The complex and interconnected nature of this risk environment means that there is greater demand for the solutions and expertise that reinsurers can develop and share, noted Swiss Re’s Leopoldo Camara (pictured), in a recent interview with ReInsurance Business. As head of P&C Re in Northern, Central, and Eastern Europe, he has seen the greater intensity in Swiss Re’s relationships with clients across a wide range of topics – beyond just natural catastrophes.
On the downside, the reinsurance market is facing some significant challenges, whether that’s with regard to the volcanic geopolitical landscape, concerning casualty trends, the radicalization of political discourse, or the challenge of bridging the ever-growing protection gap.
There’s a variety of factors driving these market conditions, according to Camara. Looking to the casualty space, he gave the example of the time value of money (TVM) in long-tail business, both on the primary and the reinsurance side. “Of course, premiums are paid up-front and the claims are paid late, so the time value of money is very important in the way you price the business. With interest rates up and down, and down and up, you see its impact on how you plan.
“You might plan on a certain basis, and then, all of a sudden, the interest rates go down and then you need to adjust that plan – and then they move up again. So, the environment is volatile. And that is slightly preferable to what we had before, which was stagnation at zero or even a negative interest rate level, but it does play through and make things less predictable and more challenging.”
If there is one clear lesson that Camara believes humanity has had to learn in recent years it is that, “inflation is a very difficult animal to tame.” When expectations shift around, it’s very difficult to predict how the TVM will evolve, and that’s a big challenge for the whole of the market – in short-tail as well as long-tail.
The variability of inflation is a consideration that brings additional complexity, he said, offering an example of how this is playing out in the construction market. Everybody’s talking about how new buildings have new technology, which is more expensive – whether it’s to do with heating, insulation or installations. When inflation is unpredictable, understanding and valuing the full cost of construction decisions is made even more difficult.
“We've seen that in recent events. In Italy, for example, severe convective storms in July 2023 led to a large insured loss and it was short-tail so everybody thought, ‘Okay, give it four or five months, and we'll know the final loss amount,” he said. “However, the loss more than doubled after January 1. The initial estimates were off - and they were off maybe because the valuations of these installations and insulations [involved] were underestimated. But inflation doesn't make it easier to estimate, it actually makes it more difficult.”
The answer to offsetting this challenge lies in championing the value of up-to-date valuation assessments, and of effective volatility and capital management. That’s where the expertise of Swiss Re and others in the market really comes to the fore – in supporting its insurers through ‘shocks’ but also empowering them to prevent those shocks from occurring again.
“We are here to cover shocks,” Camara said. “That helps primary insurance companies stabilize their positions. But if we have massive adverse development – where you have a loss, you think you know what it is and then it turns out to be much bigger – that generates a lot of friction. It certainly creates friction with shareholders who were told one thing one day, and another on the following day.
“It also makes for friction with reinsurance dealings because, post-renewal, it turns out the loss experience was very different to the risk that was priced for. In sum total, and it’s difficult to accurately quantify but it all increases the cost of reinsurance and of insurance. But if we can make sure that valuations are appropriate, ideally from the get-go, ideally from the time the policy is written, then the whole chain works much better, and it’s more efficient and also cheaper in the end.”
