ERM and risk modeling helped reinsurers weather CAT storm: A.M. Best

Better risk management and more sophisticated risk modeling platforms are two main reasons behind the global reinsurance sector’s “resiliency” in the face of near-record catastrophe losses last year, says A.M. Best in a recent report.

“In a word, ’resilient’ might best describe the financial position of global reinsurers, considering the volatile economic conditions and the frequent and severe loss events of 2011,” the rating agency notes in its Global Reinsurance Financial Review. “The only year that produced larger cumulative insured catastrophe losses than 2011 was 2005, when hurricanes Katrina, Rita and Wilma (KRW), in combination with other, smaller events, produced about $125 billion in industry losses.”

The lessons learned from previous catastrophic events helped reinsurers maintain capacity and absorb the severe losses. “Since KRW, there has been a continuing evolution in enterprise risk management (ERM), which has strengthened overall risk management,” A.M Best notes. “It has encouraged prudent capital management strategies.”

In addition, improved catastrophe and economic capital models allowed reinsurers to better allocate capital within complex risk portfolios, according to the firm. “The models, while not perfect, helped keep both individual and cumulative losses in 2011 within stated risk tolerances for most of the global reinsurers.”

The rating agency forecasts a “stable outlook” for the global reinsurance industry.