As the global reinsurance industry looks ahead to 2023, writing in this op-ed, Swiss Re’s Moses Ojeisekhoba, Chief Executive Officer – Reinsurance, explains the need to reshape the risk industry, in order to boost resilience in an increasingly volatile world.
The extraordinary natural and human forces shaping our planet were on full display this past year.
A simmering pandemic, war, soaring food and energy costs, and historic natural catastrophes all tested the resilience of the world — and the institutions that form the bedrock of a stable society. Re/insurance remains a central part of this equation, but as 2022 has shown, our industry must become more resilient, too.
When 2022 began, I thought I had pretty realistic expectations about the challenges we’d be facing in the coming twelve months. If you’ll recall, the Omicron variant of COVID-19 was surging in most countries. My colleagues and I were also busy assessing the pandemic’s lasting impact on global supply chains. Meanwhile, inflation had re-emerged after decades of relative stability.
By themselves, these problems would have been sufficient to keep most anyone up nights. But they were swiftly amplified by the invasion of Ukraine, setting off energy supply disruptions and deep concerns over food shortages and other products for which Ukraine and the surrounding countries are key suppliers. They became yet another driver of an increasingly fragmented multi-polar world. Only weeks earlier, such an extreme scenario would have seemed remote.
As these acute challenges hit, climate change, which remains the enduring challenge of our generation, kicked things up a notch. The impact of a warmer, wetter planet — driving more frequent, extreme threats like flooding, hailstorms, drought and bushfires – made itself felt, often with unprecedented intensity. And just when many of us optimistically thought we’d made it through the Atlantic storm season, Hurricane Ian made landfall in late September.
In short, my expectations, realistic at the start of 2022, were confronted by a stark new reality. I’ve said this before, but I believe the era we are living through is bound to be one of those rare periods in history where we will eventually look back and ask ourselves, “Can you remember where you were when the world changed?”
Strong signal
For the re/insurance industry, this proliferation of historically low-probability events – war, droughts and severe storms, as well as the continuing pandemic – hit us practically simultaneously. While industry models have long taken such events into account, their occurrence in quickfire succession has created an unprecedented challenge.
Add to this the convergence of mounting geopolitical tensions and macroeconomic challenges, and it becomes clearer that the art and science of ratemaking has to evolve. There is far greater uncertainty in todays world. Our models must acknowledge that confidence intervals are wider and require greater allowances for unknowns.
There’s now near-universal recognition that the program structures that reinsurers have offered in recent years when market conditions were softer have not been consistent with the losses that were ultimately borne. This realisation began to set in some time ago, but it’s resonating ever more strongly in this latest round of renewals as focus is placed on achieving appropriate terms and conditions and sustainable risk pricing levels that adequately reflect the present volatility.
All these factors combined send a strong signal: The re/insurance industry must adapt as it pursues its central mission: As we support the stability of society, we ourselves must become more resilient, to make the world more resilient.
Sharpening our tools
As part of this adaptation process, the pressure remains on re/insurers to improve their ability to manage an ever-more-complex risk landscape. We already have many of the risk assessment tools necessary to do this. Still, we need to get sharper at forecasting and pricing the myriad risks we encounter – and as I mentioned already, accounting for unknown risks lurking on the horizon. There is ample evidence that these exist.
Here are a couple of examples of how we’re approaching this at Swiss Re. This goes much further than improving our models for Atlantic storms, something we’re constantly working on.
In France, for instance, as fierce convective storms rolled over the countryside this summer to pummel whole regions with destructive hailstones, Swiss Re Cat Perils analysts got to work poring over the numbers from the last two decades to demonstrate that the frequency of such costly, extreme events is increasing and – key for our clients and their customers – underestimated in existing insurance industry benchmarks.
Swiss Re’s new guidance also takes into account forward-looking macro trends like urbanisation, climate change, additions like solar panels that can increase vulnerability, and social inflation trends. Regarding climate change, conditions conducive to convective storm development are expected to become more common. Still, in the medium term, our experts have concluded socio-economic factors are likely changing at a faster pace and will be the dominating drivers of the observed loss trend.
And on the Life & Health front, we’ve studied patterns linked to COVID-19, including in the United States that was hit hard by successive waves of the disease. As most of the world has opened up, we’ve seen the important role that vaccines can play in protecting populations. Medical advances have seen new drugs but deploying them to the best advantage of populations as a whole remains challenging. With time, more and more people have had exposure to the virus through past infection, which adds to population immunity. Nonetheless, ongoing vaccine rollouts and take-up of those vaccines remain key to ongoing resilience against the virus. We can learn a lot from these past years on pandemic management – and this helps prepare Swiss Re and our partners to better navigate the next one, when it arrives.
Adaptation is essential
For re/insurers, developing a better understanding of risks and how they change over time is key to ensuring that the essential protection our industry offers remains sustainable, for years to come. Whether for pandemics or extreme storms, our approaches to assessing and defining potential threats – through our risk assessment, risk management and analytical and pricing models — must be constantly upgraded to better reflect the future state of risk.
The United Nations COP27 climate summit this past November ended with mixed results, with advances on climate finance but less progress on more ambitious emissions reductions. Still, one of the positive takeaways I saw emerge from the meetings in Egypt was the growing acknowledgment of the critical role that transformative adaptation will play in protecting communities, especially those that are vulnerable to the effects of climate change that we’re already experiencing.
Similarly, re/insurers themselves must adapt to the exigencies of a world that, like it or not, has never faced so many daunting, interconnected risks at once.
So, as I look ahead to 2023, I’m sticking to what I again would consider to be realistic expectations, albeit with slightly revised definitions: I am optimistic about the prospects for our industry, which are being lifted by heightened risk awareness. But I’m cautious, too, since the volatility now shaping the world will likely accompany us for the foreseeable future.
Article by: Moses Ojeisekhoba, Chief Executive Officer – Reinsurance, Swiss Re.
