Catastrophe predictions are less reliable than rolling dice, says Seymour Matthews.
Predicting major events such as hurricanes, typhoons and earthquakes is a fun but crazy game. Yes, the circumstances were right for major hurricanes last year and they occurred but major events in the context of insured losses are much harder to predict.
There were powerful hurricanes and typhoons aplenty in 2007, but they did not hit the major insured exposures, so there were no major losses or events by industry standards. We predicted that there were not going to be any major events for 2006 and 2007 and have rolled the dice again and say that there will be some for 2008; just because luck may run out and the configuration of exposure is getting worse each year.
We hope that we are wrong, although many practitioners would say that we need another major event to maintain existing prices. This may frighten off some of the capital markets, which are more short term and opportunistic than most of the traditional reinsurers.
Although property insurance is a short-tail class it needs to be observed over a lengthy period to analyse profitability. Reinsurance does its job by removing the majority of the catastrophic losses, hopefully just leaving the insurer with a first loss retention which is manageable in the balance sheet. What we have seen over the last few years is an increase in frequency even though the insured severity has not been that large by modern standards.
There were a number of strong earthquakes of magnitude seven or more as well as two category five hurricanes which made landfall, but luckily not in the most populous/insured areas. The big Japanese quake has been predicted to occur for so many years (there are underwriters who scaled down their aggregate some 20 years ago in anticipation of this event – what to do now?).
As Chinese insured aggregates grow – will China deliver the big Asian event before Japan? If that is the case then Asia is a safe place to write Earthquake for a few more years.
Seymour Matthews, managing director of reinsurance at Heath Lambert