In a world of growing risk the insurance industry has a crucial role to play
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Homes razed by forest fires. Seafronts washed away by floods. Foundations shifting with subsidence.
The damage from climate change means that insured property catastrophe losses in key markets like China, France, Germany and the UK are predicted to rise by as much as 120% over the next 20 years.
The property and casualty (P&C) insurance market is changing fast. Global property catastrophe premiums are set to increase by up to 41% (USD 183 billion) until 2040 due to climate risk, with USD 110 billion coming from advanced markets.
As the Swiss Re Institute shows in its latest sigma report More risk: the changing nature of P&C insurance opportunities to 2040, climate change is the key driver of a riskier and more complex property portfolio for insurers. Economic growth, digitisation and urbanisation are also contributing to an increase in risk and a reconfiguration of risk pools that is reshaping the industry.
Flood damage is a clear example of the fall-out from climate change. By 2040, it could lead to a 200% increase in insured losses in the UK, France and Germany, a 235% increase in China and a 145% increase in Canada.
And these figures may not capture the full extent of future risk, according to Irina Fan, co-author of the sigma report and Head of Insurance Market Analysis at Swiss Re Institute. Some of the driving factors were difficult to quantify, she says, meaning that the report’s projections “are on the conservative side.”
A more complex and riskier business landscape
An expansion of property and liability claims is shifting the balance of risk. Within the next 20 years, property’s share of the P&C market will grow from 25% to 29%, and liability’s share will grow from 12% to 13%, while the motor sector will drop from 43% to 34% as cars become smarter and safer.
Motor insurance will still constitute the largest segment of the global P&C risk pool by 2040, but opportunities will move to emerging markets, as incomes rise and private car ownership increases. In developed markets, new products may need to be introduced in reaction to trends such as mobility as a service. More opportunities will come from commercial motor. One example? Uber drivers use separate policies for carrying passengers and for private use.
Elsewhere, digitisation brings with it an additional set of risks − including cyber security threats − that call for innovation in data and state-of-the-art data analytics tools to make risks more insurable and more accurately priced. It is important that insurance regulation is flexible and accommodates the use of new data sources and modelling technologies.
“The industry as a whole is now moving into more data and analytics to provide risk analysis,” says Fan. She cites the use of data to monitor river levels in regions heavily reliant on water-based transportation: if a river isn’t navigable, then protective claims can be triggered.
While technology is helping to reduce specific risks – like the safety improvements from advanced driver assistance systems – advancing digitisation does shift some risks from motor and property to liability. In a world where business activities increasingly rely on cloud computing, for instance, a major outage could rapidly become a catastrophic event for liability insurers.
Climate change is also having an impact on liability. Thomas Holzheu, co-author of the report and the Swiss Re Institute’s Chief Economist for the Americas, points to various types of climate litigation, along with “transition risks where business models are obsolete.”
“For example, if you’re in fossil fuels in 20 years, that’s probably not such a good idea anymore,” he adds.
Levelling the rising tide to support sustainable growth
In order to mitigate the rising threat of climate impacts, it’s vital for the private and public sectors to work together to establish conditions for sustainable long-term growth.
“Obviously, you need strong policy actions,” says Holzheu. “We need more action than the commitments that are there right now. That’s where the collaboration starts to come into play. We need green infrastructure.”
Investing in sustainable infrastructure and upgrading zoning and building standards can guarantee the insurability of property risks.
Insurers can help by supporting green industries – for example, through new products, such as risk offsetting at solar farms, which have less reliable power generation – and by managing risk exposure.
As demand for reinsurance grows, global flexibility in the allocation of capital and risk will also enable reinsurers to use scarce capital efficiently and provide a maximum of risk transfer capacity to the global economy.
Building opportunity to improve societal resilience
In 20 years’ time, the risk landscape around P&C insurance will look decidedly different. Historically, says Fan, premiums have risen broadly in line with GDP in both established and emerging markets.
That is now changing thanks to the strong economic growth that is propelling the motor sector into new markets. And because emerging markets are also keen to "go green." For example, emerging markets are now the largest investors in renewable energy infrastructure, which requires insurance protection for those projects and operations.
“In emerging markets, P&C premium growth will continue to outpace GDP growth. In advanced markets, property and liability are continuing to grow faster than GDP,” says Fan. "Emerging markets will gain weight in the future P&C market, from a 20% share in 2020 to 33% in 2040."
Given the level of complexity of risk inherent in a more unpredictable world, there are opportunities for the insurance industry to play an integral role in facilitating the sustainable long-term growth of business and society.
Today, the P&C risk pool is about USD 1.8 trillion. By 2040, that will have more than doubled, reaching USD 4.3 trillion. Mitigating that level of risk will require innovation and a targeted response.
Risk reduction and adaptation, detailed forecasts and an evolving suite of products will all be important ways of managing behavioural shifts and climate impacts. By working in partnership, insurers, governments and the private sector can address global challenges in a way that benefits everyone.