To protect themselves against extraordinary losses, particularly natural catastrophes, insurance companies will spread their risk by purchasing reinsurance from other insurance companies. EMC Insurance Group Inc., which has provided reinsurance coverage to other property/casualty companies since the 1950s, launched its own reinsurance subsidiary when the company went public in 1982. The Business Record checked in with Ron Hallenbeck, president of EMC Reinsurance Co., to get his take on the unprecedented level of catastrophes.
BR: Have extreme weather and catastrophes become routine for the insurance industry?
Hallenbeck: Hopefully it is not routine for us to lose money, but certainly the last six months have been a challenge for us. Of our top 15 catastrophes since 1980, four (The Japan earthquake, and the Tuscaloosa, Ala., Joplin, Mo., and Springfield, Mass., tornadoes) occurred in the first six months of this year.
BR: How does reinsurance work?
Hallenbeck: There are multiple types of reinsurance. It can be written on a per-risk basis, for example, if you have a building that’s worth more than you can afford to lose. The other major type of reinsurance is catastrophe reinsurance, which usually involves any and all loss arising out of one event.
BR: Are insurers becoming more risk-averse in how they’re buying reinsurance?
Hallenbeck: A.M. Best (Co.) does look very closely at the adequacy of reinsurance, according to models that are utilized. As a reinsurer, we like to see a certain benchmark as far as the potential (loss) to the written premium, but we also use models to determine catastrophic loss (potential) as well.
BR: Are models being adjusted to consider more erratic weather?
Hallenbeck: Catastrophe model changes seem to be suggesting that the probability of events considered to be outside of the 1-in-250-year probability, which is the equivalent of a 0.4 percent probability, is perhaps much higher. Recognition of this has been painful to both insurers and reinsurers, particularly to those who thought that models were relatively infallible previously.
BR: What’s the lesson there?
Hallenbeck: It’s probably not good to place too much reliance on models, but they are a helpful tool. Models are just a tool to normalize risks across a large section of policyholders. I’m not saying these are the right numbers, but if Joplin was a 1-in-8,000 event, then hopefully you wrote 8,000 other policies that weren’t in Joplin.
Click here to view chart of costliest U.S. disasters.
To view the Ceres report, “Climate Risk Disclosure by Insurers, go to http://www.ceres.org/resources/reports/naic-climate-disclosure/view