“Our effective investment in R&D is the basis for continued underwriting outperformance.”
Group Chief Underwriting Officer
Competitive advantage in underwriting
The investing community debates whether an alpha or beta investment strategy has a higher likelihood of success. The alpha investor tries to actively outperform the benchmark of a segment by picking the right stocks within this segment. The beta investor tries to pick the right segments and asset classes.
The same concept applies to underwriting. An underwriter who tries to outperform the competition by:
- selecting good risks and avoiding bad ones,
- structuring policies and contracts to achieve contract certainty and better align policyholders’ interests with those of the re/insurance company,
- more precisely quantifying the costs associated with the acceptance of risks, and
- achieving higher prices for the risks assumed
is the underwriting equivalent of an investor seeking alpha.
The underwriting equivalent of a beta investor is a re/insurance company that tries to outperform competitors by allocating more or less capital to individual portfolio segments depending on the perceived attractiveness of each segment. In the insurance industry, typical “beta” strategies include portfolio steering, cycle management, and capacity or capital allocation.
At Swiss Re, we believe that both superior bottom-up transactional underwriting and top-down capital allocation — or portfolio steering — are absolutely key. To be successful, we need to be able to forecast insurance loss-relevant developments. We therefore conduct research to understand, for example, economic, legal, political and societal changes, all of which are highly relevant for the assessment of casualty risks. We focus on identifying trend patterns related to natural catastrophes, cyber-threats, credit defaults, mortality or morbidity to better understand the potential for future losses for these perils. We apply advanced analytics to large amounts of data and work together with universities, government organisations, NGOs, consultants, investment management firms, law firms and many more. Findings related to loss, premium or exposure trends are used to underwrite individual risks and strategically allocate capital, both of which — if done well — create value for shareholders. The Swiss Re Institute will further strengthen and steer our R&D activities across the organisation.
Underwriting performance in 2016
The Group’s overall underwriting performance was solid, with technical profitability across all businesses. Influenced by the softening market environment, the Group’s claims ratio for property and casualty increased from 53.3% in 2015 to 61.2% in 2016.
Both periods benefited from a lower-than-expected level of natural catastrophe losses. The 2016 loss burden amounted to USD 0.8 billion, still below the expected value but clearly higher than the 2015 loss number of USD 0.2 billion. The largest natural catastrophe losses in 2016 were the wildfires in Canada (USD 229 million net), the Kaikoura earthquake in New Zealand (USD 184 million net), and Hurricane Matthew (USD 113 million net).
For accident year 2016, large man-made losses came in below the expected level, while 2015 was impacted by an above-average amount of large man-made losses due to the Tianjin loss in China.
The total life and health benefits increased from USD 8.0 billion in 2015 to USD 9.0 billion in 2016. The increase was mainly supported by large transactions in the US in early 2016, a large transaction won in Australia in 2015, other new business wins in Asia in 2016, partially offset by lower performance in the UK life and health portfolio.
For more on the underwriting performance of all Business Units, see Reinsurance.
Market environment and outlook
Global exposure growth will continue to develop unevenly in line with economic trends. Loss trends in property and casualty are likely to accelerate in some markets. The property and casualty market is generally softening; however, given that prospective returns are approaching the cost of capital, rate decreases are slowing down in many lines of business.
In the short term we expect challenging market conditions to persist until demand and supply of capacity start to balance out. In such an environment underwriting outperformance remains key. We will therefore seek to exploit our competitive advantage in risk selection and capital allocation to protect our bottom line. We will continue to reduce capacity for some natural catastrophe scenarios and prune our reinsurance motor portfolio in selected regions.
Growth opportunities will be assessed with caution. We will focus on large and tailored transactions and pursue a small number of opportunities presented by major demographic, socioeconomic and technological trends, including the long-term rise of high growth markets, or the expanding need for health protection in ageing societies. In addition, we expect to write some new business in the public sector and in areas where protection gaps are threatening the resilience of society.