The reinsurance group has recovered from the losses of the first quarter and is optimistic about the future. But Swiss Re has calculated that climate change is becoming more and more expensive. Those costs end up ending up with homeowners around the world.
Flooding got this car into this predicament in Tumbulgum, Australia. The costs of climate change are rising sharply in many regions.
In the second quarter, Swiss Re was able to make up for its poor start to the year to some extent. The second largest reinsurer in the world thus achieved a net profit of 157 million dollars in the first half of the year. And that despite numerous adversities: At the beginning of the year, the corona pandemic in the USA once again claimed many lives, which placed a heavy burden on Swiss Re’s life and health division.
The sharp fall in share and bond prices also ensured a very weak investment result. In addition, natural catastrophes caused significantly more damage than expected in the first half of the year: there were severe hailstorms in France and floods in Australia and South Africa. Usually the second half of the year causes more damage when the US hurricane season begins.
In the second quarter, however, things took a turn for the better for Swiss Re: Since March, mortality worldwide has fallen to a normal level, although new variants of the corona virus continue to circulate widely. After more than two years of losses, Swiss Re’s life division was finally able to break even again. And if the virus does not claim many more lives in the fall, the profit prospects for the division in the second half of the year are good.
In the coming months and years, Swiss Re will also benefit from the central banks’ stricter interest rate policy and be able to achieve better yields on its bonds again. Finally, the investment specialists will say to themselves – after years of dry spells with very low or even negative key interest rates.
The reinvestment return on Swiss Re’s bond portfolio was 3.1 percent again in the second quarter, which is well above the average return on the entire portfolio. That means: With every new investment in government and corporate bonds, the investment portfolio becomes a little more profitable.
Inflation as far as the eye can see
What helps Swiss Re is not necessarily good for everyone. One should not forget the reason why interest rates have to rise so quickly and so much in the first place: Inflation is currently eating deep into wallets and corporate balance sheets in the US and Europe. This also affects insurers and reinsurers a lot.
Inflation is not the same as inflation, as Swiss-Re CFO John Dacey explained at the media conference. Motor vehicle insurance, for example, is particularly affected: In the USA, the costs for spare parts for cars have risen by 16 percent over the past year, and in Germany by as much as 27 percent. Car insurers are therefore paying much more for repairs than expected.
Insurers and reinsurers alike face a delicate task. If they continue to write their policies at the previous conditions, they can bring in a lot of business in the short term – but they pay for it in the medium term because the claims are much higher than expected due to inflation. So that’s not an option.
The providers have two options: On the one hand, they can pass on the expected inflation to their customers. Swiss Re did this very well in some areas, such as protection against natural catastrophes. In this area, their premium volume increased by an impressive 23 percent. It also benefited from the fact that competitors had withdrawn from the market in some regions and it was able to take on more volume. But the price increase was definitely significant.
On the other hand, it is possible that customers will not go along with the demanded price increases: they go to a competitor who offers lower prices, or they reduce their insurance coverage. Swiss Re then remains on the sidelines and gives up market shares. Apparently this has recently been the case in some areas of motor vehicle insurance.
The price tag of climate change
Another problem is becoming increasingly noticeable in insurance balance sheets: climate change. Swiss Re justified some of its sharp price increases not just with inflation, but with its new models with which it estimates the impact of climate change on insured losses.
These models should also shake up politicians and urban planners. Swiss Re has warned for some time that global warming is leading to more and stronger so-called secondary natural hazards. These include forest fires, floods or droughts, which can cause enormous damage to agriculture. “Twenty years ago, these dangers played almost no economic role for us,” says Swiss-Re boss Christian Mumenthaler. At that time, insurers primarily had to cover losses from hurricanes in the USA and from earthquakes. That has changed since then, worldwide. “We are seeing a massive increase in damage from secondary natural hazards. At the moment they even dominate the picture.”
Dacey and Mumenthaler defended themselves before the media against the thesis that large areas had already become uninsurable; in many places, however, prices rose significantly. One example is Australia, which has been battling severe forest fires and floods with great regularity in recent years. Anyone who has built their house in the wrong place will therefore have to pay significantly more for their insurance in the future.
The American state of Florida is currently a major problem: Many private providers no longer insure homeowners against hurricane damage because the premiums do not correctly reflect the enormous damage potential. That is why hundreds of thousands are currently only getting insurance cover from the state insurer of last resort. Much of the problem is self-inflicted: Florida’s population is growing rapidly, and many expensive homes are being built in the worst possible locations near the coast. Where they easily fall victim to the floods.
The market conditions in Florida are therefore uniquely unfavorable. And yet: With their price increases, reinsurers like Swiss Re are sending out strong signals that climate change will bring with it an ever increasing price tag if, firstly, it is not stopped and, secondly, urban planners and architects do not take it sufficiently into account in their building projects.