8 POLICY Special edition 2023 How to Avoid Negative Surprises in the Upcoming Renewals Season By Anna Ziswiler, Market Head Switzerland and Mediterranean, Swiss re In the aftermath of a tough 1/1 renewals season, what to expect in the upcoming January reinsurance renewals is the question we get asked the most these days. While I don’t have a crystal ball at hand to predict what kind of surprises nature will throw our way in 2023, I can give you a few pointers on what you should keep an eye on as the year unfolds to avoid negative surprises when the time comes. A new norm for average annual natural catastrophe losses Risks are becoming increasingly unpredictable. The lingering effects of a three-year-long pandemic, the growing impact of climate change in the frequency and magnitude of secondary perils, coupled with global political and economic instability were the ingredients for a dramatic “perfect storm” in 2022. Although hurricane activity was considered average in the North Atlantic, 2022 proved to be yet another costly year, with natural catastrophe global economic losses totaling a staggering bill of USD 275 billion. Of that, insurance covered USD 125 billion, the fourth-highest number of insured losses since 1970, well above the 5- and 10-year averages of USD 110 billion and USD 81 billion, respectively, and still leaving a USD 150 billion protection gap. But 2022 was not an outlier. For six years in a row now, we’ve seen aboveaverage losses. This, however, is not a surprise per se, as it re-affirms the 5-7% annual growth, net-of-inflation trend in catastrophe-related insured losses since the 1990s. This trend also shows that today, average annual industry losses from natural catastrophes of more than USD 100 billion are becoming the norm. A changing risk landscape Looking ahead, we anticipate this trend to persist. While climate change undoubtedly alters the risk landscape by intensifying weather hazards, several key factors significantly amplify these losses. Economic development, population growth and urbanization contribute to increased exposure of valuable assets in areas vulnerable to weather-related disasters and/or exposed to seismic activity. 2023 has already seen strong earthquakes hitting Southern Turkey and Syria in early February, killing more than 50,000 people and devastating the region’s infrastructure. In addition to the undeniable tragedy of lives lost in such disasters, reconstruction efforts, already hampered by scarcity of building materials, will have to factor in higher inflation cost, another more recent factor contributing to further increasing insured losses. As the value of buildings, cars and other assets rise with inflation, so do the repair costs, which drive higher claims costs resulting from natural catastrophes. The power of disciplined modeling and underwriting So, what is in store for us in 2024? Fortunately, we have witnessed a longoverdue shift in risk awareness. There is now more emphasis on disciplined modeling and underwriting of natural perils, leading to better alignment between exposure and anticipated losses. This marks a departure from the era of abundant capital driven by low interest rates, which resulted in a prolonged period of softer reinsurance market conditions. Israel: a sophisticated insurance market with fine-tuning opportunities While the scenario described above is global, it relates very closely to Israel. The highest natural disaster-related risk for Israel is earthquake exposure. We find a well-developed market as well as growing exposures and the need for re/insurance support. Israel generally boasts good insurance penetration, though there is always room for finetuning. Does homeowners’ property insurance provide adequate coverage in the event of a disaster? Does the indexation of insured property values accurately reflect current prices? Moreover, the Israeli market has addressed an important issue by offering land cover insurance to mitigate the mismatch between the reconstruction value and commercial value of properties. Despite its lowerthan-expected uptake, considering the real estate boom in Tel Aviv, this innovative add-on product showcases the insurance market’s capacity for innovation. It serves as a reminder to consider not only the uninsured but also the level of insurance coverage and potential gaps that may exist. Fostering the development of a longterm sustainable insurance market We know that ensuring sustainable Continued on page 33
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