Hardening to continue amid underwriting pressure
Swiss Re says underwriting margins need to improve by 7 to 12 points in 2021.
By Mark Richardson, London Editor
Swiss Re is expecting further rate hardening across all lines of business. The group said at a press conference last week the increases would be driven by the combination of lower interest rates and the need for prices to cover increasing loss trends.
The Swiss Re Institute has concluded that to achieve a reasonable return on equity through 2021, non-life insurers in G7 markets will need to improve underwriting margins by as much as seven to 12 percentage points to compensate for lower interest rates slashed to combat COVID-19.
Swiss Re’s Chief Executive Officer Reinsurance Moses Ojeisekhoba said, “Even before the COVID-19 crisis, most major markets were operating at below-average profitability. To be able to address the growing need for insurance protection in a sustainable way, further price increases across all lines of business are clearly needed.”
Swiss Re’s Group Chief Underwriting Officer Thierry Leger (pictured) said that on the back of several years of claims deterioration and premium declines the situation for the reinsurance industry had gotten worse in 2020.
As a result, he said Swiss Re had decided to focus in upcoming renewals on achieving underwriting technical profitability and clarity of terms and conditions.
“The low interest rate environment is here to stay for longer and it might even get worse in the years to come,” Leger said. “The decline just in the first half year of 2020 has changed the loss ratio in, for example, casualty lines by 5%. This really means that the timid price increases we have seen have been offset by the further decline in interest rates.”
The second driver of worsening profitability Leger cited was social inflation.
While he said this has been a factor for the industry to contend with for decades, he explained its speed comes in waves, and that the last few years had seen a significant acceleration.
“Social inflation is fuelled by a general anti-corporate environment,” he said. “This pushes plaintiff bars to develop psychology-based strategies to trigger juries. As a result, we can see the higher plaintiff awards, those above $5m, have been increasing at quite a rapid pace over the last few years. If you look at settlements beyond $100m or even above $1bn, you can see an even stronger increase. That will have an impact on casualty lines.”
He noted that further pain for the industry is still also expected from COVID-19 claims. He said market estimations of the immediate impact have been set at between $50bn and $80bn, but that the industry had so far only booked claims losses of around $20bn.
“So it looks like there is still much more to come,” he remarked. “And we are still in a very uncertain environment.”
However, the group does expect there will be more opportunities for re/insurers in the market going forward due to a combination of improving insurance demand and growing exposures.
Overall, Swiss Re expects the non-Life insurance market to continue to grow, driven primarily by exposure growth. Swiss Re Institute forecasts a global growth rate of 3.3% in real terms for 2021. Other factors given driving demand were increased awareness, triggered by COVID-19, of the danger of being uninsured and the increasing frequency of weather-related events.
Ojeisekhoba added, “In these unprecedented times it’s more important than ever to support our clients with risk knowledge, capital strength and tailored solutions. In the end, it’s about tackling protection gaps together to make the world more resilient.”
The group’s research highlighted that hurricanes are frequently affecting areas where exposures have grown as a result of wealth accumulation – leading to increasingly severe losses, as demonstrated in the past few years.
The current 2020 Atlantic hurricane season is the first on record to see nine tropical storms forming before August and 13 before September. The situation is further aggravated, the group said, by the higher frequency and severity of secondary perils, such as floods and wildfires, leading to rising claims and highlighting the need for insurance protection.
Against this background of ensuring pricing adequacy, it said moving to a more scientific, technology-driven approach using data analytics will continue to strengthen underwriting.
Swiss Re highlighted its work utilising geospatial data to improve the accuracy and speed of risk and loss assessments, and its use of natural language processing in contracts alongside human reviews to flag problematic clauses, as examples of how advanced technology can improve underwriting performance.
