European P&C insurance: Risks and opportunities in a changing landscape

Insurers and risk managers should align their interests if they are to overcome shared challenges like climate change and inflation, according to Etienne Champion, chief underwriting officer, APAC and Europe at AXA XL.

As we approach the European renewal season, it is clear that insurers and clients face a common set of challenges. From extreme weather events to ongoing supply chain disruption and an energy crisis in Europe, volatility is increasing, while the macroeconomic outlook is troubling, with high inflation and an uncertain economic environment likely to affect insurers and customers alike.

These are not small challenges, and to overcome them, insurers and customers will need to align their interests. In a more volatile and changing risk landscape, risk management will always prove its value. Businesses that can demonstrate robust risk management will find willing partners in their insurers, who, for their part, will increasingly differentiate themselves through advice and services.

Shared challenges
Today, businesses and insurers are navigating their way through a period of heightened volatility and uncertainty, driven by social, economic and political change. Pandemic and war have set the stage for a period of economic and financial market uncertainty. Inflation is approaching levels not seen in almost 40 years in several European markets, causing a cost-of-living crisis and increasing the risk of recession. According to the World Bank, global growth is expected to slump from 5.7% in 2021 to 2.9% in 2022.

Longer term, climate change is undoubtably the biggest challenge for society. Four of the last five years have seen catastrophe losses exceed the ten-year average, while secondary perils – such as floods, wildfires and winter storms – accounted for more than 70% of all insured losses in 2021. If insurance is to be sustainable, insurers and clients need to work together to mitigate these risks as the world transitions to a low-carbon future, while the industry will also need to be remunerated for increased exposure and volatility.

For our part, we are committed to supporting clients in Europe and across the world as we transition to a greener economy. We believe that the insurance industry can play a key role in accelerating the transition to a resilient, net-zero emissions economy, in line with the 1.5°C target of the Paris Agreement. As a founding member of the UN-convened Net Zero Insurance Alliance, chaired by AXA CEO Thomas Buberl, we aim to both serve our clients and preserve our planet.

Sources of volatility
Climate change is just one source of volatility. Take inflation, for example. The effect of inflation on insurance is complex, and requires careful and detailed evaluation of exposures prior to renewal. Broad-brush valuations using the retail or consumer price inflation index do not reflect the impact of varying price volatility in building materials, parts and labour, as well as the impact of supply chain disruption on property and business interruption exposures.

In addition to real inflation, social inflation continues to impact US casualty lines and is now beginning to spill over to other regions and lines of business. Unlike general economic inflation, the effects of social inflation are harder to predict, with ‘nuclear verdicts’ from the courts and the rollback of tort reform. Much like catastrophe events in property lines, insurers will need to price for this volatility in liability lines, and take steps to manage exposures in the worst-affected areas.

With the inexorable march of digitalisation, cyber is a growing source of risk for our clients, and another potential source of volatility. The cyber market is undergoing a significant correction, in response to growing recognition of incurred losses and potential systemic losses in this important line of business. Increased demand and recent price increases, however, will help achieve critical mass, which is essential if the cyber market is to absorb catastrophe losses in the future and remain sustainable.

Global programmes, captives and risk services
Insurance buyers have had a tough couple of years, as insurers have taken necessary action to address poor returns from the prolonged soft market. As a result, the insurance market is now on a much stronger footing and AXA XL is now in a position to grow in Europe, albeit selectively, in most of the lines of business we underwrite, via open-market placements or delegated arrangements.

Global programmes and captives are at the heart of our strategy, enabling clients to control their global risk management and insurance cost centrally. With each phase of the market, captive utilisation has increased, expanding into new lines like cyber and down into the mid-corporate sector. According to the Ferma 2022 European Risk Manager Survey, interest in captives has gone up significantly during the past five years, from 15% in 2018 to 47% today. Some 35% of risk managers intend to use a captive during the next two years, while 12% say they will create a new captive.

Increased risk retention and an evolving risk landscape change the conversation with clients. Growth in captives, along with challenges like climate change, requires long-term partnerships and will drive demand for more sophisticated risk management advice and services.

Our 400-strong team of risk consulting experts – who supports clients with understanding and mitigating their exposures – has, for example, developed risk management tools ranging from flood exposure management to environmental sensitivity mapping. AXA Climate was established to help companies adapt to climate change and support them as they transition to net zero, whether its weather-linked parametric insurance or ‘climate school’, an online employee training tool that has been used by more than 40 of our corporate clients.

Sustainable long-term partnership
While the insurance market is on a much-improved footing, it could be said that we are also skating on thin ice. Big challenges like climate change and inflation have not been addressed by recent underwriting actions. While price increases have overall shown signs of moderation in recent quarters depending on geographies, price reductions are not on the cards given current reinsurance market trends, loss volatility and the performance of financial markets.

Underwriting actions taken during the past two years have placed AXA XL in a strong position and we are now able to pursue our strategy of ‘smart growth’. Using data and analytics, we can clearly define our risk appetite across segments, rewarding clients for good risk management and transparency while generating more new business opportunities in our preferred segments.

A stable and strong insurance market that can train the next generation of experts, and support innovation and growth, is essential for customers, especially as we navigate the uncharted waters ahead.

Contributed by Etienne Champion, chief underwriting officer, APAC and Europe at AXA XL.