Swiss Re Institute
Competitive advantage in underwriting
Distinctive knowledge and insights into insurance risk pools and individual risks have been the bedrock of Swiss Re’s underwriting outperformance for more than 150 years, and cutting-edge research and development (R&D) continues to underpin the evolution of our capabilities and client offerings. Technological progress has opened up new opportunities to advance our expertise. Access to more and better data, advanced analytics and a strong talent base allow Swiss Re to create new insights at an ever-accelerating pace.
The insight from our R&D is the foundation to how we model and understand risk.Edouard Schmid
Chairman Swiss Re Institute & Group Chief Underwriting Officer
For example, the ability to aggregate and augment large pools of natural catastrophe exposure data from different sources allows Swiss Re to expand its ability to model and understand risk. In this new approach, data-mining techniques and clustering algorithms are being used to enrich risk characteristics of individual property exposures (such as age or construction type, for example). The underlying exposure database with more than 12 billion individual records is fully integrated with Swiss Re’s proprietary risk modelling landscape, positioning us well for superior risk selection and advanced accumulation tracking. Strategic collaboration with open-source partners, for example the Global Earthquake Model (GEM) public-private partnership, provides further access to data and ensures timely consideration of leading scientific perspectives as we advance our own views on risk.
Deep risk insight coupled with a data- driven ability to assume forward-looking perspectives on insurance risk pools allows Swiss Re to allocate risk capital to the mutual benefit of our clients and shareholders, as well as society in the broader sense. Strategic investments in targeted R&D activities form the basis for continued underwriting excellence and position Swiss Re as a market-leading knowledge company.
Underwriting performance in 2019
The Group’s overall underwriting performance in 2019 was impacted by higher-than-expected large natural catastrophe and man-made losses. Normalised for large losses, the Group’s underwriting results are solid and bear testimony to our risk selection capabilities and the strong diversification of our business. In property and casualty, higher large loss burden and adverse prior-year development were balanced with profitable business growth, particularly in the natural catastrophe business. The Group’s total property and casualty claims payments in the amount of USD 18.7 billion helped individuals, businesses and communities rebuild in the aftermath of natural catastrophe and man-made events. Underlying underwriting performance in life and health was strong, offsetting the adverse impact from carrying value adjustments and the charge related to the agreement to sell ReAssure. Total life and health benefits amounted to USD 13.1 billion, up from USD 11.8 billion in 2018.
Accelerated exposure growth and growing concentrations in areas with heightened exposure to natural catastrophes, such as coastal zones, have been contributing noticeably to loss activity in property and casualty. While technological progress can have a positive impact on loss frequency and severity in some lines of business, there are broad secular trends driving up loss cost tied to climate change, rapid urbanisation and increasing complexity of business operations. Changing societal trends and attitudes have been impacting claims severity further in specific markets, mainly in the US, a phenomenon commonly described as social inflation. Similarly, on the life and health side, the expansion of genetic testing, rising obesity rates, opioid-related mortality and other trends drive up claims amid stalling mortality improvement rates.
Swiss Re is well positioned to support our clients in addressing these challenges by utilising cutting-edge underwriting R&D, innovative risk transfer solutions and a strong balance sheet.
Market environment and outlook
Going into 2020, we expect the outbreak of the SARS-CoV-2 coronavirus, and the related illness, COVID-19, will lead to significant disruptions of economic activity and a global recession in 2020. While there is considerable uncertainty around the virus spread, our baseline scenario is for economic activity to normalise during the second half of the year and into 2021. For our baseline, insurance premiums are nevertheless expected to grow by around 3% in real terms, with emerging Asia powering global industry growth. China, India and other Asian markets continue to expand, based on significant protection gaps in those markets. Government initiatives and industry efforts increasingly seek to close those gaps. Swiss Re aims to be at the forefront in this area to help reduce the barriers to supply and demand that currently hinder insurance uptake.
While the effects of the coronavirus are still unfolding, what we have learned from past pandemic outbreaks is that it is important to actively encourage data gathering and cooperation between healthcare and other sectors. Swiss Re continues to engage with leaders in science, insurance and regulatory bodies on the topic.
Profitability, as measured by return on equity, has strengthened in both property and casualty and life and health reinsurance businesses in 2019, in part due to improved realised gains from investment management. With low interest rates set to stay, however, the investment environment will remain extremely challenging. With the industry experiencing its third year of elevated insurance losses, the pressure for improved market discipline is rising, and this discipline has begun to spread from catastrophe-affected portfolios to other lines of business. This is leading to improvements in pricing and the exit of several re/insurers from otherwise unsustainable markets.
We expect broadly stable to improving property and casualty reinsurance prices as a result of rising claims and a significant reduction of available retrocession capacity. Underlying primary commercial line price increases have gained strength and broadened throughout 2019. Due to our long-standing underwriting experience as a leading reinsurer, we are well positioned to navigate fast-developing risk environments.
We are positive about the opportunities available to us. Demand continues to grow for solutions and services that deploy our R&D to clients, and our ability to engage in large and tailored transactions is an asset. In addition, our industry-leading product and geographic franchise enables us to rapidly and flexibly deploy capital across all insurance risk pools.