Natural Perils

__

In the world of specialist insurance and reinsurance, many people look after quite obscure, niche risks. However, says Chaucer’s Head of Bermuda, James Holliss, his work is quite relatable. “We reinsure the insurance companies. The products we’re offering are in respect of natural perils, so ultimately we’re dealing with coverage against hurricanes, earthquakes, typhoons and so on.”

“The mechanics are very similar to your own homeowner’s insurance,” he continues. “But we’re talking about billions of dollars, not thousands. It is on a much grander scale and tends to mean newsworthy events.” Indeed, the sums involved can be huge, “I can remember doing a $100 billion industry loss warranty. The loss to the industry had to be greater than $100 billion before it paid out.”

It doesn’t stop at reinsurance either. “We’re the reinsurer but we then buy our own reinsurance in the form of retrocession insurance – and even the retrocessionaries are passing off risk. You want to avoid a spiral effect and the concentrations of exposure that happened in the financial crisis.”

Natural disasters mean lots of data. As with most branches of insurance, the quantity and quality of the information available has grown enormously in recent years. “These days you can get data down to a really granular level. You’re looking at individuals’ behaviour and you can access a lot of information from social media.” This has resulted in large numbers of insurance start-ups that are very tech focused. “They’re looking to harness the data from social media to price the risk that they’re offering from a natural perils perspective.”

If greater insights to behaviour at the individual level are one big growth area, another significant change is on a planetary scale.“The effects of climate change are becoming more and more obvious,” says Holliss. This, in turn, impacts almost everything else. “We need to look at how rising temperatures and sea levels are impacting the frequency and severity of hurricanes in years ahead. What I like about my job is that there’s a great deal of analysis around these kinds of events but you also spend a lot of time in face-to-face discussions with clients too.”

For those who are insuring (and reinsuring) against natural disasters, it has been a busy few years. “In 2017, you had Hurricane Maria, Harvey and Irma and Californian wildfires. In 2018, you had another hurricane hit Florida, plus you had some Japanese typhoons, then another round of California wildfires. This year you’ve already had two Japanese typhoons.” All of these result in damage to property portfolios that run into millions or billions of dollars. “You need to ask yourself ‘Is this just a bad couple of years or is it a trend? Is it the new normal?”

Key to this, says Holliss, is understanding not just the events themselves but the way the various drivers behind them interact. Climate change may be marginally increasing the frequency of wildfires but the bigger issue is that land which was once wild is now covered by suburban neighbourhoods. When the fires start in places like California and Australia, they burn homes and other property rather than dry forest and scrubland. Similarly, flooding in the US is a larger problem than it might have been 30 years ago, because of weather patterns. However, the more significant drivers are population growth and the development of land prone to flooding.

The factors affecting Holliss’s area of reinsurance are not limited to climate and population either – the world of finance has a role to play too. In recent years property insurance has seen a large influx of money from pension funds. The reason for this is that these funds have billions under management and interest rates are very low, so they’re looking for places to invest that provide a better return.

This is not the only reason they like insurance. Reinsurance, Holliss explains, is a non-correlating or low correlating line of business, which enables pension funds to diversify their risk exposure.
“The money markets don’t cause an earthquake in LA,” he says. For clients this has had the effect of driving premiums down – as the supply of finance has grown faster than the business.

As if all this weren’t complicated enough, the natural disasters of the past few years are now making the pension funds question whether this space is providing the returns they’d hoped for. “Are they pricing their risk appropriately? Have they factored in changing weather patterns?”

Other changes are more straightforward. Holliss says he sees “anything cyber-related” as important. “We’re definitely looking at things like loss of data claims, data breach claims. It’s a massive space.”

There are also often surprising new opportunities is everyday insurance. “Even in the most developed of territories, like the US, there are significant gaps in coverage.” Here, he says, he’d expect flood insurance to be a big growth area. “Also, in California the penetration of homeowners’ earthquake insurance is still very low – about 12 per cent – because mortgage companies don’t require you to buy it. If that were to change, that could be a significant growth there.”

This interconnected world plays to Chaucer’s strengths because it offers a large number of product lines covering many types of risk. “Increasingly clients are looking for a kind of holistic relationship– someone who does not just write property, but casualty, marine and terrorism too,” says Holliss. “Over the years we have greatly improved the dialogue that we have between various teams, so that we can very quickly identify core clients and engage with them effectively.” Customers, he adds, are rationalising their placements. “They would rather deal with 10 to 15 relevant reinsurers than 50, many of whom are irrelevant or only offer a couple of products.”

Finally, the specialist reinsurance industry itself is not immune to wider changes in society. Holliss says the overall culture of the industry is changing – and for the better. “The Lloyd’s market has been slow to change, but that’s changing now. If you walk around the Lloyd’s underwriting room you see a much greater gender balance and a more diverse range of people. Things are changing, and definitely for the better.”