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‘Up to $12.5bn’ of ILS capital trapped or lostThe size of the trapped collateral could raise doubts about investors’ willingness to commit more capital to the market

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US insurers face double whammy from cat hit and market weakness

Everest Re most exposed to Q3 cat losses

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NEWS www.insuranceday.com | Monday 16 October 20172

US insurers face double whammy from cat hit and market weakness

Fundamentals were deteriorating before Hurricanes Harvey, Irma, Maria and the rest

Graham VillageGlobal markets editor

Even after what are expected to be significant reinsurance recoveries, the US property/ casualty industry will be post-

ing a hefty net underwriting loss this year and one of its worst combined ra-tios of the century.

The record peak ratio of 123.3% in 1992, the year of Hurricane Andrew, is unlikely to be beaten but the market may post a ratio of 110% or worse for the first time since 2001.

Following the market’s underwriting loss in 2012, owing in part to Hurricane Sandy claims, the US market delivered profits for the next three years in a row – incredibly, the first time since the early 1970s it has been on such a good streak.

However, between 2013 and 2015 the market’s profitable performance de-pended on the abnormally low major loss experience and a level of reserve releases that analysts say is unsustain-able over the longer term.

With the rating environment weak, major loss experience picking up and motor business deteriorating for both personal and commercial lines writers, the US industry returned to its more usual, loss-making form last year, turn-ing in a combined ratio of 100.7% and an underwriting deficit of $4.7bn.

Things had worsened this year even before the disastrous third quarter. At the half-year mark, the industry’s com-bined ratio had deteriorated one per-

centage point to 100.7% compared with the same period of last year. Catastro-phe losses were higher and also well above the 10-year average and the 4.3% rise in attritional losses outstripped the industry’s 3.4% earned premium growth as the industry struggles with rising motor loss costs.

Insurers continue to show favourable reserve development and for the first half of this year releases actually rose, up 17% to $6.9bn, giving a 2.6 percent-age point benefit to the combined ratio.

Analysts calculate the market is still running at an overall, modest reserving surplus, although motor lines have fall-en to deficiency. But a recent survey of actuaries carried out by Willis Towers Watson suggests reserving trends may be on the turn. Survey participants sat-isfied with the accuracy and confidence of their reserving levels fell 15 points since last year to 48%.

That heavy fall may be a reflection of an inflection point in the reserving cycle, according to Willis Towers Wat-son’s property/casualty mergers and acquisitions practice leader for the Americas, Joseph Milicia, as insurers need to track and deal with the end of

the benign loss trends of the past decade.If a reserving squeeze is on the way it

could not have come at a worse time, as insurers will be looking for any sources of relief to help pay for this year’s heavy losses. Previously in response to major catastrophes, insurers have typically identified reserve surpluses they have been able to release.

Looking at the industry’s long-term performance reveals a clear correlation between major catastrophic loss and the industry’s level of profitability but it is rare for cats to push the industry into an overall loss.

Since 1991 the market has posted a net loss only once, in 2001. Even in 2005 – the year of Hrricanes Katrina, Rita and Wilma – net profit was a respect-able $44.2bn. More damaging was the financial crisis in 2008, although insur-ers stayed in the black that year, deliv-ering a small profit of $3bn (see table).

Post-crisis, insurers have had to get used to a reduced level of investment earnings, making the industry more vulnerable to catastrophic loss.

Companies House tomorrow looks further at the US market and the impact of the recent cat losses.

Table: US property/casualty industry net profitability in years of major loss

Year Event Industry net result ($bn)

2001 World Trade Center (7.0)

2005 Hurricanes Katrina, Rita and Wilma 44.2

2008 Financial crisis, Hurricane Ike 3.0

2011 Hurricane Irene, thunderstorms 19.5

2012 Hurricane Sandy 33.5

Source: Insurance Information Institute, Insurance Services Office, AM Best

Residents boat down a flooded street in Houston after Hurricane

Harvey hit the city: the US property/casualty market could be heading for one of its worst

combined ratios of this century IrinaK/Shutterstock.com

NEWSwww.insuranceday.com | Monday 16 October 2017 3

‘Up to $12.5bn’ of ILS capital trapped or lostThe size of the trapped collateral could raise doubts about investors’ willingness to commit more capital to the market

Lorenzo SpoerryDeputy editor

Between $10bn and $12.5bn of capital in the insurance-linked secu-rities (ILS) market has

been lost or lies trapped because of recent natural catastrophe loss-es, according to internal estimates given to Insurance Day by a top ILS fund manager.

The size of the trapped collateral could raise doubts about investors’ willingness to commit more capital to the market in coming quarters.

Estimates by Alliance Bern-stein predict ILS investors will pay between $4bn and $9bn to cover losses from Hurricane Irma, which slammed into Flori-da in mid-September. But a larg-er amount is likely to remain trapped as collateral until the fi-nal scale of the losses is revealed - a process that market sources say could take years.

Florida wind risk forms a major part of most ILS investors’ port-folios, with some 13 catastrophe

bonds at risk from Irma, by S&P Global Ratings’ reckoning.

Losses arising from this hur-ricane season are likely to be the largest that the ILS market has ever faced, with Lane Finan-cial calculating that investors lost 5.4% on their money in the third quarter.

The re/insurance industry as a whole could pay out more than $100bn to cover losses seen so far in 2017, by many estimates, and some believe it could prove to be the largest annual loss on record

Luca Albertini, chief executive

of Leadenhall Capital, told Insur-ance Day the firm is in conversa-tion with existing as well as new investors about committing capi-tal to the market.

A relatively benign natural catastrophe environment over the last decade means that ILS has delivered a generous 7.37% since 2002, by Lane Financial’s estimation. The figure includes recent losses.

ILS issuance so far this year has already broken an annual record, with a total of $10.64bn of bonds brought to market, ac-

cording to Artemis.bm, a special-ist news source, bringing its total size to $29.87bn.

Some ILS fund managers have told investors to expect a “sig-nificant” increase in yields on catastrophe bonds and other ILS instruments because of the amount of capital destroyed in the re/insurance industry.

Vegard Nilsen, chief operat-ing officer of ILS fund manager Securis Investments, has told In-surance Day that he expects the combination of hurricanes Har-vey, Irma and Maria to be a “mar-ket-changing event”.

Executives of traditional re-insurers at the Monte Carlo Rendez-Vous suggested that out-of-pocket ILS investors might be keen to seek legal remedies to avoid paying claims arising from the hurricanes, in contrast to the tradi-tional reinsurance market, which would have paid out quickly.

But legal experts speaking to Insurance Day have dismissed such suggestions and said that improvements in the wordings of ILS contracts over recent years makes them far more difficult to contest in court.

Everest Re is most exposed to Q3 cat losses Everest Re has emerged as the most exposed of the Bermudian carriers to the third quarter’s catastrophic losses, writes Mi-chael Faulkner.

The group has estimated a $1.2bn pre-tax loss from Hurri-canes Harvey, Irma and Maria and the two earthquakes in Mexico.

This would equate to a 14% hit to shareholders’ equity, based on financial data for the first half of 2017.

XL Group is the next most ex-posed. Its preliminary estimate of $1.48bn for third-quarter losses is equivalent to 13.3%

of shareholder equity. Renais-sanceRe and Axis Capital fol-low, with pre-tax third-quarter losses representing hits to share-holder equity of 12.5% and 10.5% respectively.

Carriers are basing their esti-mates on industry losses in the region of $75bn to $100bn for the third quarter, using a mix of mod-elled information, underwriter analysis, preliminary discussion with client and profiles of exposed limits in affected regions.

But they have also been at pains to stress the considerable uncer-tainty around the ultimate losses,

Novae puts Q3 cat losses at $60mThird-quarter catastrophe losses will cost Lloyd’s insurer Novae $60m, writes Michael Faulkner.

The estimates, which are net of reinsurance, cover Hurricanes Harvey, Irma and Maria and the two earthquakes in Mexico.

They were contained in a pre-liminary disclosure from Axis Capital, which is due to acquire the Lloyd’s insurer.

Axis said Novae had “signifi-cant aggregate reinsurance cover still remaining”.

Fellow Lloyd’s insur-er Beazley has es-timated it will pay out be-tween $175m and $275m to cover losses arising from Hurricanes Har-vey, Irma and Maria and the Mexico earthquake.

Lancashire Holdings has es-timated its aggregate net loss-es from the events at between $106m and $212m.

Hiscox said it expects to pay out about $225m to cover claims from Harvey and Irma.

$175m to $275m

Amount fellow Lloyd’s insurer Beazley

expects to pay out for Q3 cats

St Petersburg beach in Florida after Hurricane Irma

Laurel A Egan/Shutterstock.com

Table: Bermuda carriers’ third quarter loss estimates as percentage of shareholder equity

Company Pre-tax estimate % shareholders equity

Everest Re $1.2bn 14.00%

XL $1.48bn 13.30%

RenRe $625m 12.50%

Axis Capital $617m 10.50%

Validus $378.9m 9.00%

PartnerRe $475m* 6.90%

* HIM only

particularly given the complexity caused by the multiple events, to-gether with the expectation of a

relatively high proportion of flood related losses attributable to Hur-ricane Harvey.

It would not be surprising if the final loss figures are revised upwards.

FOCUS/ US PROPERTY/CASUALTY www.insuranceday.com | Monday 16 October 20174 www.insuranceday.com | Monday 16 October 2017 5

US reinsurance deal essential for London after break with EUThe covered agreement between the EU and the US will no longer apply to London market firms once the UK leaves the EU, so a replication of the deal is an urgent post-Brexit priority for the market

Dave MatchamInternational Underwriting Association

Europe and America have a long history of interna-tional co-operation and shared political values. As

the US senator John McCain said: “Americans and Europeans share a common goal – to build an en-during peace based on freedom.”

Yet despite this closeness, dif-ferences remain. For many years the remarkably interdependent insurance and reinsurance mar-ket shared by the two sides has operated with significant trade barriers. Perhaps the relationship is better reflected by comedian Mike Myers, who observed: “Eu-rope is weird songs that would never make it in America.”

Certainly, the announcement of a covered agreement between Europe and the US to enhance international insurance and rein-surance regulation has been long anticipated. When the Interna-tional Underwriting Association (IUA) first began actively advocat-ing the case for mutual recogni-tion between authorities on both sides of the Atlantic, Hilary Clin-ton was First Lady of the US and everyone was worrying about the Millennium Bug. Now, 20 years later, the case has finally been recognised at the most senior lev-els of government with a deal that promises to remove regulatory barriers to a more efficient re/in-surance marketplace.

Collateral Before 2012 non-US reinsurance businesses were forced to post collateral equal to 100% of the gross reported loss when writ-ing US risks. The Dodd-Frank Act eventually allowed states to en-

act changes to this rule, reducing the collateral requirement to be-tween 10% and 20%. Many took advantage of the opportunity, but with each state having to pass leg-islation individually the process has been time-consuming.

However, Dodd-Frank also cre-ated a Federal Insurance Office, which could represent the US industry to negotiate a bilateral trade deal on reinsurance. As a result, the IUA, together with a coalition of other industry rep-resentatives, has been arguing a covered agreement would be the best way of dealing with the col-lateral issue and, at the same time, could offer many other benefits.

Early this year negotiators on both sides of the Atlantic an-nounced they had reached such an agreement and after a not in-significant ratification process the deal has finally been signed. It seeks to eliminate collateral re-quirements for reinsurers operat-ing on a cross-border basis in the EU and the US.

There are a number of important reporting requirements and oth-er conditions, such as the change only being prospective and regula-tors still being able to require col-lateral if the same is demanded for domestic reinsurers. However, the relief is significant and requires states with existing collateral re-quirements to take steps to reduce them by 20% a year, phasing out to zero in five years.

In addition, the covered agree-ment clarifies that a re/insurance group will be subjected to world-

wide group supervision only in its home jurisdiction. Finally, it also encourages regulators in the US and EU to share information on a confidential basis and sets forth a model to support such co-operation.

Level playing fieldThe net result of these arrange-ments is to establish a more level playing field between EU and US reinsurers. Cross-border trading will become more efficient and greater global access to reinsur-ance services will be promoted.

One of the most significant Eu-ropean providers of cover for US risks is, of course, the London market. Unfortunately, since the covered agreement is between the EU and the US, it will no lon-ger apply to firms there once the UK leaves the EU. It would be a great shame if this were the case, so a speedy replication of the deal, maybe as part of a wider UK-US trade deal, must be an urgent post-Brexit priority.

Indeed, the much-anticipated breakthrough the covered agree-ment represents clearly illustrates the possibilities for greater inter-national co-operation between regulators and provides a perfect template for future negotiations. Above all, it sends a powerful international message that pro-tectionist regulation is not in the long-term interest of clients. n

Dave Matcham is chief executive of the International Underwriting Association

The much-anticipated breakthrough the covered agreement represents clearly illustrates the possibilities for greater international co-operation between regulators

Future of covered agreement open to questionRegulatory changes due in the US and subsequent concerns raised by state regulators mean the viability of the covered agreement signed earlier this year could be in doubt for the foreseeable future

On January 13, 2017, the US and the EU concluded nego-tiations on the first US-EU insurance covered agree-

ment after this novel multilateral agreement, envisioned and promoted by the National Association of Insur-ance Commissioners (NAIC), was au-thorised by Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act (PL 111-203, 2010). The covered agreement was recently exe-cuted on September 22, 2017.

The agreement is intended to allow US and EU insurers to rely on their home country regulators for world-wide prudential insurance group su-pervision when operating in either market; to eliminate for EU reinsur-ers the collateral requirements and local presence requirements for US reinsurers that meet certain solven-

Jeffrey Kingsley and Frederick J PomerantzGoldberg Segalla

Bridging the technology and talent gapsCustomers, even in specialty areas, are seeking insurance solutions that fit with the speed they are accustomed to in other areas of their lives

To be sure, information has always been the cornerstone of the insurance industry. We cannot be effective from

a business standpoint or do right by our clients if we lose the sharp edge that solid information provides. Ear-lier in my career, I recall waiting weeks – and sometimes months – for reports needed to make decisions re-garding changing appetite or deter-mining what line or class of business was having profitability issues. Such lengthy lead times must boggle the minds of those newer to the industry. And yet there is something to be said for making sure the brakes on the data speed train work to be certain it

is taking us where we need to go and not racing off the rails.

Green light, red lightWe’re more connected today than ever before. Sensors enable data col-lection at every moment. They allow wearable devices to track our heart rates, capture our driving habits and allow home automation systems to be controlled remotely at the stroke of a touchscreen. The internet of things connects our present and fu-ture, with implications we continue to tease out as technology advances.

Consider driverless vehicles. Au-tonomous cars have grabbed the attention of many in the industry, perhaps more so than any other recent technology. Autonomous ve-hicles are going to have a very dif-ferent impact on excess and surplus (E&S) lines compared to straight auto coverage. For E&S, I predict a

future full of interesting exposure questions in terms of who is respon-sible when an accident occurs. The car manufacturer? The software developers? Or maybe the people who installed the special traffic sig-nals or signage necessary to interact with autonomous vehicles?

If the technology driving autono-mous vehicles is as effective as it is expected to be, look for a significant drop in claims and, as a result, in

premiums for those underwriting personal auto. Public entities will have to deal with infrastructure costs to accommodate these new vehicles, which is another consid-eration for those underwriting that line of business.

DronesAs you read this article, a drone could be hovering overhead, gathering data for an insurer who has already found

value in obtaining pre-loss images of a property. That is one way insurers can head off fraudulent claims.

Drones also make it much easier to document damage after disas-ters, such as hurricanes, which in turn speeds up the claims process. There are certainly exposures to weigh up with regard to privacy and drones. Consider the exposure in a scenario in which that same drone operator uses the camera to record neighbours in their homes. The law in this area is evolving and will be critical to watch.

Industry leaders continue to follow insurtech startups such as Lemon-ade, an insurer focusing initially on the homeowners and renters mar-ketplace in New York City. These start-ups have already begun to alter the insurance landscape by appeal-ing to customers drawn to instant access and a swifter transaction than

insurers traditionally have provided. The insurtech movement hasn’t

made a significant impact on the medium-to-large accounts in the E&S world, but we cannot assume that it won’t at some point in the fu-ture. The timing will dovetail with the migration of millennials into entrepreneurial and business lead-ership roles, where they will seek insurance solutions that fit with the speed they are accustomed to in oth-er areas of their lives.

Bridging the talent gapSpeaking of millennials, our industry is facing a well-publicised talent gap, with an estimated 400,000 insurance employees expected to retire with-in the next several years. Marrying data extraction with machine learn-ing and artificial intelligence could very well reduce the number of hires necessary to fill those openings, but

no matter what, people will always be at the heart of this business.

Across the insurance industry, employers are working hard to at-tract top talent. Many offer recent college graduates with risk manage-ment and insurance academic back-grounds a rigorous training program that exposes them to various disci-plines within the company.

People want to do business with people they like, respect and trust. If we keep that in mind, all the other things will fall into place, from effec-tively leveraging technology to gaug-ing exposures and attracting talent. For our industry, long-term success still depends on the person across the table or on the other end of the call – or text.n

Ron Vindivich is president of US excess and surplus lines at Argo Group

Ron VindivichArgo Group

‘Both US and EU insurers deserve to receive fair and equal treatment. There should be no disadvantage to an EU insurer doing business in the

US. Similarly, a US insurer should not be disadvantaged

when it operates in the EU’

Ted NickelNAIC

cy and market conduct conditions; and to encourage information shar-ing between insurance supervisors.

One goal of the covered agree-ment is to affirm the Federal Insur-ance Office’s (FIO) authority, also established by the Act to preempt state laws that are inconsistent with the agreement and may result in less favourable treatment for for-eign insurers. Such pre-emption, however, may not apply to any state insurance measure that “governs any insurer’s rates, premiums, un-derwriting, or sales practices.” Al-though the FIO and the US Trade Representative (USTR) must consult with Congress on the negotiations, the Act does not require specific au-thorisation from Congress for the covered agreement to take effect. The FIO represents the US in inter-

national negotiations with respect to insurance regulation and has a seat on the executive committee of the International Association of In-surance Supervisors.

ConcernsOn June 8, 2017, the House of Representatives voted to pass the Financial Choice Act of 2017. A section of the Choice Act, known as “orderly liquidation authority”, al-lows regulators to resolve a failing financial firm much like the Feder-al Deposit Insurance Corporation handles failing banks. Some argue these emergency powers in Dodd-Frank have made “too big to fail” a permanent policy.

Initially, the covered agreement did not call for “equivalency recog-nition” of the US insurance regulato-ry system by the EU. Since January, there have been developments signi-fying a cooling of enthusiasm by cer-tain trade associations representing segments of the insurance industry and by state legislators.

In a newsletter from the Center for Insurance Policy and Research, dated March 2017, NAIC president and Wisconsin insurance commis-sioner, Ted Nickel, quoted some of the assurances offered by the FIO: “State insurance regulators were told by the negotiators the two goals of the process were to gain equiv-alence for the treatment of U.S. insurers operating in the EU and recognition by EU of the U.S. insur-ance regulatory system. In my view, neither was clearly resolved in the covered agreement.”

“Fellow regulators and I are con-cerned with the disparate treat-ment some EU jurisdictions are imposing on US insurers. State in-surance regulators are committed to reaching accord on a system of mutual recognition without any ju-risdiction imposing its values and regulatory systems on another. Both US and EU insurers deserve to receive fair and equal treatment. There should be no disadvantage to an EU insurer doing business in the

US. Similarly, a US insurer should not be disadvantaged when it oper-ates in the EU.”

In March 2017, state insurance regulators and the NAIC wrote a letter to the Treasury on the cov-ered agreement asking it to work with the EU to clarify details of the agreement and also to offer tech-nical assistance and expertise in terms of implementation.

Thus, with the benefits to US in-surers and reinsurers subject to interpretation, the FIO facing elimi-nation under the pending Choice Act and the powers of the Consumer Fi-nancial Protection Bureau set to be diluted by the Choice Act, it is easy to see that the covered agreement’s viability could be in question for the foreseeable future. Time will only tell for state regulators as they are faced with the task of implementing it over the next two years.n

Jeffrey Kingsley and Frederick J Pomerantz are partners at Goldberg Segalla

Drone: one of a number of new technologies that has implications the insurance industry will have to get to grips with

Ruslan Ivantsov/Shutterstock.com

FOCUS/

Hurricane Harvey, Irma and Maria are very unlikely to lead to large losses under cyber insurance poli-cies or even to claims under non-af-

firmative (so-called “silent”) cyber cover. However, the storm losses are the last ele-

ment in a convergence of developments which will have a profound impact on the cyber mar-ket and on the way cyber cover is offered. In short, the storms look set to deal a blow to free non-affirmative cyber coverage.

Following conversations with many re-insurers it is clear there is growing intent to push back on non-affirmative cyber, as it is felt this exposure belongs in a market where it is appropriately assessed, priced for and aggregated. We have already seen this move-

ment materialising and have seen a number of new exclusions that reinsurers will look to be adding to their policies. This in turn will drive the sale of additional, standalone poli-cies to cover the excluded risk.

ReactionHurricane losses alone were insufficient to drive this emerging position, which extends well beyond one or even a handful of rein-surers. Instead, a series of developments has caused this reaction. There is mounting pres-sure on reinsurers from regulators and rating agencies to get a firm handle on exposures and aggregations from non-affirmative cyber. Regulators are clearly unhappy the market is providing cyber insurance without asking questions and assessing exposures.

The second development is the pressure of recent material losses under non-affirmative cover that followed the global NotPetya ran-somware attack and other hacks. NotPetya particularly has changed not only percep-

tions of the magnitude of non-affirmative cy-ber, but also its nature as a genuine multiline peril. The attack indiscriminately hit sectors from banking to pharmaceuticals to shipping.

The storms and their tragic and costly toll are the third development, but are simply a catalyst that reinsurers perhaps needed in order to act. Push-back on exclusions is not possible in a soft market, but we are already seeing reinsurers looking to push-back fol-lowing Harvey, Irma and Maria.

NotPetya clearly revealed the potential for large multinational, multi-line, non-affirma-tive cyber losses to accumulate on the books of reinsurers, which if retained could leave them in a materially different financial position.

Net lossAn important point to highlight is that the retrocessional covers reinsurers purchase are very often granted on a “named peril” basis, and as cyber is often not one of those named perils, reinsurers are likely to be stuck

with keeping any loss net. Reinsurers believe to control their exposures they must exclude non-affirmative cyber risk, since they believe inaction could leave them holding large ced-ed losses on their own balance sheet. Even the hint of a broadly hardening market gives them the chance to do so. The broader impli-cations of these trends are still to be seen but it is questionable if insurers will be willing to retain this risk themselves.

That could lead to a significant change; non-affirmative cyber risk will be written affirmatively in the specialist cyber market. Once there, cyber risk will be properly as-sessed, aggregations can be measured, risk-based pricing calculated, and risk mitigation measures adopted much more widely, to the benefit of all (in a similar way to which insur-ance has helped many other sectors with risk mitigation).

Furthermore, when cover is granted on an affirmative basis, coverage disputes should decline materially.

This market reaction is not a completely unfamiliar one. It was experienced notably for aviation war risk coverage following the Gulf War, and for terrorism coverage after the September 11, 2001 attacks. Standalone aviation war and terrorism markets quickly emerged to pick up the slack, in both cases at times when global capacity was tight.

Capsicum Re believes this outcome is like-ly. However, it is not a certainty the primary markets will be able to exclude non-affirma-tive cyber coverage from their policies. Cus-tomer push-back and competitive forces may prevent it. However, whichever way the market goes, solutions are available to limit risk for reinsurers, insurers and ultimate cus-tomers alike. Facilities and mechanisms are already in place which have been developed to meet changing demand, no matter how it evolves after the storms of 2017. n

Ian Newman is global head of cyber at Capsicum Re

US PROPERTY/CASUALTY www.insuranceday.com | Monday 16 October 20176 www.insuranceday.com | Monday 16 October 2017 7

Flood is insurableAdverse selection is no more an issue for flood risk than it is for hurricane wind risk. Insurers can get a viable spread of risk for flood but it requires effort and investment in catastrophe modelling technology

Brad KadingAssociation of Bermuda Insurers and Reinsurers

As a consumer with a Hurricane Irma claim I am glad I have a home-owner’s contract that

has coverage for both wind and water, with a unified coverage lim-it and the same 2% deductible. It allows me and the insurer to avoid the confusion and the conflict as-sociated with allocating damage to storm surge from the hurricane or wind. It should lead to a quicker more satisfactory settlement.

Why is such coverage not more often available in the US? There are a variety of reasons: the ad-age that flood is not insurable, regulatory restraints on rates and coverage forms, insurer fears of growing hurricane losses, price competition from the National Flood Insurance Program (NFIP) and mortgage lenders refusing to accept private flood insurance. Let us tackle these one at a time.

Is flood insurable? Despite what I learned in my 40-year-old Char-tered Property Casualty Under-writer texts, flood is insurable. Adverse selection is no more an issue than it is for hurricane wind risk. The insurer needs to obtain a diverse spread of like, uncorrelat-ed risks. You cannot do it within a single county, but you certainly can within a region, a country or the world. An insurer can get a spread of risk but it takes an effort. New catastrophe modeling technology helps the underwriter enormously.

Restraints on rates and cover-age forms: in our state-based system this is a real issue. On a positive note, several states in-cluding Florida are leading the way, allowing insurers to exper-iment with rates and coverage forms. Several states already al-low insurers flexibility in use and file systems. Insurers look for cer-tainty and fear future regulatory

overreaction tied to paradigm shifting loss events. We need to recognise the development of a private flood insurance market as an experiment. Give it 10 years – a chance to evolve.

Larger hurricane losses? Cli-mate change is real. The early evi-dence is climate change and ocean warming will not lead to more hurricanes but may lead to more intense hurricanes. The anecdot-al 2017 hurricane experience will reinforce that notion. But insur-ers have already adjusted to the expectation of larger-sized hurri-cane wind losses. Building code updates and enforcement and new construction techniques are successfully improving building resilience helping to counter the growing coastal exposures. Insur-ers are taking on this heightened wind risk; would they not logically also pick up the storm surge risk?

The storm surge risk is not greater than the wind risk, prob-ably less. For the underwriter this is a matter of matching risk with capital. And reinsurance today is a cheap form of capital aiding in insurer’s risk management. Just as state-based residual markets act as a shock absorber for con-sumers if insurers restrict their wind risk appetite, the NFIP can serve that role in a private flood market. As the experience with private flood takes place, maybe state-based residual markets may also become part of the plan.

NFIP competition: the NFIP has been diverted from its original purpose of calling attention to flood risk and promoting miti-

gation. Instead, with subsidised rates, a simplistic rating plan and a politically led effort to “protect” consumers from signals about risk, it has been perverted.

We have seen this before in state-based residual markets from workers’ compensation to motor to property. But state based re-sidual markets end up being self- correcting over time, whereas the NFIP, with its unlimited federal borrowing authority and political-ly naïve Congressional oversight, seems to resist necessary reform.

Having said that, we do rec-ognise the leadership of former representative Judy Biggert and incumbent House committee on financial services chair, Jeb Hen-sarling, in promoting necessary reforms. We encourage Congres-sional action that is necessary to send appropriate risk signals that protect people and property, pro-tect tax-payers and promote a pri-vate flood market.

Today primary insurers, re-insurers, regulators and policy-makers are working together to bring consumer choice to flood insurance markets. And the Mil-liman study makes it clear that consumers will benefit from lower prices and better coverage options. Association of Bermuda Insurers and Reinsurers mem-bers are glad to be working with the Property Casualty Insurance Association of America and its members to help advance these public policy objectives. n

Brad Kading is president and executive director of the Association of Bermuda Insurers and Reinsurers

Beware the cyber storm blowing through the marketThe impact of this year’s hurricane season on the US property/casualty insurance market is considerable, but there are also significant repercussions for the cyber insurance market

Ian NewmanCapsicum Re

Flood is the most prevalent and fre-quently occurring natural peril in the US and affects every state in the union. Yet despite this, it is poor-

ly understood.Take, for example, the Federal Emergency

Management Agency (Fema) database, which is the main national source of flood data. It is inconsistent, lacks detail and much of it is out of date. Some regions have no data, while oth-ers rely on data from the 1960s. What is more, it lacks detail on flood depth and return pe-riods, two hugely important metrics for fore-casting losses. This has unfortunately led to a false sense of security in some high-risk areas and an overstating of risks in others.

The devastation caused by the two storms is rightly shocking. Latest estimates suggest Harvey was in the range of a 500-year flood event; however, this terminology can be mis-leading – the science and probability behind these labels are actually rather complex.

Consider that between August 2015 and August 2016, there were eight 500-year flood events recorded by the US National Weather Service. There were six 1,000-year floods in the US over the five years from 2010 to 2014. In 2015 and 2016, there were at least three each year, according to Vox Media.

In other words, if you dismiss these long return period events as “inconceiveable” events, you do so at your peril.

Complex riskFlood is far more complex than other perils, mainly because of the impact of local terrain features and geography. To date, the US in-

surance market has been focused on under-standing hurricanes and storm surge, while overlooking different types of flooding.

This has been dramatically exposed by Hurricane Harvey in particular. Surface wa-ter flood was a key feature and the volume of rain (estimated at tens of billions of gal-lons) meant flooding was seen in many areas

where river flooding (which many people think of as the sole source of flooding) has never been seen. At JBA Risk Management we explicitly model different sources of flood for precisely this reason.

In general, flood maps used by insurers should be based on detailed, nuanced data that covers a range of return periods, from one-in-20-year events through to one-in-1,000-year events, and which indicate like-ly flood depths. Using data of the highest possible resolution and quality is also im-portant, as flood is far more localised than other perils.

Too many people are underinsured for flood in the US and this has sadly been laid bare by the recent storms. In Harris county, Texas, where Houston is situated – only 80 ft above sea level and in a hurricane zone – as few as 15% of its structures are covered by flood insurance.

Nationwide, market penetration hovers around 50% of properties in 100-year flood plains. Even in very high-risk areas, such as New Orleans and south Florida, penetration rates range from slightly more than 50% down to single-digit percentages.

We cannot predict the outcome of the gov-ernment’s review of the National Flood Insur-ance Program (NFIP), but the status quo is no longer viable and the recent storms will only compound the pressure.

The NFIP is $25bn in debt and operating un-der a model that is no longer fit for purpose. Harvey and Irma will be significant events

for the NFIP, which has $2bn in cash and a further $6bn in borrowing capacity. The net result is the NFIP will fall further into debt.

Identifying the problemsWhat has gone wrong? Part of the problem stems from pricing restrictions, which mean roughly one in five policyholders are charged rates that do not fully reflect their actual ex-posure. But that is only half the story: a lack of adequate data has been a significant hurdle.

Harvey and Irma will shine a spotlight on the reauthorisation of the NFIP. At JBA Risk Management we think it is extremely likely the market will open up to greater private participation in the very near future.

Even if a moderate percentage of the mar-ket is transferred to private carriers, this could be one of the biggest growth markets for property/casualty insurers in years – so long as they are prepared.

Preparation and awareness are essential. Like any natural peril, communities and in-dividuals need accurate knowledge, as does the insurance market that serves their needs. Part of that preparation is having a clear, up-to-date, science-based understanding of the underlying risk.

If any good is to come out of this year’s hur-ricane season, then the re/insurance, busi-ness and government communities must take heed of these lessons. n

Matthew Reid is managing director of JBA Risk Management USA

Harvey and Irma: five lessons for the insurance industry

None of these ‘lessons’ are new. Harvey and Irma have merely exposed the urgent need for a better understanding of flood risk in the US

Matthew ReidJBA Risk Management USA

Just as state-based residual markets act as a shock absorber for consumers if insurers restrict their wind risk appetite, the NFIP can serve that role in a private flood market

A car drives down a flooded street: despite being the most prevalent and frequent natural catastrophe event in the US, flood is still not well understood

thanatphoto/Shutterstock.com

Argo appoints David Higley US property and inland marine headArgo Group has appointed David Higley head of US property and inland marine, writes Rebecca Hancock.

Higley will report to Ron Vin-divich, president, excess and sur-plus, colony specialty, and will lead the group’s newly formed US property unit, made up of Alteris Property, Colony Specialty Prop-erty and Ariel Specialty Insurance Managers. He will also lead the group’s inland marine division.

Higley joins Argo from Hartford, where he was vice-president, head of marine and livestock segments.

Before Hartford, he worked at Allianz Global and Corporate Specialty as market management executive. Higley also served as senior vice-president, regional sales executive at Fireman’s Fund; vice-president and chief operat-ing officer at Healthcare of New York Workers’ Compensation Trust; and branch vice-president at Royal and Sun Alliance.

Vindivich said the newly com-bined operation will enable Argo to “more clearly articulate” its business appetite.

Tokio Marine pegs HIM and quake losses at $580mInsurer says disasters will have a ‘minor’ impact on its financial soundness

Lorenzo SpoerryDeputy editor

Tokio Marine has esti-mated its pre-tax losses from Hurricanes Har-vey, Irma and Maria and

the earthquakes in Mexico at ¥65bn ($580m).

The Japanese insurer said the losses will have a “minor” impact on its financial soundness.

Hurricane Irma is set to cost

it about ¥32bn ($285m), with Harvey set to generate a loss of ¥21bn ($187m).

Maria is expected to cost the carrier ¥9bn ($80.2m), and the Mexican earthquakes a further ¥3bn ($26.7m).

Tokio Marine said these esti-mates could change “materially” as claims are investigated because of the “complexity of factors” con-tributing to the losses.

Tokio Marine’s domestic rival MS&AD has estimated its pre-tax losses from the same disasters at between ¥70bn ($623.7m) and ¥110bn ($980.4m).

Barclays’ analysts expect most of these losses to come from MS&AD’s Lloyd’s carrier MS Am-lin. By their calculations, it should wipe out two to three years’ worth of earnings from MS&AD’s insur-ance business outside Japan.

RMS estimates $3bn to $6bn wildfire bill but warns loss could growRMS has estimated an insured loss range of between $3bn and $6bn for the wildfires raging in California, writes Scott Vincent.

The estimate, based on infor-mation available as of October 12, includes losses arising from property damage, contents and business interruption caused by the burn component of the fires to residential, commercial and in-dustrial lines of business.

The estimate does not include motor or agricultural losses or

smoke damage, nor does it factor in post-loss amplification. RMS said there was significant uncer-tainty regarding the long-term business interruption impact on the wine industry in the affected region, which could lead to a high-er total loss.

The modelling firm said the on-going nature of the event meant the loss estimate was preliminary, given the potential for the perim-eters of the active fires to change significantly before containment.

The insured loss range also equates to RMS’s estimate of eco-nomic impact from the event, be-cause of the high level of take-up of wildfire coverage in the region.

Much of northern California remains under a red flag warning for high winds as wildfires contin-ue to burn. More than 20 wildfires remain active in the region.

As of October 12 the death toll had climbed to 31 and the area of charred territory had risen to 191,437 acres. With 400 people

Darag Italia appoints chiefRun-off specialist Darag has ap-pointed Tullio Ferrucci chief exec-utive of its Italian business, writes Lorenzo Spoerry.

Ferrucci previously worked at Donau Versicherung, where he was appointed special represen-tative to run its Italian branch. He was tasked with managing the unit’s distressed business.

“Italy is one of Darag’s core markets and one in which we see significant growth opportunity,” Stuart Davies, chairman of Darag, said. “Following our acquisition of Ergo Assicurazioni in 2016, we expect to expand our activity in the country.”

In September Darag received regulatory approval to buy Ikano Försäkring, the Swedish insur-ance arm of Ikano Group.

reported missing, the death toll is expected to rise.

Around 5,000 evacuees are wait-ing for the green light to return home to see if they still have one.

While firefighters achieved 10% containment of the Tubbs fire in Sonoma county, officials there still ordered the evacuation of more residents.

That fire has consumed nearly 35,000 acres, while the Atlas fire in Napa and Solano counties has claimed nearly 44,000 acres.

Residents of Fort Myers, Florida wade through flood water in the aftermath of Hurricane Irma: Tokio Marine estimates the storm will cost it $285m

© 2017 David Goldman/AP

¥65bnTokio Marine’s estimated pre-tax loss from Q3 cats