Swiss Re Report Urges Reinsurers to “Get-back-to-Basics”

October 25, 2002

Swiss Re announced that it has issued a new “Focus” report at the Baden-Baden reinsurance meetings urging the world’s reinsurers to “get-back-to-basics” in their approach to natural catastrophe underwriting as they begin the 2003 renewal season.

The report, “Cat reinsurance – meeting the sustainable level,” focuses on the insurance and reinsurance of natural disasters and discusses the latest developments. A related report “Floods are insurable!” addresses the problems presented by the recent heavy flooding in Eastern Europe.

“Premium rates in catastrophe reinsurance have staged a strong recovery over the last two years. Yet, according to cat market research carried out by Swiss Re, they are still below the level needed to achieve long-term targeted returns. In particular, reinsurers have yet to sufficiently recuperate the high cost of risk capital used to cover the major loss scenarios in the US, Japan and Europe,” said the announcement. It also found that reinsurers had been “too generous in relaxing other reinsurance conditions and expanding cover” during the long “soft-market” phase the industry has gone through.

“During the upcoming renewals, emphasis in the negotiations should be placed on greater transparency, limited liability and tighter treaty conditions, in addition to premiums that adequately reflect the risk,” the report continued. Swiss Re said it expects demand for “top-quality reinsurance security” to increase while ” available capacity will remain limited.”

The report on floods urged the industry “to play a bigger part” in addressing these kinds of disasters. It noted that last summer’s “devastating” floods in Germany, Austria and the Czech Republic “acutely threatened, or even ruined, many livelihoods,” and stressed that “this was largely due to the fact that only a comparatively small percentage of the material damage and economic losses was insured.”

“The authors of Floods are insurable! maintain that this situation is highly unsatisfactory for the insurance industry, given the key societal function of insurance in providing economic security and facilitating rebuilding efforts by offering adequate insurance cover,” said the announcement.

The report did note that the impact of the flooding has been mitigated by generous allotments of government aid and private charitable donations to flood victims. It stated, however, that “In Swiss Re’s opinion, funding catastrophe damage via voluntary donations and taxpayers’ money is only the second-best solution.”

According to Ivo Menzinger, Head of Flood Group at Swiss Re, “An approach based on traditional insurance according to the solidarity principle is better for all concerned – and it is feasible:from an underwriting point of view, there is no reason why comprehensive cover for flood damage should not be available.”

The report cautions, however that such coverage should be conditioned on observance of the “essential principles of insurability,” and presupposes a “close partnership among the insurance industry, policyholders and governments.”

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