Climate remains front of mind for reinsurers: PwC

Reinsurers have again ranked climate change as the most significant risk facing by the sector, according to PwC’s latest Reinsurance Banana Skins Survey, amid rising losses from an increasing number of more severe weather events.

The biennial research is carried out in collaboration with the Centre for the Study of Financial Innovation. The survey was conducted between May and August 2023, with 41 respondents from the reinsurance sector across 15 territories.

Launched this morning at the Rendez-Vous at an event jointly hosted by PwC and Swiss Re Reinsurance Solutions, PwC noted that climate change-related risk remains the most significant risk, having also topped the 2021 survey.

This year’s survey follows the World Meteorological Organization’s declaration of July 2023 as the hottest month on record globally, while wildfires and flooding alike have caused significant losses – not to mention the growing costs of secondary perils such as severe convective storms in the US.

As reinsurers endure the rising cost of cat claims, respondents expressed concern that some areas and types of business may become uninsurable in the future.

“The main concern to me is the impact of climate change and the pressure that will bring on the insurability of some risks/regions,” said a reinsurer respondent from Belgium.

The report outlined several impacts for reinsurers stemming from climate change risk, ranging from pricing and legal liabilities to changing consumer behaviour and the impact of the net-zero transition on reinsurers’ own operations.

Andy Moore, PwC UK partner and London market leader, commented: “Reinsurers are acknowledging that the effects of climate change are already being felt.

“It’s impossible to fully prepare for such a fast-changing and unpredictable risk, but the sheer scale of the impact on almost all areas of the market means doing nothing is not an option.”

Some firms are already taking steps to enhance risk modelling, as well as undertaking strategic risk management reviews and reassessing the resilience of their portfolios.

“Due to the ever-changing nature of this risk, companies need to put controls in place to ensure they have confidence in the data, infrastructure and policies they will rely on to remain agile in the face of the climate emergency and its repercussions,” Moore continued.

“Doing this will put reinsurers in the strong position they need as they play a key role in managing the wider global transition to net-zero.”

Cyber crime moves up top three while AI debuts at sixth

Placing second in the reinsurance cohort’s ranking of most pressing risks was the operational risk associated with cyber crime, up one place from the 2021 survey.

Cyber crime placed as the top risk across the insurance sector as a whole in PwC’s wider survey, unchanged from 2021.

With the growing sophistication of threat actors, both criminal and state-sponsored, respondents expressed concern that a successful cyber attack could be detrimental to business continuity, not to mention the reputational repercussions following theft of sensitive data.

In its inaugural appearance on the Banana Skins list, reinsurers ranked AI sixth, while the overall industry placed the technology in seventh.

As well as noting the accelerating pace of development, respondents raised questions over the reliability of the data and how it is used, such as the use of AI to penetrate defences and mimic humans.

“A lack of regulation and transparency around the ‘black box’ in the middle [of AI models] could potentially lead to manipulation of outputs,” said one Bermuda-based chief risk officer.

PwC noted that, like cyber crime, reinsurers are ideally placed to develop the risk understanding and working partnerships needed to manage and mitigate AI risk.

Reinsurers voice doubts over relevant technical and technological skills

Closing out the top three key risks for reinsurers was technology, with worries predominantly centred around a company’s ability to keep up with the pace and cost of technological change, as well as matching the investment and advancements made by peers.

PwC noted that while reinsurers clearly recognise the need for new and enhanced capabilities to manage the risk landscape of today, systems and skills can still fall short.

Barriers to technological progress cited by respondents include conservative distribution channels, regulatory burdens, and practical difficulties in developing and rolling out clear, strategically aligned operating models.

Difficulty in talent acquisition and retention – particularly individuals with the relevant technical and technological skills – was ranked fourth, up one place from the previous survey.

Rounding off the top five risks was regulation, with reinsurance respondents citing the cost and burden of concurrent waves of regulation, as well as the wider ESG agenda as a driver of regulators’ expanding toolkits.

Reinsurers compared to the wider insurance industry

As part of the survey, PwC asked respondents how well-prepared they thought the industry was to handle the risks that they identified.

On a scale of 1 (poor) to 5 (well), reinsurers gave an average response of 3.41. This was higher than the average of 3.20 for the entire insurance industry, as well as the highest of all sub-sectors, with P&C at an average preparedness of 3.13.

PwC suggested that this optimism may reflect reinsurers’ confidence in their ability to harness the power of new technology, as well as the relative sophistication of reinsurers’ risk management systems and scenario planning.

Although demonstrating a “considerably lower than average” concern over their sector’s ability to achieve cost reductions to remain competitive, as well as the segment’s ability to manage change, reinsurers were the only segment to include de-globalisation within the top 10 risks.

Placing ninth, PwC suggested this may be indicative of the global nature of the reinsurance segment, highlighting concerns around the consequences of protectionism.

“The sector was also more concerned about availability of capital, and credit risk, reflecting some of the challenges seen in the market over the last year and the recent implications of some alternative capital structures,” said the report..

“There was a note of concern about the reinsurance sector in the responses from other sectors, particularly as regards to capacity and credit strength in the face of large catastrophe claims. Access to reinsurance was also identified as a risk. The outlook was seen to depend on whether capital would shy away from the sector, or be enticed by hardening rates.”