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(Re)insurers Accumulating Concerns Over Aggregation Risks
Thursday 04 June 2015
Author: Russell Group
Tags: cyber risk, aggregating risk, casualty accumulation, Alps Enterprise, Alps Non-Marine, connected risk, portfolio loss

Russell Group was interested to read a recent report by ratings agency Fitch, which outlined how:  “high claim activity (or aggregation risk) for property/casualty insurers is a rising risk as insurers increase coverage to protect against cyber threats.”

This has been a theme that Russell has been exploring in our own research over the last 18 months throughout a series of white papers on the topic. 

Fitch concedes that the potential for any future credit impact to major providers is kept in check by the still relatively small size of the cyber-related insurance market. But as Fitch goes on to say: “As insurers continue to improve and refine their understanding of cyber risks, Fitch expects the industry to broaden coverage and accept larger and potentially more threatening exposures.”

Mooted legislation and regulatory initiatives such as proposed EU directives could add fuel to the cyber fire and mean that a failure to report a breach in time could lead to fines of up to 5% of total turnover, or EUR100 million, whichever is greater.

The ratings agency believes that such directives could increase demand for cyber insurance, which is certainly a view that Russell Group takes and has been discussing with increasing frequency with its partners in the underwriting community.

Accumulation risk has been a strong theme throughout recent insurance reporting and content written by leading industry commentators. As Andrea Scascighini, Head Large Underwriting Desk US at Swiss Re recently commented on its excellent “Open Minds” (re)insurance blog:

“The casualty results of insurance companies have generally been very good over the last few years. A few catastrophic events like the Deepwater Horizon explosion, have been greatly over shadowed by continuous reserve releases, fuelled by the hard market years and by the lower than modelled inflation following the financial crisis. P&L relevant asbestos reserve increases might seem to belong to the past, yet Casualty insurers should not be over confident. The accumulation risk in casualty lines is very real and growing.” 

The reasons listed are wide ranging but the key factors outlined by Scascighini focus on social media increasing transparency, the accelerating speed of technical advancements and the growing realisation that  in a “hyperconnected world it becomes difficult to understand who is responsible for unintended consequence of a product or an happening.”

Scascighini concludes: “We believe that every insurance company must actively manage their casualty accumulation risk as the potential impact of unintended accumulation could lead to disastrous results.”

When one considers the potential accumulation risks of the scenarios and themes noted above it is hard not to agree with a recent XL Catlin blog, which noted: “Today’s loss prevention experts need to be advanced engineers, able to operate in a complex, rapidly evolving, global economy.” 

Russell Group could not agree more. In today’s hyper connected world, it is inevitable that reinsurers will come to rely increasingly on aggregate analysis that quantifies their gross portfolio loss (the loss from all policies and contracts underwritten in the portfolio) for each line at user defined market loss levels.

At the same time, technology, modern actuarial techniques and data-led analytics are all set to revolutionise the way (re)insurance realistic disaster scenarios are modelled and rolled out across the speciality (re)insurance classes.