Property-Casualty Insurers Face Riskier Future as Risk Mix Changes

Property-casualty insurance will undergo a fundamental transformation over the next 20 years, with business becoming both riskier and more complex, according to a new report.

While auto insurance has for many years been "the low-risk, high-volume mainstay" of many property-casualty companies' portfolios, the share of auto in global premiums will decline, a new Swiss Re Institute sigma report says.

"The fastest-growing lines of business will be property and liability, both of which inherently carry more risk than motor," Swiss Re says.

The decline of auto as a share of the property-casualty mix will be the result of technological advances, according to the sigma No 4/2021 report, titled More Risk: The Changing Nature of P&C Opportunities to 2040, September 6, 2021. As safety technology increases in car fleets, accident frequency, claims costs, and premiums will decline.

Auto likely will also be affected by global sustainability efforts and increasing reliance on shared mobility models, according to Swiss Re. "This will have a dampening effect on premium growth and within insurers' motor portfolios, likely leading to a shift from personal to commercial business," the report says.

Swiss Re projects that auto's share of the total property-casualty risk pool will decline from 42 percent in 2020 to 32 percent in 2040.

Amid the fundamental shifts in the industry, however, there are growth opportunities, according to the report, with total property-casualty premiums expected to double to more than $4.3 trillion by 2040. Emerging markets will drive global growth, representing 33 percent of all property-casualty premiums by 2040, the report says.

Economic development will be the primary force driving growth across all lines of property-casualty insurance, according to Swiss Re. The report concedes, however, that its premium growth forecasts should be taken as "best estimates," given the uncertainty around predicting climate, technology, social, and legal changes.

Property will be the fastest-growing segment, according to Swiss Re, with global premiums expected to increase by 5.3 percent annually to 2040. Climate risks will be the primary factor driving property premium growth. Swiss Re estimates that climate risks will increase the global property risk pool by 33 percent to 41 percent, generating $149 billion to $183 billion of new premiums by 2040.

The share of catastrophe risk in all property premiums will increase from 20 percent in 2020 to 28 to 31 percent in 2040, the report says. In advanced markets, the increase in the frequency and severity of events as a result of climate change will add 30 percent to 63 percent to insured catastrophe losses, while in some key markets like China, the United Kingdom, France, and Germany the increase could be as much as 90 percent to 120 percent.

In emerging markets, urbanization will be the primary factor behind property exposure growth, resulting in $24 billion—around 10 percent—of additional global property premiums by 2040, according to the report.

Property will represent 29 percent of the total property-casualty risk pool by 2040, according to Swiss Re, up from 25 percent in 2020.

The report notes that natural catastrophes are the primary loss driver in property insurance. "Disasters are hard to predict and with climate change, weather-related catastrophes will likely become both more intense and frequent," the report says.

Global liability premiums are projected to triple by 2040 to $583 billion, accounting for 13 percent of the property-casualty total, up from a 12 percent share in 2020, the report says. "Growing by 4.7 percent annually, we see exposure opportunities emanating from artificial intelligence, social inflation, climate change litigation, and collective redress in Europe," Swiss Re says. Those factors will expand the scope of tort liability, according to the report.

Liability risks involve human behavior that evolves as socio-economic circumstances change, according to the report. "[P]redicting associated long-term trends is at best an imprecise art," the report says. "In the digital age, events such an outage of a major cloud service provider can quickly turn into a catastrophic event for liability insurers, and also present potential for huge loss accumulation.

"In the short- and mid-term, social inflation will drive up the frequency of large verdicts/settlements, especially in the US," the Swiss Re Institute report says.

As the property-casualty insurance business becomes riskier and more complex, capital requirements and the need for reinsurance will increase, Swiss Re says.

"Together, the industry and governments need to promote conditions for long-term sustainable growth, and collective action to mitigate and adapt to climate change is needed," the report says. "Investment in green infrastructure, and upgrading zoning and building standards are important to ensure the insurability of property risks."

Meanwhile, with fewer restrictions on allocating capital across jurisdictions, re/insurers can offer more risk transfer capacity globally, according to the report. "Evolving exposures call for innovation in data and related analytics tools to make risks more insurable and risk pricing more accurate," the report says. "It is also important that regulation is flexible and accommodates the use of new data sources and modeling techniques."

Advanced modeling can allow insurers to analyze and better understand key risk drivers, the report says, adding that product developments and innovation around data and analytics are needed to expand the scope of insurance in order to respond to the evolving risk landscape.