Gianfranco Lot, Swiss Re
In terms of the renewals and hard market conditions, what are the forces driving the market?
We have experienced significant loss activity over the past three to four years, from a string of natural disasters in Japan and Australia to manmade losses that manifested around the world.
In the US we have seen social inflation drive significant adverse development across the industry in commercial auto and commercial liability. And then there is the uncertainty around Covid-19, as well as the ultra-low interest rate environment.
Let me be more specific and take natural catastrophe business as an example. We are seeing increased frequency of large events as well as more severe losses. This year’s Atlantic hurricane season had nine tropical storms formed before August and 13 formed before September this is a record. Add to this the fact that more people are living in catastrophe-prone regions thus more wealth is lying in the path of hurricanes and typhoons. We can re/insure the assets that have built up in those regions but the price must be risk-adequate.
It is not the time to buy less reinsurance, in fact we see demand for reinsurance going up. As a consequence, I expect the hardening market which started earlier this year to continue. This is needed if we are to address the chronic underpricing which has developed over the past several years.
What are your predictions on rate increases?
Given much lower investment returns for insurers and reinsurers, we see increased importance on reaching an acceptable level of technical profitability. The Swiss Re Institute has estimated that non-life insurers in G7 markets need to improve underwriting margins by 7 to 11 percentage points to compensate for the lower interest rates and achieve a reasonable return on equity.
I expect reinsurance terms and conditions to continue to firm up across the board, albeit at different paces, with the US Commercial P&C insurance and reinsurance market being the most pronounced.
We see good rate momentum on the original business and continued firming up on the reinsurance side, which is needed to achieve a more sustainable pricing level. Similarly, we expect more firming up in Japan and Australia, as well as other geographies such EMEA, as many reinsurers have suffered from continued low returns.
“Our capital strength and quick turnaround time are key factors that add value for clients who need access to sizeable and immediate quality capital.”
What are the priorities of your client base, the large insurers, in terms of their buying strategies?
Our clients want to write profitable business and ensure a return to their shareholders. In such an extraordinary year, there may be some understanding from shareholders whose dividends or share buy-backs have been cancelled. However, going into 2021, insurers will need to make sure they can get back to returning money to shareholders.
Logically, this will raise demand for reinsurance in order to remove volatility and protect capital. In such an environment we will see a flight to quality in terms of the reinsurance, where insurers are focusing on the capital strength, consistency and franchise value of their partners.
Swiss Re’s industry-leading capital position and long-term relationships put us in a very good position to service these needs.
How do you add value to these large clients?
With the focus very much on temporary earnings volatility and capital needs, we will benefit from being long-term and stable partners beyond 2021. With some of our large clients we have cultivated uninterrupted business relationships for over 100 years. Our passion is to understand our clients’ ambitions, strategies and pain points, and help them reach their objectives.
Clients highly value our structured solutions team, who have an impressive track record of developing innovative solutions that address the intersection between client need and risk appetite.
Our capital strength and quick turnaround time are key factors that add value for clients who need access to sizeable and immediate quality capital.
Our access to clients, business footprint and knowledge enable us to provide data-driven insights to help our clients grow, reposition their underwriting portfolios and transact more efficiently through our proprietary platforms.
Our new Digital Market Centre complements our offering, especially when dealing with highly complex and interconnected risks. For example, our risk models for natural catastrophes have supported clients in underwriting US flood business, an area that was previously very difficult to offer insurance for. Other topics include solutions for the automotive industry or cyber.
Will this renewal differ from previous years’ because of COVID-19 and market trends?
I am impressed by how teams, clients and our broker partners have been able to sustain interactions in a seamless manner, while almost all are working from home. I got to know my clients in a different light some working from their apartments, while others took the opportunity to work from their second homes.
We look forward to the ‘digital’ Monte Carlo and CIAB meetings, and to working through this renewal. I wonder how much carbon dioxide we were able to reduce this year? Of course, the COVID-19 crisis is not over yet, lots of uncertainties remain. We cannot rule out further, perhaps more localised, lockdowns.
On the business trend side, as mentioned, we would expect many insurers to be looking at options to firm up their capital positions, especially in light of increased shareholder expectations in 2021. With our industry-leading capital position and expertise, we will be very active in supporting them.
A key discussion will be the importance of technical underwriting results to support profitability. We want to close protection gaps and thereby grow but only when this can be done at prices that make sense for the risk we are taking on.
In addition, the pandemic has reiterated the importance of contract certainty for both claims and underwriting.
What is your key message to clients ahead of the renewals?
Contract certainty is more important than ever and we should not forget that clarity of what is covered is the cornerstone of trust.
We are long-term partner for our clients and brokers and intend to foster even stronger relationships. Together as industry we’ve had years of sub-par returns on equity and there is still a great deal of uncertainty as well as the ongoing challenges of the low interest rate environment.
Swiss Re has the capital strength to support, and we will look to deploy that capital to strengthen our clients.
We believe there is an awareness among businesses and communities that insurance protection is valuable and that people are willing to pay a commensurate rate for the security we offer.
How will you replace face-to-face meetings this year? Will it matter?
I’d love to be able to head down to Monte Carlo and meet our clients face to face. However, we’ve got some very exciting virtual events planned for our clients, and we have converted the physical meetings into digital ones. In fact, we have a similar number of meetings planned, and some we re-designed to fit time zones and client preferences, making them more effective.
We’ve learned from the pandemic that we can operate very well with the virtual technologies available it was surprising how quickly our whole industry got used to the new situation. In fact, many of our global relationships have strengthened as we’ve discovered that we connect virtually more frequently.
Finally, I am a strong believer in the irreplaceable value of physical interactions, but the current crisis triggers a re-think of how we should operate in the future to make our world more sustainable.
Gianfranco Lot is head of global reinsurance at Swiss Re.
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