Europe floods won’t impact cat bonds, show need for protection: Plenum

The ongoing and historic flooding across Europe is very unlikely to have an impact on the catastrophe bond market and insurance or reinsurance market losses will only be a fraction of the overall economic impact, showing the evident flood risk protection gap and the opportunity for cat bonds to help close it, according to Plenum Investments.

Flooding in Germany, photo from Christoph Reichwein – AFP

As we reported earlier today, severe flooding across a number of countries in Europe could become one of the most expensive flood episodes on record in the region, with the insurance and reinsurance industry expecting billion Euro industry losses.

But those losses are only going to be a fraction of the overall economic impact, as flood risk remains very under-insured and for the insurance-linked securities (ILS) market even as an industry loss in the billions, the impact of this event would be slight, even through private collateralised reinsurance and retrocession deals it seems.

Specialist Swiss catastrophe bond and reinsurance linked investment manager Plenum Investments said today that it does not believe any cat bonds could be affected by these floods in Europe, despite the devastating impacts seen.

Plenum explained, “We do not expect the dramatic floods to have any impact on CAT bonds. While some cat bonds cover storm risks in Europe only around 9% of the market is at least partially exposed to European windstorms.

“However, only one CAT bond issued by the Italian insurer Generali covers material storm risk in Germany, but the flood exposure of this bond is very small.”

Overall, Plenum expects only a small component of the economic losses will actually be covered by insurance and or reinsurance.

“In comparable flood events in Germany in the past 30 years, the share of insured losses was 20% to 25% of total economic,” Plenum said.

Plenum believes there is work to do in better protecting people and assets against flood risks in the European region, which presents an opportunity for market expansion.

The investment manager explained, “The protection gap shows the growth potential for P&C (re)insurers in Europe.”

Adding that, “CAT bonds can help to close this protection gap going forward. Increasing supply of cat bonds covering European perils will provide new opportunities for investors to optimize their portfolios.”

Once again a major flood event is going to lay bare the lack of insurance protection in-force, especially for the much broader economic effects of such a wide-reaching catastrophe.

It also drives home the need for technological innovations to enable structuring of risk protection that ties the disaster footprint to broader economic effects, enabling new risk transfer tools to be developed to provide greater financial resilience to affected communities.