Big capital increase for cat exposures at UK insurers under RMS 11 and SII

The report finds that RMS 11 will have ‘significant ramifications’ for the UK risk transfer industry when its capital calculations for windstorm and storm surge are overlaid with Solvency II rules.

Of course any increase in capital for the risk transfer industry is likely to be passed on to buyers in the form of rate increases.

The estimated jump in capital demand is based on a comparison with the requirements that would have been imposed by Solvency II and RMS 10, the previous generation of the model.

hide

Willis Re was keen to point out that the 97% figure reflects the increase that mono-line property insurers could see in their net capital requirements, adding that diversification benefits reduce this number ‘significantly’.

Robert Rogers, Willis Re Regional Director UK and Ireland, said: “Many insurers are coming to us because they are alarmed by the increases in modelled loss produced by the new model. They want our view on whether the output is reasonable, and to what degree it should drive their reinsurance purchasing decisions.”

Tim Edwards, author of the report, said that a key aim of his team’s investigations was to consider the merits of changes made in RMS 11.

“From validating against 3rd party hazard datasets and testing against our clients’ loss experience, we see the RMS v11 modelling as being an improvement in many respects but with certain major calibration issues,” he said.”

“We believe that RMS v11 for the UK is unlikely to adequately reflect the nuances of all clients, and we therefore see it as our role to customize the view of risk to satisfy our clients’ internal governance requirements and the increasing demands of external stakeholders,” he added.

Mr Edwards noted that reinsurers are also asking questions about the validity of RMS 11. “We are having conversations with them, looking into the ways in which RMS v11 may be over-stating exposures,” he pointed out.

RMS is expected to release some additional features to its current model in early July. These will include the ability to quantify the vulnerability and uncertainty around their central view of risk released in August last year with an upper and lower view.