Swiss Re Is Dedicated to Underwriting Improvements Through Research-Led Investments in Technology

Equity Analyst

Henry Heathfield

For almost a decade, Swiss Re has been missing its stride. Yet we think this is a top-quality reinsurer with some unique assets. More than any other European reinsurer we cover, Swiss Re puts research and development, data and technology, customer relationships, analytics, and insight front and center when trying to carve out a pure underwriting-based competitive advantage. It has the leading property and casualty claims ratio by a minimum of 1 percentage point. We think it operates with strong natural catastrophe underwriting skill sets, driven by its proprietary risk models and collaboration with leading scientists. Barriers to entry are high because of potential losses, should a business fail to properly underwrite. A new entrant's entire capital base could easily be wiped out. That entrenches Swiss Re with customers, enhances trust, and increases switching costs.

In life and health reinsurance, Swiss Re is now past a difficult time. In response to its post-level-term exposure, it introduced a proprietary policy-by-policy administration system that led to a substantial improvement in Swiss Re's and its clients’ lapse rates. The average mortality of the relevant books was improved, and we think the client disagreement rate is now ultralow. Swiss Re operates with the industry-leading LifeGuide. Designed for life insurance underwriters, each year LifeGuide focuses on a specific data set to improve value to clients. Its recent focus includes tumors, cardiometabolic diseases, and mental health. Large amounts of historical data are a key competitive advantage in pricing new life and health.

In corporate solutions, Swiss Re's five-step underwriting process has led to substantially improved results.

While Swiss Re sold ElipsLife a few years ago, the white-label individual protection solutions provider IptiQ remains. This delivers insurance products to primary insurers for them to repackage to clients. IptiQ has 2.7 million policies and generates around $1.1 billion in premiums from life insurance and supplementary health. We think IptiQ highlights part of the future direction of Swiss Re: embedding technology with primary insurers and leveraging risk insights.

Business Strategy & Outlook

We do not believe Swiss Re has an economic moat.

We think Swiss Re’s property and casualty reinsurance division is one of the most profitable in our European reinsurance coverage. We think the division generates the best claims ratio among the largest reinsurers thanks to its investments in intangible assets. 

The Swiss Re property and casualty reinsurance division produces the best property and casualty combined ratios, and this is all down to claims. It has delivered an average combined ratio of 96.8% over the last 10 years-plus; we believe that a 1-percentage-point minimum improvement versus peers is a result of the company’s investments in intangible assets and resulting expertise in natural catastrophes. With Swiss Re’s ongoing heavy focus on research and development, the implementation of its CatNet natural catastrophe hazard information mapping system, and its proprietary forward-looking exposure-based natural catastrophe modeling, over the last 10 years the company has delivered a 77.5% natural catastrophe combined ratio. We think Swiss Re tends to underwrite around 50% of secondary peril natural catastrophes and around 25%-40% of property and casualty reinsurance premiums written by the largest eight firms. We think its research and development capabilities and application of these learnings combined with big data sets and smart analytics mean that the company is better placed to assess the probable occurrence of a claim on an asset, and within that the probable value of a claim on an asset, than all other reinsurers in our European reinsurance coverage. Further, we believe that as Swiss Re has been reinsuring property and casualty risks for over 150 years, it is more valued and trusted by clients who have faith in its ability to assess the probable occurrence and probable value of a claim and price this accordingly. This gives clients confidence that if the claim does arise, Swiss Re will be able to make good on it. Being valued by clients in this way leaves Swiss Re in an enviable position of being able to write customized tailored solutions for large clients, solutions that small reinsurers have neither the data sets, proprietary technology, expertise, reputation, nor balance sheet to do. This places Swiss Re in a position where it can drive the pricing and conditions of these contracts. Up to 50% of Swiss Re’s premiums written can come from transactions.

We think Swiss Re’s success in doing this is shown by its client retention rates as well. Of its 100 largest clients across property and casualty reinsurance and life and health reinsurance, which represent around three-fourths of total premiums, Swiss Re has a 99% retention rate. Aside from providing reinsurance, it helps clients with new product development, portfolio risk analytics and modeling, capitalization, technology-based solutions, and training for emerging risks and risk engineering services. Swiss Re places weight on building client relationships and developing interactions.

In life and health reinsurance, we think the company has built out and benefits from similar intangibles.

Having incurred some losses in the book as a result of the introduction of HIV testing in the late 1980s that led to term life policyholders being stratified into preferred and standard risks, Swiss Re invested in a new policy administration system that meant the company could look at life and health policies on a policy-by-policy basis. This is referred to in the insurance industry as seriatim. In three years, Swiss Re tripled the number of policies it processed on a policy-by-policy basis, commensurately tripled the persistency, and significantly improved average mortality. This was achieved within the books of businesses ceded to Swiss Re and the books that remained on Swiss Re clients' balance sheets. As a result of the implementation of this proprietary technology, Swiss Re has reduced client disagreements.

This situation occurred because policyholders who were newly classified as preferred lapsed their term life policies. We think this was compounded by the acquisitions of M&G Re, Life Re, and Lincoln Re, where mortality risk had not been priced correctly. We think there is a significant risk in growing inorganically in insurance.

Swiss Re was one of the largest underwriters of United States term life reinsurance around this time with a new business market share of 30% after these acquisitions. The experience of these lapse and mortality events added to Swiss Re’s large historical data and proficiency, providing it with a competitive advantage in assessing risks on a forward-looking basis.

In the same way that Swiss Re provides additional products and services to clients in property and casualty reinsurance, it has the technology and research and development capabilities to do it in life and health reinsurance. One example is helping a life and health primary insurer develop a senior cancer policy. Swiss Re was modeling pandemic mortality before the coronavirus for years. These technology, research and development, and product development capabilities not only help with client retention rates of 99% for its 100 most important clients, but also help the company to continue developing better risk selection capabilities. The business has the well-known LifeGuide, an internet-based underwriting manual and claims guide. This is the life insurance industry’s number-one underwriting manual and is used by over 900 companies in over 100 countries, with 20 million hits annually.

In the same way that proprietary technology, data and analytics, and experience enable the company to write tailored transactions to large clients that other reinsurers wouldn’t be able to do in property and casualty, Swiss Re does this in life and health reinsurance too. Large, tailored transactions can account for up to 60% of Swiss Re's life and health reinsurance premium. Tailored transactions carry better profitability. Ninety-five percent of Swiss Re’s life and health reinsurance clients are direct relationships and Swiss Re partners with well over one-fourth of them providing solution-based services.

None

Economic Moat

Swiss Re AG

Swiss Re AG engages in the provision of reinsurance, insurance and other insurance-based forms of risk transfer. It operates through the following segments: Property and Casualty Reinsurance, Life and Health Reinsurance, Corporate Solutions, Life Capital, and Group Items. The Property and Casualty segment comprises of the business lines property, casualty including motor, and specialty. The Life and Health segment includes property and casualty; and life and health sub-segments. The Corporate Solutions segment offers innovative insurance capacity to mid-sized and large multinational corporations across the globe. The Life Capital segment encompasses the closed and open life and health insurance books, as well as the ReAssure business and the primary life and health insurance business comprising elipsLife and iptiQ. The Group Items segment represents the administrative expenses of the corporate center functions that are not recharged to the operating segments. The company was founded on December 19, 1863 and is headquartered in Zurich, Switzerland.

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