After two years of unprecedented disruption, it is easy for insurers, reinsurers, and brokers to look back at the pre-pandemic period with rose-tinted glasses. Now, as the industry moves towards a ‘new normal,’ it’s important to look to those pre-pandemic days to see what in fact has changed and which challenges remain.
Claus-Ulrich Kroll, president and CEO of Munich Reinsurance Company of Canada, summarized the pre-COVID days like this: “We had global economy that was at the edge of a recession. Climate change and the impact of frequency and the severity of natural catastrophe was high on the agenda. The Paris [Accords] had happened. There was a low interest rate environment for a long time. […] And to make it even more interesting, there was a war for talent going on, which added additional pressure on the industry.
“It was a challenging and busy time before COVID, and then COVID came into our lives, and we all know it’s still here, with an impact on society, the economy, the companies we work for, and also on our individual lives. In the meantime, we’ve experienced the most severe recession in modern economic times, and also the fastest comeback ever, with volatile capital markets, and even lower interest rates. And we are suddenly dealing with a topic that hasn’t been there for a long time – inflation.”
All of these challenges have come together at a time when the world is dealing with a significant increase in the frequency and severity of natural catastrophe events. In 2021, insured damages for severe weather events across Canada reached $2.1 billion, according to Catastrophe Indices and Quantification Inc. (CatIQ), making it the sixth highest loss year on record. This follows loss years of $2.3 billion in 2020 and $2 billion in 2018, leading many to the conclusion that $2 billion of extreme weather losses per year is the ‘new normal’.
“Climate change is not a new topic, it doesn’t come as a surprise, and it’s good to see it on top of the agenda again,” said Kroll at the CatIQ Connect virtual event on February 10. “We are in the business of assessing, pricing and taking risks - in an uncertain and changing environment. In order to do so, the understanding of the risk landscape, and the exposure, and the complex and constantly evolving environment will remain key for the whole industry.”
Fellow reinsurance leader and panellist at CatIQ Connect, Matt Wolfe, president - Reinsurance Solutions (Canada), Aon, described climate change as “a difficult risk to get our arms around,” before posing the question: “How insurable is it?” He said there are opportunities for the industry to provide solutions to climate and weather-related risks, with the warning that “we need to be mindful” of the looming, long-term challenges.
“We need to make a material investment in being able to better model climate change,” Wolfe stressed. “Part of that … is [understanding] the impact in the last decade or so of the capital markets, particularly the pension funds, [who are] looking at the insurance and reinsurance sector as an attractive place to be [as] it’s a diversifying source of risk. If you look at global reinsurance capital, it’s roughly US$650 billion over the last 10 years or so, and the capital markets now represent US$100 billion of that. So, we think about how difficult taking on the risk of these cat events has been for our industry, but we’ve had the help of US$100 billion of new capital flowing in.
“But we’re at a difficult point right now. The numbers superficially look good that the capital markets continue to grow and come in. But, actually, if you look at the amount of deployable capital, some of that has been trapped. And some of that capital is looking and saying: ‘Well, if climate change is really going to change the frequency and severity of these weather events, and the models, frankly, are overly relying on historical data, can I, in good conscience, invest my members’ funds in this risk?’ So, I think that’s something that we need to spend a lot of time thinking about.”
The insurance and reinsurance industry “doesn’t have to be 100% of the balance sheet” when it comes to mitigating and responding to losses associated with climate change and severe weather, according to Wolfe.
He said: “We’ve got the distribution, we’ve got the underwriting expertise, so we need to find a way to deploy that. And really, as opposed to looking at certain challenging segments, like flood risks in certain areas, let’s find a way to work together, to bring additional capital in, to increase our relevance to Canadians in terms of both physical and personal protection.
“I’m very proud of our industry through COVID. It’s been incredibly challenging. We’ve pivoted to a virtual world, and I think largely, we did not miss a beat. We were there and able to respond to client needs, from the insurers to the reinsures. And so, I am optimistic, I think we can rise to the challenge, but I think it’s important that we do make significant investments in talents and tools.”
