Climate change has altered the risk environment: Swiss Re

Wildfires, floods, unseasonal storms—the list of so-called secondary perils which are taking a more prominent share of re/insurance losses seems to be growing by the year.

The first two—the former in California and Australia and the latter which took huge swathes of Germany by surprise during the summer—are particularly pertinent signals of how the re/insurance’s industry’s sense of natural catastrophe risk has evolved in recent years.

While nat cat analysis has historically focused on higher-profile devastating events such as hurricanes or tsunamis, the shifts in our climate over the past few decades and the growing realisation that such events are not outliers has forced the industry to reassess its approach to such risks.

Speaking to the 1.1 Club, Intelligent Insurer’s online, on-demand platform for interviews and panel discussions with industry leaders, Swiss Re’s president of US P&C Keith Wolfe discussed how climate change is changing the re/insurance industry.

Shifting patterns in the global climate have always been at the heart of the re/insurance industry, but as the changes over the last decade have become ever more challenging and unpredictable for the market, it has become the number one issue facing carriers.

Wolfe says that in the US market in particular, secondary perils have quickly become an issue that has consumed a large part of Swiss Re’s time and effort, as the frequency and severity of events has begun to diverge significantly from historical norms.

“This is one that we’ve been spending a lot of time on for the last several years. It’s been a bit of an outlier in the marketplace, to be honest. We’ve been talking about the secondary perils issues we’ve had here in the US market,” he said.

“Whether it’s tornado or hail, wildfires, winter storms, you name it, almost any part of this country is exposed to something that wasn’t a severe problem in the weather environment five or 10 years ago. The frequency and severity of those types of events has been astronomically higher than we’ve seen historically.

“This has changed the risk landscape and has increased what real loss costs are. You see that certainly in flood environments, when events happen that’s been a particularly bad area, and the wildfires are another example,” he said.

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Pricing in the long term

For Wolfe this poses a serious issue not just in the immediate losses that such unexpected events throw up and their impact on profitability, but also in pricing and assessing risk for the longer term.

“If we think about modelling risk, this is also something where we are a bit of an outlier. We have our own proprietary risk modelling systems, we have adjusted them, we think properly about most of these climate change issues that have risen much more strongly in the last five years,” he explained.

“We needed to increase property prices in certain segments of the market because of the increased loss cost that was coming through and what we saw in the overall market.”

The executive said that highlighting these risks to clients on the primary side remained a top priority, as regardless of whether they had suffered losses over the past few years, climate change is set to impact all portfolios moving forward.

“Our biggest concern is making sure people have a wide recognition of the effect that the secondary perils and climate change have had on portfolios,” he said.

“Whether or not they’ve experienced losses in the reinsurance part, it doesn’t mean that the risk is not in those portfolios, and that’s the part we’re trying to convey to people based on what we’re observing.”

As the reinsurance market heads towards the January renewals following 18 months of particularly high loss activity ranging from wildfires and floods to the chaos of the pandemic, Wolfe says that pricing has moved in a steadily upward trajectory since the beginning of 2021.

He also noted that while some parts of the market were likely to see substantial rate increases, there would probably remain significant disparity between individual accounts.

“We’ve seen what I would call a firming rate environment throughout 2021 that started in January. It was a continuation of some of what we had seen in the prior 12 months. The mid-year renewals gave us some indications of a similar dynamic,” Wolfe said.

“In parts of the market where the rates have improved significantly—well into the double digits on a primary basis over the last two years—we’re starting to see the positive rate movement, but not quite as strong.

“Now it’s moving into high single-digit rate environments. It depends on whether you have loss-impacted programmes on the reinsurance side, that is driving a very different dynamic for people.

“You could see some considerably stronger rate improvement on loss-impacted programmes than you’re seeing on those that have not experienced the losses,” he concluded.

To view the full 1.1 Club interview click here