The insurance mix is changing Property’s share of the premium pool is rising, bringing with it more complexity and volatility By Wendy Pugh
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echnology advances and climate change over the next two decades are set to drive a global premium pool rebalancing away from motor and toward property, leading to a more complex risk landscape in catastrophe-prone countries such as Australia. A Swiss Re Institute report looking at property and casualty (P&C) insurance through to 2040 forecasts the global premium pool will more than double from 2020 levels to $US4.3 trillion, with far-reaching changes in the mix. Property will almost triple to $US1.3 trillion and increase its share to 29% of the pool. Motor – the high-volume low-risk mainstay for decades – will almost double to $US1.4 trillion, but its share of the total risk pool will decline to 32% from 42%. “We didn’t look at which point there would be a crossover in terms of property being even more important than motor, but it won’t be too long after 2040,” Swiss Re Group Chief Economist Jerome Haegeli tells Insurance News. “If you think about what that shift means, it means more risk in the system. And I think for the insurance industry this means also more complexity to handle.” Motor risk is more easily calculated than property, which is assessed by a rising number of models, and the distinction is becoming more apparent in the context of a changing climate. Rebalancing from one to the other means this is by no means a simple substitution. “With the global portfolio shifting from lower-risk motor insurance to higher-risk lines, P&C insurance business will become more volatile,” Swiss Re Head of Global Reinsurance Gianfranco Lot told a presentation of the Sigma report findings last month. “At the same time, risk modelling will become more complex, which will lead to higher capital requirements and an increased demand for reinsurance.”
Economic development is the dominant driver of growth in both lines in the outlook, with gross domestic product (GDP) expansion also subject to climate change uncertainties. In motor, safety technology developments will temper that growth as advances introduced into car fleets are expected to reduce accident frequency and claims costs and slow premium gains. Property, on the other hand, will be fuelled by climate change impacts, while urbanisation is expected to be an additional contributing factor to the expanding pool. Swiss Re Sigma’s assumptions reflect Paris Agreement commitments to limit temperature increases to around 1.5 degrees Celsius, but deteriorating climate-related risks could further accelerate property premium trends. The Intergovernmental Panel on Climate Change Special Report, released in August, notes a significant risk that temperatures could exceed the 1.5 degrees target by the 2040 timeframe that Swiss Re has adopted for its analysis. “If you have a more severe outcome on the climate front, then as an industry we will always be able to price it, but prices would then reflect the risk,” Dr Haegeli says. “And it is in no-one’s interest that the risk will increase to such an extent that it becomes extremely expensive.” Swiss Re’s study includes an estimate that climate risks specifically will increase the property pool by 33‒41%, generating up to $US183 billion of new premiums globally. But average weather-related property catastrophe losses in advanced markets could increase 30-63%. For Australia, there’s a potential impact of around 50%, while for China, the UK, France and Germany the
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Predicting unpredictability: Swiss Re’s Jerome Haegeli
October/November 2021
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