The need for growth


The need for growth / peopleimages

Rather than taking advantage of a potential market shift following Harvey and Irma, it’s more important that we think about the transformational steps we can take to expand the ILS market, says Tom Johansmeyer of Verisk Insurance Solutions.

There’s always plenty to discuss at the annual Rendez-Vous de Septembre. The market spends at least part of the summer figuring out big ideas, talking points, and scripts for the spontaneous remarks we’re all expected to have.

Of course, this year, it didn’t quite work out that way. The best plans of August mattered much less than anticipated. Hurricanes Harvey and Irma made landfall and are expected to cause significant industry losses. The storms dominated the share of mind and voice, as one would expect, bringing a new sense of urgency to an event that had settled comfortably into what can only be described as an annual gripe about a protracted soft market.

That time the plans didn’t matter

Many probably spent the summer looking for ‘something to talk about in Monte’, digging deep for a few ideas that would make them stand out at the tables in Café de Paris. I’m no different. When the storms came, my talking points became seemingly irrelevant—but I’m not ready to let them go.

We need to bring new risk into the market, and even a shift in rates post-event (if it happens and to what extent) is a temporary response to a likely inevitable future rate slide over an eventual string of loss-light years.

My team and I spent the summer focused on specialty lines, with the launch of PCS Global Marine and Energy in April and PCS Global Cyber at the beginning of September reflective of our efforts to help expand the insurance-linked securities (ILS) market. We believe—through extensive conversations across the market—that specialty could provide an important opportunity to expand the ILS sector’s global footprint.

Room temperature isn’t always comfortable

When you look at any of the global rate on line (ROL) charts produced after each of the major renewal milestones, you can see a pretty clear trend. Post-event market hardening has declined over the past 30 years. Read such charts from left to right, and the spike after Hurricane Andrew was the last big one, with ROL surges following the terror attacks of September 11, 2001, the 2004 and 2005 hurricane years, and the 2008 financial crisis (with a pair of hurricanes, as well) becoming progressively smaller. Sandy in 2012 barely made a mark on the ROL charts.

Through improvements in risk and capital management over the past handful of decades—in conjunction with a significant increase in capacity available and the maturation of the ILS sector—rate increases following a loss event have become less pronounced. And while we have yet to see the combined effect of hurricanes Harvey and Irma (PCS has yet to release estimates as of this writing), it seems worth risking the assumption that it’ll fall in line with the ROL evolution we’ve all seen.

Basically, property-catastrophe ROLs seem to be in a near-permanent state of ‘room temperature’. It’ll take a lot to turn up the heat. Speculation over the past few years has seen that threshold tick upward from $100 billion to now more than $200 billion. But what it would take to truly harden the market isn’t relevant. True growth potential can only come from diversifying beyond property-catastrophe risk. 

Designed to solve the problem

The suitability of specialty risk for the ILS market is far from being a settled issue. What is evident, though, is that the ILS community has done more than dabble in the space. It didn’t even take long for the first industry loss warranty (ILW) using PCS Global Marine and Energy as the trigger to come to market.

Transactions involving cyber, terror, and aviation have found their way into the ILS space. It may not be the same as property-catastrophe risk, but there’s room for specialty in ILS. The challenge is going to be to attain scale.

In marine and energy, the historical lack of an independent third-party trigger caused the ILW market to contract a bit, with some players exiting the line completely. It seems much of that protection did not meander into the traditional market. As a result, there’s ample opportunity for this market to grow, resulting in a new opportunity for the ILS space to deploy capital.

While marine and energy is unlikely to rival global property-catastrophe reinsurance in size, it does become part of a broader solution to the problem of the risk/capital imbalance that has plagued the market for more than a decade.

In other lines, increased accumulations are poised to become an issue at some point in the future. Terror, for instance, comes to mind. An unsurprising soft market development saw terror creep into property-catastrophe programmes, leaving reinsurers with significant amounts of risk. And since additional payment for this risk was either slim or nonexistent, transferring it has become problematic. Yet, there’s enough talk about accumulations that some degree of risk transfer is likely to occur in the next couple of years, even if it is an expense for uncompensated (or thinly compensated) risk.

Cyber is similar to terror in this regard. Some risk has been added to property-catastrophe programmes on an unpaid (or, again, thinly compensated) basis. As risk accumulates, one should begin to contemplate risk transfer. However, there’s an added concern: cyber is growing. Quickly. Already a hot topic (even with the two major storms making landfall), cyber does have the potential to rival property-catastrophe in size. Such a future would help absorb a significant amount of capital currently sitting on the sidelines.

Time to check the crystal ball again

Cyber, terror, marine and energy, and other specialty lines. There’s plenty of risk that could use additional capacity, and the ILS market is in a position to make a difference. Today, our industry has to be focused on making the right decision. Rather than take advantage of a potential (even if minor) market shift following hurricanes Harvey and Irma, it’s much more important that we think about the transformational steps we can take to expand the ILS market—and the reinsurance industry as a whole.

The time for short-term thinking is behind us. Let’s bring scale to specialty lines ILS transactions. The result will be absorbed capacity, diversifying risks, and a much larger industrywide mission.

Tom Johansmeyer is assistant vice president, PCS Strategy and Development at ISO Claims Analytics, a division of Verisk Insurance Solutions.

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