Insurance industry needs to respond proactively to changing market dynamics in order to benefit from promising opportunities
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- Market environment remains challenging, but short- and long-term opportunities for growth exist
- With an estimated 2 billion people globally having no access to insurance, addressing the protection gap is the most promising long-term opportunity along with the growth of risk pools
- Swiss Re expects the pricing environment to be broadly stable; largest P&C insurance markets need to improve underwriting margins to achieve sustainable return on equity
Swiss Re sees some of the current improvements in the overall market environment as a chance for the insurance sector to embrace new market dynamics; for example, the increased use of digital solutions. Swiss Re expects companies that respond proactively with more relevant solutions and services in support of their customers' goals to benefit most from long-term opportunities. While the current environment is still influenced by an abundance of capital, rising interest rates are having a positive impact on long-tail lines of business in life and casualty insurance, as well as on the return profile of investment opportunities across the industry. Looking ahead, the continued growth of risk pools combined with the large and growing protection gap, represent the most significant growth opportunities for the industry.
Swiss Re's CEO Reinsurance, Moses Ojeisekhoba, says: "Together with our clients, we worked through a difficult environment after the 2017 natural catastrophe events. By paying claims and helping to rebuild, we could again demonstrate the value of sharing risks. Although the market environment remains competitive with an abundance of capital, the long-term opportunities that lie ahead are positive as we address the very large protection gap that still exists. I am optimistic about our future growth."
Addressing the challenges and opportunities of a very large protection gap
The natural catastrophes in 2017 showed the importance of insurance coverage and once again highlighted the protection gap. It persists in emerging as well as in advanced markets, and across all lines of business – with a global estimated premium potential of USD 800 billion. Just to compare: The Swiss Re Institute estimates the global size of the insurance market to be at USD 4.7 trillion. Roughly 2 billion people worldwide have no access to insurance, resulting in a very large protection gap. Therefore, a real potential for the re/insurance industry exists to support the global population.
Global natural catastrophe losses totaled USD 2 trillion over the last decade, 70% of which were uninsured, according to estimates of the Swiss Re Institute. The uninsured losses from natural disaster events are expected to exceed USD 150 billion annually, underlining the need to close that gap and help societies better protect their people and assets against risks.
Such statistics are sobering, and for re/insurance to make a difference, Swiss Re and the industry must seek to address the key drivers that help create this gap, such as lack of awareness, access, affordability and understanding, as well as product design elements. In this context, having close client relationships, offering know-how and expertise and supporting clients with large transactions as well as new, innovative, technology-driven solutions will be critical for success.
A tangible example of such a solution is the "Flood Insurance Toolkit", a full service offering Swiss Re has rolled out in the US in its continuous effort to find new ways of managing uncovered risks caused by climate change and natural disasters. The flood toolkit incorporates over 400 000 modelled events, which enables insurers in the US for the first time to offer affordable, more accurately priced flood policies. Underinsurance against flood, one of the biggest risks for the US, is prevalent and only one in six homes has flood insurance. As a result of this, an average year of storms will produce uninsured losses of USD 10 billion due to flooding, compared to insured losses of USD 5 billion. Swiss Re's toolkit can potentially help make a significant difference in the coverage of this risk.
Swiss Re has also developed a fully digital insurance offering for natural catastrophe perils with embedded, so-called parametric product design, enabling automated and therefore much faster claims payments and policy administration. Such digital platforms and devices are enabling cheaper, faster and more scalable solutions expanding the boundaries of insurability. Customers can access covers that would previously have been unaffordable or inaccessible.
Rates are expected to be broadly stable
Swiss Re expects overall broadly stable price development, with heterogeneous trends depending on lines of business and market. After many years of price erosion and only moderate improvements in 2018, large market segments remain inadequately priced to achieve sustainable returns on equity. Swiss Re expects gradual improvements, depending on emerging loss experience and level of rate inadequacy.
Swiss Re's Group Chief Underwriting Officer, Edouard Schmid, says: "We believe an inflection point in the pricing cycle for non-life insurance has been reached. For 2019, we broadly expect stable rates, provided no major event happens this year. Underwriting margins in major non-life insurance markets need to improve more to deliver sustainable returns on equity."
Focusing on partnerships for future growth
Swiss Re's focus remains on its clients and on providing them with the required capacity, expertise and innovative solutions. Swiss Re aims to bring value by leveraging technology to support its clients' needs while also improving the efficiency of its own business. As an example, the company offers a machine learning-based pricing engine to accurately price flight delay risks. This enables automated claims payments and real-time steering. It is a flexible turn-key solution that can be leveraged for other parametric insurance offerings such as earthquake coverage.
In addition, advancements in technology are expected to bring many benefits to the re/insurance industry across the whole value chain (i.e. distribution and sales, underwriting, claims, solutions & services, and operational backbone). Technology is also changing the nature of risk itself – both mitigating and creating new categories of risk.
Swiss Re's CEO Reinsurance, Moses Ojeisekhoba, says: "In our view, trying different solutions aimed at addressing the protection gap is the only approach that will make a material difference. We already see that various elements of new technologies afford us an opportunity to break down some of the barriers. At Swiss Re we see ourselves as part of the solution and will continue to collaborate with our clients, governments and other partners to bring tangible innovation that helps narrow the gap."
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