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Insurers need better solution to flood risks: Industry executives

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The insurance industry withstood the 2017 natural catastrophes with little impact on rates, but needs to develop a better solution to flood risks in the United States, according to top industry executives.

“Here it was the largest cat year on record and we didn’t see insolvencies,” Richie Whitt, co-chief executive officer, Markel Corp. in Glen Allen, Virginia, said at an industry town hall event on Tuesday at the Insurance Leadership Forum, sponsored by the Council of Insurance Agents & Brokers in Colorado Springs, Colorado. “The industry proved it was able to take a punch and continue to deliver for our customers.”

“It was an earnings event and what we all found out was that earnings events don’t move markets,” he continued. “Capital events move markets. While there was a little bit of a tick-up in rates post the event, that’s really moderated in the months since.”

What was particularly interesting for Markel, given its recent activity in the insurance-linked securities space, was the ILS response to the catastrophes, Mr. Whitt said.

“It was very interesting to see the ILS market be able to reload,” he said. “The investors did not run for the hills. In fact, they put more capital in. Some people would look at that and say that’s a validation of that ILS model.”

The Hanover Insurance Group does not write personal lines business in Texas and Florida so was relatively unaffected by the 2017 catastrophes, but those catastrophes and Hurricane Florence should cause the industry to reflect on the fact that many people are uninsured against flood risk, said Jack Roche, president and CEO of the Worchester, Massachusetts-based insurer.

“These flood-based events are going to challenge us as an industry on not just whether we can get the (National Flood Insurance Program) sustained, but is there an opportunity for more privatization,” he said. “What does that look like? It’s not an easy problem to solve and there’s a lot of people that oversimplify it. That’s something that we have to reflect on. Our image is not going to get enhanced as an industry if the vast majority of people that suffer those losses have to rely on the NFIP” or are uninsured.

“This is why innovation is so important to our industry,” he added. “As much advancement as we’ve had in modeling, flood models are still very immature. Based on the way (Houston) has been built out and based on some of the prior experiences that they had, Harvey shouldn’t have been so surprising to people. In a lot of ways, we have to step back and stop being so model centric and exercise a little bit of common sense” and ask how the business needs to transform in the sale of property insurance.

Technology will play a role in that transformation, Mr. Roche said.

“We think there really is an opportunity to transform the way we do business and yet there are a lot of hazards to embracing technology the wrong way,” he said. “What’s undeniable is that if you look inside the way in which you do business today that you can do it better.”

Part of that is monitoring and understanding the insurtech trend, Mr. Whitt said.

“There’s no doubt the things that are going on in insurtech are really important things that we need to pay attention to, but the reality is that very little of that is actually generating any kind of revenue or profitability,” he said.

The two executives also discussed their respective companies’ recent corporate transactional activity.

In August, Markel announced its acquisition of ILS manager Nephila Holdings Ltd. as part of its effort to “build out our capabilities across the product sector away from traditional insurance and reinsurance to ILS capabilities,” Mr. Whitt said. 

In September, Hanover announced the sale of Chaucer, its Lloyd's of London-focused international specialty business, to China Reinsurance Corp for total proceeds of $950 million, which Mr. Roche said will be a “watershed moment for us as a company.” When Hanover purchased Chaucer in 2011, it surprised people that a regional company would become a Lloyd’s underwriter, but it had diversification and intellectual capital exchange benefits for the insurer, he said.

“What we didn’t find was as much business synergies as we hoped,” Mr. Roche said. “Over time for many reasons we decided it was a best to go down and look at a strategic alternative process with our team at Chaucer. We’re happy. We think this is a win-win-win. We think Chaucer will enjoy their new ownership. We think China Re will be greatly advantaged by this asset.”