Renewal season preview: Taking steps to ensure sustainability

It’s hard to believe it, but it’s renewal season again. Like many of you, I recently came back from Les Rendez-Vous de Septembre, and have been thinking a lot about what it will take to make sure our industry remains sustainable and responsive - amid continuing challenges. 

In Monte Carlo, the conversation seemed to focus on three themes/factors: secondary perils; strikes, riots and civil commotion; and inflation.

The discussion around secondary perils isn’t new; what is new is that secondary perils are increasingly of primary importance. In the first half of 2023, we saw USD 50 billion of catastrophe activity; 70% of that was a result of convective storms in the US. Meanwhile, extreme weather events continue to wreak havoc in EMEA. Yet secondary perils continue to be attritional. At Swiss Re, we’ve been sounding the alarm on this issue for a while.

While we’ve made progress in recent years, there’s still plenty of work to do in restructuring coverage for these risks. This year I expect to see a continued focus on loss occurrence language, on topics like attachment points and removing frequency, and on pricing.

During this renewal and beyond, I see the industry responding with short, medium and long-term actions. In the short term, reinsurers will refocus on our core mandate - supporting clients in dealing with major catastrophes, and not attritional high-frequency events. In the medium term, I believe we will start to see the fruits of greater use of granular data, industry benchmarking, and working with industry groups to better understand these risks. In the long term, we’ll need to build better public-private partnerships - and not just in emerging economies. Take the recent flooding in the Emilia-Romagna region of Italy: Italy has the world’s eighth largest economy, but of an estimated USD 10 billion economic loss, only USD 600 million is insured - that’s a 94% uninsured gap. It’s clear we must continue pushing to get these partnerships off the ground - to increase insurance penetration, but also to engage governments in disaster prevention and mitigation.

Another feature of this renewal is an increase in losses stemming from growing civil unrest, a category that’s come to be known as SRCC (strikes, riots and civil commotion).

You might say SRCC first become a factor in 2019, when an increase in subway fares in Santiago, Chile, sparked demonstrations that spiraled into widespread riots totaling as much as USD 4 billion. The next year, Americans took to the streets to protest the killing of George Floyd, racking up an estimated USD 2 billion loss. More recent unrest - in South Africa in 2021 over the imprisonment of former President Jacob Zuma, and in France earlier this year over pension reform- cost the industry USD 2 billion and USD 714 million, respectively.

SRCC is and should be a concern for all of us. As an industry, we need to bring our experience and expertise to bear—focusing on clear aggregation language, attachment points, and making sure we price coverage appropriately - so we can be there for our insurance clients when they face losses.

One of the biggest contributors to underinsurance is the failure to accurately calculate the effects of rising inflation - an issue advanced economies haven’t had to worry about for years. That’s one of the lessons we’ve learned in the wake of the recent devastating earthquake in Turkey, where the knock-on effect of inflation on reconstruction costs, exacerbated by supply chain issues, were a wake-up call for insurers. Add to that the social inflation component - something we’re seeing in EMEA - which impacts our casualty business.

Last year we took steps to improve the balance, but with 2.6% inflation expected in the Eurozone next year - on top of 5.5% in 2023 - it’s clear that this will be a major topic in this renewal and beyond. It’s important to remember that if we don't properly incorporate inflation, our clients risk being underinsured. That reduces the industry's ability to support society in its time of need.

All of these factors represent significant challenges for the (re)insurance industry, but also opportunities for growth, as increased risk awareness and exposures will generate higher demand for coverage.

To meet the moment, while remaining a viable industry, we must ensure that pricing accurately reflects the risks. This can be accomplished through more frequent adjustments to underwriting practices, focusing on quality and margins, and greater contractual clarity.

We also need to rebalance risk between insurers and reinsurers. In the last few years, the reinsurance industry absorbed a disproportionate amount of losses from nat cat events, in particular secondary perils. This year, we’ve started to move toward sustainable balance in risk-sharing across the value chain, with primary insurers covering frequency and attritional losses (e.g., storm-related flooding), and reinsurers absorbing the shock of more severe events, such as the recent earthquake in Turkey.

I’m happy to say that Swiss Re stands out as the reinsurer of choice in this uncertain environment. Our resilient capital position and strategic framework, combined with our cutting-edge technology allows us to support our clients with a holistic approach to protection that goes beyond pure risk transfer.