Reinsurance Reset

The 8th annual Canadian Insurance Financial Forum (CIFF), presented by MSA Research Inc., provided actuarial, accounting, finance, compliance, regulatory and investment professionals with need-to-know information on topics from earthquake to black swans, cyber and insurtech.

RELIANCE COURTS PROCRASTINATION

The potential for procrastination to address the consequences of a large earthquake in Canada are persistent, demanding implementation of a tactical plan that could see “the issue dealt with, one way or another, in the next 12 months,” Senator Scott Tannas argued during CIFF.

For both the property and casualty insurance industry and government, “I submit that we have enormous potential for procrastination,” said Tannas, keynote luncheon speaker at the forum. “I don’t think that we will ever see a solution if we wait for the government to proactively try and solve this problem for us. It’s that simple.”potential for procrastination to address the consequences of a large earthquake in Canada are persistent, demanding implementation of a tactical plan that could see “the issue dealt with, one way or another, in the next 12 months,” Senator Scott Tannas (pictured, left) argued during CIFF.

There is strong evidence that the financial damage of a “big shake” — likely in British Columbia; possibly in Quebec — could produce overwhelming losses for insurers and threaten “our country’s entire financial system,” he said.

“In aggregate, the whole of the industry could likely handle a $20 billion event. This is roughly where insurers are prepared with capital and reinsurance resources today,” Tannas said. Consider, though, that recent Cat models have generated losses from a big shake of as much as $95 billion.

Currently, in the event of a large earthquake, Ottawa would need to provide a significant and unknown financial commitment. “I submit to you that this situation is the perfect recipe for many, many more years of talk, study and inaction.”

Developing a staged tactical plan “puts the onus on our industry and our leaders to propose a clear and detailed plan that is fair to all stakeholders.”

The plan to get the quake concern “onto the agenda and see the issue dealt with one way or another in the next 12 months” would involve a number of steps: industry leaders acknowledging the current situation is not sustainable; creating a blueprint of what a proposed mechanism would look like; and forming a task force that is given six months to develop “a detailed, down to the penny” plan to present to the finance minister.

Ottawa would then be asked to engage with the task force within 90 days.

BLACK SWANS NEED ATTENTION

The (re)insurance industry would do well to pay more attention to unanticipated and tough-to-model black swan events, Monica Ningen, Swiss Re’s managing director and chief property underwriter for the United States and Canada, suggested during a CIFF panel discussion.

“When you look back at the major events around the world, there is always something notable about them that we didn’t anticipate. They are sort of in the ‘black swan’ category,” Ningen told attendees of Perspectives on the Canadian Reinsurance Scene After a Rough Year.

She cited a California quake event to illustrate an atypical event. People could “walk away from their mortgages,” Ningen said, noting there are more people owing money on their mortgages than for what the homes have been insured.

This would default back to the mortgage company, which buys default covers, often from reinsurers, she said. The scenario does not even take into account if municipalities can get infrastructure back open and communities rebuilt.

“Just sit back and think about how many black swans happened in your lifetime,” Ningen said, adding that the Quebec ice storm could certainly be considered one.

CYBER POLICIES COULD CONVERGE

A lot more convergence in cyber insurance policies is expected within the next few years, as policies, exclusions and wording get tested and case law develops, John Elbl suggested at CIFF.

“Right now, because of the soft market, everyone wants a piece of the pie, so the exclusions are diminishing,” the vice president of AIR Worldwide noted in response to a question about whether he sees future policies addressing particular needs or a growth in exclusions.

As case law develops, “I believe, say, easily five years from now, we’ll see a lot more similar cyber policies than a lot more divergent,” Elbl said during Pricing and Reserving Cyber Risk Products. “It probably won’t be as similar as, say, the homeowners’ market for policies wording, but I think there will be a lot more convergence.”

The vast majority of the cyber market today is commercial, he noted.

For personal lines, Milliman consulting actuary Elizabeth Bart suggested that consideration must be given to how something like the Internet of Things, or IoT, could influence personal lines. “Even though it was your toaster that (allowed the hacker) in, you still need your ID theft protection,” Bart advised.

MODELLING THE PROCESS

The future is more around modelling the process than the data, Kevin Huang, founder and chief executive officer of Huang & Associates Analytics, suggested during CIFF’s Data Analytics, Data Science, Big Data panel discussion.

While the focus previously was on modelling financial catastrophes, there is now the ability to model human behaviour, man-made Cats, terrorism and even casualty Cats, Huang told attendees.

“If you have a very complicated process and you have a lack of data, you have scarcity of data, then modelling the process is the way to go so you can complement your lack of data with your better understanding of the process,” he said.

In the reinsurance space, “the quantity of data is always a challenge,” said Jonathan Frost, senior vice president of GC Analytics at Guy Carpenter, adding the space is trying to acquire more data.

In certain cases, Jeff Turner, Beach & Associates’ senior vice president and managing director, Toronto, said there may not be enough data to develop credible results. “There’s a ton of information that’s out there that isn’t necessarily being captured by primary insurers that would be helpful for the reinsurers.”

In the actuarial space, Huang would like to see a “centralized place” where industry partners could team up with a provider “who can digitize every single

piece of information.” Global users could then search for and extract the data, perhaps providing the source some money per search, he added.

INDUSTRY WARMS TO INSURTECH

Change in the insurance industry will unfold regardless of what those in the value chain do, but a new view of how insurtech can help enhance customer and consumer engagement seems to be forming, Nigel Walsh said during CIFF.

Walsh, a partner with Deloitte financial services practice in the United Kingdom, said both fintech and insurtech are witnessing tremendous growth.

Still, Walsh told those attending InsurTech: Here and Now that he sees a big difference between fintech and insurtech, one that could fuel growth for the latter.

“I don’t think insurers are sitting there with a pin trying to burst it (insurtech bubble),” he said. Rather, they are asking, “‘How do we work together? (to get a better outcome for customers).”

Pointing out “there’s a really tidy space to go after,” he suggested, “all we’re doing is squeezing more and more companies into the space that can address this.”

Something like half of the US$8.5 billion of investment in this space in recent times is targeting distribution, he said. “That, to me, says we want a better way to engage. As consumers, we’ve built our expectations; we’ve increased our bar.”

MUNICIPAL COLLABORATION KEY

The consequences of poor land use policies is but one of the lessons learned from the Fort McMurray wildfire, Michael Brisebois, global head of reinsurance at TD Insurance, suggested during CIFF.

“Society as a whole is still living with the consequences of poor land use policies,” Brisebois said during the reinsurance panel discussion. For example, some houses are being rebuilt on known floodplains despite there being no robust flood mitigation in place, he noted.

After Fort McMurray, it became “pretty clear that both insurance companies and reinsurance companies now look at wildfire a little differently,” Brisebois said. “It’s not a one-off event.”