Group underwriting

Edouard Schmid – Group Chief Underwriting Officer (photo)

“Our effective investment in R&D is the basis for continued underwriting outperformance.”

Edouard Schmid

Group Chief Underwriting Officer

Competitive advantage in underwriting

Swiss Re is fundamentally a knowledge company, especially when it comes to underwriting. We channel over 150 years of experience and cutting-edge research and development (R&D) into two pillars of outperformance: active capital allocation across insurance risk pools and distinctive underwriting of individual risks. We blend experience, proprietary data and forward-looking research, and create unique underwriting opportunities and access to risk pools.

Our proprietary natural catastrophe modelling is one example. The underlying tool was developed based on proprietary Swiss Re R&D. It has been built over the past three decades in collaboration with external partners, and crucially, by leveraging our own experience and proprietary data to create the model. Once an exclusively in-house underwriting tool, this year it has been extended to our insurance clients in response to demand. Our trust in this proven model has enabled us to become leaders in profitably allocating capital to the important natural catastrophe modelling market – and the same confidence allows us to retain most of the risk. This represents a distinctive proposition to our clients and shareholders alike.

Likewise, our in-house biometric risk solution, Magnum, is a market-leading underwriting capability. Used by over 60 insurance clients, this automated underwriting solution processed more than 12 million applications in 26 countries in 2018, covering a full range life, health and medical expense products. It is the outcome of over 20 years’ experience and acknowledged industry knowledge leadership, constantly refreshed with new research. Magnum enables us to allocate a growing amount of capital to support our position in life and health insurance.

These are mature solutions, for mature risks. The same capabilities drive our ability to absorb risks that are less understood, such as cyber insurance. In previous years, Swiss Re adopted a cautious approach towards cyber risk, while others were more willing to underwrite this fundamentally new risk pool with questionable profitability. We deliberately shaped our capital allocation to maintain a watching, yet underweight market interest. In 2018, our R&D delivered a capability to track and contain the accumulated cyber risk – and we have deployed an increased appetite for a risk that has become addressable.

We continue to create value by delivering resilience. Resilience – the confidence that we can stand by our underwriting and risk-taking for many years to come – is crucial to our clients and to our shareholders. That resilience is assured through our ongoing disciplined commitment to both active capital allocation, and distinctive underwriting.

Underwriting performance in 2018

The Group’s overall underwriting performance in 2018 was solid, despite high large natural catastrophe and man-made losses in the year. Group results were affected by a number of major insured natural catastrophe losses that made 2018 the fourth-costliest year for the insurance industry according to the Swiss Re Institute. Despite pricing improvements in 2018, the market environment in our Property & Casualty Reinsurance businesses remained challenging. Meanwhile, the performance of Life & Health Reinsurance continued to be solid, and critical underlying markets remained attractive.

In 2018, Reinsurance made payments of ca. USD 10 billion to 3 300 clients in 150 countries, while Corporate Solutions’ payments totalled ca. USD 2.5 billion in over 50 000 payments to its insureds and third-party claimants. These payments helped people rebuild homes and supported communities to recover in the aftermath of catastrophes.

The 2018 large loss burden totalled USD 3.0 billion, driven by losses associated with the typhoons Jebi and Trami in Japan, hurricanes Florence and Michael, the Camp and Woolsey wildfires in the US and the Ituango dam collapse in Colombia.

Total Life and Health benefits increased from USD 9.2 billion in 2017 to USD 10.3 billion in 2018. The increase was due to various factors, mainly currency fluctuations against the dollar, unfavourable claims development in US Mortality observed in the first half of 2018, and strong business growth, in particular in US Individual Mortality, Disability in Australia and Continental Europe and Medical in Europe.

Market environment and outlook

We anticipate continuing, albeit slowing global economic expansion in 2019. Insurance premiums in advanced markets will likely increase, in line with this economic growth, while emerging market premiums will continue to outperform on the back of increasing penetration levels and solid growth, particularly in China. We continue to expand our potential market through ongoing work to reduce the protection gap, and to address the barriers to demand and supply that hinder insurance uptake.

The natural catastrophe events of 2017 led to an improvement in market discipline in 2018. Encouragingly, this discipline has begun to spread to other lines of business, including the underpriced US casualty insurance market. Increased discipline has led to improved pricing and the exit of several re/insurers from otherwise unsustainable markets. In our view, further such exits in the coming year would not come as a surprise. We believe this represents an opportunity for a long-term, stable and resilient re/insurer such as Swiss Re.

We expect broadly stable non-life reinsurance prices, even while underlying primary commercial line prices increase. We anticipate the possibility of moderately increasing interest rates, but continue to focus our underwriting on the key loss drivers. We continue to closely monitor inflationary trends and their effects on claims severity. Our capital allocation process takes this into account, and as a result, we remain comfortable that risk is well within our expectations.

Our core outlook remains the same as last year – we are positive about the opportunities available to us through three distinctive abilities. Our ability to engage in large and tailored transactions has created a market for which we have truly distinctive capabilities. Demand continues to grow for solutions and services that deploy our R&D to clients. Our industry-leading product and geographic franchise enables an unrivalled ability to rapidly and flexibly deploy capital across insurance risk pools.

Our strong underwriting discipline and our strong capitalisation will support us in playing a leading role in making the world more resilient.