Q: How would you describe the state of the casualty market in the EMEA region? What are you seeing in terms of rates and conditions?
Steinmann: EMEA is such a diverse region, all with its challenges and opportunities. In the larger more mature markets, we have been seeing and expect to see further price increases. This is an area where most of the losses come from and we see our reinsurance clients managing their limits and being stricter on terms and conditions. In the smaller risk space, we see a stable environment and prices are usually sufficient to cover loss costs. In general, we consider the commercial casualty market to be attractive and we selectively purse opportunities.
Q: Are you seeing any particular pain points? What are the drivers behind that?
Steinmann: There are clearly some pain points affecting non-life carriers and reinsurers and in particular casualty as a line of business.
The low interest rate environment will not go away too soon: Interest rates have a significant impact in our industry. For any insurance company, when you look at the P&L of a company, it is made up of two components, investment returns and the technical returns. When interest rates drop, it has a clear impact on returns on the investment side. Insurance companies will have to adjust on the technical side to compensate the lower returns on the running yield. We have no other choice than improving the technical combined ratio as an industry.
Inflation is the key medium-term risk for non-life insurers: Supply disruptions and strong demand supported by fiscal stimulus have pushed prices higher this year. Longer-term tolerance of inflation is a key risk, particularly for longer-tail liabilities at risk of rising claims. On the casualty side, our analysis suggests claims severity may continue trending higher in the medium term due to potential increases in healthcare and wage inflation. A surge in unexpected inflation would affect casualty lines through new business and the legacy book of prior-year claims reserves.
Motor as a line of business is expected to face its challenges in the next couple of years: In the recent past, we saw lower loss frequencies during the COVID-19 lockdowns, as there were simply less cars on the streets. When we now go back to a pre-COVID-19 traffic situation paired with low interest rates and the inflationary environment described above, we create the perfect storm. We are in close dialogue with our clients and brokers on these topics and we can offer solutions to address these challenges.
The growing demand for re/insurance protection translates into a positive premium outlook.
Q: Where are you seeing growth opportunities by casualty line?
Steinmann: There are plenty of growth opportunities as we see growing demand for insurance protection due to economic recovery and growing exposures. The protection gap reached a new high of around US $1.4 trillion in 2020 according to our studies of the Swiss Re Institute. The growing demand translates into a positive premium outlook. We expect total global direct premiums to be 10% higher than the pre-crisis level by end 2021 and we expect continued rate hardening into 2022.
One of the fastest growing lines of business in casualty is cyber. The cyber insurance market for 2021 amounts to approximately US $7–7.5 billion globally and we estimate approximately 40% of global cyber premiums are ceded to reinsurers, which is much more than for other lines of business. The rapidly changing risk landscape makes understanding and managing cyber risk, and its potential accumulation, a nice challenge for the entire industry. We support our reinsurance clients with a suite of cyber solutions which allow them to grow their business and understand their overall cyber exposures and accumulation. We would still consider our approach to be selective in this space.
Another growth area despite the current challenges is motor, especially if you have the capabilities to combine traditional risk transfer with value adding services that address the rapidly changing environment. Our Swiss Re solutions around ADAS Risk Score, Telematics, Smart Claims and solutions addressing automatic and electronic vehicles are only a few examples most of our clients are already familiar with and we are not yet at the end of our journey.
Last but not least, we also believe that small business growth will also lead to opportunities on the casualty side and the winners of tomorrow are the ones that are able to handle this business efficiently.
Q: In the US, there’s much talk about the impact of social inflation. What are you seeing in the EMEA region? Have you seen any impact from litigation funding? Is that also spreading from the US?
Steinmann: Propensity to sue, rising jury awards and expanding judicial theories beyond insurance contract language and intent are expected to continue and tort cases will continue to be a revenue stream for plaintiff attorneys and litigation funders. We observe social inflation in the US, Australia and the UK. With regards to other jurisdictions, we are monitoring the trends closely and cannot rule out an expansion into other geographies.
