Historical EU windstorm losses could be unprecedented today: Swiss Re

Leading reinsurer Swiss Re has brought to light the potential for unprecedented insurance industry losses from three historical European windstorms if they occurred today, underlining that the costs to the insurance and reinsurance industry would be extremely significant.

European windstorms have the scope to be far-reaching, long-lasting and extremely damaging to economies, societies and the risk transfer markets that seek to protect against the peril.

And while many parts of Europe are considered developed regions of the world, especially when compared to parts of Asia, Latin America and India, for example, insurance penetration levels could still be greater across many parts of Europe, somewhat highlighted by the potential insured losses provided by Swiss Re in its latest report, ‘Winter storms in Europe: messages from forgotten catastrophes.’

For its research, reinsurance firm Swiss Re selected a storm from March 1876, an event from late January 1884 and finally, a European windstorm that took place during February 1894, all of which significantly impacted several parts of Europe and caused widespread, lasting damage.

The first storm, which the report describes as Lothar’s Big Brother, Lothar being a storm that impacted Europe in December 1999, caused damages across France, Germany, Belgium, the U.K., the Netherlands, and Luxembourg.

Swiss Re predicts that should the 1876 storm, which crossed “almost precisely over London, Amsterdam and Hamburg,” have occurred in 2014, estimated insured property losses would amount to $10.037 billion, with more than $4 billion worth of losses coming from France alone.

Important to note here, and as is the case with the insured loss estimates provided for all regions, from all three of the selected historical European windstorms, Swiss Re’s predictions only include insured property losses.

Meaning that other insured business lines, like motor, engineering, agriculture and so on, are not included, suggesting that total insured losses from the events could be substantially higher than the ones provided in the report.

The second storm discussed in the report occurred in late January of 1884, battering parts of Europe and producing the lowest pressure reading ever recorded over the British Isles and continental Europe, says Swiss Re.

Should this storm have taken place during 2014, it would result in estimated insured property losses of almost $14 billion, “far beyond the insured losses caused by any European winter storm in history,” says the reinsurer.

Furthermore, as the 1884 storm affected most of the U.K., with particular devastation being experienced in the Northern parts of England and Ireland, the U.K. alone would face estimated insurance industry losses of just below $12 billion, highlighting the need for developed, adequate insurance and reinsurance protection across the entire world, developed and emerging regions alike.

The final storm Swiss Re examines in its report took place in 1894 and severely impacted northern Germany, as well as parts of the U.K., the Netherlands, Denmark, Poland and Ireland, a year which the report claims witnessed numerous European windstorms.

Based on a European PERILS AG market portfolio, as all the loss estimates provided in the report are, were the storm to have happened in the modern world, in 2014, Swiss Re puts estimated property insured losses at just beyond $8 billion, the least costly to the insurance and reinsurance industry but still a very substantial loss.

“Running the three event footprints in Swiss Re’s European winter storm model results in insured property losses of between EUR 8 and 14 billion across Europe. However, this does not represent a complete picture. Additional contributors like motor, engineering and forestry insurance would certainly increase the indemnities paid out by insurers,” explains Swiss Re.

Adding; “The same holds true for the loss amplification effects of demand surge (costs of labour and material) and insurance claims inflation (settlement time pressure and resource constraints). Assuming that these factors account for 20% of the loss – in our view certainly justified given the severity of the events – drives the total insurance industry burden from the three events up to between EUR 10 and 17 billion.”

So the potential losses from severe European windstorms are significant, according to Swiss Re, highlighting the need for adequate, affordable and comprehensive insurance, reinsurance and insurance-linked securities (ILS) solutions to protect economies and societies from one of the world’s most devastating adverse weather events.

In fact, European windstorm reinsurance has been extremely cheap in recent times, resulting in a decline in the issuance of catastrophe bonds for the peril as traditional cover is extremely competitively priced.

However, should an event occur of the magnitude that’s discussed and examined in Swiss Re’s report, resulting in substantial, and even unprecedented insurance industry losses, it would likely stimulate greater interest in the issuance of cat bonds to cover the peril again.

The report provides insight into a peril which may be being priced too cheaply right now, according to many reinsurance and ILS market players. Were one of these historic events to occur today, it could provide the impetus to raise pricing across European windstorm exposed treaties.

The full Swiss Re report can be accessed here, which provides insight into the reasoning for selecting the storms it did and the methodology used to produce the report.