As Loss Costs Rise and New Markets Emerge, Industry Must Transform to Meet Demand

Clive R. Tobin, CEO, Torus Insurance Holdings speaking in New York at APIW & New York CPCU meeting yesterday. (Photo: Sonya Szostak) Clive R. Tobin, CEO, Torus Insurance Holdings speaking in New York at APIW & New York CPCU meeting yesterday. (Photo: Sonya Szostak)

NEW YORK—As markets grow in developing countries and losses escalate, insurers will have to reassess risks and likely consolidate to meet the rising demand for coverages and limits, an industry executive says.

In an address here yesterday before a joint meeting of the Association of Professional Insurance Women and The New York Chapter of CPCU Society, Clive R. Tobin, chief executive officer of Torus Insurance Holdings LTD, said the staggering cost of loss is challenging insurers to find more ways to raise finances and “build relationships with the capital markets.”

In the late 1970s, he recalled, a commercial account would submit an application seeking coverage for $25 million to $50 million in loss. Today, he said, corporations seek programs that want coverage terms up to $5 billion in some cases, or they won’t entertain further discussion.

At the same time, losses have escalated dramatically, rising into the $30 to $40 billion range. The number of locations that can be hit with double-billion dollar losses has also grown. Tobin noted that the earthquake in Christchurch, New Zealand, with a population of 300,000, cost the industry around $30 billion.

He surmised that if the New Zealand event could produce that much loss, an earthquake striking San Diego or San Francisco would produce losses in the hundreds of billions of dollars.

“I don’t want to be alarmist, but we never expected these figures 25 years ago,” said Tobin. “It is a challenge where we need to ask ‘How do we raise capital?’ It is a challenge we should not underestimate.” 

The industry, he said, needs to take a closer examination of risk in China, for instance, where the chance of great earthquakes has been documented over many centuries, causing massive loss of life and destruction.

One major risk that is not getting enough attention, he said, is the growth of industrial zones where potential losses are not fully appreciated. He pointed to last year’s floods in Thailand that caused substantial business-interruption losses for many global companies because parts they depend upon from there could not be produced, shutting down production elsewhere.

Turning to the insurance industry’s response to the changing realities, Tobin said companies are poised for massive consolidation over the next 10 to 15 years as reinsurers seek to acquire insurers in order to increase capital and drive efficiencies. At the same time, insurance brokers with their ability to slice and dice client information will more and more become the underwriters of their client’s risk.

Brokers will “rent” placements from insurers because it will remain too expensive for them to start insurance companies themselves, Tobin predicted. Insurers will also find themselves in the position of being less able to dictate terms and conditions on accounts because brokers will have the upper hand.

However, he cautioned that one unknown is how regulators will react to these marketplace changes.

Contract certainty will also become more important, Tobin said, especially in such places as China and India, where the legal systems are uncertain regarding contract issues. He said underwriters will have to produce products with parametric triggers, which set out loss payment under terms of a clearly defined event.

He explained this must be done to make the insurance contracts “meaningful” to clients in these emerging markets and ensure quick settlements.

“We, as an industry, have to be ahead of the game,” Tobin stated.

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