Swiss Re’s da Victoria Lobo: Misunderstanding inflation will “short-change policyholders” towards underinsurance

It is imperative the reinsurance industry “captures inflation properly” ahead of the 1 January renewals so that clients do not face the risk of being underinsured, Swiss Re’s Nikhil da Victoria Lobo has warned.

Ahead of the Baden-Baden Reinsurance Meeting 2022, Swiss Re’s head of Western and Southern Europe cited inflation, cat capacity and contract clarity as three of the main talking points in the run-up to 1 January.

He warned of the risk of underinsurance as a consequence of miscalculating the effects of rising inflation.

“If we don’t capture inflation properly at this renewal, basically the people we’re short-changing are the end policyholder, because when things go badly – and insurance and reinsurance need to pay – if we haven’t captured inflation in our projections we run the risk of underinsuring them,” da Victoria Lobo said.

To further emphasise this position on inflation, da Victoria Lobo referenced the losses pounding the industry as a result of the increase in frequency and severity of natural catastrophes, especially from secondary perils.

The term secondary perils is a “misnomer” according to da Victoria Lobo, as such events have recently been driving billions of dollars of losses for the industry.

“Knowing that these losses will come from these events, we have to get the figures right in the assessments and so we need to make sure we build inflation into our projections,” he noted.

As one of the main loss drivers for the (re)insurance industry, secondary perils have prompted some players to retrench from cat business, and other lines, in a bid to reduce exposures.

These diverging appetites have prompted concerns over cat capacity at 1 January. For da Victoria Lobo, it is important for the industry to understand how to provide the solutions that its clients need.

“It’s really key as we deal with these secondary perils that we get the right structure and balance between what is retained with the insurance companies, with the policyholders, and what is transferred to the reinsurers, particularly on topics like retention and price,” he noted.

In addition, the industry’s ability to service its clients also hinges on contract clarity, as further granularity would help it solve problems more methodically.

“Unless we have clarity as an industry on these key topics, when these events [secondary perils] happen with more frequency we’re not going to be able to react the way we need to,” da Victoria Lobo warned.

A tough stance on carbon

The frequency and severity of natural catastrophes has been connected to the effects of climate change, which in turn has prompted companies to make efforts to incorporate ESG guidelines into their operations.

The (re)insurance industry has a central role to play in advising on and incentivising the journey towards net zero. Underwriters, for instance, can embed ESG factors and ratings into their underwriting strategies to make decisions that will ultimately drive better ESG-related behaviour.

Reinsurance industry players have taken different approaches to underwriting carbon-intensive companies, and these strategies can help drive the efficiency of ESG targets.

Da Victoria Lobo underscored Swiss Re’s position as one of the prominent players in the industry driving the journey towards net zero.

He referenced the work that Swiss Re has been doing as a member of the Net-Zero Insurance Alliance, an initiative that has been spearheading important but not widely known workstreams.

As an example, da Victoria Lobo referred to the work around carbon-based accounting, which looks to monitor and match how underwriters are accounting carbon in their portfolios.

“It’s probably one of the most fundamental things going on to drive this transition in the global economy,” he concluded.

“We as a company will phase out – and we’ve talked about this publicly – phase out reinsurance for thermal coal in the OECD by 2030, and in all other markets, the rest of the world, by 2040,” he said. 

Watch this nine-minute interview with da Victoria Lobo for more insights on: