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Insider in Full: Is the specialty market asleep at the wheel on systemic risk?

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Topics: Aerospace Claims & Losses Directors & Officers Emerging Risks Financial Institutions Marine Cargo Political Risk & War Strategy Topical Trends

The word “unprecedented” has to go down as one of the most used terms of vocabulary in the last two years...

The (re)insurance market prides itself on being there for when the unexpected happens. But how well is it really prepared for the unprecedented?

The evolving situation in Ukraine has thrown this topic into stark focus.

Three weeks on from when Russia first invaded the state, and the London market is not a huge amount clearer on its ultimate exposure to the conflict and the subsequent sanctions on Russia.

The market might have expected political violence and political risk to face significant losses. Both of these classes estimate gross exposures in the single-digit billions each (see our coverage here and here), and although ultimate losses will be lower, they will not be insignificant.

But arguably it didn’t necessarily expect that one of the smallest niche classes in London – contingent aviation war – would generate one of its biggest exposures to the Ukraine-Russia conflict. The exposure numbers for this class alone run into the double-digit billions.

This is before we examine the impact on marine war, on cargo, and the ripple effect on the D&O and FI markets as insureds themselves grapple with Russian sanctions.

The Ukraine-Russia crisis been described by some as a “black swan” event for the (re)insurance sector and for aviation war in particular – an unpredictable event that is beyond what is normally expected and has potentially severe consequences.

But it wasn’t so long ago that we had one of those.

The Covid-19 pandemic should have served as a warning shot for how little the market truly does understand its aggregations and systemic risk.



Global pandemics are supposedly a one-in-100-year risk, but the experiences of the contingency and the property markets showed that no one was considering that we would not be able to congregate physically in the event of one.

And again, in the case of contingency, it showed how niche specialty classes with small premium pots can generate outsized losses when there are systemic losses.

The resulting claims disputes in property BI – both between insurer and insured, and later insurer and reinsurer – underlined how the market was not joined up in its thinking around how losses are triggered, or how losses would aggregate.

The reputational damage the industry suffered as a result of Covid BI disputes was tangible and arguably it is in for Round Two on this front in the case of Ukraine and aviation war.

These are two headline examples of underlying systemic risk in the specialty (re)insurance market. But there are others.

Writers of strikes, riots and civil commotion cover did not anticipate that the murder of a black man by a white policeman on the streets of Minneapolis would trigger a wave of protests not only across US states but across countries worldwide, at the same time.

And while the term “systemic risk” is never that far from cyber market discussions, the focus in this discourse has almost always been in the context of the “cybergeddon” catastrophic event.

And while this is of course a very real risk scenario, what has caused the most pain to cyber insurance to date has been the rise in attritional claims. This has caused some in the market to claim that they believe the biggest threat to cyber profitability is in fact a systemic rise in claims frequency, rather than outsized severity.

Which leads us to the question – is the specialty market in fact asleep at the wheel when it comes to aggregations and systemic risk?

Is the market thinking laterally about how these “black swan” events can occur – rather than focusing on the tried-and-tested RDS scenarios rolled out by Lloyd’s and other regulators year after year?

The past few years have shown that the interconnectedness of the world reaches far further than the digital means of trading. We are more connected than ever in terms of geopolitical relations, our ability to communicate via social media, and in terms of our ability to react collectively to a singular event. There are more avenues than ever to create systemic risk.

Diversification has always been held up as one of the biggest defences against outsized loss events within a given class. But what both the pandemic and Ukraine have shown is that there is no diversification within an aviation, or a marine, or a contingency portfolio if there is true systemic risk – as all limits can go at once. In a truly interconnected system, diversification of risk fails.

In the case of contingent aviation war, the straightforward use of country caps for aggregations could at least have put boundaries around this outsized problem.

Which prompts some crucial questions. How many more instances like this are out there?

And, have we at least ripped up the floorboards to try to find out?

Following the last two “black swan” events, there is a very real question around market portfolio resilience.

It’s time for the market to start challenging itself more strenuously about what can go wrong.


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