Modern Insurance Magazine Issue 60

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INTERVIEWS Modelling Modern Risk with Dr. Kirsten Mitchell Wallace Modern risk comes in many different forms. With this in mind, Modern Insurance Magazine sat down with Dr. Kirsten Mitchell-Wallace, Director of Portfolio Risk Management at Lloyd’s of London, to discuss emerging challenges in the catastrophe risk market, the potential of new state-of-the-art underwriting technology, and the steps being taken to reassure the wider industry in light of rising claims costs. Hi, Kirsten – great to meet you! Thanks so much for your time today. Q You are responsible for leading the strategy and day-to-day activities of the Lloyd’s Portfolio Risk Management Directorate. I’d like to start by talking about your current priorities within this role. Where does your focus lie at present? AThanks Amelia. Great to meet you, too! The primary goal of the Portfolio Risk Management department at Lloyd’s is to create confidence to take risk. We have four teams focusing on Exposure Management and Aggregation, Outwards Reinsurance, Pricing and Portfolio Analytics, and Emerging Risks. The quantification of catastrophe risk is a very important part of that, but it’s certainly not all we do – our work covers many disciplines and parts of Lloyd’s. We have four key strategic priorities at the moment, which is primarily where our focus lies. Firstly, we’re reviewing the risk landscape – not just in natural catastrophe risk but also in non-natural catastrophe risk, like Cyber and Liability. We’re also looking at how we can apply technical advances in the field and disseminate best practice. We are developing our oversight, particularly around pricing, which is quite new for Lloyd’s. Finally, we’re looking at how we can improve our processes to make them smoother. QWe live in a time of unprecedented levels of risk from both natural and anthropogenic causes. What are the emerging market challenges facing the catastrophe risk industry at the moment? AWell, in terms of natural catastrophe (‘Nat Cat’) risk, we’re in a fairly good position in many ways because we have years of data, alongside established frameworks for understanding the risk and recording exposures. In terms of non- Nat Cat risk, particularly cyber, there’s definitely still more work to do in terms of how we quantify those risks. That’s certainly a big challenge at the moment. The completeness and appropriateness of our risk quantification methods is also a challenge. We must continually review our models to make sure they’re appropriate for current risks, accounting for changes in hazard, particularly with regards to regional perils and in response to climate change. Whether it’s monitoring the impacts of social inflation or issues around insurance to value, models should be complete for all of the different sources of risk that might be associated with a peril. QLloyd’s maintains mandatory Realistic Disaster Scenarios to stress test both individual syndicates and the market as a whole. How have tests evolved in recent years, and what are your findings within this results framework? AWe’re always evolving and reviewing our Realistic Disaster Scenario framework to make sure it continues to be appropriate for the risk landscape. However, we also know the risk landscape is changing rapidly. We’ve just completed a data collection exercise on geopolitical risk scenarios, for example, and we’ve recently updated our cyber risk scenarios to make sure we’re still measuring the right things – blackouts, data breaches, ransomware and cloud cascade scenarios. Three years ago, we also introduced six new liability scenarios around financial product mis-selling, financial market manipulation, pharmaceutical products, construction products, and chemicals in the food & energy sectors respectively. We need to make sure our scenarios remain appropriate for both Nat Cat and non-Nat Cat risk. QTell me about your most successful transformation effort. How has this come to fruition in recent years? AIn terms of oversight at Lloyds, the move from ‘minimum standards’ (of which we had hundreds) to oversight based on just 13 principles has been really important. This embraces the concept that the level of risk should be proportionate to your maturity and ability to manage that risk, and that’s been a really fundamental transformation. We’ve certainly moved away from a minimum standards approach, towards a method that is more outcomeorientated. It seems to be working really well. QWhat potential is being realised through new, state of the art underwriting technology? AWell, there are a number of algorithmic underwriting proposals in play at the moment, not to mention existing syndicates as well. There’s a lot of discussion about Big Data in particular, and the potential that could be unlocked. For example, businesses are now using satellite data to really understand the details of roof types on individual properties, which can massively impact the outcomes of claims potential. Telemetrics data isn’t something we’d use so much at Lloyd’s, but having seen the impact of that in the 12 | MODERN INSURANCE
INTERVIEWS Kirsten Mitchell-Wallace is the Director of Portfolio Risk Management at Lloyd’s, the world’s leading insurance market. She is responsible for leading the strategy and day to day activities of Exposure Management & Aggregation, Outwards Reinsurance, Pricing & Portfolio Analytics and Emerging Risks teams. She has been at Lloyd’s for over 5 years and has over 20 years of experience in the insurance industry. In her previous role as Regional Cat Manager for Europe, Middle East and Africa at SCOR, she was responsible for leading catastrophe risk teams based in Zurich and Paris. Before this she was Head of Cat Pricing and Methodology and responsible for coordinating the development of SCOR’s own view of risks, as well as managing the Zurich-based cat team. She also worked for Willis as a Senior Catastrophe Risk Analyst for almost five years and spent two years in model development for RMS and a couple of years as a risk management consultant. Kirsten has a PhD in Atmospheric Physics from Imperial College, London and a Masters in Meteorology from Reading University, as well as a degree in Chemistry from the University of Bristol. She also has an International Diploma in Risk Management from the Institute of Risk Management, a Level 5 qualification in Coaching and Mentoring from ILM, and is a Certified Catastrophe Risk Management Professional. motor insurance space, there are clearly so many potential avenues where we’re seeing information open up - particularly for insurance, pricing, accumulation and product development. QConversely, catastrophe modelling is a relatively young discipline in comparison to other risk management processes within insurance. How does this create limitations? ACatastrophe modelling came about in the early 1990s, so we’re looking at around 30 years - quite a while in career terms! That being said, we face some of the same challenges we always have, one of which is the communication of uncertainty. Limited quantification of uncertainty in catastrophe models is definitely still a restriction. I think that continues to create a real test for us as an industry, particularly for anyone who’s involved in modelling or quantification of risk. You can’t just think about what the point estimate answer is, but also what the uncertainty around that is, and what your appetite for that uncertainty is. How conservative do you want to be? We’re asking people to think about that a lot more within the market at the moment. QWhat about Managing Agents? How can they improve their modelling and pricing of catastrophe exposures? AThe completeness and appropriateness of their view of risk in relation to the current risk environment is paramount. Managing Agents must be alive to all of the changes that are happening at the moment, and ensuring that those changes are adequately reflected within their distribution of losses. Traditionally, I think the focus of catastrophe modelling and exposure management has been more on the tail risk, making sure people are adequately capitalised for really big events. Now, it’s becoming equally important for people to put the same level of focus not just on the tail, but on the whole distribution. You’ve got to get the expected loss right if you want the pricing to be right and the technical pricing to be appropriately derived. QFinally, many insurers have declared an intention to reduce their natural catastrophe exposures due to volatility and the likelihood of rising claims costs. What more can be done to provide the sector with appropriate reassurance? AIt’s true that claims costs are rising, and in reality, we expect them to continue to rise because there continues to be more exposure. Much of that exposure is in locations which are inherently considered to be more hazardous; coastal areas or the wildland-urban interface, for example. That’s before we’ve even considered the impact of climate change. On top of this, climate change will have an impact – and that impact will vary depending on different perils in each specific region. A rigorous analysis of historical claims and the components of this data helps to ensure that current claims are being modelled appropriately and, on top of that, potential future changes within the environment can be worked into modelling frameworks. The data going into these models needs to be accurate, and other factors which could amplify claims should be considered within the modelling framework. It’s important that we focus on the frequency of catastrophe claims, not just the severity, keeping on top of the science and making sure that our models remain appropriate for the current conditions. Dr Kirsten Mitchell-Wallace, Director of Portfolio Risk Management, Lloyd’s of London MODERN INSURANCE | 13
Page 1 and 2: ISSUE 60 ISSN 2515-3803 Risky Busin
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Page 15 and 16: INTERVIEWS solutions, particularly
Page 17 and 18: EDITORIAL BOARD Supporting Vulnerab
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Page 22 and 23: Helping businesses make better deci
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Page 43 and 44: FEATURES Building Trust through Res
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MCA2023 “My highlight of the nigh
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INSURTECH Catastrophe and Climate:
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