This year’s SIRC proved beyond doubt that it is one of the most important forums in the world as a platform for reinsurance debate. It is also a credit to the island nation of Singapore. Speakers at the 19th SIRC explored all of the existential risks that faced the world, and what (re)insurers needed to do to tackle those risks.
Being at the tip of a major
(re)insurance revolution – with the market hardening, rates increasing and terms tightening – speakers at the 19th Singapore International Reinsurance Conference (SIRC) spoke about some of the challenges the industry is facing. They discussed the context of the prevailing uncertain and volatile risk landscape illustrated by prominent inflation, rising interest rates, economic depression, political tensions, cyber crime and costly climate-related disasters.
Monetary Authority of Singapore managing director Ravi Menon, during his keynote address as SIRC guest of honour, said that progress has been made and demands have improved within the industry through expanding the availability of high-resolution data.
“Asia is expected to become the main contributor to global economic growth, eventually overtaking the advanced economies,” he said. “More lives, wealth and assets will need protection as Asia remains the world’s most disaster-prone region, with significant protection gaps,” he said.
Natural disasters in the APAC region resulted in economic losses of $80bn in 2022 – of which only 14%, or $11bn was covered by insurance. Asian economies are most exposed to cyber risk, given the rapid pace of digitalisation, with the APAC region accounting for 31% of all cyber incidents globally in 2022.
He suggested that deeper partnership between the insurance industry, the cyber security sector and policymakers can help improve cyber security and reduce cyber loss.
“The reinsurance industry is an important partner for helping Asia realise its growth opportunity by helping to manage risks, through effective risk financing solutions and risk mitigation insights. With strong collaboration across the insurance ecosystem, policymakers, businesses and academia, we can secure a more resilient future in Asia,” he said.
Climate Armageddon is coming unless we change
The unique value of the SIRC as a forum for debate was highlighted on day three of the conference at the session on climate change. This forum might go down in the annals of the SIRC as one of the most important ever for throwing the spotlight on the main challenge – how to get reinsurers talking the same language as climate scientists.
According to Earth Observatory of Singapore’s Professor Benjamin Horton, there is a disconnect between what climate scientists are saying and what the reinsurance industry is hearing.
He had a blunt message for delegates. “In 2018, I warned the insurance industry that we will soon enter a climate emergency that will have heatwaves and wildfires, torrential rainfall and landslides, impending sea level rise and coastal flooding. I warned that people would lose their lives if we did not act,” he said.
The reality is that mankind did not act and today temperatures have risen so much, the ocean temperature is three or four standard deviations greater than the mean.
“Some 20 years ago, climate scientists were tasked with identifying tipping points in the Earth system. Beyond
that and the Earth system collapses. We are not talking about a government collapsing, or failures of the automobile industry or financial sector,” he said.
He was involved in a research group that looked at the tipping point of the Antarctic and Greenland ice sheets and concluded that going beyond the 1.5 degrees C threshold would cause the collapse.
“There is no engineering solution that can solve this because the ice sheets melt so rapidly. Climate change is happening fast. It is impacting our economy, ecosystems and being. The impacts could be devastating if we fail to monitor, mitigate and adapt using both local and global strategies. We need to take on this challenge in a holistic way,” he said.
According to the professor, reinsurers could be using data from the wrong region. “When I talked to the reinsurance industry, I found that for risk in Asia, companies were using science and data from North America or Europe. To provide the best solutions for Southeast Asia, scientists from the region, who have the knowledge and data are needed,” he said.
Solving the Earth’s climate change problems will involve much closer dialogue between climate scientists like Professor Horton and the reinsurance community – and he made it clear that the doors of the Earth Observatory of Singapore are wide open to reinsurers looking to develop meaningful solutions backed by real up-to-date scientific evidence.
Reinsurers: Much cooler than bankers
The reinsurance industry has reset in terms of correction of prices, particularly in short-tail businesses and property and casualty, which has driven an expectation of profitability for the industry. All this, Hannover Re CEO Jean-Jacques Henchoz said, meant that the outlook was relatively good.
“I think the reinsurance industry has proven, despite the lacklustre performance in the past few years, that it looks at underwriting profitability, diversification of exposure and remains disciplined.
“Nevertheless, climate change was a big driver of losses, which took the industry, to some extent, by surprise. But there were not so many bankruptcies in the reinsurance industry. It was a very special five years where the industry could continue to deliver and offer the capacity to the market,” he said.
He also said that the decarbonisation of society would trigger a big industrial transformation. “This is a big opportunity for insurance on the one side, to control exposure to fossil energy. On the other hand, the industry needs to encourage new forms of energy and new technology to comply with the needs of decarbonising society for the next 20 or 30 years,” he said.
Despite its accomplishments and dynamism, Mr Henchoz said that the reinsurance industry was too modest to show its relevance to society. He believes that reinsurers must show how critical reinsurance is to the future soundness and robustness of societies.
He said, “There is societal value in reinsurance. The industry just needs to make a big effort to train and educate the young generation in underwriting or other areas and bring them in. Once they get it and see what it implies, they are interested. I’ve always said reinsurers are much cooler than bankers.”
The perceived contribution of reinsurers
The last 12 to 18 months saw a significant shift in the risk rebalancing between reinsurers and insurers, the panellists at the CEO roundtable agreed. This came after a six-year period where the reinsurance industry did not earn its cost of capital.
“Is there is enough capacity out there to cover the core programmes? But the reinsurance risk appetite has been redefined. It’s fairly disciplined. There’s clear attention that’s being paid to appropriate terms and conditions and rate for the risks that are being taken on. Demand is up, volatility is up, uncertainty is up and the supply side remains disciplined,” said Swiss Re CEO P&C reinsurance Urs Baertschi.
It is also important for there to be sufficient pricing in the primary market, or else it becomes difficult to agree on a sustainable rate between a primary insurer and their reinsurer, said Munich Re member of the board of management Achim Kassow.
“If we want to have sustainable solutions, we cannot only focus on the risk sharing between ourselves that we could do if there is enough knowledge available. If we feel that the underwriting profitability of the core risk that we are taking as both industries together is not sufficient, it is then also up to us to educate markets, to educate public opinion, also to educate policy makers what we need to change to have sustainable solutions,” said Dr Kassow.
While a lot of policymakers are very cognizant of the potential risks and have put in place various schemes or risk pools as a form of risk transfer, Mr Baerstchi said that it will not actually reduce the cost of losses.
“There’s probably a little bit of a notion out there that maybe government schemes or government pools are a way to lower the cost overall. But actually, we have to dispel that notion because ultimately, someone needs to pay for the losses that occur. As long as the losses are the same, the costs are going to be the same, too. In the insurance industry, we call our revenue stream premiums. In the public sector, you call it taxes. At the end of the day, it’s not a zero-sum game,” he said.
Reinsurers must also be critical about the institutional role of reinsurers, when in discussions with policymakers, said Mr Kassow. He also noted that reinsurers’ balance sheets are incredibly complex, when compared to insurers and banks. “At the end of the day, the art of producing our annual or quarterly profit results hardly matches with what people see as our value contribution to society. We need to do more and better about understanding the analytics behind our industry and communicate more transparently how we assess and price risk.” A