A wake-up call in uncertain times: Swiss Re

The warning signals from 2017 are clear: the future success of our industry will depend on the strength of our partnerships and our ability to combine the knowledge and assets of each in order to develop innovative solutions, says Moses Ojeisekhoba of Swiss Re.

Fifty years ago, Swiss Re published the first issue of sigma, its flagship report, in the wake of Hurricane Betsy in 1965. At a time when nat cat risks were considered to be virtually uninsurable, Swiss Re founded sigma to harness data to analyse insurability and other challenges affecting the re/insurance industry.

Betsy was a wake-up call for the industry. Today, the risk landscape and the industry look very different, and so do the challenges. But will the current conditions turn out to be another alarm call for our industry? There are plenty of reasons why they should and could be.

Resilience tested

From Cyclone Debbie and hurricanes Harvey, Irma and Maria to a string of Californian wildfires, 2017’s disasters caused more than $337 billion in economic losses. It remains to be seen what will be the impact of the 2018 nat cats on our industry’s resilience. At $144 billion of insured losses, 2017 was a record-breaking loss year for the industry. Even after a year of record-breaking catastrophe losses, the global reinsurance industry showed that it was resilient and able to cope with several major natural disasters in a single year.

Yet at the same time, the tremendous scale of losses incurred did not increase the cost of coverage. The current rate of return is destroying value. If 2017 was a measure of the industry’s own resilience, then we passed the grade once more, but under current soft market conditions the question remains: for how much longer?

This will depend on at least three key factors: a sustainable strategy and long-term vision, technological innovation, and trusted partnerships.

Sustainability is vital

Swiss Re’s ability to absorb multiple hits from natural disasters, such as the ones experienced last year, was largely thanks to our strong capitalisation, risk management expertise, quality underwriting and a well-diversified global portfolio. These qualities are, and always have been, the hallmarks of our success. But today’s uncertain economic climate and tough underwriting conditions pose enormous profitability challenges for us all.

As rating agency S&P has found, the ability of re/insurance companies to earn returns that cover their cost of capital has declined significantly. Profits have dropped, and low interest rates continue to dampen investment income. Despite last year’s record losses and even after many years of price erosion and only moderate improvements in 2018, large segments remain inadequately priced to achieve sustainable returns.

Without the ability to sell protection at a price that accurately reflects the ever more complex risks in the market, many
re/insurers will struggle to remain profitable.

In difficult times like these, it is becoming abundantly clear that only those willing and able to adapt will succeed over time. For reinsurers, this means adjusting their business models, not only to ensure the sustainability of their own operations but also to help their clients better navigate today’s challenges and achieve long-term success.

Insurers, in turn, need partners who will stand by them in the good times and the bad. Such commitments are essential in a world where it is not uncommon for claims to take decades to develop, placing an added premium on sustainability.

Technology offers new opportunities

While the effects of technological advancements are creating new opportunities, staying current is adding complexity. From analytics to deep learning, digital platforms and artificial intelligence, there is a need to invest significant sums in cutting-edge R&D to better align price with the risks assumed. Without doubt recent investments in technology have generated efficiency gains, compressed margins for the distribution system in commoditised lines and reduced claims costs.

Although the benefits for profitability are partially clouded by the cost of investment in technology, these technological advancements are indispensable, as we strive to expand our business by covering new and increasingly complex risks.

Long-term success depends on trusted partnerships

New approaches that build on shared insights and expertise will be vital for the long-term success of insurers and their reinsurance partners. This is why the most successful partnerships are those which go beyond merely providing re/insurance cover.

A profound understanding of clients and the application of knowledge as a strategic asset leads to some of the most promising innovations. We at Swiss Re are seeing exciting results from such collaborations.

For example, due to our early investment in behavioural science we have been able to make a significant financial impact for our clients in sales, underwriting, claims, and retention. In one case, we worked with our client to help boost their sales by 180 percent through a direct mail campaign by focusing on the messenger and a clear call to action. We also made possible a 51 percent increase in completions of a client’s claims form by anchoring the policyholder to tangible actions.

With another innovative partnership, we helped a client in Florida offer insurance to a whole new customer base by sharing our flood risk expertise. While for many years flood risk was deemed uninsurable, advancements in flood modelling are revolutionising the market for flood insurance products and helping to close the protection gap.

Made possible by a joint venture between Security First Insurance and Swiss Re, Florida residents can now include water damage, along with flood coverage, in their homeowners’ policies for the first time.

Collective challenge

Innovations driven by technology and digitisation are opening up new opportunities for growth and greater profitability in an otherwise difficult business climate. In contrast to 50 years ago, technology today is helping us understand individual household nat cat risk profiles, and our challenges are no longer insurability but rather long-term sustainability.

The future success of our industry will depend on the strength of our partnerships and ability to combine the knowledge and assets of each in order to develop innovative solutions. The warning signals from the record-breaking year of 2017 are clear.

As an industry, we must be agile enough to adapt to change if we want to remain relevant in the future and continue to deliver what we do best: innovating to provide society with stability and continuity in an otherwise uncertain world. This is the collective challenge we must meet. This is the wake-up call we must recognise.

Moses Ojeisekhoba is chief executive officer reinsurance of Swiss Re. He can be contacted at: moses_ojeisekhoba@swissre.com