Canadian Underwriter

Swiss Re plans to expand R&D capabilities to efficiently allocate capital into growing risk pools

December 2, 2016   by Canadian Underwriter

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Swiss Re’s stronger focus on and investment in research and development (R&D) to identify risk pools, as well as its move to further leverage technology, seeks to meet the twin goals of facilitating enhanced client support and creating competitive advantage.

Two business persons plan a project“This is consistent with Swiss Re’s top priority of meeting its financial targets over the cycle and strengthening its long-term financial performance,” notes a press release issued Friday in advance of Investors’ Day 2016.

“We acknowledge significant challenges in some of our markets, but we remain optimistic for our industry in the long term,” Christian Mumenthaler, chief executive officer of Swiss Re Group, says in the statement.

“In the current environment, it is absolutely essential that we focus on what we do best: leverage our capability to price risk and allocate capital to those opportunities that are most attractive,” Mumenthaler continues.

Swiss Re reports its strategic framework, introduced a year ago, positions it well for significant short- and medium-term industry challenges. “It will also allow Swiss Re to access those risk pools which are expected to grow over the long term.”

Swiss Re's Strategic Framework

Despite challenges for the insurance industry – like pricing pressures, low interest rates, political instability and regulatory fragmentation – the company “is convinced the long-term trends for the insurance industry are positive,” the statement notes.

For example, that “risk pools will continue to expand based on rising GDP in the world’s economies and demographic trends,” Swiss Re points out.

The reinsurer has identified more than “40 different liability and asset risk pools, such as property, mortality or health, into which it allocates capital based on the historical performance and future outlook of the pools,” the statement reports.

“Technology, in particular, will help to close protection gaps worldwide by providing better, more efficient and cheaper offerings,” it argues, adding insurance penetration levels are still low in many parts of the world, especially in high-growth markets.

Targeting high-growth markets will remain a key element of the company’s growth strategy, Swiss Re points out.

“Reinsurance premiums in these markets have grown at a compound annual growth rate of 17% from 2010 to 2015 and Swiss Re’s workforce has more than doubled in these markets since 2011,” the statement notes, adding the goal is to “narrow the protection gap jointly with its clients going forward.”

“Leveraging technology enables Swiss Re to better understand risk, improve underwriting processes and increase the efficiency of reinsurance,” the company statement notes.

Related: Aegon, Allianz, Munich Re, Swiss Re and Zurich launch blockchain initiative B3i

The company has executed more than “500 digital product or capability use-cases over the last three years, spanning the entire re/insurance value chain from product design to claims,” it adds.

Selected R&D investments over past 25 man-years

In terms of profitability, the target is a return on equity (RoE) of or above 700 basis points over the risk-free rate, measured by 10-Year US government bonds.

“We are committed to meeting our ambitious targets,” says David Cole, Swiss Re Group’s chief financial officer.

Christian Mumenthaler, Chief Executive Officer of Swiss Re Group

Christian Mumenthaler, Chief Executive Officer of Swiss Re Group

“We’ve generated an RoE of more than 11% over the past 10 years and an economic net worth per share growth over the same period of over 14%. This gives us confidence that we can continue delivering strong performance over the cycle,” Cole adds.

Swiss Re “will continue to focus on our disciplined underwriting approach and further cut our capacity in some property and casualty businesses. On the other hand, we will invest more in life and health businesses,” Mumenthaler (pictured left) says.

“By placing even stronger emphasis on serving as the knowledge partner to our clients and by investing in those risk pools with the most attractive returns, we will be able to set ourselves apart,” he argues.

A full slide package is available.

Related: Swiss Re reports net income of US$3 billion for first nine months of 2016