Cat models don’t reflect climate change well: RenRe O’Donnell CEO –

In a statement issued this afternoon on the second quarter earnings call of Bermuda-based reinsurance and third-party capital management specialist RenaissanceRe, the company’s CEO Kevin O’Donnell said vendors are simulating these risks and failing to capture the impact of climate change.

O’Donnell’s comments point to a lack of confidence in the existing risk management system that is one of the biggest contributors to property risk.

This can be a concern for model sellers, as the person who signs up loses confidence, others may follow suit.

“I wanted to address one of the biggest things that the market sees about the risk of cats, and that is the poor performance of cats,” O’Donnell began, adding, “In part, this is due to the number of cats. relying on commercial models which does not adequately address climate change.”

He went on to say, “At RenRe, our scientists believe that commercially available models do not accurately reflect climate change as a changing phenomenon.

“Some of the risks, where the marketers have changed their thinking to reflect the latest trends, we believe they have not grasped the science of climate change firmly.

“This approach to risk management means that vendors’ results may ignore the risks that insurers and insurers are managing.”

Of course, that is why the main trading models can all be changed so that the user increases their perception of the risk of the weather, or adds weather conditions on top of the seller’s perception of the risk.

But it sounds, from O’Donnell’s comments, like RenaissanceRe believes that risk models for vendors are lagging behind, keeping their minds on risk and how climate change affects them.

“This may cause companies to disclose more costs than they need and their returns on managing cat risks may be lower than expected,” O’Donnell said.

The CEO went on to explain why he feels that RenRe is well-positioned as a risk underwriter and climate change event manager.

“In many cases, investors can question whether all insurance companies fully understand the potential consequences of climate risks, whether they are properly included in the company’s risk assessment and in depth, whether they are properly reflected in the prices,” said O’Donnell.

In addition, “Let me explain why we are confident in our management, pricing and design for this risk.

“We have spent a lot of money on modeling and understanding climate change. Here at RenRe, our scientists ensure that our models always reflect the latest, most recognized science.

“This allows us to gradually increase our current observations to reflect what is happening today as a result of climate change. As a result, we believe that our models are a good predictor of how climate change will cost the damage.”

Which is a big part of the knowledge underwriters are now trying to use models to find out. How will the losses change over time as a result of climate change and how to measure the amount and cost of their write-up.

O’Donnell closed his comments on climate risk models by saying, “Our REMS (Renaissance Exposure Management System) reporting system gives us another competitive advantage in reporting property risks.

“All of our risks must be documented and tracked through REMS, which is continually updated to reflect a better understanding of climate change.

“This ensures that the decisions we make are based on the increased risk that climate change presents and gives us confidence that we are being compensated appropriately for the risk we assume.”

Of course, risk models from the major vendors all weigh their output on climate events and are regularly updated to incorporate the latest scientific thinking.

It is always obvious that they will lag behind the best companies, so they can change the models and turn them into the most skilled users.

In this case, it seems as if RenRe has lost confidence in the main types of selling cats, which should have given a warning to the sellers, as usually when one underwriting shop has such a view, others can soon follow.

Of course, having a strong and independent approach to analysis, valuation and pricing, including your views on climate change, will be an attractive trait for partners such as RenRe’s third party and ILS investor style.

Investors are looking to invest in strategies where they see alpha being generated by science and underwriting, something that having your own approach to the cat model and how climate change is calculated can be helpful.