Severe thunderstorm loss potential increasing in Europe: Munich Re

by Artemis on March 3, 2016

The threat of losses from severe thunderstorms and resulting hail, flooding, and wind gusts are on the rise warns Munich Re, meaning insurers, reinsurers, and insurance-linked securities (ILS) funds’ exposure to the peril is increasing.

“Over the last few years, severe thunderstorms in Europe have caused a number of losses of more than a billion euros, mainly as a result of hail, strong gusts and flash floods,” explains Munich Re.

And now, owing to more intense thunderstorms, a potential increase in frequency and the growing vulnerability of buildings to damage from intense hailstorms, the loss potential from severe thunderstorms throughout Europe is on the rise, says the reinsurer.

2015 was another benign year for catastrophe losses when compared to the ten-year average, with insured losses amounting to $30 billion, and economic losses amounting to $100 billion. Compared with a ten-year average of $56 billion and $180 billion, respectively.

However, despite losses in the most recent months remaining low, the threat of more intense, more frequent severe thunderstorms in Europe remains, and is on the rise, explains Munich Re.

“Rising moisture content in the lower atmosphere is a key driver of stronger thunderstorms – a physical consequence of the long-term warming of the world’s oceans. With values also continuing to rise, prevention is becoming even more important to keep loss levels low,” said Peter Höppe, Head of Munich Re’s Geo Risks Research department.

Many European insurers and reinsurers have exposure to severe thunderstorm events across the region, via their property insurance or reinsurance portfolios, highlighting that any up-tick in the severity or frequency of events signals the possibility for rising losses for such firms.

Many of them cede a significant portion of the catastrophe risk through reinsurance programmes, retrocession and collateralized reinsurance arrangements.

But it’s not just the re/insurers that would be wise to heed Munich Re’s warning, as ILS funds and other third-party capital backed vehicles are increasingly exposed to European severe thunderstorm events, as re/insurers’ use of capital markets investor-backed capacity within their catastrophe reinsurance or retro programmes continue to expand, underlined by the continued growth of the collateralized reinsurance and private ILS space.

A potential rise in losses for ILS funds/managers, insurers and reinsurers, then, also highlights the possibility for capital markets investors suffer increasing exposure, notably those invested in European reinsurance sidecar ventures, funds focused on private ILS transactions, and collateralized reinsurance and other multi-peril ILS business.

ILS funds have already begun to see an increasing number of loss reports, as the impact of growing investments in private ILS and collateralized reinsurance are manifesting through growing ILS fund exposure to frequency, or attritional events, as well as the aggregation of catastrophe losses across a year. European thunderstorm and hail losses would likely fit into this kind of loss scenario in the ILS world.

So the exposure is certainly wide-reaching, and with the ILS space predicted to expand further in the coming months, into new regions and perils, along with an expected rise in potential European severe thunderstorm losses, it’s likely that players in the ILS space will see their exposures grow.

Underlining just how damaging the peril can be, Munich Re notes that in Germany in 2013, a severe thunderstorm and resulting hailstorm created losses of €4.6 billion in today’s values, of which roughly €3.5 billion was insured.

Interestingly, currently no catastrophe bonds cover European severe thunderstorms, although European windstorms are covered in a number of deals as both a stand-alone peril, and as part of a transaction that covers multiple international perils.

However, the potential for a European severe thunderstorm cat bond is evident as loss expectations rise, and could be structured as a multi-peril European deal that sits alongside European windstorm coverage, or multiple other European perils, as seen with deals focused on multiple U.S. catastrophe risks.

So while currently no catastrophe bond investors and sponsors are exposed to the potential rise in severe thunderstorm losses across Europe, there is potential for ILS structures and features to manage the risks.

However, the potential for increased losses to insurers, reinsurers, and ILS market participants with exposures to European severe thunderstorms remains, highlighting a need for market players to avoid any overexposure to such events and consider a potential rise in event intensity within their catastrophe programmes.

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