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Save us from the clones

There’ll be a day of reckoning for these reinsurer clones; you mark my words.

Not that I’m criticising — after all, the belief that you can model everything is a persuasive and seductive one. And we humans want to feel as if we’re in control of our destiny, that we’re charging the right price and doing the right thing. Like old dogs who’ve run away to the circus, every day we dream up new ways of doing old things and somehow convince ourselves that we are putting the dark ages of the past behind us.

It is a noble and just cause and is what differentiates us from the lesser mammals. When man’s ancestors picked up sticks and stones and started using them to crack open nuts, they were only doing exactly what all the men in white coats at the Hedge Funds and modelling companies are busy doing — trying to work out how to do things better.

Of course, some unfortunate ones amongst those early nut-cracking pioneers were the first to discover the fact that extreme nut allergies can be a killer!

Bummer! How unfair the world is — no sooner do we learn how to fly than the Gods conspire to bring us back to earth with a resounding thud, and a grinding crunch of broken bones and snaggled teeth!

The news that a lot of the converging between capital market players and reinsurers has latterly been occurring more on the reinsurers’ turf has surprised me somewhat. These days brokers tell me they can more or less mirror ultimate net loss covers in the capital markets. Hurrah! No more basis risk!

Well, let’s hold up that mirror — because if you look in it you will no longer see a beautiful gleaming hi-tech capital market princess — but a veritable old reinsurance toad, warts and all.

Reinsurance is akin to driving a vehicle blindly through a minefield – danger is all around and you never really know quite what is going to blow up next. Given this fact — you’re usually better off doing it in a tank than a flashy sports car.

But this reinsurance mistress is a seductive siren.

You may start off nice and easy, pure, unchaste and mathematical — you’re almost boringly antiseptic and statistical; but before you know it, you’re cracking open exotic nuts left right and centre and wolfing down the contents. You never really know whether you’re going to like what you end up swallowing or if you’re going to choke.

And that is why I’ll warrant it won’t be long before this Greek tragicomedy is providing us with a few wry chuckles.

Comments (2)

Name witheld:

As MD of a small Caribbean property and casualty insurer, reinsurers addiction to cat models is terribly frustrating, especially when in our case everyone knows that the models are hopelessly inadequate at best.

One issue that you did not address is the job function of a so called property cat underwriter in this era of cat models, seems to me that it is certainly not underwriting,
and that makes me wonder about the job security of a property cat underwriter.

Below is an extract of an e-mail that I sent recently to a reinsurer:

"Someone said to me recently that commonsense is unfortunately becoming less and less common. Quite frankly the whole model issue is farcical and the
amount of shareholders capital being put at stake entirely on what models say is mindblowing.

"As I said to one of your colleague reinsurers at a
recent meeting, why are they employing the so called underwriters that were meeting with us when they make no decisions and don't actually underwrite.

"They put data in and do as the results tell them. A high school graduate with no experience and a little instruction could do that.

"The use of models is the biggest abdication of responsibility by reinsurers management in the history of the insurance business.

"Reinsurers seem to be prepared to lose a lot of money as long as it is justified by the models. If they lost less money as a result of human decisions one can't help feel
that would be less acceptable than losing more with the models."

Mark Geoghegan:

I think the answer to your question is that the job of a property cat underwriter is to travel and market himself and maintain key relationships with his main four reinsurance brokers and do whatever the modelling specialists tell him will optimise his portfolio.

I agree the 'underwriting' part seems not to exist any more. And it's certainly convenient to have a tool to blame instead of your own faulty workmanship.

As the sub-prime crisis or any other mis-pricing of risk has shown us, models are always wrong, it's just how wrong that varies.

The problem from your point of view is that Cat models have consistently under-priced risk - so maybe you shouldn’t grumble lest they look under the bonnet of the model and hike your premiums!

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