Following Hurricane Katrina in 2005, former U.S. Vice President Al Gore described it as “the first taste of a bitter cup that will be proffered to us over and over again.”
That devastating event killed more than 1,800 people and in economic terms still ranks as one of the costliest tropical cyclones on record. Al Gore certainly proved to be correct: The cup keeps being proffered to us, and that cup was very bitter in 2017.
The severe catastrophes last year, including Harvey, Irma and Maria, resulted in the loss of some 11,000 lives. Also homes, business and livelihoods were destroyed, causing economic losses of $337 billion. The insurance industry could foot part of that bill ($144 billion), again demonstrating that insurance and reinsurance are essential to society.
Yet for some reason we are having a hard time selling this protection at a sustainable price. What gives? While the aftermath of Hurricane Katrina in 2005 represented the last significant correction in rates, last year’s record-breaking losses have merely resulted in stemming the price declines of the previous five years. Is this sustainable in the long term?
Certainly today, circumstances are different in comparison to 2005. With the low levels of natural catastrophe activity in recent years, re/insurers have built up capital, and capital market investors seeking noncorrelated investments, such as hedge funds and pension funds, have put record amounts of money into catastrophe coverages.
But 2017 still represented a very tough year. The industry on average reported a slump in profits, with combined ratios well over 100 percent and an absence of underwriting profits, while investment income also suffered from low interest rates. According to rating agency S&P, reinsurers’ ability to earn returns above their cost of capital has declined significantly. So, to answer that question from earlier: It is clearly not sustainable.
What could a sustainable future look like for our industry? A variety of factors have clearly precipitated change across the industry, and reinsurers need to adjust their business models to ensure the sustainability of their operations. I feel that principal among their considerations must be an orientation toward the long-term, providing society with stability and continuity in an increasingly uncertain world.
Insurers need partners who will be there in the good times and bad. Such long-term commitments are vital in a world where it is not unusual to see claims that take decades to develop, placing an imperative on sustainability.
These partnerships will develop to include more than just reinsurance coverage. New innovative, technology-driven solutions critical for the success of insurers will be jointly developed, a trend that we are already seeing now.
One such example can be found in Australia (in a company called Essentials by AAI), where the insurance and reinsurance industry partnered with the government and an NGO to bring affordable protection to society’s poor and to make them more resilient when disaster strikes. This protection could benefit millions more if repeated in other markets.
And following Hurricane Sandy, which hit New York City in 2012, our industry not only provided funds to rebuild tens of thousands of private homes and businesses, it also advised the city, based on its “Economics of Climate Adaption” methodology, on how to best spend taxpayers’ money to prepare for the storms to come.
Swiss Re can do this based on its technology solution that powers the underwriting of natural catastrophes (CatNet). It is also supporting related open source solutions such as the OASIS framework, which can be used by anyone to help prepare for the next natural catastrophe events. In other words, Swiss Re has proprietary tools but also supports open source solutions to handle cedents’ needs.
This was all made possible by being innovative, reaching out to existing and new partners with novel insurance coverages, new solutions, and by employing the opportunities technologies provide to reach those without protection.
For example, index insurance for farmers in Africa, which combines satellite technology with a mobile phone distribution network, has already paid out thousands of claims during the droughts in the past years. This kept farmers in business who otherwise would have been forced to abandon farming.
Another example is the World Bank’s pandemic bond, where technology enabled the industry to create a pandemic model that helps to put a price tag on the next event. On this foundation an insurance scheme was funded that will release the needed quick cash payouts to contain pandemics, thereby potentially saving thousands of lives around the globe.
I remain positive that we can make big inroads into insuring the outstanding $193 billion of losses that were not covered by our industry in 2017.
The demand for re/insurance should continue to grow as the insurance industry strives to cover those who are not insured. If we add to this the higher concentration of assets in catastrophe-prone regions, rapid urbanization, new technologies and associated risks (cyber risk), changes in the environment (climate change) and an aging society, there is very little doubt that more capital and innovation will be required in the re/insurance industry—whether traditional or alternate.
In combination, all of these pieces form part of a big mosaic that will make our world more resilient if, or more accurately when, disaster strikes. And when that disaster does strike, our industry needs to be ready to provide society with stability and continuity.
Al Gore summed things up quite nicely when he spoke about the aftermath of Katrina: “What changed with Hurricane Katrina was a feeling that we have entered a period of consequences.”
I can’t help feeling that our industry needs to take heed of those words and make sure it can continue to deal with the consequences and cover the unexpected events in an uncertain world. If it does so, we can look forward to a positive, sustainable future for our industry.
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