The types of measures that insurers take to mitigate losses to their portfolios from cat events was then outlined, including the use of sub-limits, deductibles and premium loadings (based on location, construction or a combination of these). The way insurers and reinsurers manage their aggregate exposure was also discussed.
In the short discussion that followed, the point was made that the building codes (including the one in KSA) are primarily designed to save lives, not reduce the insured loss. There are situations where deaths and injuries are light, but the building is still a total loss and the insurance market is severely impacted.
In the second presentation (by Mohammad Ali Al Marhoon and Salman Abdullah Al Fawzan, members of Saudi Re’s Treaty Team), the impact of cat exposure on the pricing of a proportional treaty was reviewed. To provide a basis for comparison, the average property rates charged by a sample of companies in the Saudi Market were shown (without identifying the companies). This slide showed a very wide spread in the average rates charged, which led to a spirited discussion regarding the reasons for the differences (differences in underwriting philosophy and portfolio, lines of business written, level of deductibles, etc.). The same process was then gone through regarding engineering business – and a similar spread in the rates charged – the highest average rate being over 3 times the lowest rate. The question was asked as to whether these big spreads were justified – and if they were based on an active Enterprise Risk Management (ERM) process or not.
When the cat exposure to the reinsurance programs is analyzed, a similar diversification of approach is seen. The amount of protection purchased by companies on a non-proportional basis varies widely, as does the attachment points. This means that some proportional programs are significantly more exposed to catastrophe losses than others. Theoretically, this increase in exposure should mean that the “cat loading” on these proportional treaties should be higher. The reinsurers need to price for the exposure (on non-proportional covers) and / or encourage the ceding companies to price their business taking account of the catastrophe exposure (for proportional covers). Also, reinsurers must protect their capital bases by buying their own protections and limiting the amount of aggregate they retain in catastrophe zones. Again, the role (if any) of an active ERM process was identified as something that must be considered by insurers
Given that the Jeddah floods took place not long after the Seminar, the catastrophe risk of flood will obviously be a topic for an upcoming seminar.
