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Risk Intelligence - Generating Long Term Profit within the Catastrophe (Re) Insurance Market
Gero Michel (Senior Vice President, Chief Risk Officer and Head of Risk Analytics)
Montpelier Re
July 2013
 

In considering the future economic potential of the catastrophe reinsurance market, I will examine current issues including rate adequacy, uninsurable and indirect losses, as well as the use of vendor models. I will discuss how new ideas, regulation and a new breed of scientists are changing the industry and conclude that the market will only be profitable in the long-term for a select group of leading reinsurers.

One of our investors recently asked whether the catastrophe reinsurance market will be profitable in the long-term. The question hinted at tail catastrophe risk, the accuracy of catastrophe models, and concerns about the ability of large events to wipe out profits for years. The short answer is, yes, the market will be profitable because: (1) the insurance market depends on catastrophe (re)insurance; (2) no other line requires similar levels of capital to stay afloat; and (3) large losses trigger capital shortages which are followed by premium, price increases and possibly by capital influx. For these reasons, catastrophe (re)insurance in general is unlikely to follow the fate of other (re)insurance lines which have remained in deficit for years. But there is much more to this­ story....

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