past five years as an anomaly rather than as a leading indicator of the next normal.”
Last year’s Midwest Derecho was one such peril that caught reinsurers off-guard, driving estimated losses of $5 billion despite its secondary peril status.
“What stood out about last year’s event was the location of the derecho and the damage it caused,” Smith acknowledged, but added that the event was not that far out in the tail, given that derechos are not new phenomena in the U.S.
“What used to be deemed ‘tail’ events are getting closer and closer to the mean,” he explained. “Stated differently, what used to be 1 in 100, 1 in 250 or 1 in 500-year events are happening with much greater frequency. We’ve learned that tail events are not the rare occurrences of the past.”
As weather patterns shift and the effects of global warming continue to be felt, EMC Re has been working to refine its portfolio composition, expanding into areas that are not correlated to US weather events and developing core competencies in lines of business that are not directly exposed to severe weather losses.
“While retro protection is key for us, it is imperative that we proactively manage our exposure to weather-driven secondary perils upfront,” Smith told Reinsurance News.
“Our retro partners desire to see us make conscious efforts in managing our exposure to climate-related loss events. Similarly, we desire our clients to prudently manage their climate exposure to loss as well.
“EMC Re is fortunate to have a talented team that’s not afraid to admit what we don’t know and reach out to our strategic partners to help fill the knowledge gap.”