sigma 4/2021

Sigma 4/2021 More risk: the changing nature of P&C insurance opportunities to 2040

Zurich, 6 September 2021LET'S JOIN FORCES | swissre.com/RVS2021PROGRESS.TOGETHER

Gianfranco Lot – Head Globals ReinsuranceDr. Jérôme Haegeli – Group Chief Economist

Media Conference sigma 4/2021 | 6 September 2021

The transforming P&C insurance landscape will lead to new underwriting opportunities and a higher demand for reinsurance solutions

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The biggest transformation will be in motor

Climate change will increase the propertyrisk pool by 30–40%

Technological, societal and legal changes –strong growth in liability

New opportunities arising…

• Evolving P&C landscape calls for a data-led underwriting approach

• Increasing need for reinsurance due to more severe catastrophe losses

• New underwriting opportunities with green infrastructure, advanced technologies and interconnectedness

• Novel partnerships models to improve insurability of hard-to-insure risks


• Promote pre-disaster loss mitigation

• Green infrastructure to reduce carbon emissions • Premium discounts for investment in loss mitigation

• Embed effects of climate change into risk modelling

• Government as last resort for risks that exceed private sector capacity

• Regulation to curb unsustainable social inflation

• Invest in new data sources and data analytics tools

• Innovate in insurance product design

Governments Insurers

• 2050 net-zero emissions targets • Net-zero underwriting, operations and investment

Call for action to strengthen resilience

Source: Swiss Re Institute

3

Climate risk

Systemic risk (eg cyber, pandemic)

Social inflation

Climate risk

Expand insurability

Media Conference

sigma 4/2021 - More risk: the changing nature of P&C insurance opportunities to 2040

Zurich, 6 September 2021

Media Conference sigma 4/2021 | 6 September 2021 5

Let’s start with the key figures…

>2x -1/4 +50% Increase in P&C market premiums by 2040 Change in share of motor • Increase in share of catastrophe business in all property premiums

• Increase in EM share overall in relative terms (from 20% to 33% in global P&C weight)


“Property & Casualty business will become riskier and more complex over the next 20 years. Insurers’ P&C portfolio will shift from low-risk motor to property and liability lines, and from advanced to emerging markets. However, where there is risk there is also opportunity.”

Changing risk landscape



P&C risk pools are powering ahead given the megatrends

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• The great pivot East• Peak of globalisation• Inequality

• Resilient infrastructure investment

• ESG policies

• Future of mobility• Smart homes/cities• Network economy

• Climate change liability• Expanding collective redress• Social inflation• Rising exposure in intangible assets

Note: Motor P&C simulated with baseline and alternative assumptions for safety technology, property with baseline of 1.5°C temperature increase by 2040. See appendix for detailed methodology Source: Swiss Re Institute

Economic development

Climate risk and CC policies

Technology / Digitalisation

Liability regimes, social inflationUrbanisation

• Rapid urbanisation in emerging markets

Motor*

Property*

Liability

Explicit quantitative analysis of impact Implicit quantitative analysis of impact


P&C premium growth will slow to below global GDP with EMs still outpacing

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The future (average growth 2021-2040)The past (average growth 2000-2020)


• In the past 20 years, global P&C premiums have on average grown faster than nominal GDP

• In the future, global P&C premium growth will be slower than GDP growth, reflecting significant slowdown of the motor segment in advanced markets. In advanced markets, property and liability will continue to grow faster than GDP

• In emerging markets, total P&C premium growth will continue to outpace GDP growth. EMs will gain share, from 20% in 2020 to 33% of the global P&C premiums in 2040

0%

2%

4%

6%

8%

10%

12%

14%

Global Advanced markets Emerging markets

Nominal GDP P&C Motor Property Liability

0%

2%

4%

6%

8%

10%

12%

14%

Global Advanced markets Emerging markets

Nominal GDP P&C Motor Property Liability


The size of global P&C risk pool will more than double by 2040

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A shift in portfolio mix: Property and liability will gain weight

Note: Motor and property risk pool 2040 projections shown are upper bound of forecast rangeSource: Monte Carlo Sigma to be published on September 6, Swiss Re Institute

Motor42%

Property25%

Liability12%

Others21%

P&C risk pool 2020USD 1.8 trillion

Motor Property Liability Others

Motor32%

Property29%

Liability13%

Others25%

P&C risk pool 2040USD 4.3 trillion

Motor Property Liability Others

Contributions to additional premiums by driver (2040, USD billion)

-800

-400

0

400

800

1200

1600

motor property liability other

Economic development Urbanisation

Climate change Technology & Sustainability

Economic development will remain the key driver


“Economic development will remain the key growth driver across all lines of business. Climate risks will raise property claims and premiums significantly. Technology will make commercial motor more important.”

@Anja: Photo to update, include quote

Quantifying the drivers



Deep dive 1: Motor – Overall pool is still growing, but lower than GDP with technology changing the mix and more opportunities coming from EMs

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77%

23%73%

27%

Personal Commercial

0% 10% 20% 30% 40% 50%

Africa

Middle East

Emerging Asia, excl China

Central & Eastern Europe

Latin America

Advanced Asia-Pacific

China

Advanced EMEA

US & Canada

2040 2020

2020

2040

2020: USD 322 billion2040: USD 1.3-1.4 trillion

Motor premium projections by 2040 vs 2020, by region and by line of business

• Lower growth: Global motor premiums will double to around USD 1.3–1.4 trillion by 2040, growing by an average rate of 3%

• Divergence: In advanced markets, we estimate that technology will reduce accident frequency by 35%–60% in new vehicles by 2040, denting premium growth. EMs will take an increasing share of the motor market, rising to 46% in 2040 from 26% in 2021

• Portfolio mix: Commercial motor share will increase to ~27% in 2040 from 23% in 2020, as shared economy transport models gain traction

Note: The chart shows share according to baseline forecastSource: Swiss Re Institute


Deep dive 2: Property – Climate risk to grow property risk pool by 30-40% by 2040

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0%

30%

60%

90%

120%

150%

UK China France Germany Canada Australia UnitedStates

Japan

• Global property insurance premiums will increase ~3x to USD 1.3 trillion by 2040. Economic growth will be the main driver, contributing USD 616 billion (75-77%) of additional premiums

• Climate risk could increase weather-related insured catastrophe losses by 30-63% in key advanced markets. In China, UK, France and Germany, the increase could be as much as 90-120%

• Climate change effects will raise premiums by USD 149-183 billion. The share of catastrophe in property premiums will rise from 20% in 2020 to 28-31% in 2040

Note: The perils considered include tropical cyclones, winter storms, floods and wildfires. These are the biggest risks facing insurers and are most likely to be impacted by climate change effects. Natural catastrophe risks are calculated under the assumption that the global mean surface temperature will increase by 1.5C by 2040 from pre-industrial times. The chart shows the upper bounds for countries if they are affected by tropical cyclones. With the high degree of uncertainty in climate change trends, our forecasts are by design intended as best estimates. Source: Swiss Re Institute

Note: The chart shows the upper bound estimates Source: Swiss Re Institute.

Global property premiums by 2040, by key drivers Expected climate change impacts on total weather-related insured catastrophe losses

0

200

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600

800

1000

1200

1400

World Advanced markets Emerging markets

USD

bn

Market size in 2020 Economic development

Urbanisation Climate change


Deep dive 3: Liability – Volume to triple by 2040!

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Collective redress in

Europe

Social inflation

Climate change

litigationLiability for Artificial

Intelligence


Liability risk

0

100

200

300

400

500

600

700

World Advancedmarkets

Emergingmarkets

USD

bn

2020 2040

~3x

~2.5x

~5x


Call for action

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“With a riskier and more complex business landscape, re/insurers can play an increasingly important role in facilitating the sustainable long-term growth. Importantly, more collective action with the public sector is needed.”

Dr. Jérôme Haegeli | September 2021 14


Key takeaways

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The global P&C risk pool will become riskier and more complex, increasing by ~2x to USD 4.3 trillion in premiums by 2040. Emerging markets will gain share, from 20% in 2020 to 33% in 2040

Technological development to cause the share of low-risk motor will drop notably to 32% by 2040 from 42% currently

Climate risk will raise insured property catastrophe losses (could be by as much as 90–120% in some markets like China, UK, France and Germany) and global property premiums by 30–40% in 2040

P&C market will be undergoing important changes with the re/insurance industry playing a key role in facilitating a sustainable economic recovery

Risk pool

Technology

Climate


Latest Swiss Re Institute publications

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https://www.swissre.com/institute/


Q&A

Please raise your hand to ask a question.



Appendix

18Media Conference sigma 4/2021 | 6 September 2021 18


Source: Bloomberg Consensus, Swiss Re Institute

Economic Outlook: Strong rebound but longer-term picture is very clouded

Growth outlook: Strong cyclical recovery thanks to

stimulus and vaccine roll-out, but peak behind us. Long-

term economic damage is done

Inflation: Higher in 2021 due to base effects and supply

headwinds. Risk of higher mid-term inflation has increased

Interest rates: Lower-for-longer interest rate environment

here to stay

Risk outlook: Overall balance of risks is to the downside.

Inflation risks are skewed to the upside with a significant

risk of a stagflationary environment in the US

1

2

3

4

2021 2022 2021 2022

Real GDP (% change)

US 6.0 4.0 6.2 4.3

Eurozone 4.9 4.3 4.8 4.4

China 8.3 5.3 8.5 5.6

CPI (% change)

US 4.3 2.9 4.2 2.9

Eurozone 2.0 1.4 2.0 1.5

China 1.7 2.1 1.5 2.3

10y Gov. Bond Yield (%)

US 1.40 1.60 1.64 2.01

Eurozone -0.40 -0.20 -0.18 0.12

China 3.00 2.70 3.00 3.00

ConsensusSwiss Re Institute


• NatCat: H1 2021 was the highest first half losses since 2011. A severe winter storm in the US was the costliest event in H1 and

costliest ever for this peril

• Catastrophic activity intensified in H2 (severe floods in Europe/China, wildfires in US/Europe, Hurricane Ida)

• Man-made disasters triggered USD 2bn in 1H 2021, down from USD 5bn in 2020, and below 10y avg of USD 5bn, in part due to

remaining COVID-19 restrictions around the world

Secondary perils in focus in H1 Severe weather (secondary perils) in the US was the main loss driver in H1

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NatCat insured losses: secondary perils in the frontline again Man-made insured losses: below average


USD bnUSD bn

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120

150

180

H1 insured losses FY insured losses

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4

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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

H1 insured losses FY insured losses


Motor: a scenario approach and key assumptions

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Key drivers Assumptions / effects

Income effect or GDP growth Forecasts based on historic estimated elasticities of motor premium growth relative to GDP per capita growth

Shared mobilityGradual shift from personal to commercial lines, whereby 12% of travel is assumed to be substituted in advanced markets by 2040, 8% in China and 10% in other emerging markets.

Sustained mobilityPush for sustainable mobility leads to a gradual reduction in car based travel by 2040 of 15% in advanced markets, by 8% in Central and Eastern Europe, and by 1% in other emerging markets.

Safety technology Baseline scenario Disruptive scenario

Introduction of Advanced Driver Assistance Systems (ADAS) technology in new vehicles assumed to reduce accident frequency by 35% by 2040 in new vehicles with ADAS technology compared to vehicles without.

Introduction of ADAS technology in new vehicles reduces accident frequency by 60% by 2040 in new vehicles with ADAS technology compared to vehicles without.

Sources: McKinsey, Swiss Re Advanced Driver Assistance Systems team, Swiss Re Institute


Long-term factors Implications for risk pool Impact on premium trends

Economic development

Income elasticities, stronger for emerging economies

Climate changeHigher cat losses, highest impact in advanced economies

UrbanisationHigher exposure growth, significant for emerging markets

Smart homes, IOT, sensor technology

Reduce loss frequency, significant for high-income economies

Green buildings, infrastructure

Higher exposure growth, significant for high-income economies

Advanced markets Emerging markets

High cat exposure Low cat exposure

(Tier 1) (Tier 2)

GDP: captures elasticities of property premiums to GDP

0.96 1.03 1.08

Share of urban population: captures elasticities of property premiums to the share of urban population

Statistically insignificant

Statistically insignificant

0.94

Weather-related catastrophe insured losses: captures elasticities of property premium to insured losses at a constant exposure (normalised by GDP)

0.14 Insufficient data* Insufficient data*

Property: methodology and key assumptions

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*For smaller advanced (Tier 2) countries and emerging economies, there is not enough data to draw conclusions on long-run elasticities. Elasticities are significant at 5% confidence level. Source: Swiss Re Institute



Long-term factors Implications for risk pool Impact on premium trends

Economic developmentGDP elasticities larger than one, stronger for emerging economies

Climate change Climate change litigation

Technology, digitization Cyber risk exposure, litigation

Expansion of legal liability Social inflation

Elasticity of liability premiums with respect to

GDP, advanced markets only 1.11

GDP, emerging markets (excl China) only 1.15

GDP, China only 1.23

Lloyd's Price Index 0.6

Liability: methodology and key assumptions

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Source: Swiss Re Institute Note: Regression output is based on a panel regression using nominal liability premiums, nominal GDP, a global Lloyd's Price Index and country fixed effects. Regression includes 36 advanced economies and 24 emerging economies for which sufficient annual data was available over the period 1990-2020. All variables are in logs so that the estimated coefficients represent elasticities. All elasticities are significant at 1% confidence level. Source: Swiss Re Institute


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