Flood Modeling: A Key Property Market Challenge
Capacity awaits for when flood can be more adequately modeled.
As if putting a neat bow on all the major themes of the Advisen Property Insights Conference June 4 in New York, Robert Schimek, senior vice president and CEO Americas said that “within the next few weeks, AIG will announce a new risk management center of excellence in association with a major university that will be centered on engineering and technology.”
Although the event had its usual depth and breadth, each panel and speaker seemed to focus on different perspectives of the same essential concepts: Big data and third-party capital markets are forcing an industry that has historically sought more information and funding to restructure itself to be able to manage surpluses of both.
The AIG center is expected to provide insight on how to do that. No further details were available from the company at press time.
“There are billions of alternative-capital dollars on the sidelines just waiting to get in,” said Cory Anger, managing director of GC Securities and global head of ILS origination and structuring at Guy Carpenter.
“Just 1 percent of the pension funds is about the current size of the reinsurance market today. And that does not even count sovereign wealth funds and family offices.”
She also noted that this looming capital is becoming available at a time when several markets are in need of fresh capacity. The flood market in particular, Anger cited, “has a huge under-funded problem. We are at a very big turning point in how we deal with this. It is a sea shift as rate adequacy is moving up slowly. We are seeing increased privatization of risk that had been centralized.”
While that might seem like an unmitigated blessing, Advisen CEO Bill Keogh, moderator of the CEO panel that closed the conference, asked the panel if reinsurance was still viable in the face of burgeoning alternative capital, and if property catastrophe margins were gone forever. Both unintended consequences.
Byron Ehrhart, CEO of Aon Benfield Americas and chairman of Aon Securities, assured the packed room that “reinsurance is still viable and is becoming more competitive.”
And Anger, of GC Securities, offered hope that “prop cat margins can get to where baseline pricing is more reliable so it can be depended on as a source of revenue.”
As with big money, big data is both a boon and a burden. “Analytics is exciting stuff,” said Thomas Lawson, president and CEO of FM Global.
“But we have been collecting data for 180 years and we know that the strength of your model is only as good as your data. And your data is only as good as your premise.”
Lawson also made a point of addressing a concern that several large owners had raised throughout the conference: the reluctance of underwriters to pay property claims in cases when the damage could be traced to some type of cyber threat, or to write coverage for data and systems.
One reason for that reluctance is that cyber security remains difficult to evaluate in traditional underwriting. So just as a theft claim would not be honored if a door were left unlocked, some carriers have been unwilling to pay for cyber losses if proper safeguards were not in use.
“You can’t keep people out of your system. But you can know when they get in, and have ways to get them out.” — Thomas Lawson, president and CEO of FM Global
“We have known that data is property for some time,” said Lawson.
“A loss is a loss, loss of data, or denial of service. The same as if a gas turbine explodes because of a virus or because of a mechanical failure.”
On cyber security Lawson added, “the current mentality is that you can’t keep people out of your system. But you can know when they get in, and have ways to get them out.”
Taking an active role, Schimek said that AIG has been investing in new capabilities to provide insights on dark networks and insureds’ vendor networks.
“There is a real risk to physical property from a cyber attack.” Far from being a problem, he exhorted, “this is a great opportunity for the industry.”
The idea of a broader opportunity was another theme in the conference, established early by Paul VanderMarck, head of strategy and partner development for RMS, in his keynote address.
“Models make markets,” was the catchphrase of his remarks. He elaborated that the flood market in the United States “is a well known peril, but is nowhere near fully covered because it is one of the most complex perils to model. We have made much more progress in earthquake.”