The President’s Message: Fall 2022
Calling 2022 “challenging” may be the understatement of the year. As of October, WRC has seen historically high losses, an unprecedented number of catastrophes (we are now at eight) and a new high mark in retrocessional costs. Throw in double-digit inflation and an impending recession and 2022 is a year to forget. But if we want to put some lipstick on this pig, it’s this – 2022 has driven WRC to take difficult actions that we were reluctant to take previously.
Having lived in Florida, I’ve been through a hurricane or two. As devastating as they are, hurricanes also reveal valuable information after the fact. Every time Florida is hit, some buildings come through relatively unscathed. That’s because if your house is destroyed by a storm and you know storms come every year, you can’t justify rebuilding a house using the same design. You learn from your experience and build the new house stronger, anticipating the next storm. And, if by some stroke of luck, you aren’t hit by a storm the next year, you don’t stop strengthening your house under the assumption that storms won’t reoccur. We must take the same approach with our companies.
It’s self-evident that the broader the base, the more stable the structure. As a reinsurer, the mutuals we insure are our base. When severe storms come, the strength of a structure’s base is revealed. WRC’s results are a direct reflection of the health and stability of those companies we insure, and given our results over the past few years, some components of our base have to be addressed.
Insurance companies must be built for the next storm, and the one after that, no matter when or where it will hit. We can’t afford to relax and fail to improve our structures. And yet, we see it time and time again. Companies who:
- Haven’t taken a rate increase in over 10 years (despite rising home values and claim costs increasing by over 30% in that timeframe)
- Haven’t factored inflation into their pricing (meaning they may already be close to 10% deficient from the start of this year alone)
- Haven’t converted their forms to current standards (despite industry form changes to mitigate loss trends)
- Have kept deductibles below industry norms (despite inflation reducing the value of the dollar)
- Haven’t updated their underwriting guidelines (to ensure their risk portfolio hasn’t unintentionally shifted away from their appetite)
- Haven’t regularly audited their claim and underwriting files (to determine if there are trends that need to be accounted for in pricing, deductibles and risk assessment)
- Haven’t kept abreast of developments in the world of insurance (to anticipate what the future may hold as it relates to their company).
All these factors are cracks in your foundation and they become exposed when pressure is applied. And every year that passes without action is a wasted opportunity to protect your mutual and your policyholders from the next storm.
I think of reinsurance as a back-up parachute (apologies for mixing metaphors) – it should only be used when your primary chute doesn’t work. If you keep having to use your back-up chute every time you jump, then you need to figure out what’s causing the issue with your main parachute before you jump again.