The impact and subsequent loss creep from typhoon Jebi in Japan in 2018 caught many insurance-linked securities (ILS) investors by surprise, but the eventual deviation from initial vendor model loss estimates doesn’t translate to a fundamental issue with the models themselves, say industry experts.
Week two of our virtual ILS Asia 2021 event, held in association with our headline sponsor AM RE Syndicate Inc., commenced with a discussion around the importance of investor communication in insurance-linked securities (ILS) management.
Moderated by Artemis’ Steve Evans, the audience heard from Yuko Hoshino, Co-head of Global Investor Relations and Paul Wilson, Head of Non-Life Analytics, at Securis Investment Partners LLP.
The session started with an overview of the Asian ILS investor base and explored the experience of investors in the region after some challenging loss years.
The impact of Jebi was a focus of the session and Hoshino explained that when the storm arrived in September of 2018, even local people did not expect that it would become the largest loss event in Japanese insurance history.
“For most Japanese people, they usually experience many typhoons over summertime. Therefore, they did not feel that the initial Jebi loss estimate from the insurance industry was too low.
“When we started running an increased loss estimate from a counterparty from the end of 2018, we started informing investors that Jebi would create a large degree of uncertainty, which surprised our investors, and they started talking about what was special about Jebi,” explained Hoshino.
For Securis, Hoshino explained that Jebi was more impactful for aggregate deals since the loss creep followed other 2018 events, including Hurricane Michael and wildfires.
“In contrast to Jebi, our investors were very proactive with large US events, often well in advance to the actual events that were unfolding. Most investors asked us the event impact to the portfolio long before a hurricane has landed. So, Jebi’s case gave our investors a lot of surprise,” she continued.
According to Hoshino, in the aftermath of Jebi, investors specifically asked questions around issues such as modelling for Japan typhoons, flood risk, the setting of side pockets and how losses would be reserved for.
Wilson agreed that there’s been a lot of talk around Jebi and the way the loss developed, and reminded the audience that as with other events, the industry did learn from Jebi.
“But, to my mind, the real issue with Jebi and what I’ve heard back from the team, was the poor quality of the initial estimates that were received from the model vendors when they were put out to the market and perhaps an over reliance of the market on those initial model estimates. And not actually a fundamental issue with the models themselves,” said Wilson.
Interestingly, Wilson went on to explain that when he speaks with investors, he always looks to separate the two aspects of the use of the catastrophe models.
“There is the use of catastrophe models as a tool to price investments, using the stochastic event catalogue, the 1000s of simulations of pseudo-events that could potentially occur in the future. And, then there’s a separate tool, which is using that model and that one framework, using input which has been derived from observations and events which are occurring in real time, to calculate the damages of a storm as it is occurring in real time,” said Wilson.
“So, a good model with an accurate and robust view of risk, can still produce a bad real-time estimate for many, many different reasons. That separation of the nature of these tools is very important to recognise and to communicate to our investors,” he added.
As well as the on-demand playback, we will be archiving every session from our online and virtual ILS Asia 2021 conference over on our YouTube Channel in the coming weeks and audio versions will also be uploaded to our podcast which you can subscribe to here.
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