NEWS
Insurers and reinsurers must adjust for capacity shortfall at 1/1
Insurers are seeking more reinsurance protection as losses rise, partly driven by inflation, yet reinsurance supply is down on previous years.
A rebalancing of the relationship between the insurance and reinsurance sectors is urgently needed and will likely happen during this year’s 1/1 renewals as increased losses across the insurance industry clash head on with poor results for reinsurers.
This is the view of Urs Baertschi, regional president, chief executive officer Reinsurance EMEA, and member of the Group Executive Committee at Swiss Re. He told Baden-Baden Today that a supply-demand imbalance is emerging, which is bringing things to a head. Insurers are seeking more reinsurance protection as losses rise, partly driven by inflation, yet reinsurance supply is down on previous years.
“The experience and the results for the reinsurance industry have been quite poor over the last five years. The industry has been paying for losses that are much more attritional in nature and should often be covered by the retention of the insurance companies,” Baertschi said.
“We have an environment where demand from our client insurers is up yet, at the same time, supply from reinsurers is down. Something needs to change. We anticipate a rebalancing in that relationship between the insurance and the reinsurance industries.”
He said two big factors will inform any rebalancing of this relationship. On one hand, structures, retentions, and terms and conditions will change; on the other, pricing will increase in a way that appropriately reflects the risks being taken on.
But renewals do not exist in a vacuum and Baertschi admits that the macroeconomic and geopolitical context for this renewal is unprecedented. “There’s so much going on and it’s all happening at the same time.
“We still have a pandemic that’s impacting people and companies and societies around the world, we have a war in Europe, inflation is high, and there’s a looming recession. We also have supply chain issues, an energy crisis, a food crisis, and then we have climate change and natural catastrophes, again all happening at the same time.
“This has increased losses for the insurance industry. It has increased uncertainty and volatility. Insurance companies don’t like that so their demand for more protection in the form of reinsurance is up.”
Demand for reinsurance might be up, but Baertschi reiterated that the supply of reinsurance is down.
“Pricing will increase in a way that appropriately reflects the risks being taken on.”
Urs Baertschi, Swiss Re
Loss trends
Another major talking point in the re/insurance industry, intertwined with the above challenges, is climate change. The industry is concerned around the extent to which it is affecting natural catastrophe frequency and severity, and, in turn, loss trends.
Baertschi said that when Swiss Re has examined natural catastrophe losses over the long term, the reinsurer found losses increased by between 5 and 7 percent a year. “What is clearly driving this, including more recently, are some of these secondary perils and some of them come from climate change,” he said.
He highlighted the floods in South Africa in April 2022 as an example, where record-breaking rain inundated the region around the port city of Durban in the KwaZulu-Natal Province. Flooding killed more than 400 people and destroyed homes and livelihoods.
Baertschi described it as “one of the costliest and deadliest events in the 21st century” and said that climate change has played a big part in events like this. He also said that population growth and growth in exposures through urbanisation were responsible for greater losses.
This trend of rising loss costs means two things for insurance companies, he said.
“Clearly insurers have more demand for more protection against these natural catastrophes and secondary perils, but they also want to have more insights. A lot of that insight will come from technology, from data, from tools, and we have some of them here at Swiss Re as part of our Solutions Business.”
Europe has experienced devastating floods and secondary peril events such as wind storms and hail. In July 2021, major flooding hit Europe, killing more than 220 people and causing severe damage. Germany was worst affected, with insured loss estimates of €7 billion initially suggested by the German Insurers Association. Belgium expected to see up to €2 billion in losses and further losses were expected from Luxembourg, the Netherlands and Switzerland for the same event.
Baertschi was keen to emphasise the worldwide nature of increases in frequency and secondary perils, such as drought, flood, hail and wildfire, which he called a “global phenomenon”.
“If we just look at this year, and you go from Brazil to South Africa to Australia, France, Germany, the US and so on, these events are happening around the world and the frequency is clearly up. And it’s almost as though they’re no longer catastrophe-like—they’re much more attritional in their loss nature.”
“The first thing is around building awareness, and technology can help.”
Building resilience
The protection gap around these secondary perils remains large, depending on where you look. In 2021 there were about 50 major flood events globally and the protection gap was around 65 percent on average in mature markets and up to 95 percent in high growth markets, Baertschi said. To tackle this, he has identified the three ways that the industry needs to respond to secondary perils.
“The first thing is around building awareness, and technology can help here,” he said. He highlighted Swiss Re’s CatNet product, which looks at exposures, as an example. “We looked at the flood losses or where the water went for the flood events in Germany last year and we overlaid it with our own map and we had an almost perfect match. So from these tools you can see and learn and grow the awareness of where the risks really are.”
With this knowledge, the industry needs to provide appropriate, fit-for-purpose products that meet the customer demand, he said. Lastly, an appropriate price must be charged for the risk the industry is taking on, he added.
Meeting these requirements will go some way to ensuring the re/insurance industry can play a key role in strengthening resilience against these risks, he said.
Returning to the role of technology to make a difference, Baertschi said that tech is at the forefront of efforts to support resilience. Swiss Re’s Solutions Business is constantly working on new technology to address clients’ demands. This work focuses on growth, underwriting profitability and operational efficiency using tools to help clients manage their portfolio.
Data-based tools and technologies are at the core of this developing technology, he said, all with the aim of enabling Swiss Re’s clients to make decisions about running their businesses based on a strong foundation of data.
“That could be CatNet that I mentioned, or a Rapid Damage Assessment product that helps to give a good view of where claims are very quickly, or our P&C analytics platforms. These are the kind of things that are helpful to our clients to run their business more effectively, more efficiently and more profitably.”
Urs Baertschi is regional president, chief executive officer Reinsurance EMEA, and member of the Group Executive Committee at Swiss Re.
Main image: Shutterstock / HAKINMHAN
