Industry recalibrates to higher catastrophe trend, exposure to outpace inflation: Swiss Re

Insured losses from natural catastrophes are expected to continue rising faster than economic growth and while, for now, the insurance and reinsurance market recalibrates its models to these higher loss trend, it requires more resources (capacity) to meet this growing need for disaster protection, Swiss Re has explained.

In its latest sigma report, Swiss Re looks at insurance market conditions and concludes that the hard market in non-life risks is expected to persist through 2024 and 2025, given ongoing inflationary pressures and rising claims costs.

Profitability for property and casualty insurance carriers is expected to improve as a result and the fact global economies are robust means continued expansion for the insurance industry is anticipated.

Commenting on the state of the global insurance market, Jérôme Haegeli, Swiss Re’s Group Chief Economist said, “The insurance industry has reached a new equilibrium after the challenges of recent years. The global economy has surprised on the upside, which should drive more demand for insurance. The life sector in particular is one to watch as higher interest rates drive investment income and consumer demand for annuities, giving more people secure retirement incomes.”

Kera McDonald, Chief Underwriting Officer Swiss Re Corporate Solutions added, “Commercial insurance accounts for almost half of the total property and casualty market. We expect commercial P&C carriers to maintain profitability in 2024, as rate trends have enabled lines like property to stay sustainably priced. The industry has seen single-digit rate increases for property business written this year. On the casualty side, we observe a trend of general market softening across most long tail lines.”

But, the reinsurance company cautions in its report that natural catastrophe insured losses are continuing to accelerate faster than economic growth, which Swiss Re sees as a challenge and a driver for the need for resources and capacity to grow across the sector.

Large losses from natural catastrophes are seen as a potential influence on the underwriting cycle, Swiss Re notes.

In order for the insurance and reinsurance industry to remain more stable, to the benefit of its end-customers, it’s important that capacity supports the industry through major loss experience.

Swiss Re’s sigma report states, “To be better positioned to absorb the potentially very large economic loss impacts of disaster events and thereby strengthen societal resilience, the industry needs to continually adapt to changing risk landscapes, such as, for example, urbanisation and associated asset value accumulation, and also climate change effects.”

While the industry is going through a recalibration, of models and risk appetites, to the higher catastrophe loss cost trends being seen, Swiss Re forecasts continued nat cat exposure growth in the region of 5% to 7% CAGR over the medium-term.

Which also means the industry needs to be expanding its capital base as well, in order to meet the demand for protection and the growing loss cost needs of its clients, while this exposure outpacing growth also presents societal challenges too.

It’s not actually a new trend though, as Swiss Re notes that over the last 30 years, insured losses have grown at an average annual rate of 5.9% in real terms, compared with the global real GDP growth of 2.7%.

But it is a continuation of the issue and in a world where climate-related weather events are becoming increasingly impactful in some cases, it does not bode well for the ability of the re/insurance market to provide a stable capital base to support its customers, without the need for growing risk transfer capacity support and also increased mitigation efforts across economies.

“The industry needs to grow its resources to match the growing demand for financial protection against evolving natural catastrophe risks,” Swiss Re explained.

Adding that, “While there are opportunities for the industry, insurers also face challenges when losses from natural disasters grow at a faster rate than GDP. There are also implications for insurance affordability, with potentially larger protection gaps in many regions of the world.”

All of which requires capacity to support the insurance industry as it assumes more nat cat risks, as well as investment in mitigation to reduce the loss quantum from source.

Swiss Re explained, “In 2023, nearly 62% of total catastrophe losses were uninsured. Narrowing protection gaps requires reducing expected losses and/or increasing insurance coverage. And reducing loss potential involves climate change mitigation, loss reduction, and prevention and adaptation actions to minimise exposure and vulnerability to hazards, both at societal level (eg, enforcing building codes) and at the individual asset level.”

Going on to state that, “Reducing loss potential will enable the insurance industry to continue to play its role in covering the risks that remain outstanding after mitigation and adaptation actions take effect. By reducing future vulnerabilities and increasing resilience, the cost of insurance coverage can be brought down, this enabling rising take-up of risk protection covers. Moreover, strengthening risk assessment and ensuring that premium rates are commensurate with rising exposures are key to safeguarding the economic sustainability of the industry.”

For the property insurance market, over the medium to long-term, Swiss Re explicitly states that, “the growing need for catastrophe covers will support demand.”

Which speaks to the continuing need for efficient sources of insurance and reinsurance risk capital, as well as the opportunity to devise business models that can leverage capital markets appetite for natural catastrophe risk, to work alongside traditional insurance businesses and expand coverage, while reducing volatility.