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Climate Change Is a Fact, and It Is Affecting Insurance

village center of Monreal in Elz flood, July 2021
The Elz river floods the village center of Monreal, Germany, July 15, 2021.

Thierry Léger, Swiss Re’s Chief Underwriting Officer, discusses the state of the market, global warming and why we’re in the middle of a revolution in claims. 

What is the state of the reinsurance market going into 2022?

It's not a buyers’ market, but it's also not a seller's market. An emphasis is being put on terms and conditions, capacity, and prices after years of losses. I think this is deserved as we need to get back to sustainable price levels. Also, I see a growing demand for insurance and reinsurance driven by the very uncertain environment.

It's not a buyers’ market, but it's also not a seller's market,
Thierry Léger, Swiss Re’s Chief Underwriting Officer

Where are we in the reinsurance cycle?

I think insurance is ahead of reinsurance by about two years. In insurance, the hardening is expected to continue, if at a slower pace. In reinsurance, we are not yet at the peak. Many lines of business still deserve further improvements in price and conditions.

Will reinsurance buyers change their programmes because of the tough market conditions?

Most buyers think long term. They have core programmes that they try to change as little as possible from year to year. But I see more changes at the periphery. In nat cat, the layers lower down will require changes in structure and some more clarity in what is covered. In cyber, I see big changes, driven by losses, and not just on the price side. There too we need to clarify what is covered – for example, how do we deal with ransomware?

What more can the (re)insurance industry do to help curb global warming?

I think we can now say that climate change is a fact, and it is affecting insurance. The wildfires in California and in southern Europe this year, for example, are the result of climate change and are causing higher losses.

Many countries and companies have now declared net zero targets and our industry cannot stand on the side lines. It's clear to me that we can make a very active contribution in two ways.

Many have now declared net zero targets and our industry cannot stand on the side lines.

The first is to help clients in certain industries, such as coal, oil, and gas, to adapt. But we need to differentiate between those companies that are serious about adapting but need a bit more time, and those that are not going on that journey.

The second is by helping the transition to the low-carbon economy. The Swiss Re Institute recently published a report stating that we will need to extract CO2 from the atmosphere to reach net zero. That will require trillions in investment in new technology. But these are new technologies that our industry will need to understand. I see this as the biggest opportunity but also the biggest challenge we face.

Won’t that require a big change in the (re)insurance industry’s mindset?

You’re right, we have not had the best track record in making new technologies insurable. You can see how difficult it is to make cyber risk insurable. I think we are still struggling with the supply chain and we're also struggling with climate change and its impact on certain risks. But as an industry, we need to help improve the world’s resilience to these risks. That's what we are working on and it should be our industry’s contribution.

Apart from climate and cyber, are there other new emerging risks?

It's very clear that the pandemic has accelerated the use of digital, to the extent that we’re entering a new world in cyber. We’re all buying and communicating online much more today. So, that's a big new exposure.

Also, I think that with climate change and the transition to the local-carbon economy, there will be many more climate-related liability cases. We will have to watch that space very closely.

We’re in the middle of a revolution in claims.

The last is data. Tomorrow’s world will be made insurable by using more information. There’s been an explosion in the availability of data, but there are also ethical questions regarding what data we should be allowed to access. The regulations governing the use of data have changed a lot in recent years, and I think they’ll change further in years to come. Again, it’s both a challenge as well as an incredible opportunity for our industry.

Which of the technological innovations the industry adopted during lockdown has had the greatest effect on underwriting?

The pandemic meant that the industry couldn’t travel to assess losses, so, we had to find ways to do this remotely. As a result, we’ve developed remote monitoring capabilities that are vastly superior to what we had in the past, such as satellite imagery to assess natural catastrophe risks. It’s not possible to access places hit by floods, storms, or earthquakes for some time after the disaster has hit. But now we can assess losses by comparing satellite photos of sites before and after a disaster has struck.

Also, the number of sensors in industrial machines now means it’s now much easier to monitor and maintain them remotely. The data they produce is also very helpful in settling losses. There’s a paradigm shift taking place, from physical to virtual, manual to automatic loss settlements. We’re in the middle of a revolution in claims.

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