ERIC SUGIER, LIBERTY MUTUAL REINSURANCE
Reinsurers must keep pace with climate-accelerated risk changes
As the planet warms, causing the nature of risk to evolve more quickly, Eric Sugier says the industry needs to be proactive in evolving coverage for a new reality.
In the last weeks and months, the world has witnessed several tragic losses caused by natural disasters. Major floods have occurred in the US, across Southern Europe and Southeast Asia as well as in Brazil and most recently, Libya, while earthquakes have rocked Turkey and Morocco and wildfires have swept through Greece and Canada.
Storms of increased severity alone are causing billions of dollars in property losses every year. In early September, it was reported that the global modelled insured average annual loss from natural catastrophes exceeds $130 billion, a new high for the insurance industry.
With climate change pointed to as one of the leading contributors to these extreme weather events, many industries are quickly learning they need to adapt.
For the reinsurance industry, economic factors such as inflation and supply chain disruption, coupled with these global trends, affirm that the nature of risk is evolving faster than ever. For reinsurers, monitoring and adjusting for trends is part of the fabric of the industry, but as natural catastrophes become more frequent and more intense, the property reinsurance market is adopting a much faster rate of transformation to prevent total losses.
Staying ahead: evolving coverage for a new reality
The impact of climate change is increasing the risk of earnings erosion for reinsurers. To stay ahead and ensure they have sufficient resources to guard against future natural disasters, reinsurers must maintain effective portfolio management, seek out fresh avenues for growth, and set risk pricing at appropriate levels to sustain their ability to shoulder the growing threat of natural disasters.
“The property reinsurance market is adopting a much faster rate of transformation.”
Eric Sugier, Liberty Mutual Reinsurance
Just as important is building in retentions and attachment points at levels appropriate to the exposures, in collaboration with brokers, insurers and partners, ensuring expectations match the available coverage.
In 2023, we have witnessed the repositioning of the market to this higher level, as was necessary to protect the industry, its capital reserves and avoid having to subsidise a lack of earnings. This has meant that the market has not only significantly increased premium rates, but also increased risk retentions. For many reinsurers, this has included redefining the terms and conditions available on coverage and adjusting risk appetite to improve returns.
Evolution through technology
In addition to these traditional tactics, the reinsurance market is embracing technology to manage risks and ensure its sustainability in the face of this environmental crisis. This new wave of technology is driven by data accessibility, the use of specialised software to address specific pain points and advanced modelling techniques.
Technology is enabling ground-breaking new products. In early September, Liberty Mutual Reinsurance (LM Re) announced the launch of the world’s first advanced earthquake parametric reinsurance treaty that harnesses the power of real-time building sensor data installed at the insured’s location.
By deploying hundreds of low-cost sensors, this parametric trigger earthquake policy can deliver accurate, efficient and direct claims payouts and simplifies processes for clients, brokers and insurers. This represents a significant advancement towards a more resilient and prepared population in the event of a major earthquake.
The project has been deployed in a seismically active region of Mexico, but this treaty for earthquake risk is just one example of how reinsurance is embracing technological advancements to counter the threat of natural disasters and can be a model for future parametric products designed to counteract climate change-exacerbated risk.
“This parametric trigger earthquake policy can deliver accurate, efficient and direct claims payouts.”
The reinsurance market has begun to employ advanced modelling techniques. Insurers and reinsurers are increasingly relying on climate models that incorporate data on factors such as rising sea levels, temperature increases, and extreme weather patterns.
These models help assess the potential impact of climate change on insurance portfolios, allowing companies to make more informed underwriting decisions and allocate capital more effectively. This proactive approach helps reinsurers better manage their exposure to climate-related risks.
Proactive on climate change
Reinsurers are promoting the adoption of sustainable practices and incentivising climate-resilient investments among their clients, through risk selection, retention, and evolved terms and conditions.
By changing the structure of reinsurance products in alignment with our business partners, adopting technology and being proactive on the climate transition, LM Re is safeguarding the financial future of reinsurance as the capital backstop for society. Our financial strength builds community resilience—ultimately ensuring that health and property are protected from the impacts of climate change.
Eric Sugier is head of property, EVP, Continental Europe, MENA and Latin America at Liberty Mutual Reinsurance. He can be contacted at: eric.sugier@libertyglobalgroup.com
Main image: Shutterstock / RODKARV
