Providing effective financial protection against large natural catastrophes is at the heart of Swiss Re’s vision to make the world more resilient.
For the past 159 years, Swiss Re has been at the forefront of building financial resilience for catastrophe risks. The first reinsurers emerged in the mid-1800s following a series of city fires, including the Hamburg fire of 1842 and the Glarus fire of 1861. After these events, governments and communities needed greater assurance that they could rebuild after catastrophic events – and the system of “insurance for insurers” developed.
While the Glarus fire led to the birth of Swiss Re, the defining test of Swiss Re’s value came after San Francisco’s devastating earthquake of 1906. Following a magnitude 7.6 earthquake, the city was enveloped in a fire that destroyed an estimated 25 000 commercial and residential buildings. The insurance industry was there to help rebuild. Over 130 insurance companies paid out fire claims and the USD 235 million paid out at the time was easily a record. At nearly 100 times the market’s fire insurance premiums – the claims burden was too big for many local insurers.
The net loss for Swiss Re of CHF 4.3 million from this event was considerable, as the company’s equity at the time was only CHF 9.9 million. However, excellent business results in the previous and subsequent years allowed Swiss Re to shoulder this burden. In the wake of this disaster, Swiss Re’s reputation in the reinsurance industry was well and truly established.
Fast-spreading city fires no longer pose a formidable threat. However, hurricanes, earthquakes and floods still cause significant losses. The COVID-19 pandemic also illustrated how life and health risks can cause economic damage comparable to natural catastrophes.
These events can have a profound economic impact on societies. In 2022 alone, global economic losses from natural catastrophes soared to USD 268 billion. The insurance industry provided USD 118 billion to businesses, governments and households through claims payments. However, despite this large amount, the protection gap remains well over 50% of all losses, a financial burden that must be carried by governments, businesses and households.
A business built on diversification and knowledge
In 1906, Swiss Re had already built a globally diversified business, which helped it through the San Francisco earthquake. Today, Swiss Re’s natural catastrophe business is further diversified both globally and across a range of perils. The natural catastrophe business is also just one part of Property & Casualty Reinsurance’s (P&C Re) portfolio, alongside other areas, such as the casualty business. And with the purchase of Life Re in 1998, Swiss Re entered life reinsurance, further diversifying its business.
In order to participate in such a diverse range of global risks, Swiss Re places an emphasis on research and development activities. For the natural catastrophe business, Swiss Re currently employs more than 50 dedicated scientists who maintain around 200 natural catastrophe models. These models provide insights into over 90% of the world’s insured exposures. Modelled perils range from hurricanes and tornados to earthquakes, floods, winter storms, wildfires and volcanos.
In 2022, Swiss Re Institute implemented major updates to many of these, including the Tropical Cyclone North America model and several large earthquake models. Recent updates also incorporated the impact of economic growth, demographic change and climate change risks.
Research and development over the last three years has also yielded new models and model updates for so-called “secondary perils“, which are usually smaller natural catastrophes such as flash floods or wildfires. These typically generate losses of low to medium magnitude but can happen relatively frequently.
Losses from these events have been trending upward since the 1970s. Swiss Re’s models have been updated to ensure they account for this trend.
Natural catastrophe reinsurance is an indispensable shock absorber for the global financial system. Natural catastrophe losses are increasing, fuelled by a mix of economic growth, urbanisation, wealth accumulation in disaster-prone areas, such as on the coasts, and climate change. However, the reinsurance market is growing to support the need for more coverage. Currently, natural catastrophe reinsurance represents an estimated USD 45–50 billion business in annual premiums, with an annual growth rate of 7–8% since 2000 – outpacing GDP growth. Currently, natural catastrophe reinsurance represents an estimated USD 45–50 billion business in annual premiums.
Swiss Re has carefully steered its natural catastrophe business over this time, maintaining its position as a market leader while carefully managing exposure to potential losses.
One important reason why reinsurance can grow despite the increase in natural catastrophe losses is that contracts for property insurance can be renewed on a regular basis – usually annually. This means that the long-term trends can be priced into renewals cycles from year to year.
The business opportunity for reinsurance is robust – it is poised for positive long-term profitability, performance and growth.
One of the financial key metrics used to measure profitability is the “combined ratio“. This calculation expresses the total claims plus expenses as a percentage of earned premiums. A result under 100% means that the business is profitable.
For Swiss Re’s natural catastrophe business in P&C Re, the average combined ratio over the ten years from 2013 to 2022 stands at 77%. Although this measure does not take into account the cost of capital, it illustrates P&C Re’s ability to absorb claims, effectively manage costs and maintain an adequate margin.
Beyond core reinsurance
Today, natural catastrophe protection remains the core of Swiss Re’s reinsurance business, and also represents a substantial part of Corporate Solutions’ value proposition for large companies.
In recent years, Swiss Re has seen an increasing demand from clients for broader services outside the core risk transfer products. This has led to the development of a diverse range of solutions such as Swiss Re Corporate Solutions’ Risk Data and Services for Corporates platform. These solutions deploy cutting-edge technologies to develop new products, speed up claims or inform risk management processes – thereby reducing exposures to losses.
This growing demand is set to continue as the insurance industry maintains its mission to close the protection gap for natural catastrophes globally and to build financial resilience.
 “Large natural catastrophe losses” refers to all losses over USD 20 million and is prior to retrocession.
Currently, natural catastrophe reinsurance has an annual growth rate of 7–8% since 2000 – outpacing GDP growth.
Swiss Re has carefully steered its natural catastrophe business and for P&C Re, achieving an average 10-year combined ratio of 77%. As the global property reinsurance market moved into a “hard market” in 2022, Swiss Re achieved strong price increases and grew its business.
In 2022 alone, global economic losses from natural catastrophes soared to USD 275 billion. The insurance industry provided USD 125 billion in claims payments. However, the protection gap remained well over 50% of all losses.
Hurricane Ian is estimated to have cost the insurance industry USD 50–65 billion, making it the second-costliest hurricane on record. Swiss Re expects to provide USD 1.3 billion in claims to hundreds of clients for this event.
Research and development
For its natural catastrophe business, Swiss Re currently employs more than 50 dedicated scientists who maintain around 200 natural catastrophe models. These models provide insights into over 90% of the world’s insured exposures.