Understanding the risks

Matthew Maddocks discusses the importance of exposure management in specialty lines reinsurance

Exposure management in its simplest form is an understanding of the relationship between market losses (the total insured loss across all companies) and portfolio losses (the insured or reinsured loss to a single company), prior to an event occurring. Without exposure management, a reinsurer cannot effectively price the risks it is underwriting, evaluate any outwards reinsurance requirements, or understand the level of capital required to support the business. In short, good exposure management is at the heart of a successful reinsurance organisation.

For a reinsurance company, good exposure management has a number of basic requirements: data and a framework within which to model possible market losses; a transparent relationship with its clients; and robust software to process the analysis. To a certain extent, all of these requirements are influenced by factors outside the control of a reinsurer: most companies do not produce proprietary data for all classes; in practice to achieve transparency a degree of market collaboration is necessary; and very few companies have the resources to develop and maintain proprietary software solutions. At Russell our aim is to facilitate complete exposure management by addressing all these issues and providing an integrated approach to insurance and reinsurance companies operating in the specialty lines segment (including aviation, space, marine, energy, casualty and engineering).

Market loss modelling
Although we endeavour to create a line-of-business generic architecture, each class requires a unique approach to predictive loss modelling. We aim to provide our clients with a completely flexible framework to stochastically generate market level losses, which then feed seamlessly into our portfolio modelling applications. We do not impose restrictions on the uses to which the software can be put and allow clients to parameterise the model as they see fit. This allows them to focus on areas where they can create value for their company without being constrained by any view we may have regarding the frequency, severity, or allocation of events.

On the data side we look to build strategic partnerships with data providers in each of the different classes of business. This allows us to provide a superior service to our clients as we are able to validate, manipulate, and integrate the data into our software much more efficiently than if they were to try to obtain data themselves.

Data transparency
To facilitate increased market transparency, Russell is fully embracing Web 2.0 technologies in ways that we believe will ultimately benefit the entire market. We have developed wiki-style forums where market practitioners come together to agree the data formats and standards that are used to transfer risk information from insurer to reinsurer, from reinsurer to retrocessionaire, or from any party to capital providers or other stakeholders. Hopefully these communities will grow over time to become a resource for all practitioners in the specialty arena including underwriters, brokers, risk managers, and other service providers.

This free market approach taken by Russell is in contrast to that taken by most catastrophe modelling software companies who base their business around protected formats and information that can only be utilised in their software. We work with the entire market to develop standards and best practice, with the results being used by clients and non-client alike. Of course it opens up the possibility of other software providers basing their products around these developments, but at Russell we are proud to compete on the basis of the products and services we provide to the market, with the confidence not to have to rely on an information monopoly.

Solvency II should also provide momentum to increase the amount and frequency of data passed between insurers and reinsurers. Reinsurers should no longer accept a treaty where they have no mechanism to quantify the extent to which the assumed exposures accumulate within its existing portfolio. Reinsurers would not accept this in property catastrophe lines, and Russell is of the opinion that, with risk management at the heart of the new regulatory regime, should not and will not continue to do so in the specialty lines. Going forward, it is unlikely that regulators will accept “it’s always been done that way” or “the client/broker doesn’t want to provide us with the information”, as an excuse for a lack of risk management control. Insurers may have very good reasons for not wanting to provide the data, but this should be met with a swift ‘non-renew’ from underwriters.

Software solution
On the software side we aim to provide a first-class product in terms of functionality, usability, processing power, support and service. In line with the company ethos of openness, our clients have access behind-the-scenes to perform their own analysis or to integrate, with or without our assistance, our products within their companies overall IT application infrastructure. We like to work collaboratively to develop solutions, focusing all the time on delivering what the client wants, when the client wants it.

The future
Our view of the future is clear: it is one where all parties work together as a community giving practitioners as close to perfect information as is possible at the point of decision making. This then allows them to focus on creating value for their company by understanding and managing the risk better, rather than wasting time just trying to establish what the risk is. Going forward we foresee a new age of exposure management where mere knowledge or information is no longer enough but where it is the sophisticated use and interpretation of that knowledge that is key.