The reinsurance market has been hit by a series of unforeseen events in recent months. It’s time to think again about how the market can be better prepared and help clients to improve their resilience to shocks.
As we head into the busy autumn renewal season, the reinsurance market is faced with a rapidly changing and increasingly complex landscape of risk.
After the era-defining and industry-shaping losses of the September 11, 2001, terrorist attacks and Hurricane Katrina in 2005, the reinsurance market grappled with the new normal and adjusted to the possibility that such large and previously unheard-of losses could, and would, occur.
Over the past few years, however, a series of unexpected and unprecedented events have meant we need – again - to think differently about the risks that businesses and society face and find new ways to try to assess, manage and transfer them.
Record-breaking nat cats
The impact of a changing climate is being keenly felt in the reinsurance world. Perils like drought, wildfire and flooding, while being risks that we have been dealing with for decades, have hit some unexpected locations.
Earlier this year, for example, record-breaking rainfall in Dubai saw a year’s worth of rain in just 12 hours that left the emirate under water and caused an insured loss estimated at between $3 billion and $4 billion.
The size of this loss is huge when one considers the size of Dubai itself, and the unusual nature of the loss in an area renowned for being extremely hot and dry was far beyond modelled expectations.
Outsized losses
Much like flood, other risks with which the insurance and reinsurance markets are very familiar have been causing unexpected losses in due to the severity of the peril.
While hail in Europe is not unknown, a series of severe convective storms in northern Italy last summer caused an aggregated insurance industry loss of more than $6 billion.
The storms saw the European record for the largest hailstone broken three times, with the European Severe Storms Laboratory certifying that a 19 cm-diameter stone found in Azzano Decimo, north of Venice, is the biggest ever to be found in the continent.
Again, the size of the insured loss exceeded modelled expectations and is particularly significant given the size of the Italian market.
Surprising risks
It is not just unexpected weather-related risks that have impacted the reinsurance market.
In May, protests and riots over changes to voting laws in New Caledonia, a tiny sui generis collectivity of overseas France in the Pacific Ocean, resulted in the tragic deaths of 13 people and an estimated insured losses of about $1.2 billion.
New Caledonia, which has a population of just over 270,000, was probably not even on the radar of most underwriters before the rioting became a newsworthy event.
When one compares the $1.2 billion insured loss bill with the $770 million estimated insured losses from the June 2023 riots in Metropolitan France – which has a population of some 65 million people – the unprecedented nature of the loss becomes stark.
A change in expected events
The world is constantly changing, and risks are becoming more complex and more interconnected. An event like the Baltimore bridge collapse illustrates that while the size of losses may fall within the bounds of what we might foresee, the scenarios – in this instance a blocked port leading to supply-chain issues exacerbated by geopolitical events in other important shipping routes – may not.
Lessons for the future
Looking at these unforeseen events, coming as they do alongside more predictable losses, the question for the reinsurance market becomes: what have we learned?
Historically, we have looked at past events to model and make calculations for what might happen in the future. But these, and other unexpected losses, have torn up the rulebook and shown that there are plenty of areas of risks that we cannot begin to envisage by relying on past data alone.
The whole world – our cedants and their insured clients – must realise that there will continue to be losses that we simply cannot predict. This needs to be factored into the margin of the price of reinsurance.
The sophistication of today’s world and its interconnectedness means that there will be shocks. But this also illustrates the value of reinsurance, the vital role it plays in acting as a safety net. The onus now is on our market to think about the future and the ways in which we can prepare ourselves and our clients for the unexpected.
The sophistication of today’s world and its interconnectedness means that there will be shocks.
