Can marine ILW’s make a comeback? Q&A with Tom Johansmeyer, PCS

Property Claim Services (PCS) recently launched a new service offering non-elemental industry loss estimates for the global marine and energy insurance and reinsurance sector, as well as a risk-transfer index to facilitate transactions. Following this launch Artemis spoke with Tom Johansmeyer, assistant vice president, PCS Strategy and Development to discuss what could be a resurgent market.

Artemis: So, the marine and energy ILW market is pretty small right now. Why did PCS choose it as its first specialty lines market entry?

TRJ: Good question. Estimates vary, but we figure that the marine and energy ILW market is around a few hundred million dollars in notional right now (including some ILWs that include more than just marine or energy risk). When you compare that to US natural catastrophe ILWs, it seems pretty small – just like every other class of ILWs, really. From what we’ve heard in the market, though, since PCS first started looking at marine and energy, is that the market should be much bigger. And with the right index, marine and energy could get there.

Absent a credible index, several reinsurance players left the marine and energy ILW market over the past few years. The entire reporting process just wasn’t a good fit. Following extensive discussions across the reinsurance industry, we saw how we could develop a reliable, independent, non-elemental global marine and energy loss index. We worked very closely with a wide range of marine and energy risk-bearers to ensure the index would meet their needs. The reinsurance sector has been quite supportive, and we couldn’t have launched – or continue to operate – PCS Global Marine and Energy without their support.

Ultimately, marine and energy has the potential to become a bigger niche ILW market. I don’t expect it to become as big as US property-catastrophe ILWs, but with the right momentum, it has the potential to drive meaningful growth to the entire worldwide ILW market.

Artemis: What makes the PCS approach to marine and energy losses different from what’s been out in the market so far?

TRJ: What’s most important is that PCS Global Marine and Energy loss estimates are independent, consolidated with one reporting agent, and representative of broad market feedback. Given what’s been used in the past, this represents a significant change for the market – and a positive one at that. The marine and energy reinsurance has been waiting for a tool like this for a while.

To date, marine and energy ILWs have relied on either data sources not designed to be triggers or a hodge-podge of data sources that may conflict with each other, represent only a narrow or biased view, and on top of that weren’t designed to be triggers! Without an alternative, the prevailing approaches to marine and energy ILW triggers forced reinsurers to try jamming a square peg into a round hole. Ever tried that? If you haven’t, believe me when I tell you, it always ends in frustration.

PCS Global Marine and Energy, on the other hand, works as a trigger because that’s what it’s built to be. It comes from an independent organisation with a track record in producing industry loss estimates for the reinsurance market. And the number comes from just one source. Our team reviews data from across the market, but in the end, it’s one reporting agent reporting one number. The ILW agreement needs to reference only PCS Global Marine and Energy. Because of this, the risk of conflicting loss reporting sources no longer enters the process. It’s all much cleaner.

Finally, our estimates are based on data for a large pool of well-regarded reinsurers, intermediaries, ILS funds, and publicly available data sources (when relevant). The breadth helps inform the estimate and prevent events from being missed. Also, the varied perspectives of our different participants reduce the risk that any one part of the market could have disproportionate influence.

Artemis: What makes the process for PCS Global Marine and Energy different from what PCS does in the US, Canada and Turkey?

TRJ: When the team began working on PCS Global Marine and Energy a year ago, we decide to do with fresh eyes. The only rules we had were:

1. Forget everything you know about PCS for property-catastrophe
2. Forget all previous assumptions we had about marine and energy
3. Engage as many people in the market as possible
4. When they’re talking, shut up and take notes!

What we’ve built in collaboration with our clients, therefore, differs from our property-catastrophe solutions in a number of ways. Because it should. We set the event definition threshold at $250 million to be able to capture enough events to be useful without becoming a burden on the folks supplying data (our historical database goes back to 2009, with some events still in the initial estimation process). We also collect data on a quarterly basis rather than the 60-day cycle we use in property-catastrophe to reduce the level of effort required to provide loss data to us. Given the development involved in non-elemental marine and energy losses, and the high threshold, we resurvey every event (as we do in Canada and Turkey).

The way we close events is a bit different as well. For property-catastrophe events, PCS looks for two successive resurveys with stable industry-wide data by category and state, as well as no outstanding factors that could affect the estimate significantly (such as pending class action litigation). In marine and energy, we realize that we may rack some events for several years – with perhaps four or five quarters (or more) where the estimates remain the same. So, while we’ll still look for estimate stability from one reporting period to the next, the more important input is whether there’s anything out there that could materially change the number.

Artemis: Now that you’ve launched PCS Global Marine and Energy, does this mean you’re focussed on specialty instead of adding more geographic regions for property catastrophe in the future?

TRJ: Not at all. We have a two-pronged approach to expansion, given the needs of our client base worldwide. We’re still actively engaged in international expansion for property-catastrophe loss aggregation. Last year, we finished a full historical industry loss database for Turkey. It goes back to 1999 and has a TRY30 million threshold. And, we recently published our first loss estimate for the terror attacks that happened in Turkey last year (broken out by CRESTA zone). And we’re working on some new regional solutions.

At the same time, we are pressing forward with the specialty market. It’s no secret that I’ve been interested in global terror and cyber for a while. And there are some other classes on my mind as well, which could help bring more original risk to the global reinsurance market.

Rather than commit to a certain type of risk, we’re more focused on index tools our clients want to see us develop. We want to develop loss aggregation tools that are useful and used. If we accomplish that, we’ve helped the market bring consumable original risk into the market.

Read previous Artemis interviews here.

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