Companies transitioning to net-zero emissions by 2050 will need to be halfway there in 10 years, according to Swiss Re’s group CUO Thierry Léger, who set out to Insurance Insider his views on the profitability of nat cat coverage and the issues posed by volatility in secondary perils.
In a wide-ranging interview encompassing Swiss Re’s progress on its own climate targets, Léger iterated the challenges insurers are facing during the transition, as world leaders negotiate critical climate agreements at Cop26.
He emphasised why transitional activities during the next decade will be crucial. “Most companies realise that whatever they commit to by 2050, which generally is net zero, half of that needs to be achieved in the next 10 years or so. It’s doable, but because it’s just 10 years, every year counts,” he said.
During the next five to 10 years, Léger admits that insurers will see “a world of different speeds”, with countries like China moving slower, and that as a global company, Swiss Re will have to weigh up how to apply its rules and commitments to these different speeds.
“Whether it's by 2030, 2040 or 2050, the support of the transition to net zero is a challenge, because it involves lots of less proven technologies. For an insurer, it's always the lack of history and data that is challenging,” he added.
Amid increasing volatility across climate-fuelled perils, Léger pointed out the problems they unleash for underwriters due largely to their unpredictable nature, and the data gaps that persist around certain cat events.
“If you take 50 years of data”, he explained, “what’s missing is the shorter term dynamics that we see today. There are perils which are not much or not at all impacted by climate change. With hurricanes in the US, for example, they are not impacted much, maybe the frequency goes down even, but the intensity [of each storm] might increase.”
But Léger said there are other perils that are “very dynamically impacted” by climate change. “That’s where we see the losses today,” he added, noting the wildfires in the US, the bushfires in Australia and more recent wildfires across European countries on the Mediterranean.
“These are devastating, and they have increased over the last few years,” he said, warning that these events will increase further.
Léger also set out the data gaps around these events that can affect carriers.
“These perils are over-proportionately impacted by climate change. What we need for these events is much more granular data about values. So it's not just enough to know where your apartment is, it’s important to know; is it on the third floor? Does it have less exposure? If your property is on the ground, how many centimetres above ground has it been built, to prevent flooding?”
“So all of that data becomes increasingly important. We do already get a lot of excellent data around location, type of building and values for underwriting, but our biggest challenge is the data on the peril itself. The US wildfires are hard to predict. All we know [is] it's getting worse, it’s super volatile and it’s this volatility that is so difficult to predict.”
Secondary perils
At a recent Baden Baden virtual press conference, Léger’s colleague Beat Kramer Mölbert, EMEA head of property underwriting at Swiss Re, said the firm would focus on reducing exposure to low-attaching secondary perils, which were delivering more regular losses.
Swiss Re itself put out a market-wide estimate last month that industry losses from storm Bernd in particular would hit $12bn, a new record flooding loss for the European market.
Léger claimed that Swiss Re was the first company to raise the issue of climate change and secondary perils and to implement changes in its nat cat models.
He added: “A few years ago we started to see the first signals of an increase in secondary perils. In November 2020, at our investor conference, we were very clear on these low-attaching, frequency layers that are impacted by climate much more. We said we would substantially reduce our exposures. We were the first to say this, and we were the first to do it. This put us into a much more comfortable position.”
For the longer term, Léger acknowledged that it would be “unacceptable to run away from risk”, and that this is not what Swiss Re wants to do.
“But in the short term, we did the right thing, and we are very pleased now to see that actually, the industry has started to react,” he said, adding: “Now the prices are evolving in the right sense. We are absolutely open to helping our clients, but the terms have to be acceptable. So we will not move back into this space as long as, for example, prices are not acceptable.”
Explaining Swiss Re’s requirements for these low-attaching, secondary peril risks, Léger added: “We need better data, we need better structures and clearer definition of treaties and wordings, and significantly higher prices. Those four conditions obviously have to come together for us to insure clients in those segments that we have left.”
I’m not worried about our capability to generate returns on our nat cat business in the decades to come. There will be difficult moments that will incur large losses, there will be bad quarters and good quarters over time
Profitability in nat cat
The concentration of simultaneous cat events during Q3 – Hurricane Ida, the Caldor fire, the Dixie fire, wildfires across Europe and the aftermath of Bernd – prompted industry conversations in some quarters around the challenges of writing cat business during this inflection point of climate change.
Some industry veterans, including Fidelis CEO Richard Brindle, have called for a rethinking of the industry’s approach.
In an interview with this publication in September, Brindle raised the simple question: “How can you write cat business in the era of climate change? That is the question the industry needs to ask itself. With five years in a row of losses, can you carry on using the same tools as before?”
That same month, Swiss Re projected that climate risks could increase average weather-related property cat losses in advanced markets by 30%-63% by 2040.
Despite this backdrop, Léger was highly confident of the prospects for profitability in Swiss Re’s nat cat underwriting.
“I’m not worried about our capability to generate returns on our nat cat business in the decades to come. There will be difficult moments that will incur large losses, there will be bad quarters and good quarters over time.
“But we have over 40 people working just on this. They do nothing else every day. They collect data, improve our models – we have something like 180 nat cat models – and we are extending that for secondary perils,” he added.
Insurance Insider’s previous analysis of nat cat losses across Q3 results shows how events such as Ida have impacted earnings across the industry this year.
Another quick analysis of Swiss Re’s nat cat losses, at the Q3 mark following storm seasons, shows they have gradually trended up in the past two years.
Transition target progress
Swiss Re is now working through its own transition targets to meet net zero. One of its commitments announced earlier this year is to stop underwriting thermal coal projects globally by 2040. This followed a previous announcement in 2018 that the (re)insurer would no longer provide cover for businesses with more than 30% exposure to thermal coal.
Léger explained the (re)insurer has made some progress on its various objectives.
“In terms of the producers of greenhouse gases, who are in the top 5% of the world’s highest producers and the most carbon-intensive companies, we have not been underwriting them since July this year.
“Unfortunately, we don’t have the data required to exclude them from our treaties, we don't have the necessary transparency. It's just not feasible at this point in time,” he said.
Léger explained that Swiss Re is on track with its objective to reduce the carbon intensity of its overall investments by 35%.
“We have also invested EUR750mn in renewables, infrastructure and sustainable power generation. We have also made EUR2.6bn of ESG investments and by 2024, that should increase to EUR4bn,” he added.
He believes the market will see huge investments in wind, solar, water and clean power production.
“We are convinced we will see huge investments in hydrogen. So that's something that the industry is already working on, that maybe consumers haven't seen yet, as well as clean energy storage.”
Léger was also asked, what happens if these targets are not reached – what’s plan B?
He answered: “It’s a good question. We have no intention to deviate from those ambitions, and therefore we have no plan B, the only plan B that comes in would be, in my view, to do a few things a bit faster if we can. It would not be to delay to the commitments we have made. We have thought this through, and we believe we have to act now. We stand fully behind our mission.”
