Tag Archives: Swiss Re

Swiss Re: “Zombies”
Could Kill Recovery

Global pandemic.

Supply-chain disruptions.

Increasingly costly cyber-attacks.

Extreme weather and other climate-related hazards.

And now, zombies.

Swiss Re’s chief economist this week said failures of hundreds of “zombie companies” over the next few years are among the concerns prompting insurers to reduce risk and charge higher premiums – a trend that is likely to continue as corporate failures increase.

Zombies – companies that lack the cash flow to cover the cost of their debt – are “a ticking time bomb” whose effects will be felt as governments and central banks withdraw measures that have helped keep these companies alive during the pandemic, Jerome Haegeli told Reuters.

The sobering prediction comes as stock prices hit records and the U.S. economy appears headed for 6.5 percent growth this year. Haegeli said these strengths are illusory because they’re based on temporary fiscal and monetary support.

Insurers are being cautious: reining in underwriting risk, being more prudent about investment allocations, and even taking precautions on insuring operations and supply-chain risk.

“They are not getting fooled by the short-term picture,” Haegeli said. “If you look at the market today, everything looks great. However, it’s illusionary to think that this environment can last” as “life support” is withdrawn in coming months. And that, he said, will bring an increase in long-overdue bankruptcies.

It’s tempting to presume that, as the pandemic-driven aspects of the economic crisis are brought under control, recovery will proceed apace. After all, the economy was doing fine before the pandemic hit, right?

But in September the Bank for International Settlements (BIS) pointed to a “pre-pandemic increase in the number of persistently unprofitable firms, so-called ‘zombies’, which are particularly vulnerable to economic downturns.”

Before the pandemic, the BIS said, about 20 percent of listed firms in the United States and United Kingdom were zombies and 30 percent in Australia and Canada. By comparison, zombies constituted about 15 percent of listed companies in 14 advanced economies in 2017 and 4 percent before the 2008 financial crisis.

Absent any reason to believe these companies’ situations substantially improved during the pandemic or that the contagion didn’t spawn more zombies, the expectation of more corporate collapses seems reasonable.

Add to this rising losses due to hurricanes, severe convective storms, and wildfires; the threat of sea level rise; and the growing reality business and government disruption from cybercrime, and the likelihood of increasing premiums and reduced coverage limits seems strong.

Swiss Re: A Katrina-like hurricane could cause up to $200 billion in damage today

A memorial cross for the victims of Hurricane Katrina stands in the water near the bank of the Mississippi River Gulf Outlet on August 22, 2019 in Shell Beach, Louisiana. According to researchers at the National Oceanic and Atmospheric Administration (NOAA), Louisiana’s combination of rising waters and sinking land give it one of the highest rates of relative sea level rise on the planet. (Photo by Drew Angerer/Getty Images)

Hurricane Katrina, which struck the United States in August 2005, remains the costliest insured North Atlantic hurricane on record and the most expensive natural catastrophe for the global re/insurance industry.  In 2020 dollars, according to a Swiss Re  report released today, total economic damage from Katrina totaled more than $160 billion.

An identical storm today “could easily reach” $200 billion, Swiss Re says.

To evaluate what Hurricane Katrina might look like in 2020 in terms of insured and economic losses, Swiss Re ran Katrina’s 2005 wind and surge footprint on its U.S. market portfolio using its probabilistic tropical-cyclone loss model.

“If Hurricane Katrina were to hit the U.S. in 2020 with the same wind and storm surge as 2005, but with current exposure information and updated flood protection and vulnerability assumptions, the privately insured losses in the U.S. alone could rise to $60 billion,” the report says. “This is true, despite the city (New Orleans) currently only having 80% of the population it did in 2005.”

Private insurance and the federal flood insurance program covered about $86 billion of the total loss, highlighting a protection gap largely driven by uninsured flood losses. Standard residential insurance policies exclude coverage for flood damage resulting from surface water, including storm surge caused by hurricanes; separate flood insurance policies are available through FEMA’s National Flood Insurance Program and private insurers.

“With Katrina, and even more recently with Harvey and Sandy and Florence, we’ve seen this profound protection gap where on average only one in six residences in the U.S. have a flood coverage policy,” said Marla Schwartz Pourrabbani, a Swiss Re natural catastrophe specialist and lead author of the report.

Today, a storm like Katrina would cause closer to $175 billion in damage because areas outside New Orleans, especially in other coastal states, have seen both increases in population and increased investments along the coast that add to the financial risk. Rising sea levels also contribute to the potential losses.

Swiss Re says the effects of climate change could drive total costs  higher.

“Considering that sea level in the barrier islands near New Orleans is now rising by over one inch every two years, a six-inch increase in sea level — and an event like this could happen in just over a decade,” the report says.

Swiss Re forecasts growth in insurance markets

This in from Swiss Re Institute’s Global Insurance Review 2017 and Outlook 2018/2019 report:

The cyclical upswing in the global economy is set to continue in 2018 and 2019, supporting insurance premium volume growth.

Global non-life premiums are forecast to grow by at least 3 percent annually in real terms in the next two years and life premiums by 4 percent.

Emerging markets, particularly in Asia, will remain the driver of global non-life and life premium growth, according to Swiss Re.

When a fire becomes a liability accumulation event

Accumulation risk, where a single event triggers losses under multiple policies in one or more lines of insurance, is emerging in new and unforeseen ways in today’s interconnected world, says a post at Swiss Re Open Minds blog.

From Ruta Mikiskaite, casualty treaty underwriter, and Catriona Barker, claims expert UK&International Claims at Swiss Re:

“Accumulation scenarios have always been familiar in property insurance but for casualty lines of business, they have been perhaps less of an issue. However, large losses in recent years show how traditional physical perils should not be underestimated for their casualty clash potential.”

For example, Kilmore East-Kinglake bushfire, the most severe of a series of deadly wildfires in the Australian state of Victoria on Black Saturday, 7 February 2009, led to a settlement of A$500 million—the biggest class action settlement in Australian legal history.

Per Swiss Re’s post, the Royal Commission found that the fire was caused by poorly maintained power lines owned by power company SP AusNet and maintained by asset manager Utility Services Group. The Victoria State government was also held liable for its failure to provide sufficient prevention measures and inadequate warnings during the fires.

“With improved technology and scientific tools available to analyze and simulate scenarios following storms, fires and floods to predict their likely or alternative courses, any action by an individual, corporate body or government now attracts far greater scrutiny. As a result, there can be a greater readiness to sue for alleged nuisance or negligence leading to more casualty claims out of natural perils.”

The upshot: insurers need to look at their reinsurance programs to see how they would respond to liability clash events.

 

Coastal resilience, or putting an insurance policy on nature

Our earlier post Working with nature to build resilience to hurricanes discussed how insurers look to natural infrastructure like coastal wetlands and mangrove swamps to mitigate storm losses.

The Mesoamerican Reef, which runs south for some 700 miles from the tip of the Yucatán Peninsula protects coastal communities and property by reducing  the force of storms, but its corals require continued repairs.

For every meter of height the reef loses, the potential economic damage from a major hurricane triples, according to The Nature Conservancy (TNC).

Now thanks to TNC and Swiss Re, the reef is about to get its own insurance policy.

From Bloomberg:

“After Hurricane Wilma struck in 2005, causing $7.5 billion of damage in Mexico, beachfront hotel owners began paying extra taxes to the state government to handle beach restoration and protect the reef.”

TNC has proposed a different approach:

“The extra money paid by the hotel owners to the government could be converted into premium payments to Swiss Re to cover the reef. The policy would be what’s called parametric insurance, in which a large hurricane would trigger near-immediate payouts. By having the money arrive quickly, reef repairs could begin sooner.”

From Artemis blog, via TNC:

“One of the most promising new developments to maximize the value of nature is the possibility of putting an insurance policy on habitats like reefs and beaches. By combining insurance and new science, we can protect and improving the health of reefs and beaches so they can continue to protect us.”

 

Swiss Re: Natural catastrophes: tornadoes, earthquakes, wildfires & floods – the story of 2016

On-demand Webinar

Last year, economic losses from Natural Catastrophes nearly doubled to USD 175 billion. Insured losses also jumped from to USD 54 billion from USD 38 billion. These numbers were at their highest since 2012 and mark a reversal from the recent below-average years.

In this webinar, experts from Swiss Re and the Insurance Information Institute review 2016’s global natural catastrophe and man-made disaster losses and explain what they could mean to the insurance industry on Thursday, April 27 from 11 – 12 PM EDT.

Watch this webinar now.

Presentation Date
Thursday, April 27, 2017

Speakers
Dr. Steven N. Weisbart, CLU
Senior Vice President and Chief Economist, Insurance Information Institute

Dr. Thomas Holzheu
US Chief Economist, Swiss Re

Dr. Josh Woodbury
Specialist Flood, Swiss Re

Insurance Payouts Underpin Disaster Recovery Process

Tens of thousands of policyholders caught in a disaster in 2016 were better able to recover from the losses and hardships inflicted thanks to insurance.

Global insured losses from catastrophes totaled around $54 billion in 2016 – the highest level since 2012, according to the latest report from Swiss Re sigma.

North America accounted for more than half the global insured losses in 2016, with insured losses from disaster events reaching $30 billion, the highest of all regions.

This was due to a record number of severe convective storms in the United States and because the level of insurance penetration for such storm risks in the U.S. is high, sigma noted.

For example, a hailstorm that struck Texas in April 2016 resulted in an economic loss of $3.5 billion, of which $3 billion, or 86 percent, was covered by insurance.

“With insurance, many households and businesses benefited from insurance payouts for the heavy damage to their property caused by large hailstones.”

However, insurance cover is not universal. The shortfall in insurance relative to total economic losses from all disaster events—the protection gap—was $121 billion in 2016. See this chart:

“Under-insurance against catastrophe risk is a reality in both advanced and emerging markets, and there is still large opportunity for the industry to help strengthen worldwide resilience.”

For example, Swiss Re noted that the U.S. has been and continues to be critically underinsured for flood risk, with a flood protection gap of around $10 billion annually.

Additional Insurance Information Institute facts and statistics on global catastrophe losses are available here.

Satellite, Mobile Technologies Underpin Insurance Payout To Herders In Kenya

A $2 million insurance payout to thousands of livestock owners in Kenya hit by drought is a good example of insurance and technology coming together to deliver financial protection where it is needed most.

The Kenya Livestock Insurance Program (KLIP), a public-private partnership developed by the government of Kenya and reinsured by Swiss Re, just announced the payout which averages around $170 per household and will be made by the end of February.

KLIP uses satellite technology to measure vegetation available to livestock. Payment is triggered for feed, veterinary medicines and water trucks when the satellite data shows drought is so bad that animal lives are at risk.

In this case, the $2 million payout will help save 70,000 tropical livestock – primarily cows, goats and camels – that in turn sustain approximately 100,000 people across six counties.

Even better, a consortium of insurers led by APA Insurance will pay funds directly into the livestock owners’ bank accounts or via mobile phone accounts.

Here’s the infographic:

The 2016/2017 drought in Kenya was one of the worst in 16 years. Between 2008 and 2011, livestock losses in Kenya accounted for 70 percent of the $12.1 billion in damages caused by drought.

More on this story from Thomson Reuters Foundation.

Insurance Information Institute facts and statistics on droughts and heatwaves are available here.

Nat Cat Losses Increase in 2016

Total global insured losses from natural catastrophes and man-made disasters in 2016 rose to at least $49 billion in 2016, 32 percent higher than the $37 billion recorded in 2015.

Preliminary estimates from Swiss Re sigma put insured losses from natural catastrophe events at $42 billion in 2016, up from $28 billion in 2015, but slightly below the annual average of the previous 10 years ($46 billion).

Man-made disasters triggered an additional $7 billion in insurance claims in 2016, down from $9 billion the previous year.

Hurricane Matthew and severe storms in the United States generated high losses during the year, Swiss Re noted.

Insured losses from Hurricane Matthew, which caused devastation across the east Caribbean and southeastern U.S. in October, are estimated to be in excess of $4 billion, while economic losses were $8 billion.

Matthew was also the deadliest natural catastrophe of the year globally, claiming up to 733 lives, most of those in Haiti.

A number of severe weather events impacted the U.S. in 2016, including a series of severe hail and thunderstorms.

The costliest was a hailstorm that struck Texas in April, resulting in economic losses of $3.5 billion and insured losses of $3 billion due to heavy damage to property from large hailstones, Swiss Re said.

Swiss Re chief economist Kurt Karl, noted in a press release:

“In this case, because households and businesses were insured, they were much better protected against the financial losses resulting from the storms.”

Total economic losses from natural catastrophes and man-made disasters globally are estimated at $158 billion in 2016, significantly higher than the $94 billion recorded in 2015, due to some large natural catastrophes such as earthquakes and floods.

The gap between total losses and insured losses in 2016 shows that many events took place in areas where insurance coverage was low, Swiss Re said.

Earthquake losses, in particular, underscore the underinsurance problem. For example, government sources put the overall reconstruction cost of an earthquake in August in Italy as high as $5 billion. But insured losses for that event are only a fraction of the total, estimated at $70 million, mainly from commercial assets.

“Society is underinsured against earthquake risk. And the protection gap is a global concern.”

The Kumamoto quakes that struck Japan in April were the costliest disaster event of the year, causing at least $20 billion in economic losses, and $5 billion in insured losses.

Growing Insurance Resilience to Disasters

Latest estimates from Aon Benfield that just 50 percent of the U.S. losses from Hurricane Matthew are covered by public and private insurance renews the spotlight on the growing risk protection gap and disaster resilience.

In its latest Global Catastrophe Recap report, Aon Benfield’s Impact Forecasting unit expected total economic losses from Matthew would range up to a high of $10 billion. Public and private insurance losses were considerably less, estimated as high as $5 billion.

The reason for this is that a large portion of the inland flood loss in North Carolina went uninsured due to low take-up of the federally-backed National Flood Insurance Program (NFIP), Aon said.

A post over at Artemis blog reports:

“Once again this demonstrates the insurance and reinsurance protection gap is not simply an emerging market issue, rather it is evident in perhaps the most mature property catastrophe insurance market in the world in the United States.”

Indeed, Swiss Re sigma has said the amount of financial loss caused by catastrophes not covered by insurance is growing.

This so-called global insurance protection or funding gap totaled $75 billion in 2014, according to Swiss Re.

A recent issue brief by Wharton Risk Center co-director Howard Kunreuther pointed to evidence showing that consumers tend to purchase too little insurance or purchase it too late.

As a result, it said, taxpayers wind up bearing substantial burdens for paying restoration costs from extreme events. The 2005 and 2012 hurricane seasons alone cost taxpayers nearly $150 billion.

The Wharton brief suggests there is much that can be done to better facilitate the role that insurance can play in addressing losses from extreme events, both natural and man-made.

To better meet its objectives, insurance must embody two guiding principles, first premiums must accurately reflect risk and secondly, to ensure equity and affordability, special financial assistance should be made available to homeowners who would no longer be able to afford their premiums.

More information on the protection gap problem in this Insurance Information Institute report Underinsurance of Property Risks: Closing the Gap.

I.I.I. facts and statistics on flood insurance are available here.