Stamford, Conn. - A study of catastrophic life insurance conducted since the September 11 (9/11) tragedy confirms that the life insurance industry's catastrophe reinsurance buying habits and risk management needs have changed significantly over the past five years. The study, conducted by Towers Perrin, explores how the life insurance industry's practices have evolved, what factors are driving the changes, and the industry's level of satisfaction with the exposure management tools currently available."In the years following 9/11, there has been a lot of discussion regarding how the life catastrophe market has changed. This survey provides important and non-anecdotal industry data about how insurers are managing their risk concentrations, and how they are evaluating reinsurance and risk retention strategies. The overwhelming sentiment among insurers is that coverage is still expensive relative to the perceived risk of life catastrophes," says Michael Plappert, vice president with Towers Perrin's life, accident and health practice, which is housed within the Reinsurance business.

Survey findings indicate that most participants have significantly changed their approach to exposure management. Among respondents, the two most prevalent new actions taken since 9/11 are monitoring aggregate exposure by ZIP code or city (65%) and monitoring all groups with an aggregate exposure above a predetermined threshold, i.e., $25 million (55%). Prior to 9/11, many life insurers monitored their exposure based on the state information contained in Schedule S of their annual statements.

"Prior to 9/11, purchase decisions were driven primarily by smaller events, such as plane crashes, with an eye toward the potential severity of a large earthquake in California. Terrorism did not factor in most companies' decisions," says Tracy Stoltz, a vice president with the firm's life accident and health practice and the survey's coleader. "The events of 9/11 shifted the focus of reinsurance buying to larger events by expanding both the list of possible locations and causes. With the heightened concern over market volatility and potential catastrophic events, we see an increased need to work with clients to assist them in developing and executing a comprehensive risk management strategy."

Although P&C carriers have used catastrophe models as risk management tools since the early 1980s, these tools were not broadly available for life products until after 9/11, according to Stamford, Conn.-based Towers Perrin. About 40% of survey participants are using some type of loss modeling tool when reviewing the cat risk of their portfolio. Given the amount of time that needs to be dedicated to these modeling endeavors, it was surprising that only 3% of survey participants found the estimated loss results to be very helpful, although 70% believe that modeled results have potential.

"It is unclear whether this skepticism is driven by the limited amount of detailed data that is available to carriers, dissatisfaction with the current software products or the wide ranges of P&C loss projections that have been released in the wake of known events, such as hurricanes," says Plappert. "The cause is likely a combination of all three and clearly indicates that the participants are not satisfied with their current options and are looking for improvement."

With 94% of respondents saying that they do not expect the market to return to pre-9/11 conditions, continued investment in exposure and catastrophic risk management tools by vendors, insurers and brokers is needed to make them more useful to the life insurance industry.

Other highlights of the survey include:

  • Despite the media attention surrounding a potential pandemic, only 6% of respondents are highly concerned about a pandemic. It is unlikely that much additional action will be taken until there is substantive and sustained evidence of person-to-person transmission of avian or other potentially catastrophic flu.
  • The potential losses from life catastrophes and hence cost of reinsurance has increased significantly since 9/11, but due to the competitiveness of the insurance market, most insurers cannot pass this higher cost on to consumers. .

Source: Business Wire


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