Tag Archives: Swiss Re

Business Insurance, Business Risk, Insurers and the Economy, Market Conditions, Risk Management

Swiss Re: “Zombies”Could Kill Recovery

Leave a comment

Global pandemic.

Supply-chain disruptions.

Increasingly costly cyber-attacks.

Extreme weather and other climate-related hazards.

And now, zombies.

Swiss Re’s chief economist this week said failures of hundreds of “zombie companies” over the next few years are among the concerns prompting insurers to reduce risk and charge higher premiums – a trend that is likely to continue as corporate failures increase.

Zombies – companies that lack the cash flow to cover the cost of their debt – are “a ticking time bomb” whose effects will be felt as governments and central banks withdraw measures that have helped keep these companies alive during the pandemic, Jerome Haegeli told Reuters.

The sobering prediction comes as stock prices hit records and the U.S. economy appears headed for 6.5 percent growth this year. Haegeli said these strengths are illusory because they’re based on temporary fiscal and monetary support.

Insurers are being cautious: reining in underwriting risk, being more prudent about investment allocations, and even taking precautions on insuring operations and supply-chain risk.

“They are not getting fooled by the short-term picture,” Haegeli said. “If you look at the market today, everything looks great. However, it’s illusionary to think that this environment can last” as “life support” is withdrawn in coming months. And that, he said, will bring an increase in long-overdue bankruptcies.

It’s tempting to presume that, as the pandemic-driven aspects of the economic crisis are brought under control, recovery will proceed apace. After all, the economy was doing fine before the pandemic hit, right?

But in September the Bank for International Settlements (BIS) pointed to a “pre-pandemic increase in the number of persistently unprofitable firms, so-called ‘zombies’, which are particularly vulnerable to economic downturns.”

Before the pandemic, the BIS said, about 20 percent of listed firms in the United States and United Kingdom were zombies and 30 percent in Australia and Canada. By comparison, zombies constituted about 15 percent of listed companies in 14 advanced economies in 2017 and 4 percent before the 2008 financial crisis.

Absent any reason to believe these companies’ situations substantially improved during the pandemic or that the contagion didn’t spawn more zombies, the expectation of more corporate collapses seems reasonable.

Add to this rising losses due to hurricanes, severe convective storms, and wildfires; the threat of sea level rise; and the growing reality business and government disruption from cybercrime, and the likelihood of increasing premiums and reduced coverage limits seems strong.

Disaster Resilience, Flood Insurance, Insurance Industry

Swiss Re: A Katrina-like hurricane could cause up to $200 billion in damage today

Leave a comment
A memorial cross for the victims of Hurricane Katrina stands in the water near the bank of the Mississippi River Gulf Outlet on August 22, 2019 in Shell Beach, Louisiana. According to researchers at the National Oceanic and Atmospheric Administration (NOAA), Louisiana’s combination of rising waters and sinking land give it one of the highest rates of relative sea level rise on the planet. (Photo by Drew Angerer/Getty Images)

Hurricane Katrina, which struck the United States in August 2005, remains the costliest insured North Atlantic hurricane on record and the most expensive natural catastrophe for the global re/insurance industry.  In 2020 dollars, according to a Swiss Re  report released today, total economic damage from Katrina totaled more than $160 billion.

An identical storm today “could easily reach” $200 billion, Swiss Re says.

To evaluate what Hurricane Katrina might look like in 2020 in terms of insured and economic losses, Swiss Re ran Katrina’s 2005 wind and surge footprint on its U.S. market portfolio using its probabilistic tropical-cyclone loss model.

“If Hurricane Katrina were to hit the U.S. in 2020 with the same wind and storm surge as 2005, but with current exposure information and updated flood protection and vulnerability assumptions, the privately insured losses in the U.S. alone could rise to $60 billion,” the report says. “This is true, despite the city (New Orleans) currently only having 80% of the population it did in 2005.”

Private insurance and the federal flood insurance program covered about $86 billion of the total loss, highlighting a protection gap largely driven by uninsured flood losses. Standard residential insurance policies exclude coverage for flood damage resulting from surface water, including storm surge caused by hurricanes; separate flood insurance policies are available through FEMA’s National Flood Insurance Program and private insurers.

“With Katrina, and even more recently with Harvey and Sandy and Florence, we’ve seen this profound protection gap where on average only one in six residences in the U.S. have a flood coverage policy,” said Marla Schwartz Pourrabbani, a Swiss Re natural catastrophe specialist and lead author of the report.

Today, a storm like Katrina would cause closer to $175 billion in damage because areas outside New Orleans, especially in other coastal states, have seen both increases in population and increased investments along the coast that add to the financial risk. Rising sea levels also contribute to the potential losses.

Swiss Re says the effects of climate change could drive total costs  higher.

“Considering that sea level in the barrier islands near New Orleans is now rising by over one inch every two years, a six-inch increase in sea level — and an event like this could happen in just over a decade,” the report says.