Capital will flow once people see underwriting is profitable: Mumenthaler, Swiss Re CEO

More capital will flow back into the global reinsurance marketplace once it is visible that new pricing levels can enable more profitable underwriting, Swiss Re’s CEO Christian Mumenthaler explained during an interview yesterday.

Speaking to CNBC at the 2023 World Economic Forum event in Davos, Switzerland, the reinsurance company CEO implied that uncertainty over pricing climate risks has been a key driver for renewal rate increases.

Mumenthaler told the interviewer, “Clearly, we see the impact of climate change, last year we had $115 billion in losses and the 10 year average is $81 billion.

“So, it’s clearly going up, and we see it in perils like floods and wildfires, etc, this clear impact of climate change and there’s a certain uncertainty right now about the pricing of that.”

This uncertainty over pricing climate-linked risks is one driver for investors to be more cautious over reinsurance allocations, it seems.

“This is why some of the capital is quite cautious, to come back in, and there’s a reluctance to deploy capital because we have to adapt, we have to know the new pricing for all of these risks,” Mumenthaler continued to explain.

But added that, “I believe in market mechanisms. So, what is happening now is prices go up quite a bit.

“Once people see it’s profitable, more capital will come back in.”

Mumenthaler went on to explain the important role of the insurance and reinsurance industry in helping society understand climate risk exposure.

He said that, “One of the important things we do for society is giving pricing signals, specific pricing signals, so if people you know, create houses in floodplains, that’s a bad idea and you can see it in the insurance premium.

“So over the long term, this is good for society, because through these price signals, people will start to build, you know, stronger buildings will build in the right places, etc. But short term, it’s clearly adding to the inflationary pressure.”

Going on to discuss inflation and whether it has become entrenched in economies, Mumenthaler said that, “If you think about the underlying, there are a lot of inflationary pressures in the world, you know, falling in part to a certain extent from climate change. There’s a lot of these pressures.

“So we believe inflation is going to stay at least above policy rates in ‘23 and ‘24. So it’s longer-term and over the next 10 years, we don’t think we’ll ever go back to the levels we had before.”

Even before hurricane Ian struck it was being said that the insurance-linked securities (ILS) market must demonstrate its improved profit potential, Luca Albertini of Leadenhall Capital Partners said it well in an interview with Artemis back in September.

Following that loss event and now the elevation of reinsurance and ILS pricing around the renewals, ILS fund managers and strategies must now demonstrate their ability to deliver profits, in order to give capital and investors more confidence.

As confidence returns and both the reinsurance and ILS market prove out the potential for profits, in the new higher-pricing environment, this should help to attract more capital and investors to the market, so 2023 could bode well for ILS sector inflows as the year proceeds.