Our market is changing

At Swiss Re we monitor and actively respond to the most pressing and market-moving macro and sector trends.

The risks the world is facing are growing. The global population is growing, and people are living longer. More and more people now live in densely populated areas. Climate change is intensifying natural catastrophe risk. As a result, there is a widening gap between the risk protection needed and the insurance cover — the protection gap. This creates opportunities for Swiss Re to grow.

However, we are also facing increasing competition. There is an oversupply of capital entering the re/insurance industry in search of returns in the current low interest rate environment. The lines between primary insurance and reinsurance have blurred, as more and more companies operate in both fields. In addition, new technologies and competitors are emerging which could potentially disrupt the whole re/insurance value chain.

On the following pages we take a look at some of the key market trends and our response to them.

Challenging economic environment

We expect global growth to remain subdued in 2020 after a slowdown in 2019. After years of low interest rates, the environment of cheap money has become the new norm. For the re/insurance industry this poses several challenges, not least because the influx of capital into the sector has increased competition.

Additionally, the continued low interest rate environment poses a challenge to investment returns. Yields on government and corporate bonds remain very low or negative in some markets. These assets and other fixed income securities constitute a significant part of re/insurers’ investment portfolios and were key profit contributors. Not all lines of business are equally affected: long-term contracts in particular suffer from low investment returns. For life insurers with guaranteed products in the portfolio, it has become increasingly challenging to match the guaranteed returns.

Our strategic response

On the asset side, portfolio diversification and a highly disciplined investment approach are critical in the persistent low interest rate environment. In recent years, we also increased our allocation to higher return-generating strategies, including high-quality corporate credit and real estate, enabling a continued strong return on investment and a stable running yield.

From an economic perspective, all of our assets and liabilities are fully matched. This neutralises the effect of the low yields on our in-force portfolio. Further, on the underwriting side, Swiss Re has refrained from doing asset intensive reinsurance transactions and assuming products with asset risk, such as life insurance savings products.

Longevity and medical innovation

The global population is becoming older: people are living longer than ever before, while the share of the working population is shrinking. As more people want to enjoy a longer retirement, public and private institutions face the risk that they will not be able to meet their financial commitments.

Longer lives have become possible as medical treatment improves, particularly the diagnosis and treatment of illnesses such as heart disease and stroke. The increasing cost of health services and long-term care impacts societies and insurance companies equally, as both need to bear these costs.

For insurers, this entails both challenges and opportunities. On the one hand, medical inflation may have an impact on disability, medical expense and casualty insurance. On the other hand, insurers can offer new paths to financial security for older people.

Our strategic response

Swiss Re is the largest life and health reinsurer globally. We have built leading knowledge in biometric risks, using the accumulated data to create unique risk and portfolio insights. Dedicated R&D activities ensure that we remain abreast of the underlying changes in the industry.

Co-creating products and solutions is at the core of our life & health value proposition. Together with our clients, we aim to close the life and health protection gap and make societies more resilient. Using our capacity, technical expertise and diversification within the life and health portfolio, we provide our clients with bespoke risk transfer solutions.

Emerging risks: cyber risk

For years, the phenomenon of cyber risk has been the centre of attention of the wider public – driven by headlines detailing high-profile data breaches and widespread ransomware attacks on large and small companies as well as on cities. The insurance industry has been trying to find ways to support customers in their risk mitigation and risk transfer efforts with new and innovative insurance products.

To respond successfully to cyber risk, monetary compensation for an incurred loss is only one component of a modern cyber insurance policy. Policies increasingly embed a broader service proposition including advice, loss prevention and mitigation services that support the overall cyber resilience of insured companies, organisations and individuals.

The upside to this is the development of a new and growing market – Swiss Re Institute forecasts a premium growth from USD 4.5 billion in 2017 to USD 25 billion in 2023. On the downside, many of the risks involved are not yet fully understood and are undergoing constant changes. Moreover, insurance companies are asked to put robust risk management frameworks in place to manage their cyber exposures. So-called “silent” cyber risks, together with the explicit coverage of “affirmative” cyber policies might lead to a risk accumulation on the re/insurers’ balance sheets that needs to be understood and actively managed.

The importance of cyber risks for the insurance industry must not be underestimated. There is a clear need in the market for insurers to be part of a wider response to this growing societal and economic threat. Hyper-connectivity, artificial intelligence, automation and the Internet of Things (IoT) are just a few factors that will shape the risk landscape in the years to come and give rise to new risks, as well as new opportunities.

Our strategic response

Swiss Re is providing the global cyber market with significant risk capacity and is heavily investing in research. As a risk knowledge company, we continuously build expertise and tools to assess and quantify risks but also to understand and promote sound risk mitigation methods.

We continue to develop cyber solutions that allow organisations and individuals to access state-of-the-art insurance and risk management support. We put our knowledge at the disposal of our clients to help them better understand and manage their cyber exposures and provide fit-for-purpose solutions to their customers.

The great pivot east continues

The strategic importance of the Asia-Pacific region is shaping and shifting the global balance of economic influence and power. Economic prosperity and the resulting growth of the middle class in many Asian countries is a key driver of greater insurance penetration in the region. According to the OECD, by 2030, China and India are expected to become the countries with the largest middle class globally by number of citizens.

Emerging markets in Asia, and China in particular, will continue to be an important driver of insurance industry growth in the future. China’s share of global premiums will rise to 20% by 2029 from the current share of 11%. China is on course to become the world’s biggest insurance market by the mid-2030s, surpassing the US.

Our strategic response

Swiss Re is well positioned for the opportunities arising in Asia. For many years we have been working with insurance companies and brokers in Asia to provide a broad range of reinsurance products and services. Swiss Re currently generates 17% of our net premiums earned in high-growth markets, and Asia contributed over half of Swiss Re’s high-growth market premiums.

Swiss Re is currently the largest foreign reinsurer in China. Our historic presence in China and other key growth regions provides us with privileged access to clients and partners. As a testimony of Swiss Re’s knowledge leadership and commitment to the Chinese market, we also opened the Swiss Re Institute China Centre in Beijing in 2019.

Digital innovation

Digital platforms and devices are enabling cheaper, faster and more scalable solutions that make insurance accessible to an increasing proportion of the world’s population. The emergence of digital platforms and ecosystems creates a unique opportunity to integrate insurance to narrow a current protection gap. Due to both a massive increase in access and the introduction of new technologies, a broader and more affordable variety of policies have become available to more and more people.

The availability of new data sources allows insurance companies to create new digital products, and achieve improved underwriting and pricing. Traditionally, insurers had one-time access to historical data from clients. In contrast, today, a continuous flow of data enables insurers to dynamically underwrite policies with new insurance products. Through advanced analytics and process digitisation, insurance companies can improve the way they operate, ultimately increasing cost efficiency and improving the customer experience. As an example, machine intelligence allows insurers to detect claims fraud far earlier in the process.

Our strategic response

In its capacity as a risk knowledge company, Swiss Re has always been at the forefront of digital innovation. We have a track record of innovating several hundred digital use cases across the insurance value chain, often co-developing these with our clients. Our innovative life insurance platform, Magnum, is an example of an industry-leading technology application. In our partnership with car manufacturers, we provide our telematics-based risk insights to the benefit of the customer.

To provide our wholesale clients with an innovative digital offering, Swiss Re has built digital insurance platforms across all business units. In Reinsurance, insurance companies benefit from our online risk portal SwiftRe. Industrial companies are offered a digital customer experience through the client portal of Corporate Solutions. In Life Capital, we have built state-of-the-art digital insurance platforms in iptiQ to partner on the basis of the latest technology with non-insurance distributors and ecosystems alike.

Climate change

Recent natural catastrophes, including severe hurricanes, typhoons, widespread droughts and wildfires, demonstrate the forceful financial impact of climate-related risks on the insurance industry. Meanwhile, the growing and quickly urbanising population amplifies the impact of any catastrophe. Higher value concentration in risk-exposed regions, such as coastal areas, increase the potential cost of a natural catastrophe. As our world warms, we will experience increased atmospheric energy, resulting in more catastrophic storm events. A warming atmosphere can also lead to greater frequency of droughts and a broadening of the areas vulnerable to these kinds of perilous conditions.

Secondary perils are also becoming a major risk related to climate change. Secondary perils are risks resulting from natural hazards, and are typically weather-related: for example, a primary peril like tropical cyclones can lead to a higher rate and risk of flooding,

Our strategic response

Swiss Re’s history is rooted in providing capacity to protect societies around the globe against natural catastrophes. Over the years, Swiss Re has built a unique set of data and proprietary risk knowledge. This allows us to optimally steer and assess risks across perils and regions. We continue to heavily invest in natural catastrophe risk research, including assessing and quantifying the impacts of climate change on the natural perils risk landscape. We provide our knowledge and services to our clients to tailor and develop industry-leading risk transfer solutions.

As a company, we are committed to sustainability. We continue to take a public stance on identifying climate change as a crucial issue for the sector, as well as society at large. As an early proponent of sustainable investing, we were among the first to adopt stringent environmental, social and governance (ESG) criteria for our asset portfolio. In 2018, we stopped providing re/insurance to businesses with more than 30% thermal coal exposure.