Catastrophe trend frightening, ILS a long-term stable market: Duperreault, AIG

In a wide-ranging discussion at the S&P Global Ratings 2019 Bermuda Reinsurance Conference yesterday American International Group (AIG) CEO Brian Duperreault explained that recent catastrophe trends are frightening.

Duperreault was talking about how the insurance, reinsurance and insurance-linked securities (ILS) industry is responding to the changing frequency and severity of natural catastrophe events and the impacts this is having on business models and the state of the market.

“The science around what we do has improved and the data that we use has improved,” he explained. Adding that on the current rate environment, “I think the modelling and pricing models are better and this has a big effect on our decisions going forward.”

“This rational behaviour is an interesting thing to watch,” he continued. “All the more reason for me to believe this is a long-term process, in terms of the improvement in rates, terms, and conditions.”

Duperreault feels the industry needs more rate across the board and discussed how the actions taken at large international players such as his firm AIG, where limits have been reduced and actions taken to improve core profitability, are influencing this, across primary, reinsurance and also retrocession.

But the impacts of catastrophe losses remains a key rating driver, particularly for reinsurance capital providers, in both traditional and alternative forms.

Duperreault highlighted Japan as a recent example, saying, “We’ve got catastrophes due to climate change increasing and becoming more unpredictable.

“Cats (catastrophes) are occurring all over the place. In Japan, we mentioned this in our earnings call, there have been 12 named cats for the Kanto region in the last 40 years and in just the last two or three of those, four have happened.

“So, the trend is pretty frightening.”

Duperreault is particularly positive on the prospects for Japanese rates at future renewals as a result. But it’s not just Japan.

On the United States he said, “We’ve had plenty of activity actually in the US. Dorian could have been a lot worse. We’ve got the wildfire season still raging in California, hopefully the wind is dying down there. But you have a lot of cat activity.”

Adding that while re/insurers are looking to improve their portfolios of risk on a gross basis, in response to both catastrophe activity and also increasing pressures from social inflation and the tort environment, this is particularly meaningful in terms of rate trajectory when you overlay it with “a retro market in flux.”

“I would say the alternative capital market is almost exhausted,” he said, referring to the chance of investor fatigue setting in. “With perhaps the fourth straight year, we’re going to have more trapped capital.”

After this experience he said, “I’m not sure what the retro market does.”

“I would say that that’s unsettling for all of us in the reinsurance market at the moment, trying to sort this thing out.”

“Yes, there could be some investor withdrawal, that could be a reaction to having more trapped capital. But, longer term I think it’s a stable market,” he said, referring to the ILS space.

While more broadly, on the role of alternative capital he said, “I would say ILS is becoming a traditional alternative.”