25 September 2014

IERM comment: generous packages

Dear friend,

In the world of enterprise risk management one of the most important topics is clearly that of modelling risk. From a regulatory standpoint and in terms of effective risk management, the adoption of sophisticated catastrophe models is now embedded as an essential requirement for re/insurers.

As well it should be, for understanding at a fairly granular level the extent of possible exposures for a given portfolio of risk is one of the most basic requirements for adequate underwriting. An insurer which doesn't properly understand the extent of its probable maximum losses is one which will very quickly be found out, either by the regulators or eventually by the market when the claims come in.

I mention this because I'm a wee bit concerned that in the current market there might well be more than one insurer which is bundling together packages for clients which offer a panoply of potentially horrific exposures which fall outside the parameters of most contemporary cat models. Such 'all-risks' policies have natural catastrophe property cover at their heart... and a few extras to sweeten the package such as terrorism or cyber cover.

Scary, isn't it? From a fairly well-defined and well-modelled property risk for a given territory we're suddenly looking at cover which includes a host of casualty offerings which substantially widen the potential loss.

In today's uber-competitive market I'm not criticising the need for such largesse as such. I just wonder, with their focus so much on internal models, longevity transfer and the like, whether regulators might overlook a simple trick here.

So far it seems some regulators at least are alert to the issue. Governor of the Bank of England Mark Carney, addressing the Institute and Faculty of Actuaries this week, accepted that "more capital boosts market capacity, but can also test underwriting discipline."

Ultimately, however, the responsibility for monitoring exposure can't be left to the regulators, it has to rest in-house. Brokers might be keen to offer ever wider all-risks packages in current market conditions, but that doesn't mean they have to be opened.

Marcus Alcock,

Editor, InsuranceERM