Alternative capital suppressing cat prices: Convergence 2020

07-10-2020

Panelists at ILS Bermuda’s Convergence 2020 conference believe large inflows of alternative capital could explain why the price of catastrophe insurance has not risen in line with insured losses. 

Speaking on a panel titled ILS & Climate Change: How Can the Industry Rise with the Tide?, David Flandro, managing director of analytics at Hyperion X, noted the disconnect between re/insurance industry catastrophe losses and the cost of insurance. Nominal catastrophe losses have grown exponentially in the last 40 years, but the price of cover has fluctuated within a relatively narrow price channel, he said. 

“Why is it cheaper to buy coastal wind protection now than it was in 2013?” Flandro asked.

Part of the answer, according to Lixin Zeng, managing partner at Integral ILS, could be the increasing prevalence of alternative capital. He argued inflows of alternative capital have increased efficiency and changed the supply and demand dynamics, preventing price rises. 

Flandro agreed alternative capital has had an impact on prices, with yield hungry investors seeing better opportunities in ILS than in many other asset classes, but suggested this trend has now run its course. Further bouts of quantitative easing could prolong market distortions, he conceded. 

Craig Tillman, president of natural hazards risk, portfolio management, risk mitigation at RenaissanceRe Risk Sciences, emphasised the differences between the long term and short term views of risk, which also impacts pricing decisions. 

Much of the cat coverage being written offers short term cover, noted Tillman. “We need a rational price for today’s risk, not one that looks 50 years out and is not relevant to today,” he said. 

Peter Dailey, vice president at Risk Management Solutions, stressed that modellers are also trying to balance the impact of climate change on mean risk levels as well as overall risk volatility. 

“Changes in risk volatility may not be perceptible in average figures,” Dailey explained. “Climate change could even mean more ups and downs, it could even mean more quiet years, which is also very important to insurers.”

Tillman called for greater transparency in catastrophe models, arguing peer reviews of models would be a good idea. It should be easier to adjust the assumptions underlying models to allow re/insurers to express their own views on risk, he said. 

“We are very worried about the interaction between climate change and social inflation,” said Tillman. “The latter is not captured well by vendor models.”

Dailey welcomed the prospect of disruption from new catastrophe modelling companies, raised by an earlier panel, but warned established providers had to strike a difficult balance between innovating and delivering the consistency of data that re/insurers need. 

“The re/insurance industry needs consistency in the pricing of risk,” he said. 

ILS Bermuda, Convergence 2020, Craig Tillman, RenaissanceRe Risk Sciences, David Flandro, Hyperion X, Lixin Zeng, Integral ILS, Peter Dailey, RMS

Bermuda Re