Natural catastrophes and climate change

Natural catastrophes are a key risk in our Property & Casualty (P&C) business. Losses from floods, storms, earthquakes and other natural catastrophes can affect millions of lives and the economies of entire countries. Therefore, providing effective re/insurance protection against natural catastrophes has large social and economic benefits. In 2014, we received USD 2.9 billion of P&C Reinsurance premiums for natural catastrophe covers (for losses larger than USD 20 million); this accounted for approximately 19% of total premiums in this business segment.

Insured natural catastrophe losses are becoming more frequent and severe globally due to the increasing use of insurance and the concentration of insured assets in exposed areas. The effects of climate change are likely to further drive up losses. According to the Fifth Assessment Report (AR5) of the Intergovernmental Panel on Climate Change (IPCC) and its Special Report on Extremes (SREX), a changing climate gradually leads to shifts in the frequency, intensity, spatial extent, duration and timing of extreme weather events. As we have pointed out in our sigma publication on “Natural catastrophes and man-made disasters in 2014”, annual insured losses from weather-related events have increased ten-fold over the last 40 years, from USD 5 billion in the 1970s to USD 50 billion.

We need to understand natural catastrophe risks and the impact of climate change to assess our P&C business accurately and to structure sound risk transfer solutions. To achieve this, we invest in proprietary, state-of-the-art natural catastrophe models and collaborate with universities and scientific institutions. This enables us to stay abreast of the latest knowledge on the economic impact of natural disasters, including the effects of climate change.

While the impact of climate change will manifest itself over the coming decades, most of our business is renewed annually and our risk models are refined every few years. Risks are essentially covered for 12 months, or for up to five years in the case of cat bonds. Thus, reinsurance premiums do not reflect expected loss trends over the next decades. Instead, for underwriting and risk management purposes, our models provide an estimate of today’s risk. However, as natural catastrophe losses continue to rise due to the different factors described above, our models will gradually reflect this trend, as they are updated at regular intervals.

In addition to providing re/insurance covers, we offer our clients strategic expertise and integral risk assessments of natural disasters and climate adaptation. These include our expertise publications, free access to Swiss Re’s CatNet^® and our Economics of Climate Adaptation (ECA) studies.

Insurance-linked securities

Non-life ILS underwritten by Swiss Re

USD millions

We are a leading player in the insurance-linked securities (ILS) sector. ILS are capital market instruments, typically in bond or derivative format, designed to meet the risk or capital management needs of a transaction sponsor. In exchange for a coupon or premium payment, the sponsor receives single or multi-year collateralised protection for specified risk events. If such an event occurs, the sponsor receives all or part of the principal; otherwise this is paid back to the investors in full at maturity.

Insurance-linked securities are particularly well-suited to provide protection against peak risks – events that happen infrequently but tend to lead to high losses, for example earthquakes or windstorms. ILS are used for both risk and capital management purposes in the P&C and the L&H business. For reinsurers they are attractive because they free up scarce capital; for insurers and corporate clients they provide multi-year collateralised protection; and for investors they offer attractive diversification possibilities, as they are relatively uncorrelated with other asset classes.

In 2014, our registered broker-dealer subsidiaries underwrote and distributed to institutional investors non-life ILS worth USD 1.4 billion, all of them for clients.

For more information see Insurance-linked securities

For more information see Managing climate and natural disaster risk