“Long-term trends are driving demand for knowledge-based re/insurance solutions.”
Group Chief Underwriting Officer
Underwriters quantify the risk of providing insurance protection for homes, cars, ships, health expenses and many other risks. They determine the premium that is commensurate with each risk and set the terms and conditions of insurance policies and reinsurance contracts. They decide which risks are acceptable and which risks are not. Our underwriters seek to protect Swiss Re’s book of business from exposures they feel will make a loss or put too much of Swiss Re’s capital at risk. Underwriting is a cornerstone of our long-term success and one of Swiss Re’s core competencies.
Underwriting, a source of competitive advantage
Re/insurance is a knowledge business. As the expected profitability of individual risks can vary widely, superior risk selection is key to outperformance. To deliver such outperformance Swiss Re relies on highly developed underwriting expertise, cutting-edge capabilities in data analytics, more than 150 years of experience, and sufficient scale to invest in research and development, all of which are aimed at creating a competitive advantage.
Steering risk globally across all Business Units and product types is key to optimising capital allocation. Specifically, our underwriting teams analyse and predict loss, exposure and premium trends by portfolio segment. A central unit then determines the optimal portfolio mix by taking into account future expected cash flow, EVM and US GAAP profiles by portfolio segment, leveraging the advantages of our multi-line book to deliver more than just the capital-related diversification benefits. Knowing these cash flow, EVM and US GAAP profiles allows us then to formulate an ambition for a future desired book of business and create a plan to achieve it.
Our underwriters can respond to our clients’ often heterogeneous needs with innovative and tailored solutions such as multi-line deals with structural elements, longevity swaps, external run-off transactions or insurance-linked securities. Our ability to write bespoke transactions leads to deals that deliver better economics than commoditised open-market business.
Underwriting performance in 2015
The Group’s overall underwriting performance was strong with technical profitability across all businesses supporting the 31% increase in net income from USD 3.5 billion in 2014 to USD 4.6 billion in 2015. The Group’s claims ratio for property and casualty decreased from 55.4% in 2014 to 53.3% in 2015.
Both periods benefited from a lower than expected level of natural catastrophe losses. The 2015 natural catastrophe loss burden amounted to USD 0.2 billion, significantly below the expected value of USD 1.7 billion, while the 2014 burden amounted to USD 0.5 billion, also significantly below the expected value of USD 1.6 billion. The largest natural catastrophe losses in 2015 were caused by the floods in Chennai, India, and storms on Australia’s east coast.
However, 2015 was impacted by an above average amount of large man-made losses, while in 2014 large man-made losses came in close to expected. The 2015 man-made large loss burden included the explosion in the port of Tianjin, China (USD 250 million), a dam burst in Brazil and a fire on an oil platform in the Gulf of Mexico.
Both periods benefited from prior-year development: USD 950 million in 2015 compared to USD 673 million in 2014. It is important to note that these prior-year developments were not ‘one-offs’ caused by good luck, but valuable earnings contributions from effective risk selection and disciplined underwriting in prior accident years.
The total life and health benefits decreased from USD 10.6 billion in 2014 to USD 9.1 billion in 2015. That result was strongly influenced by the successful completion of management actions in Reinsurance in 2014 in relation to the US pre-2004 individual life business. In 2015, mortality experience was favourable compared to expectations mainly from good experience in the US post-2004 business. Morbidity was unfavourable by about the same amount, driven by adverse experience in the critical illness business in the UK and Asia. Model and assumption changes were favourable, driven by interest rate updates of the valuation of disabled life reserves.
For more on the underwriting performance of all Business Units, see Reinsurance.
Hedge funds, pension funds and other capital market participants have been supplying ‘alternative’ capital to re/insurance markets in recent years as they search for higher returns. Primary insurers are also by and large well-capitalised after several years of generally benign loss experience, leading some of them to retain more risk than has normally been the case.
These forces have been depressing prices, especially in short-tail lines, making disciplined and selective underwriting ever more critical for re/insurers. For the January 2016 renewals we observed a continued general price softening in property and specialty lines of business. Casualty has been relatively stable, with significant differences by segment. The softening in the important US natural catastrophe market has started to ease and there is evidence that it is approaching an inflection point.
Inflation is currently well contained and will continue to keep property and casualty claims severity increases generally low for a while. The long-term outlook for inflation is more uncertain.
Exposure growth should continue to accelerate gradually in line with the economy. In high growth markets, and especially in Asia, we expect to see strong exposure growth for both life and non-life insurance, further accelerated by urbanisation and increasing insurance penetration among the growing middle classes. Fiscal austerity is expected to drive risks from the public to the private sector, creating opportunities in infrastructure, pensions, healthcare and natural catastrophes. More immediate opportunities exist in other areas with insurance protection gaps.
In the short term we expect challenging conditions to persist until demand and supply of capacity start to balance. In such an environment underwriting outperformance remains key. We will therefore seek to continue to exploit our competitive advantage in risk selection and capital allocation to protect our bottom line. We will reduce capacity for flow business in Property & Casualty Reinsurance and focus on large and tailored transactions for all lines. In addition, we will be pursuing opportunities presented by major demographic, socioeconomic and technological trends, including the rise of high growth markets, where growth remains dynamic; or where the need for health protection is expanding, as in ageing societies. Last but not least, we will also focus on areas where protection gaps threaten resilience.