vol. XVII no. 3

				Page 2 MODELING RISK Underlying Renaissance Re's success is development of REMS, a catastrophe management computer system that allows underwriters to evaluate risks to a particular client as well as risks to the company's portfolio. According to Stanard, in the late 1980s only rudimentary models for predicting the probability of where hurricanes and earthquakes might strike existed. The techies who designed these models typically held midlevel positions rather than being a part of top management. Computer modeling took a quantum leap when Andrew elevated risk management to a survival issue requiring attention at the highest levels of insurance companies. That, coupled with an increase in computer power in the 1990s and a management team with technology backgrounds, gave Renaissance a competitive edge in designing a modeling program that has now been adopted by most of the industry. " We built our own software so that an underwriter could use it at the desk and understand the risk on our portfolio," Stanard says. " You can have the greatest models in the world, but if your decision makers don't use them, that's doing you no good. We succeeded in the integration of having the traders use what the quants create." An attention to capital management is another ingredient in Renaissance's ability to manage risk. With 30 years in the insurance industry, much of it in the reinsurance area, Stanard is familiar with industry cycles. He describes those cycles like this: The insurance market experiences periodic shocks, during which some companies dissolve and others form in the window of opportunity. During the hard market phase, these new companies experience growth, but, eventually, a softening follows, during which premiums drop and opportunities lessen. Fiscal management during the soft market phases is essential to sustain the business, Stanard says. STORMY WEATHER, SILVER LININGS The period following September 11 ushered in one of these hard markets for specialty reinsurers. Six new companies with capital ranging between $1 billion to more than $2 billion formed within a matter of weeks after the World Trade Center collapsed. The market hardened further as the corporate governance failures of Enron and WorldCom became public. A spate of asbestos losses and a downturn in the stock markets in 2002 contributed to what Stanard describes as "a perfect storm in the insurance market." Renaissance was well positioned to enter markets that others were leaving. It formed a business plan to offer new products, including terrorism reinsurance. Whereas Renaissance uses different computer models to evaluate terrorism risks or risks in the financial securities market, it does operate in those areas with the same philosophy on which it has based business since its beginning. According to Stanard, Renaissance looks for products to sell where there is an ability to assess risks. In other words, the company lacks interest in offering umbrella liability for areas where risk cannot be predicted and legal exposure is unknown. Instead it focuses on areas - whether property catastrophe, financial guarantees or terrorism - where variables can be modeled and risks assessed. The company also has little interest in diversification, moving only into areas where it can overlay its expertise with an opportunity in the market or with a partner where skills are complementary. "Diversity is overrated as a risk management technique," says Stanard. "Adding complexity is more risky." Previous Page | Top | Risk Management

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