Resilience is key

The reinsurance industry has a unique opportunity to help society become more resilient during, and post, the COVID-19 pandemic, drawing on the industry’s own resilience as a strength, says Moses Ojeisekhoba of Swiss Re.

The past four years have been challenging for the re/insurance industry, but Moses Ojeisekhoba, Swiss Re chief executive officer reinsurance, said that the tough environment, including the ongoing 2020 pandemic, has created an opportunity for the industry to have a positive impact on society and make sure it’s more resilient.

This is partly because the industry itself is resilient, he said, speaking to Intelligent Insurer, despite Swiss Re’s estimates that industrywide losses from the pandemic will be between $50 billion and $80 billion.

Ojeisekhoba remains confident that Swiss Re, and the wider re/insurance industry, can “make the necessary adjustments” to ensure pricing returns to a sustainable level. 

“Our clear belief is that we can go into the market now and make the necessary adjustments, not only Swiss Re but the market as a whole, to make sure the entire industry is earning a return that is commensurate with what capital providers expect in order for the capital to continue to be there to sustain the industry overall.”

With this positive attitude, it is unsurprising that the reinsurance CEO said the industry can learn a number of lessons from the pandemic that will have a positive impact for society.

“There’s clearly a great ascent of awareness around how resilient companies or individuals are as a result of the pandemic and whether they have the right coverage in place, be it life insurance or health insurance, P&C or business interruption.

“There’s a far greater awareness now which is also driving demand.”

Disputed claims

Pointing to the industry’s challenges around disputed coverage claims, he said: “When you look at the fact that there have been court cases and disputes around whether coverage exists or doesn’t exist, that is not good. It doesn’t paint a positive image for the industry overall and we need to take that element seriously.”

“There are clear lessons to be learned around clarity, and how you price for certain exposures.” Moses Ojeisekhoba, Swiss Re

Greater clarity is needed around whether somebody has coverage or not and what the policy language reflects, which will be positive for the consumer and the industry.

“There are clear lessons to be learned around clarity, and how you price for certain exposures, because in certain cases the coverage for pandemics has been provided with clear intention and in those instances the industry has responded and paid claims.”

He said the industry needs to find a way to address this situation more comprehensively by understanding what the exposure is, for things such as pandemics, and what the industry can and cannot cover.

The industry also needs to look at what it needs to partner with the public sector to provide the right level of capacity.

However, while the industry is resilient, low interest rates remain a concern, Ojeisekhoba said.

“We feel fairly strongly that the industry should be concerned about a low interest rate scenario, especially since all the research and all the economists and commentators feel that we’re in a situation where low interests will be here for a while.”

Insurance companies around the world make money in two ways. One way is the technical side: you collect premiums, you pay losses, you pay expenses and the delta between the premiums you collect and those two things creates some underwriting earnings. The other way is on the investment side. The insurer invests the assets that it has and generates an investment income.

“The asset side has generated significant income for the industry for quite a while and that is clearly tied to interest rates because most of the investments that insurance companies make are on, mostly, a long duration investment, mostly bonds, which respond very strongly to the direction that interest rates happen to move in,” he said.

With interest rates low, a proportion of this income has gone and industry companies have to make up for it somehow, he said.

“You need to generate sufficient returns for those who are providing capital.”

“This means you’ve got to shift to the other side of generating income which is your underwriting side, and the margins have to be better to be able to meet the return requirement of shareholders to keep the business going.”

In this sort of an environment, if you’re not disciplined, you also have people who may be tempted to say, ok I’ll find a way to try and generate greater investment income, said Ojeisekhoba.

“The only way you do that is by moving down the quality curve in terms of where you invest, which in turn means it creates some risk for the company from the standpoint of losing a lot in the financial markets which then creates problems about the stability of the company.

“So I think low interest rates for a while is a major issue for the insurance industry.”

He said the only feasible reaction is that margins have to become better on the underwriting side. “That’s the combined effect of low interest rates and accumulated losses over time from not charging the right premiums. It’s the reason you see significant movement in pricing in the primary markets as well as the reinsurance market.

“And in our view, this is something that needs to continue for a while to make up for the fact that value was destroyed for a number of years. You need to generate sufficient returns for those who are providing capital to you to fund the respective companies.”

You can watch the full interview on Intelligent Insurer’s Re/insurance Lounge website here.

Images (from top): Shutterstock / Philip Steury Photography, CROCOTHERY

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