October 22nd, 2009

Casualty Clash and Casualty Catastrophe Risks, Part IV: Casualty Clash and Catastrophe Renaissance

Posted at 1:00 AM ET

metropoulos_emil_bioEmil Metropoulos, Senior Vice President

We are surrounded by casualty clash and catastrophe risk. Especially in today’s interconnected and turbulent business environment, these threats can pervade a large insurer’s portfolio, imperiling balance sheet strength and shareholder returns. For the past 20 years, we have seen the rapid escalation of casualty clash and catastrophe risk, and the trend is unlikely to abate. If anything, it will gather more momentum. Consequently, we may be on the brink of a casualty clash and catastrophe renaissance, to be fueled by the capital management agendas of large casualty writers that need to address a lingering, concealed exposure that has long been elusive.

The market is still small, but its importance is growing. At the Jan. 1, 2009, renewal, larger casualty insurers eyed casualty clash and catastrophe pricing with interest. As the risks become more menacing, reinsurance buys will likely follow. The availability of sufficient cover at reasonable terms will contribute to the renewed interest in this form of protection, but the major drivers will be broader market conditions and access to the tools that make action more meaningful.

Regardless of pricing and terms, the market dictates the likelihood of a casualty catastrophe and thus the need for cover. Precipitous equity market drops, mounting fraud allegations, and a general desperation to pin blame somewhere suggest that the foreseeable future will be packed with litigation (and probably claims). The contagion will spread quickly — as it already has — and few will not be touched. Fortunately, the time it will take for these factors to result in insured losses favors carriers. There’s still time to examine portfolios, identify clash and catastrophe exposures, and take action to protect capital.

Where does it end? A casualty insurer that sustains unanticipated large losses can expect to be punished severely by investors and analysts. The magnifying glass used to measure performance widens the effects, leaving only risk management foresight and discipline to protect shareholder value. As this perspective gains ground relative to the traditional solvency concern, larger carriers will be more likely to address the casualty and catastrophe risks in their portfolios. The increased frequency of events will become a near-constant reminder of what’s at stake.

Prudent execution will become a differentiator among casualty insurers. Those securing casualty clash and catastrophe protections will withstand future shocks more confidently and more easily. Share prices will likely show the results.

Originally published in Reinsurance Encounters

Part I: Clashing and Catastrophic Casualty Events >>

Part II: Age of Casualty Catastrophe Risks >>

Part III: Renewed Interest in Casualty Clash Reinsurance >>

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