{"id":12403,"date":"2016-11-04T16:24:46","date_gmt":"2016-11-04T20:24:46","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/swissre-banking-on-climate-change\/"},"modified":"2016-11-04T16:24:46","modified_gmt":"2016-11-04T20:24:46","slug":"swissre-banking-on-climate-change","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/swissre-banking-on-climate-change\/","title":{"rendered":"SwissRe: Banking on Climate Change"},"content":{"rendered":"

Swiss Reinsurance Company Ltd (SwissRe) is a\u00a0\u201cleader in wholesale reinsurance, insurance, and risk\u00a0transfer solutions.\u201d[i]<\/a> SwissRe is the 2nd largest\u00a0reinsurer – to put it simply, reinsurance is the insurance of insurance firms. SwissRe insurers USD $2.6B of property & casualty reinsurance claims for natural catastrophe covers \u2013 the risk of which is significantly heightened due to climate change. Worldwide, $37B of natural catastrophe is insured, giving SwissRe 7% market share in the category. Why does this matter? Reinsurance works to reduce risk in the system by shoring up insurers: “Reinsurance provides direct or primary insurers, multinational corporations, reinsurance intermediaries, nations, and captive insurers with reduced volatility, improved financing, and access to additional expertise.\u201d[ii]<\/a><\/p>\n

How SwissRe is Affected by Climate Change<\/strong><\/p>\n

SwissRe takes on\u00a0global warming risk by\u00a0reinsuring damage\u00a0caused by natural\u00a0catastrophes e.g. floods, storms, earthquakes,\u00a0and other natural disasters. When typically pricing risk for any category, SwissRe\u2019s actuaries have looked to historical loss ratios. However, pricing risk has been quite challenging as climate change has been incredibly difficult to forecast; for example, the IPCC\u2019s 2007 model predicting ice-free Arctic summers was revised in 2012 as the pace has\u00a0\u201cexceeded [even] the worst case scenarios predicted.\u201d[iii]<\/a> In particular, climate change has increased the frequency of loss events; shifted the\u00a0geographic distributions of events; and impacted the correlation between weather events.[iv]<\/a> The following chart shows both\u00a0the increasing frequency and\u00a0unpredictability of global-weather related losses:<\/p>\n

\"f3-large\"<\/a><\/p>\n

To quote an industry expert\u00a0speaking to the\u00a0Smithsonian about modeling catastrophic events: “‘In the past, when making these assessments, we looked to history. But in fact, we\u2019ve now realized that that\u2019s no longer a safe assumption\u2014we can see, with certain phenomena in certain parts of the world, that the activity today is not simply the average of history.'”[v]<\/a><\/p>\n

Steps SwissRe is Taking<\/strong><\/p>\n

In addition to providing reinsurance covers, SwissRe is offering clients strategic expertise and integral risk assessment of natural disasters and climate adaptation. For example, SwissRe committed to the United Nations to\u00a0“having advised 50 sovereigns and sub-sovereigns on climate risk resilience and to have offered them USD 10 billion against this risk.\u00a0The company also helped create \u201cthe Caribbean risk pooling scheme as well as similar schemes in Africa and among Pacific Island nations\u201d \u2013 nations where insurance penetration is quite low, thereby increasing systemic risk.[vi]<\/a><\/p>\n

However, not all of SwissRe\u2019s reactions to climate change have been as magnanimous. As the insurability of the market declines, SwissRe has used many\u00a0traditional methods to reduce its exposure, including\u00a0increasing premiums and deductibles, lowered limits,\u00a0non renewals, and new\u00a0exclusions. Moreover, SwissRe has been switching to one year (or even shorter) contracts with insured\u00a0entities to mitigate risk of long-term assumptions in its climate change models. The market has also avoided reinsuring in certain\u00a0unpredictable regions e.g. specific areas of Southeast Asia, thereby increasing volatility\u00a0and financing costs for local insurers.[vii]<\/a><\/p>\n

Additional Steps SwissRe Should Implement<\/strong><\/p>\n

Insurers have a long history of not just risk sharing but also addressing root causes of issues. Following the Great Fire of 1666, during which London had no organized fire protection system, insurance companies began creating some of first organized fire\u00a0departments to combat the risk of fires at buildings the company insured.[viii]<\/a> Instead of simply creating short-term insurance, SwissRe should offer long-term insurance – perhaps even up to 25\u00a0years – to companies and countries against major climate events. To help mitigate their risk, SwissRe\u00a0should also actively help these\u00a0countries and companies reduce their carbon footprint through private-public partnerships, while also preparing the organizations for disaster recovery scenarios.\u00a0Taking on long-term contracts will help SwissRe move from an organization simply providing information about climate change and pricing its risk to an organization impacting the future of climate and putting its capital behind this effort.<\/p>\n

Word Count: 629<\/p>\n

[i]<\/a> Swiss Re, 2015 Annual Report (Zurich: SwissRe, 2016), p. 4.<\/p>\n

[ii]<\/a> Anis Bajrektarevic and Carla Baumer, \u201cClimate Change and Reinsurance: The Human Secruity Issue,\u201d Economics, Management, and Financial Market <\/em>Volume 7(4) (2012), pp. 42\u201386: EBSCO HOST, accessed November 2016.<\/p>\n

[iii]<\/a> Rebecca M Henderson, Sophus Reinert, Polina Dekhtyar, and Amram Migdal, \u201cClimate Change: Implications for Business,\u201d HBS No. N2-317-032 (Boston: 性视界 Business School Publishing, 2016), p. 3.<\/p>\n

[iv]<\/a> Evan Mills, \u201cInsurance in a Climate of Change,\u201d Science<\/em>, Vol. 309, Issue 5737, pp. 1040-1044 (2005), Google Scholar, accessed November 2016.<\/p>\n

[v]<\/a> Joseph Stromberg, \u201cHow the Insurance Industry Is Dealing With Climate Change,\u201d Smithsonian, September 14, 2013, [http:\/\/www.smithsonianmag.com\/science-nature\/how-the-insurance-industry-is-dealing-with-climate-change-52218\/?no-ist<\/a>], accessed November 2016.<\/p>\n

[vi]<\/a> Eduardo Lull, \u201cInsurers\u2019 Pledge to Help Developing Countries on Climate Change,\u201d Financial Times, June 28, 2016, [https:\/\/www.ft.com\/content\/ec2e7e30-ccc9-11e4-b5a5-00144feab7de<\/a>], accessed November 2016.<\/p>\n

[vii]<\/a> Anis Bajrektarevic and Carla Baumer, \u201cClimate Change and Reinsurance: The Human Secruity Issue,\u201d Economics, Management, and Financial Market <\/em>Volume 7(4) (2012), pp. 42\u201386: EBSCO HOST, accessed November 2016.<\/p>\n

[viii]<\/a> London Fire Brigade, \u201cThe Great Fire of London,\u201d http:\/\/www.london-fire.gov.uk\/great-fire-of-london.asp<\/a>, accessed November 2016.<\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

How should reinsurers price catastrophic loss related to natural disasters? 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