Working smarter and harder

Dr Mike Palmer, head of research and analytics at Hiscox Re & ILS, explains why it is vital for reinsurers to understand just how much the world of risk is changing.

This year has seen some carriers pull out of areas of cat reinsurance, such as wildfire cover, due to climate change. Do you see this trend continuing, and how will it impact those still writing cover in this space?

Over the past few years, natural catastrophe losses have been increasing in severity and frequency. It is not really a surprise that reinsurers are re-evaluating their exposure, with some carriers deciding this area of risk is not for them. Hiscox Re & ILS is at the opposite end of this trend. We have navigated the tough rating environment of prior years with disciplined underwriting, and all along have been investing heavily in research and in improving our understanding of natural catastrophe risk. This has given us the confidence to underwrite as the environment changes.

As a result, rather than exiting the space, we are looking to grow our portfolio. The trend of carriers exiting will likely continue in the short term, but I’m sure that those who invest in understanding what is changing, and why, will continue to underwrite with confidence.

Climate change is just one element of overall risk. What other things does Hiscox Re & ILS look at when considering changing risk levels?

While climate change is critical, there are other risks that reinsurers must consider. A notable topic of late has been inflation – both social and economic. At Hiscox, we have focused on understanding the trends in these areas as well as the data we receive, ensuring that rapidly changing insured values and changing claims practices are represented in our pricing and portfolio management decisions. Our industry uses catastrophe models as key tools to assess and price risk, but understanding and calibrating them to ensure that they are a faithful representation of actual claims received is vital. At Hiscox, we benefit from a talented team of actuaries who provide additional valuable input to aid our decisions. Together these aspects constitute the ‘Hiscox View of Risk’, which is surrounded by robust governance to ensure proper and consistent application across the group.

How does Hiscox Re & ILS translate the results of this research into effective portfolio management and underwriting?

It has become a prerequisite for successful (re)insurers to have smart and focused research teams to help them understand how risks are changing. However, unless you can put that valuable research into the hands of underwriting teams in a timely fashion, all the good work is wasted. At Hiscox we continue to invest in slick workflows, so all of our good analysis is available at our underwriters’ fingertips, helping them make smart, informed underwriting decisions.

Going into 2024, what do you see as the main challenges and opportunities presented by climate change and its impact on risk?

One challenge the market faces is keeping up to date with all the research on climate change. The science is evolving rapidly. It is periodically summarised by the Intergovernmental Panel on Climate Change into Assessment Reports, which are a tremendous resource. However, new research is published all the time and it is vital that we stay abreast of new findings. We also need to evaluate which developments should be included in our views of risk, to keep them as up to date as possible. This is a challenge, but one that we have embraced and are committed to.