Covid-19 has had a positive impact in terms of forcing the (re)insurance industry to innovate more, although the pandemic’s positive short-term impact on casualty losses may have led to “pre-emptive euphoria”, Swiss Re’s Jonathan Isherwood tells The Insurer in an interview.
Isherwood recently celebrated a year serving as CEO Reinsurance Americas, having started in that role on 1 April last year, as well as regional president Americas since mid-August.
It is fair to say that the first year in the role since moving to the US panned out differently than Isherwood would have envisaged when his appointment was announced in February 2020. He had previously been based in Zurich in his role as head of globals since 2013.
“If somebody had said to me, ‘You’re going to spend at least 90 percent of the first year in your spare room,’ I wouldn’t have believed them,” he said.
“I’ve used the phrase Covid as a catalyst. It has forced the hand of an industry that doesn’t always innovate super quickly”
But he and the industry adapted quickly. The executive has connected with hundreds of clients and brokers remotely during the pandemic.
“We’re in a lucky industry compared to many,” he said. “Whether you’re on the insurance side or the reinsurance side, we really haven’t missed a beat. We’ve adapted to this weird environment actually quite well.”
He added: “In some ways you get to know your clients and partners better because you get an insight into their sitting room or their bedroom or their home office. You see a personal side of them that you probably wouldn’t have got behind the suits, the desk, the roundtable, the office or whatever it might be.”
Covid accelerates innovation
Isherwood continued that the pandemic has led the (re)insurance industry to be more innovative.
“I’ve used the phrase Covid as a catalyst,” he said. “It has forced the hand of an industry that doesn’t always innovate super quickly. It probably hardened that cycle of pricing and inadequacy of return on capital that was there beforehand, and it’s also really accelerated innovation in both the P&C and the life and health spaces.
“It has forced people to adapt quickly. So I think a lot of innovation has come from a necessity, so to speak. We’ve been put on the spot and I think the industry has done very well.”
This innovation can be seen in the emergence of hybrid work styles and new technologies, Isherwood suggested. It can also be seen in product innovation that has either resulted from Covid or been enhanced because of it.
Flood is one example. Isherwood said that some of the recent new technology such as data availability and accessibility to satellite imagery is opening up this area. Swiss Re estimates flood could be a $35bn market for the industry.
“We just think it’s a huge opportunity,” he said. “So far it is somewhere in the range of 150,000 flood policies that we’ve supported clients writing. That’s a real example of eventually closing that protection gap or at least making inroads. We think only about one in six homes have flood insurance.”
Another example of product innovation Isherwood pointed to is data analytics.
“That’s where we’ve seen quite some success,” he said. “It’s usually not just the data standalone, it’s also then providing insight beyond the data, which we can do because we have the ability to crunch incredibly dense data, view it as an aggregator across the industry and provide unique insights to our clients.”
“The risk is that Covid creates a little bit of pre-emptive euphoria [in the casuaty market] because courts have been shut down and as the economic activity has dropped off some of the short-term trends have actually been relatively positive versus historic loss cost trends”
As this publication has reported, one example of this is Swiss Re’s Motor Market Analyzer product that Nationwide uses for Texas auto business, with the reinsurer also offering a Homeowners Market Analyzer product.
On the life and health side, Swiss Re has collaborated with big data analytics company Palantir Technologies to integrate data sources related to Covid-19’s health, economic and social dimensions on a platform called the Risk Resilience Center.
Pre-emptive euphoria in casualty
Discussing the casualty market, Isherwood noted the pandemic’s positive impact in the short term on loss trends. But he warned against assuming that this will last, stating that Covid could have masked long-term trends that have not gone away.
“I think that the risk is that Covid creates a little bit of pre-emptive euphoria because courts have been shut down and as the economic activity has dropped off some of the short-term trends have actually been relatively positive versus historic loss cost trends. But there’s nothing that we see that would say that post pandemic there will be any change to the underlying trends,” he said.
Isherwood continued: “The historic situation was the market was underpriced and there was this extra superimposed or social inflation on top of it. There is no reason to believe those trends have changed.”
Isherwood suggested that one driver of social inflation is litigation funding. The executive noted that the rise of litigation funding is good in some ways because it provides access to the legal system to some people that otherwise would not be able to do so.
“But we are a bit worried it has turned into a money-making machine for other people, not the policyholders, and that can lead to distortion,” he said.
Mid-year renewal outlook
Covid has also had an impact on reinsurance pricing, according to Isherwood.
“Covid catalysed the thinking around that – you saw rates move up significantly from April to July and then 1.1. We don’t see that trend changing,” he said.
Isherwood added: “You read a lot in the press at the moment about how prices may have come off its peaks, but they’re still moving up in significant double digits. So as I think about the mid-year renewals for property, we see the same pressures there that have been in some ways enhanced a bit. It felt like the frequency of events and secondary perils was a huge topic over the last number of years.”
February’s Winter Storm Uri is the latest example of the industry being hit with a loss that would not have been taken into account in most companies’ models. Isherwood does not see a significant change in supply of capital for property renewals while demand from a number of clients for solutions is increasing.
“You read a lot in the press at the moment about how prices may have come off its peaks, but they’re still moving up in significant double digits. So as I think about the mid-year renewals for property, we see the same pressures there that have been in some ways enhanced a bit”
The casualty side is “a bit more interesting”, the executive said.
“You’ve got some new capital coming in, significant rate increases continuing on the underlying business, and a bit of a mixed reinsurance market in terms of where cession commissions are,” he said. “But it is generally continuing with the trend we saw over the last year.”
The climate change challenge
Beyond the impact of the pandemic, the (re)insurance industry has increasingly been taking action on environmental, social and governance issues.
In March this year Swiss Re announced a carbon reduction target for its investment portfolio of 35 percent by 2025. The reinsurer also gave more detail of its full phase-out of thermal coal, with a new exit strategy in treaty reinsurance by 2030 for OECD countries and 2040 for the rest of the world,
The thermal coal policy was first established in 2018, and was a first step towards a comprehensive carbon steering mechanism with the goal to transition Swiss Re’s (re)insurance business to net-zero emissions by 2050.
Isherwood noted that taking the stand three years ago had challenges.
“It felt like the right thing, but it wasn’t easy,” he said. “Back then, it was probably much more acceptable in Europe.”
He continued: “I feel that is changing rapidly. It doesn’t actually feel awkward now at all.”
The challenge for the industry is to play a leading role in the societal challenge posed by climate change.
Isherwood noted a recent quote from former Bank of England governor Mark Carney that climate change is “the greatest commercial opportunity of our time”.
Isherwood asked: “If that is true, and I believe it is, how does that translate to the insurance and reinsurance industry? There’s a chance to innovate and support new technologies and industries that will emerge to support a more sustainable future.”