Reinsurance’s future: tackling climate change, cyber risk and AI challenges

While much of the focus at the 2024 Baden-Baden Reinsurance Meeting has centred on property and casualty rates, participants also turned their attention to some of the industry’s most pressing emerging risks: climate change, secondary perils and emerging risks such as cyber liability and artificial intelligence (AI).

As reinsurers look to the future, these areas are becoming important to their growth and risk management strategies.

Climate change remains a key concern for the reinsurance industry, with 78 percent of respondents identifying it as a significant issue on their agenda. The industry’s focus on climate risk has never been more needed, as the frequency and severity of natural catastrophes continue to rise.

One respondent commented: “Climate change is no longer just an environmental concern; it’s a core business issue. Reinsurers are increasingly focused on how they can manage and mitigate these risks.”

This growing urgency has led to innovations in risk modelling. Another participant noted: “We’re seeing a shift in how models are being developed. It’s not just about predicting the next big event, but understanding how gradual climate shifts are impacting long-term risk.”

As extreme weather events become more common, reinsurers are adapting by incorporating more comprehensive data and forward-looking models.

“The stakes are higher than ever,” wrote one respondent. “Reinsurers must evolve to meet these challenges head-on, or they risk being left behind.”

Secondary perils, such as floods, wildfires and hailstorms, remain an increasing concern for the reinsurance industry, with 55 percent of respondents highlighting these risks as a growing priority.

“We’re investing heavily in new technologies to improve our risk assessment models.”

Secondary perils occur more frequently and can have devastating local impacts, making them harder to predict and manage.

One respondent explained: “Secondary perils are no longer secondary in terms of their impact. The frequency of these events is increasing, and they’re causing significant damage. Reinsurers need to reassess how they approach these risks.”

As these events become more prevalent, reinsurers are adapting their strategies to better model and manage the associated risks.

“We’re investing heavily in new technologies to improve our risk assessment models,” said another participant.

“It’s crucial to stay ahead of these emerging threats and ensure our solutions can address the evolving nature of these perils.”

Pressing challenges

Another growing concern is the increasing focus on cyber risk and AI. Nearly half of the respondents indicated that reinsurers are allocating more resources to these areas, viewing them as some of the industry’s most pressing challenges in the coming years.

“Cyber is the fastest-growing risk we’re facing, and it’s the hardest to price,” one respondent noted. “The unpredictability of attacks and lack of historical data make it difficult to model accurately.” As cyber attacks become more frequent and sophisticated, reinsurers are seeking better data and advanced modelling techniques to manage potential systemic losses.

AI is generating significant interest, with 44 percent of respondents believing it will transform the industry.

“AI is the key to unlocking the future of reinsurance,” said one expert. “It improves risk prediction, underwriting efficiency, and helps develop new products.”

However, caution remains, as some warned of the risks in over-reliance on AI, emphasising the need to balance technology with human judgement.

According to respondents, opportunities for growth in reinsurance are concentrated around expanding into new lines of business, with 67 percent of respondents prioritising this strategy.

“The market is evolving, and diversifying into new sectors is crucial to stay competitive,” one respondent said.

Growing market share in existing lines remains a key focus, with 56 percent highlighting this opportunity.

“We’re focused on strengthening our position in the markets we know best, while also looking for ways to innovate within those sectors,” observed one participant.

Both strategies reflect a push toward balancing risk and capitalising on growth areas amid shifting market dynamics.

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