Industry is underestimating hurricane risk: Swiss Re’s Pande

The (re)insurance industry is not taking full account of the Atlantic Multidecadal Oscillation (AMO) in its underwriting of hurricane risk, despite no sign of a change from the warm phase of the cycle that tends to drive increased activity, according to Swiss Re’s Mohit Pande.

Pande, who is head of property underwriting for the US and Canada at Swiss Re, told The Insurer in a video interview that after the active 2004 and 2005 hurricane season the industry recognised the phenomenon.

“The industry recognised that this AMO warm phase started in the mid-90s and switched its frequency assumptions to reflect being in this elevated frequency.

“However, it is truly inexplicable that in the last few years many industry players have switched back to a longer-term frequency perspective despite no signs that AMO is switching back to the cold phase,” he commented.

The AMO is characterised by fluctuations in ocean temperature and changes phase around every 25-40 years.

When the sea surface temperatures are warmer than normal there tends to be more hurricane activity than the longer-term average, while lower-than-normal sea surface temperatures typically see less hurricanes than the longer-term average.

“It is truly inexplicable that in the last few years many industry players have switched back to a longer-term frequency perspective despite no signs that AMO is switching back to the cold phase”

Swiss Re’s Mohit Pande says the industry is underestimating hurricane risk

Since 1995, sea temperatures have been warmer than average between Africa and the Eastern Caribbean, which has been attributed as the reason for highly active hurricane seasons in 1995, 2004, 2005, 2008, 2010, 2017 and 2020.

In a recent blog, Pande noted that over the last several years, some of the more commonly used catastrophe models have started to disregard the influence of the AMO on Atlantic hurricane activity, despite no forecast end to the current warm phase.

“Our role as insurers and reinsurers is to pay claims and help communities rebuild and bounce back after a major event. But to do that effectively we have to make sure we manage the impact of hurricane exposures on our balance sheets.

“To do that effectively we have to make sure we’re not misjudging the calculations and assumptions behind the frequency and severity of hurricanes,” he told this publication.

The comments come at the end of a near record-setting hurricane season for frequency.

Accelerating reinsurance rates

With the key 1 January renewal season approach, 2020 cat activity is just one factor that is driving harder property reinsurance pricing dynamics, however.

Pande described a tale of two markets in property reinsurance: pre-Covid and post-Covid.

“Pre-Covid rates were improving but the rate improvements were modest; however, post-Covid we’ve seen a significant acceleration in rate improvements,” he commented.

He said that the shift comes in the context of softening premiums over the past six or seven years at a time when property risk has increased significantly because of climate change, urbanisation and other factors driving increased loss activity, including wildfires and weather-related events in the US.

“You have premiums shrinking, losses going up, and all overlaid on a depressed interest rate environment, so all this points to the need for sustained rate improvement across the entire value chain,” Pande commented.

He highlighted the U-shaped pricing curve that had been evident as primary and retro market pricing has hardened significantly but reinsurers have been left squeezed in the middle.

“For the sustainability of the entire value chain it’s quite important we see this U-shaped curve being converted into a W-shaped curve,” Pande continued.

He said that as well as price, there is a great need to review terms and conditions, with Covid-19 having highlighted the importance of clarity around what is covered and what is not covered in contract wordings.

“We expect the industry to seek more information around underlying exposures, particularly related to non-damage BI exposures and we’ve already seen the market move towards standardised exclusions for infectious disease.

“We also need to find a more balanced definition to define some events within the reinsurance contract, particularly wildfire and civil unrest. This balance is important for our ability to provide sustainable coverage to our clients,” the executive concluded.