The new higher interest rate era is having a ‘profound impact’ on non-life insurance. The benefit of higher interest rates on investment results far outpaces the increased cost of capital. Swiss Re expects improving profitability for most non-life business in 2023. Non-life insurers can benefit from writing more profitable new business – but risk capital remains constrained.
The most pressing external conditions facing the re/insurance market are clearly delineated throughout Swiss Re Institute’s latest sigma report. Launched via a Press conference at Rendez-Vous de Septembre by Swiss Re’s group chief economist, Dr Jerome Jean Haegeli, and chief underwriting officer of property & casualty reinsurance, Gianfranco Lot (pictured), the report provides a snapshot in time of the impact of the rapidly evolving risk landscape on the re/insurance sector – as it has for over 50 years now.
Introducing the report, Lot emphasised the complexity of today’s risk landscape and how it has changed dramatically over the past few years – as accentuated by the war in Ukraine, high inflation and continued high losses from natural disasters. Speaking with Insurance Business, he also highlighted the dichotomy that exists between the interconnectivity of how these risks are playing out against each other even as increased regionalisation occurs.
“[Looking at] the global value chain, we have seen some nearshoring and friendshoring going on,” he said. “The supply chains that were prevalent pre-pandemic were much more globalised, and are now much more fragmented - a trend we observe carefully.”
The complexity and interconnectivity of the current risk environment do present an opportunity for re/insurers – increasing awareness and underscoring the need for appropriate insurance and reinsurance coverage. That is a key way to address the protection gap which has widened over recent years, he said, and which was estimated by the sigma report to stand at US$1.8 trillion for natural catastrophes, crop, mortality and health insurance in 2023.
“I love the sigma reports because they’re so insightful,” said Lot. “When we select topics, we sit together and ask ourselves what are the most relevant themes for our industry this year? What are the key themes we want to dedicate research to? And this year, it was this question of risk versus return and whether we are actually earning enough to recover our expected costs. Because inherently there’s an expectation around our industry delivering consistent returns to investors.”
What the sigma report allows for, he said, are insights that are foundational for a more rational discussion on hot-button topics that don’t always mean the same thing to everyone. Take, for example, the term ‘hard market’ - it’s a very broad term which is used a lot in the context of conversations around whether insurers and/or reinsurers are earning their cost of capital – and what that means for insurance rates.
As somebody who’s lived through a few of them, Lot knows first-hand how hard it is to define a hard market in solely quantitative terms.
Different lines of business are in different states as well. It’s not like there is a general hard market or soft market, it changes all the time depending on a broad range of considerations which, Lot noted, is part of what keeps reinsurers’ lives so interesting.
“I think sigma permits us to sit at the table and say, ‘OK, let’s have a rational discussion about which drivers of value have changed and which drivers of risks have changed’,” he said. “It’s about dissecting the problem into different pieces that are more manageable. I think it’s useful to have a data-led conversation about what that means. Because our job as reinsurers is to make rational decisions.”
Looking to the recent earthquake in Morocco, he said, already questions are being asked about the implications of the tragedy for the market. What will it mean for the African continent? Will the insurance effects be limited to Morocco? What is already becoming clear, however, is the human face to the $1.8 trillion global protection gap Swiss Re Institute has warned against in its sigma report. Underinsurance is a real concern facing far too many individuals, families and businesses which is why discussions around closing – or at least minimising - the protection gap are so important.
Touching on what the role of reinsurance – and reinsurers – is when it comes to bridging the global protection gap, Lot identified two key components to the question and the answer.
“The first is around awareness and that’s emotional,” he said. “Especially for risks and events that happen very infrequently, maybe every 100 years or so. We need to keep the focus on realising that, actually, this risk can happen anytime. We know that the latest major earthquake in California was in 1906, 120 years ago. But we also know it’s a risk that could emerge at any time, which is that awareness piece.”
The second piece of the puzzle is around the role of reinsurers and insurers in making the products that can plug the global protection gap, Lot said. Reconfiguring policies to alter the scope of cover to match what insureds are looking for from the market is one way to do this, so innovation plays a significant role in modifying existing products as well as creating new solutions.
The “good news”, he added, is that reinsurers do have a range of solutions – and, speaking for Swiss Re, the necessary capital to help clients address and navigate the risk environment they are facing. He highlighted the early success of the parametric product Swiss Re developed in the states which is aimed at lower-income bands. It’s a simple product, he said, it has no limits, and if it’s triggered it pays out immediately.
“That’s an example of a really good innovative product that people actually purchase, and it’s quite a success story,” he said. “That’s because it’s simple to explain and easy to understand. And for small businesses, if they’re facing business interruption due to a wildfire or another such peril, it’s really beneficial to get the cash right away as opposed to waiting for the loss adjuster who might not be available due to other commitments. To me it’s clear the industry is not innovating enough. Technology is permitting more innovation, and we should absolutely embrace it.”
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