The insurance mix is changing

The insurance mix is changing

Property’s share of the premium pool is rising, bringing with it more complexity and volatility

By Wendy Pugh

Technology 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.

Predicting unpredictability: Swiss Re’s Jerome Haegeli

“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 increases could be as much as 90-120%.

Climate impacts have so far shown up particularly in more intense “secondary perils”, where the risks are less well understood and which globally include wildfires and severe convective storms generating hail and flooding.

“Better modelling of secondary perils including wildfires, definitely is super-important,” Dr Haegeli tells Insurance News. “Wildfires, particularly before 2016, were about 2% of total natcat losses. Since then they have risen by around a factor of six.”

The issue is critical for Australia, which faces an outsized bushfire risk with an expected 100% loss increase. For catastrophe-related floods the increase could be 55% and for tropical cyclones up to 26%.

Dr Haegeli says Australia accounted for 4.3% of the global catastrophe loss burden last year, or $US3.5 billion in volume terms.

“That outstrips by far Australia’s contribution to the global insurance premium pool of 2.5%, which means Australia is exposed disproportionately to global natural catastrophes,” he says. “The good news is that Australia has a very robust insurance market.”

The increase in the total property and casualty premium pool to 2040 includes gains in liability, where premiums are expected to rise to $US583 billion from $US214 billion last year, as social inflation pushes up the frequency of large verdicts and settlements, especially in the US.

Swiss Re’s report, released ahead of the online Rendez-Vous de Septembre, is also a call for action that urges the insurance sector and governments to work together in the face of the transformational changes taking place in the economy, society and in technology.

It says the industry can provide compensation for damage to property resulting from extreme weather events, but a framework to encourage investment in green infrastructure, as well as upgrading zoning and building standards, is equally important to ensure the continuing insurability of risks.

Swiss Re warns global warming is a risk for economic growth rates, especially in emerging economies, which reinforces the need for policy action on carbon pricing as well as greater transparency and accountability in the private and public sectors.

The report calls for institutions to disclose roadmaps on how they intend to reach the Paris and 2050 net zero targets.

Dr Haegeli says GDP growth rates shouldn’t obscure the reality that economic resilience – the capacity to absorb new shocks – is weaker today than before COVID-19. And back then it was weaker than before the Global Financial Crisis.

“Economies globally are rebounding because we have seen the worst recession of our lifetimes last year, but let’s don’t mistake a rebound with a real structural recovery,” he says. “More is needed to have a sustainable recovery; and a sustainable recovery still is a marathon and not a sprint.”

He argues that government actions and spending should be more effectively targeted, rather than adding to measures that have seen the “zombification” of markets and real economies.

“We need more economic policies to tackle climate change,” he says. “We shouldn’t just be focused on monetary policy, with the focus we have seen in the last 10-15 years in fearing deflation.

“It is super important that today’s economic rebound is accompanied by a sustainable recovery and also a sustainable insurance system.”

Dr Haegeli says the Swiss Re Sigma P&C outlook makes an important contribution by quantifying the risks so they can be better anticipated and more widely understood. It also highlights that there is no time to wait in taking action.

It makes clear that the shifting scenarios for the property and motor markets present more risks and opportunities in underwriting and investment, and that the insurance sector globally has much to offer.

“For the insurance industry, we are part of the solution, and if you are part of the solution you have so much upside,” Dr Haegeli says.