Swiss Re’s Baertschi: Secondary perils creeping up industry losses as climate change worsens

The industry should be wary of the increasing “frequency and severity” in secondary perils as the risks associated with climate change become more prevalent and cost (re)insurers more each year, warns Urs Baertschi, CEO of Reinsurance EMEA at Swiss Re.

Speaking to The Insurer ahead of what would have ordinarily been the Baden-Baden reinsurance conference, Baertschi said in a video interview that secondary perils, such as heavy rainfall, droughts, flooding and wildfires are “causing costs for insurers to rise significantly,” with the EMEA region being particularly affected by these types of perils.

“These extreme weather events combined with increasing urbanisation and the associated increasing concentration of values are causing costs for insurers to rise significantly,” said Baertschi.

“The EMEA region is particularly affected by them and most catastrophe losses in the first half of 2020 are from these secondary perils, but it’s also true that the majority of them were actually not insured thus creating a protection gap,” he added.

It is Baertschi’s expectation that as climate change worsens, the scale of these events and associated losses in the future will amplify.

It is because of this that Swiss Re is “very active in raising awareness around these risks”.

Baertschi added: “We proactively support our customers in developing solutions to meet the environmental challenges specifically and to respond to the changing needs of the ultimate policy holders.”

Indeed, climate change isn’t the only challenge the industry faces and Baertschi emphasises the importance of the industry driving the need for more technical profitability.

“The insurance industry as a whole, both globally as well as here in EMEA, is facing a number of very severe challenges that have accumulated over a few years which now drive the need for more technical profitability,” he said.

“Rates in the industry are expected to go up and the need for this is coming from both sides of the balance sheet.”

Due to a significant amount of volatility on the asset side this year and even lower interest rates globally, Baertschi explained the pressure on capital is one part of the problem, and given the current economic outlook, he does not envisage “any meaningful signs of improvement anytime soon”.

On the liability side, Baertschi said, “The low interest rates require a higher technical margin on new business. Increased inflation is putting pressure on longtail enforced business and of course there has also been significant losses in the industry from large manmade events, secondary perils and of course Covid-19.”

On the topic of how technology opportunities have accelerated this year following the impact of Covid-19, Baertschi said the three key areas are: digitalization, data and automation.

“This year has just been a massive acceleration of those trends in our industry,” he said.

“The enormous digital footprints that individuals and companies are leaving behind now has meant that the amount of data available has increased exponentially and will continue to do so. Data has always been at the core of what we do in the insurance industry, but the sheer amount that we have today needs to be analysed and turned into intelligence which is turned into information. As an industry, we can use this information to create a better customer experience and create more tailor-made products and ultimately help close the protection gap.”

Focussing on the automation element, Baertschi added: “All parts of the insurance value chain are being automated from distribution to underwriting to policy administration and claims, and automation will continue to grow as the industry’s digital platforms evolve and more data is utilised.”

Looking ahead to renewals and client relationships more generally, Baertschi said that now more than ever, it is “absolutely imperative to be close to our clients and trading partners”.

“In this dynamic environment, there’s enormous amounts of uncertainty and we want to make available to [our clients and partners] our expertise, risk sharing, our global scale and at the same time listen to them and their views and their needs and tailor our business offering to them and for that, we have to be very close to them.”

He concluded: “We have the capital strength, we have the products, the solutions and we have strong relationships and a solid backbone of years of history. This is the time when our clients and trading partners need us to support them - through these uncertain times - and to help them capitalise on the many new opportunities ahead of us.”