Liberty Mutual Re’s Winkel calls for rethink on unmodelled perils

The (re)insurance industry must rethink the way it uses models in response to the heightened unmodelled losses of recent years otherwise carriers will no longer be able to provide coverage for such exposures, Liberty Mutual Re’s Dieter Winkel has warned.

The sector “is really not geared up for losses that we don’t really pick up the price for”, Liberty Mutual Re president Winkel told The Insurer TV during an interview for #ReinsuranceMonth.

“We have heavily geared our industry towards modelling our exposure, and to then pick up losses that you don’t price for is … a challenge,” Winkel said.

Recent flooding in Germany and neighbouring countries such as Belgium and the Netherlands is just the latest significant unmodelled loss to hit the industry, with others including the wildfires in Greece and the first quarter’s Texas winter storm.

One or two such unmodelled losses over a number of years is “probably manageable”, Winkel said, but “we’re picking them up pretty much every year”, the executive added.

In response, Winkel said the industry needs to take its own view on models “and adjust accordingly because we just cannot keep going on covering unmodelled losses”.

“That’s what we need to work on – to not just look at the history and the development over the last 20 years but also look into the future and see what’s happening next,” he explained.

Having a diverse book of business can help companies insulate themselves from being hit too hard by unmodelled losses.

“We cannot just focus on limited classes,” said Winkel. But he added that the market also needs to change the way it prices business.

“We need to look at what we’ve seen over the last 20 years [and consider that it] may not apply to the next 20 years,” the executive said.

“We need to look into the future and work through how we best manage our exposure and how to position ourselves with the clients and the risks and regions accordingly,” Winkel added.

“Reality has now overrun the models,” Winkel stated.

“I do believe we’re coming to this junction where we have the market generally reviewing that it can’t just rely on that modelled output which is looking historically. We need to take the opportunity this year to look into the future.”

Winkel was clear that data, analytics and modelling is important, but added that companies must now also consider a range of other fast-changing factors such as inflation in the cost of labour and building materials.

“What might have worked in the last 10 years [is] different to looking forward into the future and into the next 10 years,” he said.