Ever heard the underwriting joke about how to spot the actuary driving a car?
They’re the ones driving without taking their eyes off the rear-view mirror.
This cautionary tale about actuarial vision is perhaps something for ILS investors to ponder in 2018, as last year’s losses catch up with them.
This week, Markel Catco investors experienced the most jarring fender-bender to date from the 2017 events, as the retro manager increased its loss estimate from 28 percent of net asset value to 41 percent.
And when you recall that while the company was raising fresh funds last year, it was forecasting at most a 15 percent loss with the possibility of a small gain, this starts to look like a concern for whiplash.
The best-case scenario that could explain this disjuncture between the firm’s initial expectation of losses and the ultimate reality is not a comforting one. It is simply that the firm was incapable of estimating its own exposures to industry events within what seems a reasonable margin of error.
Others in the industry will be more sceptical that this is what drove the manager’s actions, but let’s proceed on the best-case assumption for a moment.
Markel Catco might reasonably argue that retro market writers are at the disadvantage of being at the end of the reporting chain for financial losses – and thus vulnerable to recognising looming hazards later than its peers.
Like the actuary who becomes so reliant on the rear-view mirror that upcoming twists in the road might be missed, Markel Catco seems to be heavily drawing on post-event data from clients and the likes of PCS to gauge its losses.
Of course, post-event data will have contained surprises for other ILS peers as well. And some of the factors that the firm pointed to are a topic of concern for other reinsurance market risk-takers – notably, high loss adjustment expense levels and the potential for lawsuits to escalate Irma claims.
But even last year, market observers believed Irma would readily trigger a Florida wind “pillar” payout for buyers of the Markel Catco product. This would have impacted one of every four pillar limits offered to buyers.
Yet aside from fears over potential Irma loss creep – which for the most part is still an emerging concern – the overall take on last year’s claims has not significantly shifted from early predictions in the immediate aftermath of storm season.
This is partly because initial fears about the scale of exposure to Hurricane Maria may have inflated industry loss expectations, but as these subsided the later-occurring October and December wildfires compounded the overall year’s losses.
Recent loss estimates (dating from February) from the likes of Swiss Re, Munich Re and Impact Forecasting all put 2017 cat losses at around $130bn-$140bn, including roughly $90bn for the trio of hurricanes – which is not out of step with the initial figures that were thrown around following HIM.
Ultimately, however, it isn’t the industry losses that matter to Markel Catco investors, but their own exposures.
The key question for investors after this year is whether they have confidence in the manager’s ability to give them forward-looking views on the market, or whether it is perpetually tied to a rear-view mirror of the world.