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Industry can’t ignore volatility impact on returns: Rob Berkley

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Underwriting executives, brokers and investors can’t overlook the presence of volatility as a critical component in measuring underwriting returns, WR Berkley CEO Rob Berkley said on Thursday.

“We think about volatility as a component of risk,” Berkley said. “Clearly, the industry is feeling the challenges that come along with cat activity.”

“From our perspective, cat activity is there on a regular basis, and why people choose to back it out on a regular basis doesn't make a whole lot of sense to us.”

The executive was speaking to analysts on the company’s third-quarter earnings call. Shortly before, WR Berkley reported $200mn in underwriting profits, shy of hitting its fourth straight record underwriting gain in a quarter.

He compared WR Berkley’s approach to underwriting to how it has managed its investments, where the company has shortened the duration – one measure of investment risk – on its portfolio.

“We do not believe you get paid enough for that potential risk,” the CEO said.

The comments come as brokers and underwriters alike have begun reevaluating their views of catastrophe risk, as there is growing evidence that the severity of more frequently occurring weather events is on the rise.

More than two years into a firming part of the cycle where carriers have achieved significant rate gains – and correspondingly, strong underlying margin improvement – underwriting profits have nonetheless taken a hit from major cat events.

Hurricane Ida is likely to rank among the costliest hurricane events in the industry’s history, and the storm follows Winter Storm Uri, which was the largest first-quarter weather event the industry has faced.

In the days following Ida, cat modeling legend Karen Clark told this publication that cat models were not accounting for a “new normal” and that the risk in the earlier return period on the exceedance probability curve generated by cat models had gone up.

“Our view is that volatility is real,” Berkley said on Thursday.

“It is a real component of risk,” he continued. “When we think about running the business, it is a great priority to us and how we think about deploying capital.”

Property reinsurance was the only line of business at WR Berkley where premiums fell in the third quarter, declining by 1.4% to $48mn.

The CEO said he wasn’t opposed to the company growing its property portfolio, so long as price increased along with its risk.

“We don't have a problem with volatility if we think you're getting paid appropriately for it,” Berkley said.

“So if we see property rates moving up to a level that we think is appropriate, then you will see us prepared to significantly grow that line.”

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