Issues surrounding reserving are going to become a selection criteria for ILS fund managers given the significant loss creep in the aftermath of Hurricane Irma, thinks Dirk Lohmann, CEO and co-founder of ILS specialists Secquaero.
Speaking to Artemis at the Rendez-Vous de Septembre in Monte Carlo, Lohmann said that investors would be more tentative about reloading in the aftermath of another sequence of catastrophe losses, given the fact that many Florida insurers’ initial projections were wrong.
“It’s about how good you are at actually projecting your ultimate, because that’s what you sell, your competence in that area,” he explained. “When you don’t have the wind blowing or the earth-shaking you generally have a positive number, depending on where you are in the risk spectrum.”
“So it really comes down to when you have an event and you give your clients information on what you think the exposure is going to be and what it ultimately turns out to be.”
Lohmann thinks the tail issues surrounding last year’s hurricane losses are largely a result of insurer’s inability to get a handle on the demand surge costs surrounding claims and loss adjusting.
“Looking at some of the problems that we’ve seen in Florida, the companies that have been set up in the last 10 to 15 years did not have substantial claims resources, so they all were relying on third-party administrators,” he explained. “And when the chips came down they didn’t have the resources they needed and the cost of adjusting claims went up.”
He anticipates these mistakes may come back to bite in 2019 Florida renewals with rates firming as a result.
“I was disappointed [this year] by what I saw as a weakening in underwriting standards of the Florida companies. What their renewals are going to look like is still a discussion for next year because this year they clearly went out early, they renewed, they made their projections and things have turned out in most instances much worse.”
At the time of writing this article Hurricane Florence had intensified to a category 4 storm and was projected to make landfall on the coast of North Carolina. Lohmann intimated it could trigger this year’s FEMA FloodSmart Re catastrophe bond given anticipation of significant flooding.
“As Florence hovers around the coast of North Carolina for three or four days we will definitely have flood losses. It’s very early days but one of the new bonds might be tested next week.”
For Lohmann, the catastrophes of 2017 were “a test”, but not “the test”.
“Although the aggregate magnitude of losses was significant, each individual loss in its own right was not that big,” he pointed out. “So the amount of those losses absorbed by the insurance industry was far larger than if you were to have a $120 billion event on its own.”
“Saying that, last year was the first time where the market had to face to fairly significant drawdown, and I’m not surprised that investors were willing and ready to reload,” he continued. “When they originally made the decision to invest they were told that may happen.”
“However, many investors now looking back are somewhat disappointed in that they were also sold on the idea that after a big loss there would be rate increases as a payback,” he added. “And we clearly haven’t seen much in the way of rating increases. There were some in January but it really started to taper off after that.”