Profitability in a tough climate
By Paul McNamara
The issue of climate change was in full evidence during the Rendez-Vous de Septembre this year, as the usual seasonal summer weather was beset by rain and cold winds. That day, a session titled ‘Politique publique, assurance et gestion du risque climatique’ was opened by SCOR chairman and CEO Denis Kessler, who said that “evidence of climate change is absolutely compelling globally.” He added that “climate change is mostly attributable to human activity. We have to find a solution.”
“The risks and opportunities to (re)insurers and their customers from global warming are profound,” he said.
“Climate change expands and transforms the risk universe, so we are directly concerned as risk carriers. Climate change-related risks will affect investments on the asset side and P&C and life lines of business alike on the liability side. In the more extreme warming scenarios, the risk universe will be so profoundly modified that maintaining affordability of insurance, and insurability throughout the world is likely to be challenging,” Mr Kessler said.
He went on to outline the categories of risk that need to be understood and addressed by insurers and reinsurers.
Physical risks: Impacts on property, infrastructure, mortality and morbidity amplified by trends of urbanisation, value concentration, non-resilient land use and infrastructure vulnerabilities.
Transition risks: Risk of economic dislocation and loss associated with transitioning to a low carbon economy, with devaluation (‘stranding’) of carbon intensive assets/increase in business costs.
Liability risks: Potential growth in related litigation actions affecting (re) insurers themselves or companies to whom they provide D&O, PI or thirdparty environmental cover.
Reinsurance profitability under pressure
Performance metrics for the global reinsurance sector over the past five years paint a picture of a sector that needs systemic change in order for it to survive in the long run, said AM Best senior director Robert De Rose at a reinsurance market outlook briefing in Monte Carlo.
The average combined ratio for the sector over the past five years was 97.6% according to AM Best data and research – a poor showing for such a large and important sector. The two main culprits for the poor performance were pricing and unexpected losses from Nat CAT according to Mr De Rose. “There is a need for improvement in underlying pricing,” he said.
The sector’s ROE also showed clear underperformance with an average over the past five years of 6%. This figure conceals significant annual swings from 11.6% in 2014, 9.5% in 2015, 8.3% in 2016, -0.3% in 2017 and 1% in 2018.
The clear need for an improvement in underlying pricing will have to take place in the face of significant headwinds for the sector.
Mr DeRose listed the main impediments facing the reinsurance sector as intense competition, excess capacity, the potential for increased inflation, less cushion in carried loss reserves and continued interest from third-party capital.
A more resilient Asia
The perennial problem of the protection gap is exacerbated by a less resilient global economy, which also has less capacity to absorb shocks, according to Swiss Re’s sigma report, released on the sidelines of the rendezvous.
However, the Asia Pacific region has seen insurance resilience improve in both the advanced and emerging economies of the region since 2007 – whereas the euro area has seen resilience decrease the most since 2007.
According to the report, Asia and Oceania had fairly stable economic resilience scores between 2007 and 2018. Resilience levels in China, Japan and Australia improved slightly, while India’s resilience declined mostly due to lower index scores for the financial-sector components, including banking industry environment, financial market development and insurance penetration.
In relative terms, the composite insurance resilience index improved in both advanced and emerging countries in Asia Pacific. In advanced Asia Pacific, the composite insurance resilience index was up 4 percentage points to 59%, while for emerging economies in the region it rose 7 percentage points to 31%. Advanced Asia Pacific countries have the highest insurance resilience score for mortality risks of any region globally at 62%.
Emerging economies in Asia Pacific also have the largest absolute insurance protection gap of $456bn, representing almost 80% of the region’s total of $572bn.