New market standards for cat risks are looming.

Lothar, Martin, and Anatol, the devastating storms which crashed through western Europe in December 1999, were a glaring illustration of the fact that Europe's major reinsurers are seriously short of comparable exposure data about the risks they assume. In the aftermath, a meeting (grandly named the European Reinsurance Roundtable) was held in Paris.

At the invitation of Zurich Re, it brought together representatives from over 50 reinsurers, brokers, modelling companies and ceding insurers. They gathered to discuss ways to help ensure that Europe's insurance community could never again be caught so badly unaware. “We wanted to seize the opportunity of the dynamic that arose after the storms to get the market on track,” says Erik Rüttener, manager of the Natural Hazards Group at Zurich Re.

The Paris meeting discussed the pressing need for market standards for electronic compilation and transmission of exposure data. The 50 agreed an industry-wide effort to establish data transparency was the best answer, and there was general consensus that a new standard should be built around the existing CRESTA (Catastrophe Risk Evaluating and Standardising Target Accumulations) Electronic Reporting Standard.

“We looked at CRESTA and UNICEDE, the existing standards, at their advantages, and at how they could be improved,” says Paul Hertelendy, manager, property catastrophe underwriting at Zurich Re. Despite its thin take-up to date, the CRESTA standard, set by the European sector's 24-year-old industry body for the technical management of natural hazard coverage, was the best starting point in sight.

The Paris meeting, described as a ‘who's who' of the reinsurance world by one attendee, spawned a technical working party which held subsequent, smaller meetings in London and Zurich. Dedicated participants included modelling companies AIR, EQECAT and RMS, and the reinsurers Cologne Re, Gerling Global Re, Munich Re, PartnerRe, Renaissance Re and Swiss Re, along with the initiator and ongoing co-ordinator of the exercise, Zurich Re.

The ‘nitty gritty' was worked out at a March meeting in Zurich, and the first phase of the exercise reached a conclusion in Dublin on 17 May 2001 when the new draft standard, called CRESTAplus, was introduced to the group. Despite agreement that some minor modifications are required, the standard was adopted.

“Two things led to the development of the new standard,” says Ian Branagan, managing director of Renaissance Re of Europe, the company which hosted the Dublin CRESTA meeting. “The storms raised reinsurers' awareness of the need for better exposure information regarding the risks they were taking on, and to raise awareness among clients and brokers that reinsurers are increasingly insisting upon better information, particularly in Europe, to allow proper risk management. Second was the realisation of the need for a standard reporting format, which will make it easier for everyone concerned to provide that information.”

Modelling companies say the new standard will make the application of their software much simpler. “The biggest problem with modelling exposures has been the transmission of good quality data into the models. Understanding the intentions of the person who originally compiled data can be the hardest part of using the tools,” says Peter Beresford, training and client support manager for EQECAT in Europe. “If we can get people to provide data in a standard format, it will remove uncertainty about the meaning of the data, making a significant improvement in this main area of using modelling tools. The key features needed for widespread take-up are simplicity of design and generality of application, and CRESTAplus achieves these goals.”

Europe's leading reinsurers agree. “The new standard is more user friendly and more flexible,” according to Martin Bisping, head of Swiss Re's Atmospheric Perils Group. “We now need to push it through. If the acceptance is improved, we have achieved a major goal.” He describes CRESTAplus as a ‘restructuring' of the old standard. Notwithstanding certain enhancements, the same basic information is put into electronic form. However, the way it is organised has changed significantly. Some information has moved from the headers, which describe the contents of each data file, into the files themselves, while some has gone the other way, Mr Bisping says.

The changes will reduce the need for manual intervention in data when translating it from one platform to another. In addition, it allows reporting for both multiple countries and multiple currencies. Neither CRESTA nor UNICEDE offer both. Perhaps more importantly, the system is spreadsheet-friendly, with simple procedures for importing and exporting data from one application to another. In addition, CRESTAplus can be easily adapted to advances in modelling technology. “As computers get faster, the models will undoubtedly start using more detailed information,” Mr Beresford says. “The standard is able to accept more detail. In that respect, it is future-proof.”

Data collection
Collection of exposure data has improved dramatically over the past decade, but much of it has been in extremely cumbersome formats, and thus not particularly helpful to reinsurers. “The data is there for most of the markets,” says Axel Middelmann, a manager of the Modelling Techniques Team at the Research and Development Department of Gerling Global Re. “From the last renewals we know that the quality of data is improving, and the coverage, in terms of how much of the market is available, is increasing. But up to now reinsurers had to isolate the data and aggregate it for each header standard. It required a lot of manual processing, which was very time consuming. That will be substantially reduced by CRESTAplus.”

The standard will not require investment in new systems or software on the part of cedants. “It does not require insurers to create new databases,” Mr Bisping says. “It is simply a format for outputting data they are already assembling.” In fact, once widely implemented the system should offer a cost benefit to insurance companies, which will be able to satisfy all of their reinsurers by producing data according to a single format in an Excel spreadsheet, as ASCII text or in XML. “It will save a lot of time and effort within cedants' companies,” says Gerling's Mr Middelmann.

Of course, the low-cost assumption is true only for those insurers which currently produce exposure information in an electronic format. The group includes all the major continental cedants, but by no means all of Europe's primary companies. “For a great many insurers this will require minimal change, but for others it will be a large change. However, if cedants are already providing electronic information, putting it into this format should not be a big cost,” Mr Branagan says. That could be a benefit, says Swiss Re's Mr Bisping. “Some sophisticated markets will find it easy to adopt CRESTAplus, and for others it is a good starting point for setting up their accumulation control.”

There is another, bigger advantage for cedants: with their reinsurers they will be able to better assess their catastrophe exposures, and thus the true level of reinsurance required to protect against those catastrophes. “Irrespective of what the subsequent analyses will show, the standard will help cedants to get the right protection, and to get a response from the broker and from the reinsurers which is based on probabilistic analyses,” Mr Middelmann says.

Zurich Re's Mr Rüttener sees even more advantages. “Our impression is that there is real value in it for the cedants,” he said. “They will get stable pricing in line with risk, and good data for external reporting to authorities and ratings agencies.” Such data is a prerequisite for alternative risk transfer projects and risk-adjusted capital measurements, he added. “Meanwhile, the whole process gets more efficient.” Mr Hertelendy points out that having data provided in a standardised format will make it much easier for underwriters to handle. “It will make the quoting process much closer to straightforward. We will have quicker response times, and a higher confidence level in the prices we put up.” That, he says, could lead to more consistent pricing throughout the market.

Standard adoption
The task ahead for the reinsurers and modellers who have developed CRESTAplus is to encourage cedants to adopt the standard – which will require brokers to apply pressure. “The big push is to get everyone to start using it,” EQECAT's Mr Beresford declares. Broker buy-in and timing are key to the roll-out, Mr Middelmann says. “A prerequisite for implementation of the new standard is the participation of the main brokers, and the timing of that support is pretty important. It has to be introduced, at the latest, in September, before Monte Carlo, otherwise I fear it will be too late for this year's renewals.” Mr Rüttener called for a bilateral effort to motivate, educate and train.

While the widespread use of CRESTAplus is clearly in everyone's interest, the market may not move en masse to the new standard in a few months' time, despite the optimism. Such initiatives rarely happen as quickly as their proponents wish. “It could take years for full implementation,” Mr Bisping admits. However, if the major European insurers embrace the standard this year a large share of European sums insured will be reported according to CRESTAplus relatively quickly. “One major insurance company has already told us that they will use it, and Zurich Financial Services already has it in operation,” Mr Hertelendy comments.

Mopping up the rest is the next challenge. He notes that implementation will require resolve on the part of reinsurers. “If I am seeing US business, and I don't get any UNICEDE data, there is a high chance that I will decline that business,” he reveals. Yet there is little reluctance in the reinsurance community to write European business that is not accompanied by CRESTA data. In practice, the original electronic standard was something of a damp squib for many reasons: “Technically, it proved to be inconvenient in terms of extracting data from a database,” Mr Middelmann says. “Since its launch in the late 1990s, we have seen virtually no data in the CRESTA format.”

Reinsurers will have to push hard for acceptance of CRESTAplus, or it could suffer the same fate. “The reason the old Cresta format didn't succeed is because the recipients [of data] were not committed to it,” Mr Branagan admits. “Now there is a wider consensus on the need for the standard, broader backing for the initiative including all the major modellers, and, most important, the storms have concentrated the minds of reinsurers.”

Mr Rüttener is confident. “We expect that we can get this in place for 1/1 renewals, with enough time before the renewal to get acceptance.” The hardening market will help, Mr Hertelendy added.

The architects of CRESTAplus see a future for the standard which goes well beyond European reporting. Zurich Re's Mr Hertelendy envisions its use as a global standard (probably excluding the US, where UNICEDE is established and functional). It could also be adopted as a basis for data exchange related to internet trading. “We are planning to put forward the standard for use with e-business platforms, which would improve the speed of implementation as well,” he says. But with more immediate implementation challenges the next item on the agenda, Zurich Re may soon invite the European reinsurance sector to meet again. “It might be a good idea to hold another Reinsurance Roundtable to support the implementation process,” Mr Hertelendy suggests.Lothar, Martin, and Anatol, the devastating storms which crashed through western Europe in December 1999, were a glaring illustration of the fact that Europe's major reinsurers are seriously short of comparable exposure data about the risks they assume. In the aftermath, a meeting (grandly named the European Reinsurance Roundtable) was held in Paris.

At the invitation of Zurich Re, it brought together representatives from over 50 reinsurers, brokers, modelling companies and ceding insurers. They gathered to discuss ways to help ensure that Europe's insurance community could never again be caught so badly unaware. “We wanted to seize the opportunity of the dynamic that arose after the storms to get the market on track,” says Erik Rüttener, manager of the Natural Hazards Group at Zurich Re.

The Paris meeting discussed the pressing need for market standards for electronic compilation and transmission of exposure data. The 50 agreed an industry-wide effort to establish data transparency was the best answer, and there was general consensus that a new standard should be built around the existing CRESTA (Catastrophe Risk Evaluating and Standardising Target Accumulations) Electronic Reporting Standard.

“We looked at CRESTA and UNICEDE, the existing standards, at their advantages, and at how they could be improved,” says Paul Hertelendy, manager, property catastrophe underwriting at Zurich Re. Despite its thin take-up to date, the CRESTA standard, set by the European sector's 24-year-old industry body for the technical management of natural hazard coverage, was the best starting point in sight.

The Paris meeting, described as a ‘who's who' of the reinsurance world by one attendee, spawned a technical working party which held subsequent, smaller meetings in London and Zurich. Dedicated participants included modelling companies AIR, EQECAT and RMS, and the reinsurers Cologne Re, Gerling Global Re, Munich Re, PartnerRe, Renaissance Re and Swiss Re, along with the initiator and ongoing co-ordinator of the exercise, Zurich Re.

The ‘nitty gritty' was worked out at a March meeting in Zurich, and the first phase of the exercise reached a conclusion in Dublin on 17 May 2001 when the new draft standard, called CRESTAplus, was introduced to the group. Despite agreement that some minor modifications are required, the standard was adopted.

“Two things led to the development of the new standard,” says Ian Branagan, managing director of Renaissance Re of Europe, the company which hosted the Dublin CRESTA meeting. “The storms raised reinsurers' awareness of the need for better exposure information regarding the risks they were taking on, and to raise awareness among clients and brokers that reinsurers are increasingly insisting upon better information, particularly in Europe, to allow proper risk management. Second was the realisation of the need for a standard reporting format, which will make it easier for everyone concerned to provide that information.”

Modelling companies say the new standard will make the application of their software much simpler. “The biggest problem with modelling exposures has been the transmission of good quality data into the models. Understanding the intentions of the person who originally compiled data can be the hardest part of using the tools,” says Peter Beresford, training and client support manager for EQECAT in Europe. “If we can get people to provide data in a standard format, it will remove uncertainty about the meaning of the data, making a significant improvement in this main area of using modelling tools. The key features needed for widespread take-up are simplicity of design and generality of application, and CRESTAplus achieves these goals.”

Europe's leading reinsurers agree. “The new standard is more user friendly and more flexible,” according to Martin Bisping, head of Swiss Re's Atmospheric Perils Group. “We now need to push it through. If the acceptance is improved, we have achieved a major goal.” He describes CRESTAplus as a ‘restructuring' of the old standard. Notwithstanding certain enhancements, the same basic information is put into electronic form. However, the way it is organised has changed significantly. Some information has moved from the headers, which describe the contents of each data file, into the files themselves, while some has gone the other way, Mr Bisping says.

The changes will reduce the need for manual intervention in data when translating it from one platform to another. In addition, it allows reporting for both multiple countries and multiple currencies. Neither CRESTA nor UNICEDE offer both. Perhaps more importantly, the system is spreadsheet-friendly, with simple procedures for importing and exporting data from one application to another. In addition, CRESTAplus can be easily adapted to advances in modelling technology. “As computers get faster, the models will undoubtedly start using more detailed information,” Mr Beresford says. “The standard is able to accept more detail. In that respect, it is future-proof.”

Data collection
Collection of exposure data has improved dramatically over the past decade, but much of it has been in extremely cumbersome formats, and thus not particularly helpful to reinsurers. “The data is there for most of the markets,” says Axel Middelmann, a manager of the Modelling Techniques Team at the Research and Development Department of Gerling Global Re. “From the last renewals we know that the quality of data is improving, and the coverage, in terms of how much of the market is available, is increasing. But up to now reinsurers had to isolate the data and aggregate it for each header standard. It required a lot of manual processing, which was very time consuming. That will be substantially reduced by CRESTAplus.”

The standard will not require investment in new systems or software on the part of cedants. “It does not require insurers to create new databases,” Mr Bisping says. “It is simply a format for outputting data they are already assembling.” In fact, once widely implemented the system should offer a cost benefit to insurance companies, which will be able to satisfy all of their reinsurers by producing data according to a single format in an Excel spreadsheet, as ASCII text or in XML. “It will save a lot of time and effort within cedants' companies,” says Gerling's Mr Middelmann.

Of course, the low-cost assumption is true only for those insurers which currently produce exposure information in an electronic format. The group includes all the major continental cedants, but by no means all of Europe's primary companies. “For a great many insurers this will require minimal change, but for others it will be a large change. However, if cedants are already providing electronic information, putting it into this format should not be a big cost,” Mr Branagan says. That could be a benefit, says Swiss Re's Mr Bisping. “Some sophisticated markets will find it easy to adopt CRESTAplus, and for others it is a good starting point for setting up their accumulation control.”

There is another, bigger advantage for cedants: with their reinsurers they will be able to better assess their catastrophe exposures, and thus the true level of reinsurance required to protect against those catastrophes. “Irrespective of what the subsequent analyses will show, the standard will help cedants to get the right protection, and to get a response from the broker and from the reinsurers which is based on probabilistic analyses,” Mr Middelmann says.

Zurich Re's Mr Rüttener sees even more advantages. “Our impression is that there is real value in it for the cedants,” he said. “They will get stable pricing in line with risk, and good data for external reporting to authorities and ratings agencies.” Such data is a prerequisite for alternative risk transfer projects and risk-adjusted capital measurements, he added. “Meanwhile, the whole process gets more efficient.” Mr Hertelendy points out that having data provided in a standardised format will make it much easier for underwriters to handle. “It will make the quoting process much closer to straightforward. We will have quicker response times, and a higher confidence level in the prices we put up.” That, he says, could lead to more consistent pricing throughout the market.

Standard adoption
The task ahead for the reinsurers and modellers who have developed CRESTAplus is to encourage cedants to adopt the standard – which will require brokers to apply pressure. “The big push is to get everyone to start using it,” EQECAT's Mr Beresford declares. Broker buy-in and timing are key to the roll-out, Mr Middelmann says. “A prerequisite for implementation of the new standard is the participation of the main brokers, and the timing of that support is pretty important. It has to be introduced, at the latest, in September, before Monte Carlo, otherwise I fear it will be too late for this year's renewals.” Mr Rüttener called for a bilateral effort to motivate, educate and train.

While the widespread use of CRESTAplus is clearly in everyone's interest, the market may not move en masse to the new standard in a few months' time, despite the optimism. Such initiatives rarely happen as quickly as their proponents wish. “It could take years for full implementation,” Mr Bisping admits. However, if the major European insurers embrace the standard this year a large share of European sums insured will be reported according to CRESTAplus relatively quickly. “One major insurance company has already told us that they will use it, and Zurich Financial Services already has it in operation,” Mr Hertelendy comments.

Mopping up the rest is the next challenge. He notes that implementation will require resolve on the part of reinsurers. “If I am seeing US business, and I don't get any UNICEDE data, there is a high chance that I will decline that business,” he reveals. Yet there is little reluctance in the reinsurance community to write European business that is not accompanied by CRESTA data. In practice, the original electronic standard was something of a damp squib for many reasons: “Technically, it proved to be inconvenient in terms of extracting data from a database,” Mr Middelmann says. “Since its launch in the late 1990s, we have seen virtually no data in the CRESTA format.”

Reinsurers will have to push hard for acceptance of CRESTAplus, or it could suffer the same fate. “The reason the old Cresta format didn't succeed is because the recipients [of data] were not committed to it,” Mr Branagan admits. “Now there is a wider consensus on the need for the standard, broader backing for the initiative including all the major modellers, and, most important, the storms have concentrated the minds of reinsurers.”

Mr Rüttener is confident. “We expect that we can get this in place for 1/1 renewals, with enough time before the renewal to get acceptance.” The hardening market will help, Mr Hertelendy added.

The architects of CRESTAplus see a future for the standard which goes well beyond European reporting. Zurich Re's Mr Hertelendy envisions its use as a global standard (probably excluding the US, where UNICEDE is established and functional). It could also be adopted as a basis for data exchange related to internet trading. “We are planning to put forward the standard for use with e-business platforms, which would improve the speed of implementation as well,” he says. But with more immediate implementation challenges the next item on the agenda, Zurich Re may soon invite the European reinsurance sector to meet again. “It might be a good idea to hold another Reinsurance Roundtable to support the implementation process,” Mr Hertelendy suggests.