At this year's Rendez-Vous de Septembre it will be “supermodels” of a different kind that will dominate discussions, explains Geoff Kinsella.
Monte Carlo is a place where fast cars and the rich, famous and beautiful proliferate. As a visitor to the Principality it is fun to spend time talking about the sports personalities, actors or supermodels you have seen during the day. But this year all the focus is likely to be on a different kind of model.
Last year's hurricanes Katrina, Wilma and Rita brought into question the adequacy of the catastrophe models used to develop pricing, risk transfer and portfolio management strategies. The unprecedented number and nature of the storms has focused the market's attention firmly on the critical role that these models play in the reinsurance arena and also on the need to provide greater detailed input when developing these models.
This has resulted in the rating agencies, which assess the capital adequacy of reinsurers, using the output of the models to help inform their credit rating allocations. In turn, the investors and capital raisers – keen to ensure that their capital is allocated to entities that will give them the maximum return on their investment – are focusing on the ratings allocated.
This just leaves the reinsurers themselves. As there is now a reduced amount of capital available, reinsurers are actively moving risk capital around within their own organisations to allow them to write the risks that will offer the greatest margins over and above modelled return periods at specific risk levels. This fluidity of capital naturally puts a squeeze on available capacity for the other risk areas that do not generate these higher margins. Ironically enough, this may be due to the fact that they have not been impacted by recent losses.
The one really thought-provoking consequence, and no doubt the issue that may be talked about into the small hours in Monte Carlo, is the drive to homogeneity in rating and coverage that the models are encouraging. As everyone is now quoting the same rates, based on the input of similar data, into the same models, the ability to arbitrage or retrocede is past. Where has all the innovation and competition gone? Perhaps we should stick to talking about real supermodels in Monte Carlo.