Peak zone problems – more capacity needed: Peter Zaffino, AIG

The insurance and reinsurance industry has a problem with peak zones and emerging risks, according to AIG President and CEO  Peter Zaffino, who believes that more capacity is required to make underwriting in peak catastrophe zones sustainable and for covering emerging exposures, from climate to cyber risks.

Speaking during a recent fireside chat with Greg Case, CEO of insurance and reinsurance broking giant Aon, Peter Zaffino of AIG discussed some of the issues that keep him up at night.

Zaffino and Case were discussing the changing risk landscape and the emerging risk issues that bother the leaders.

Zaffino explained that, “The insurance industry as a whole is not addressing emerging risks fast enough.

“There’s more work to be done there in terms of solving risk issues for our clients, as they think about emerging risk issues.

“Particularly in climate and all the things that are coming, the momentum feels real and companies are going to need to make commitments, so how do we help them with that by creating new solutions.”

But one of the areas that concerns the AIG chief is peak zone catastrophe exposure, somewhere he feels the industry has not been accounting accurately for rising exposure values, as well as inflationary factors.

“We already had peak zone problems, in terms of deploying capital. In the new world we live in, if this year gets over $100 billion, it’ll be four out of the last five years you’ve seen reinsurance and insurance losses of $100 billion plus from natural catastrophes,” Zaffino commented, adding “That’s not a world we’ve been in.”

Which means the industry is going to need to more capital for the peak zone perils, in Zaffino’s view, which also suggest the industry could look to the insurance-linked securities (ILS) market, perhaps catastrophe bonds, to take more of the top of their reinsurance towers, allowing their own capital to work where it is more effective, in the mid to lower layers.

The whole idea of the catastrophe bond market was originally to take over the top of re/insurers towers, as the cost-of-capital of ILS markets was seen as a more effective way to use capital for the higher return-periods and more remote layers, particularly where cat bond investors have a particular focus.

This could allow major insurance and reinsurance firms to do more at the lower through mid-layers, safe in the knowledge that they can protect themselves against blowing through the top of their reinsurance thanks to the catastrophe bond and ILS market.

That isn’t really how use of ILS panned out in the industry, but with increasing concerns over escalating peak zone losses, as well as higher volatility and frequency in other perils and severe weather, it is perhaps time for the industry to begin to think more seriously about how best to secure the top layers of reinsurance, which can often be very efficiently placed in the capital markets.

Zaffino said, “We need to really think about that, because we’re going to need more capacity. We’re going to need to deliver more solutions in these peak zones, that haven’t really thought through demand-surge and supply issues.

“That’s something I really give a lot of thought to, because we’re starting to see it this quarter as losses are coming out, they’re largely above expectations compared to what analysts would have expected.”

Cyber risk is another area of specific concern for Zaffino and again one where he feels the industry’s capacity may not be sufficient right now, particularly for a peak cyber catastrophe loss events.

“In our industry every single day we talk about cyber. Is cyber an aggregated risk that the industry can actually underwrite effectively to provide value for our clients? That’s something I do worry about,” Zaffino explained.

Adding, “We’ve started to see more ransomware, more frequency, the big systemic risk hasn’t happened yet.

“Is there enough capital in the reinsurance industry to actually help mitigate some of that loss and are there enough active players that can actually be creative in solving client problems.”

Overall, it’s clear Zaffino sees a lot of work for the industry and for AIG to respond to emerging risks, but also to better protect clients against the peak zones as well.

Zaffino highlighted that change may be required, in the way the industry thinks about risk and provides solutions to it, with innovation another constant thread through the conversation with Greg Case.

“There’s more complexities and how we underwrite is getting different and evolving every day and that’s something we’re just going to have to get better at,” he said.