Solvency II will nurture the conditions for “systemic risk” in the insurance industry, according to the chief executive officer of Bermuda-based re/insurer Hiscox.Speaking at the Insurance Day Summit yesterday, Bronek Masojada questioned the industry’s reliance on models and regulators’ apparent belief that, over time, models would become increasingly accurate in predicting actual outcomes.During his presentation to delegates at the Fairmont Hamilton Princess, Mr Masojada said insurance executives were making decisions based on what their models said and compared this to using cruise control on a car.The models were only as accurate as the data built into them and those who built them knew only too well of the large number of assumptions made in the model-building process.“They can end up sending you into the rocks when you think you’re doing something safe,” Mr Masojada said.Solvency II, the new European Union rules for insurers due to take effect in 2013, implied that models were improving with time and so “sets us up for systemic risk”, he added.“Every one of us uses the same set of models, so we’re all doing the same thing,” Mr Masojada said. “Just like when the banks were all doing the same thing.”While there was much talk in the industry about recent catastrophe losses and the scale of hurricane season losses that would turn the market, Mr Masojada said he seldom heard talk about statistics.Using slides, he showed statistical analysis of hurricane activity over the past 110 years. There had been about six hurricanes per year, with about one in six making landfall in the US, a key factor for insurance industry consideration.The analysis calculated an 80 percent probability that a hurricane would hit the US this year and a more than 70 percent chance of such a hurricane causing losses of between $1 billion and $2.5 billion. The chances of a hurricane causing more than $20 billion in losses was about 15 percent.Yet the cynic might believe the chances of a major hurricane was more like 50 percent, he suggested, because “in the insurance industry, bad years always get worse”, a view familiar to everyone in the business.What was important to insurers, their customers and investors, was not whether a certain type of catastrophe was a one-in-150 year event, but whether the company could meet its obligations if the event occurred and survive.“I don’t know what the probability of $150 billion US hurricane is, but I do want to know what it would cost us and that we would still be in business a day later,” Mr Masojada said.The Hiscox CEO said there was a lack of differentiation in the Bermuda reinsurance market, something that many participants thought inevitable in what was considered a syndicated business. But he believed differentiation was achievable and important.An anthropologist and professor of management he hired to study the reinsurance business found that firms put the same amount of time and effort into dealing with each piece of business, regardless of whether it was a straightforward renewal or a new and complex risk. If this was the case, there was little wonder that reinsurers lacked differentiation, he said.He talked about how Hiscox had used marketing, much of it via the Internet, to establish itself in the US market and differentiate its own insurance products aimed at small businesses.The company had even spent $300,000 on creating an Internet TV-type series, which he described as a cross between “The Office” and “Friends” to get its message across. The Internet awareness campaign was working, he said.