Bad market and catastrophe conditions mean underwriting is more important than ever, according to Jamie Miller, head of North American property for Swiss Re. He spoke with Best's News Service at the recent Risk and Insurance Management Society's annual conference in Los Angeles.
Q: We've had a lot of natural catastrophe activity over the past year. Hurricane Sandy, in particular. How have the carriers fared through all of this?
A: You know, the last couple years for the carriers has been really difficult. Two years ago in 2011, you had the second-largest year of cat losses globally. The same in 2012 with Sandy really bringing it up into, I think, a top three, top-five historical loss. So for us, it's an unusual situation in the property market because you've got two years in a row of significant loss activity.
And given the fact of that, plus the investment community results being so flat in terms of investment growth, really, cash flow management and capital management is crucial. So the underwriting community is really facing a window where underwriting results have to drive the outcomes. And exposure management becomes a big part of that. Exposure approach and appetite are a big part of what underwriters are all looking at now as they try to go forward.
Q: You've shed some light on it all ready, but do those losses show something as far as what needs to be done as far as coverage issues are concerned?
A: Yeah. I think one of the biggest issues is contract certainty. You know, you have a lot of, it isn't just with Sandy. It's been really a lot of industry events. And when we had Japan and when we had Thailand, there was a lot of concern about continued business-interruption exposures, nat cat peril triggers and so forth. Same in Sandy in terms of storm surge versus wind versus flood. And the same with other nat cat activities across the country.
So one of the challenges in the large property space is there is an abundance of manuscript coverages and words and forms. And the reality of it is that there are challenges with intent, in what underwriters say they're covering versus what the client is either needing or is expecting in the program. So there's a lot of opportunity in the industry right now to do a lot of discussions and have a lot of back and forth about contract certainty.
Q: What about the modeling? Do you think there's a need for more advanced modeling?
A: Well, we're big believers in modeling. You know, our focus on science is at the core of Swiss Re's traditions, if you would, and that continues. So I think the models are here to stay. The models are interesting now because they've gone global. So everyone is focused on the windstorm or a California earthquake, but the growth of more advanced models are having a whole range of impacts.
And one of them that most people on the buying side may not appreciate is aggregation management. Because what the models now allow you to do is get very granular in terms of where exposures, how much you can retain, what you should get for that exposure in terms of return and expected losses. And the reality is that it's putting a lot of pressure on professional aggregation management.
So you're seeing a lot of carriers across the competitive landscape, not only looking at North American modeling results and how they manage group exposures, but looking at global exposures. Especially when you relate to supply chain and so much of the globalization of the economy is such that the supply chain's becoming a very big discussion for a lot of our client meetings.
Q: Now are there any gaps or trends that you're seeing these days that are impacting the industry?
A: There's a couple that come to mind. I think the expansion of the globalization that I mentioned is a big part of it. Because what you'll find is that clients have to take a fresh look and insurers have to take a fresh look at what they're expecting to cover. What kind of aggregation they can manage. And how long can they handle that level of exposure?
The other, bigger, kind of an underlying current right now that's really important is the, I think, educational development in the industry. We have a whole slew of young underwriters and young professionals coming in and the industry used to be such a big trainer. Almost all the companies when I broke in years ago on this, all the companies had fairly significant training programs. And today you don't see that.
And I think that's one of the risks in the generational change that's going on, is that both underwriters, brokers and buyers are dealing with various levels of expertise. And the industry needs to continue to improve that and develop it.