Forecasting of US hurricane patterns may yield savings of up to 30% for reinsurers, while Canadian P/C returns to underwriting profitability after a dire 2002
Buyers and sellers of industry loss warranty (ILW) reinsurance covers can improve returns by as much as 30% if they use advances in seasonal hurricane forecasting, according to new research. The application is for covers incepting at 1 August. Historically, 96% of all intense (category 3 to 5) hurricane strikes on the US occur after 1 August.
In a paper entitled 'Business Application of Seasonal Hurricane Forecasts in Property Catastrophe Reinsurance', researchers from Helvetia Patria Group and Tropical Storm Risk (TSR) have demonstrated the relevance of seasonal US hurricane forecasts for the selling and buying of (re)insurance covers. The authors Niklaus Hilti (Helvetia Patria), Dr Mark Saunders and Dr Benjamin Lloyd-Hughes (both TSR) say that depending on the forecasted activity for the upcoming hurricane season, a decision is made whether to buy or sell an ILW cover. ILW triggers of $5bn, $10bn and $20bn are examined. For ILW sales, the forecast strategy leads to a 10%-30% increase in annual revenue net of recovery. For ILW purchases, the forecast strategy pays 10%-30% less for the same amount of protection (i.e., to gain the same recoveries without any increase in volatility or risk).
The authors tested their strategies on the 1950-2002 period of historical insured losses (at 2002 values) and over a 50,000-year period of simulated US hurricane strikes and losses. Dr Mark Saunders, the TSR lead scientist and head of seasonal forecasting and meteorological hazards at the Benfield Hazard Research Centre said: "the proof is there that seasonal hurricane forecasts benefit property catastrophe reinsurance business and opportunities exist to improve the profitability of a range of hurricane (re)insurance products."
Hurricanes rank historically above earthquakes and floods as the major geophysical cause of property damage in the United States. The annual mean insured damage bill and its standard deviation for hurricanes striking the continental US between 1900-2002 is US$2.9bn and US$6.7bn respectively at 2002 prices and exposures.
Estimation of gap in property-casualty recoverables grows
The growing gap in expectations between cedants and reinsurers may develop into a critical concern for the industry, according to a new study by Conning Research and Consulting.
Although the expectations gap fits no industry pattern, cedants and reinsurers who retrocede risk are reporting recoverables expectations that are significantly greater than those reported by reinsurers.
"While there are filing data issues that distort the net gap calculation, we estimate that it was between $14 and $24 billion in 2003," said Clint Harris, vice-president at Conning Research. "The increasing recoverable values expose the industry's increasing dependence on a financially healthy reinsurance sector."
"Our study found that as recoverables have grown, so has the gap between cedant and reinsurer expectations," said Stephan Christiansen, director of research at Conning Research. "The rate of recoverables growth slowed from its 29% high in 2001 to 6% in 2003, yet the aggregate recoverable gap continued to grow at a 22% rate in 2003."
However, the expectations gap does not appear to be a universal condition between cedants and their reinsurers. Some reinsurers consistently report assumed liabilities that are near or exceed their cedants' reported expectations.
The analysis found that there is no particular pattern in any major segment of the reinsurance market (direct, large broker, medium broker) or the cedant market (top 10 commercial and other top 100 commercial).
Canada's P/C market recovers
While 2002 is the worst performance year by the Canadian property and casualty insurance industry, 2003 will be remembered for the industry's return to underwriting profitability and strong earnings, according to a study from AM Best.
The hard market's higher rates drove much of the improvement, but it also prompted the industry's ongoing efforts to return to business basics, such as sound underwriting guidelines, more conservative claims practices and attention to expense management. Collectively, these factors provided the groundwork for this improvement, the report considers.
The overall industry, excluding Insurance Corporation of British Columbia (ICBC), generated an underwriting ratio of 98.4 and an improved return on equity (ROE) of 12.4%. Underwriting profit for the year totalled $524 million. The top 25 companies, as ranked by direct premiums written, generated an even better ROE of 12.9% but modestly trailed in underwriting performance, earning an underwriting ratio of 99.6.
Further boosting industry underwriting earnings were favourable investment income and strong capital gains, which together increased by more than 30% over 2002.
The industry is still feeling the impact of the British Columbia fires, which were among the largest catastrophes in industry history, costing CAD 250 million; losses from the Facility Association, a residual market, totalling CAD 500m; and losses from Hurricane Juan of CAD 113m, among others.
The AM Best report also notes that a softer market will also prove a test for the newly rejuvenated sector.
Aon completes outsourcing deal
Aon has finalised an agreement to outsource the majority of its US IT infrastructure to CSC. The outsourcing and related consolidation of data centres and other functions is designed to produce an estimated $300m in savings over seven years in an agreement that covers Aon's US insurance brokerage and consulting business units. Outsourcing will begin in third quarter 2004 and the transition process will occur in phases.
Functional areas to be outsourced include data centres, telecommunications and data networks, desktop support, related help-desk services and various IT support functions. These areas employ approximately 600 people across the United States, including contractors. Most of the affected employees will switch to CSC in late August 2004. Aon will retain responsibility for IT strategy and leadership, architecture and application development and maintenance.
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