Innovation needed in a crisis: Swiss Re

The world, and the risk transfer industry, face a complex set of challenges, which are almost unprecedented in modern times. But the industry does have the ability to step up and offer solutions, says Swiss Re.

The world is in crisis on all fronts: geopolitical, energy, economic and climate-related. That was the message of Swiss Re’s pre-Baden-Baden press briefing on October 19. However, a positive note was sounded regarding the industry’s ability to step up and provide support.

Exploring the key topics for Swiss Re’s conversations at Baden-Baden this year, Frank Reichelt (pictured), Swiss Re’s head of Northern, Central and Eastern Europe, highlighted the themes of inflation, pricing, supply and demand, and partnering.

“We see significant increase in demand for risk protection in the current uncertain times, across all our businesses, and in all regions,” he said.

As inflation flows through clients’ exposure evaluations, Swiss Re expects to see significant new demand for capacity. Reichelt noted that at the same time, capacity is decreasing in some areas, as many players are reducing their appetite—particularly for nat cat businesses—and this will likely have an impact on prices.

“Insurers can mitigate the downside risks of the economic situation and support their clients in their capital management, repricing insurance risks to account for higher claims costs, asset reallocation in investment portfolios, and hedging against inflation,” Reichelt said.

“Reinsurance has traditionally played a significant role in being the financial backstop to the industry. That will likely continue as the world is becoming riskier, but reinsurers and insurers need to be compensated for inflation. And as risks accumulate, insurance premiums are expected to rise to reflect the new more volatile reality.”

He added that Swiss Re is committed to being a reliable and consistent partner in these challenging times, and is partnering with clients and society to create stability as supply chain, climate, food and energy security risks grow more complex.

“More than ever, our industry must step forward as an agent of societal resilience,” he said.

He added that the industry is built on the idea that insurers and reinsurers share the risk—so, as risks increase with inflation, it will be necessary to ensure the increased risks are shared between reinsurers and insurers through various reinsurance structures.

He also noted that during recent years, client retention has not kept up with loss inflation, and this needs to be addressed to ensure that reinsurance addresses real volatility and is not just absorbing risk trends.

“The structure of reinsurance covers needs to evolve with inflation, and the retentions of insurers will need to go up,” he said.

Addressing the challenge

One area that clearly illustrates these dynamics is the nat cat situation in Europe. Discussing this in depth, Nikhil da Victoria Lobo, Swiss Re’s head of Western and Southern Europe, highlighted the prevalence of natural catastrophes globally.

“The severe weather we’ve seen in Europe this year highlights the risk of natural catastrophes, particularly secondary perils, and the fact that they are increasing in frequency and severity in all regions,” he said. “Any country can be hit by a secondary peril at any time.

“The effects of climate change are being manifested in daily life and daily insurance events, and the unprecedented floods in Australia and South Africa are further evidence of this global trend.”

He added that the impacts of climate change are being made more severe by the effects of inflation—insurers of all sizes are facing inflation across Europe. In most countries, property insurance policies have an automatic link to inflation, so with inflation, the sums insured increase.

This impacts the financial position of the insurance company, raises the risk of under-insuring people, and has led to an increased demand for additional reinsurance coverage.

“While we see significant new reinsurance capacity demand, we’re also seeing mid-sized and small reinsurers stepping out of the market and reducing capacity or even just keeping it stable,” he said. “In other words, increasing demand is being met at the same time with shrinking supply.

“Inevitably, this will mean that rates will harden off. But in parallel, client retentions are going to go up with the significant higher rates because we’re also seeing increased exposures and increased frequency of events.

“The good news is that a few reinsurers, such as Swiss Re, have the capacity to offer to close this gap. We have the risk appetite, the capacity, and the knowledge to support our clients at this time when the natural capacity demand has increased,” he said.

He added that the industry as a whole has the potential to step up and address the challenge.

“Yes, times of crisis reveal that the old recipes do not work. But they also reveal our ability to find new answers to the challenges of this type. The risk is high if we do not innovate but we’re confident our industry can do so.”