R&D effectively links advancements in technology, theoretical and applied sciences as well as legal developments and a variety of other fields within the reinsurance domain. Through this multidisciplinary approach, diverse knowledge bases are harnessed to strengthen underwriting expertise. For example, greater precision in determining appropriate earthquake covers demands the fruitful interaction of seismology, civil engineering and reinsurance know-how. The successful outcome of this interplay enables R&D to play a vital function in reinsurance for generating added value by providing new and improved products as well as tailored solutions. Rapid technological, economic and social developments pose ever greater challenges for insurers. Merely establishing past developments or relying solely on empirical factors and statistics no longer fit the bill; reinsurers must be capable of astutely determining future trends with proper application of the best knowledge available. As with the conscious perception of opportunity, anticipating and identifying risks and developments capable of creating problems in the future is a core task of research and development.
In R&D efforts, Swiss Re pursues the pragmatic path of applied research. This involves adopting a proactive stance in the market rather than one of passive response. Today, achieving successful results in R&D is not simply a matter of accumulating knowledge to discern whether or not a phenomenon or new development is at issue. Rather, the task focuses on how these findings can be quickly translated into market-compliant solutions. After all, what good is a smart car if you can't apply all its power to the road? R&D must employ ways and means to tap knowledge acquired in the market. To this end, collaboration among marketing specialists, market analysts and research and development is of prime importance. Systemic risks with high loss potential such as natural catastrophes or changes in the liability sector belong to the territory of reinsurance, and natural catastrophes represented the lion's share of last year's insured losses.
In 1999 alone, insurers paid claims totalling US$24.4bn for storm, earthquake and flood losses, making man-made catastrophes of US$4.2bn seem tame by comparison. Two factors are significant for natural perils reinsurance as offered by Swiss Re: annual loss amounts are subject to extreme fluctuations and since 1989, there has been an uninterrupted trend toward increasingly higher loss amounts. The enormous capital investment and high risk fundamentally associated with natural catastrophe covers demand more specialised insurance products and scientific models of greater complexity for risk evaluation. Teams of specialists at Swiss Re develop computer-based simulation models capable of calculating the most diverse loss scenarios.
Swiss Re also collaborates intensively with research institutes and renowned scientists from all over the world to incorporate the latest research findings in its own work. For example, by co-operating with the US Geological Survey (USGS), Swiss Re obtained findings on the time dependency of earthquakes and - following the event in Turkey in 1999 - adapted its models to the new hazard level.
While the global diversification of insured risks is decisive for the reinsurer's success in the natural catastrophe sector, economic and technical globalisation reduces opportunities for diversification in the liability sector. As the number and size of globally active companies increases, so does their exposure worldwide for the damage they cause. Moreover, globalisation has also enabled claimants and their representatives to press claims promptly and in a more concerted manner. Conventional risk analysis is no longer adequate for dealing with risks that are new or difficult to predict, such as electrosmog or genetic engineering. Again, R&D's prompt detection of risks and precise scenario modelling is indispensable. Among other tools, Swiss Re utilises a dedicated risk perception network (SONAR, Systematic Observation of Notions Associated with Risk) to tackle this challenge. A cutting edge application, SONAR is designed to detect and analyse even discreet signals of potentially major changes in the risk landscape.
R&D is compelled to continually improve processes and structures to promptly identify changes in the social, economic and legal risk landscape. If global players in the reinsurance industry fail to detect, analyse and respond rapidly to signals from a more critical general public, they may pass up opportunities or even put their very existence at risk. Being well prepared is a must due to more stringent liability regulations and legal insurance obligations or the threat of class action cases - a requirement which can only be met with a fully integrated and responsive research and development department.
Dr Bruno Porro is a member of the executive board committee and head of the reinsurance & risk division, Swiss Re. (c) of Lloyd's of London Press Limited 2001.