European flood losses may support reinsurance renewal prices: BofA

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At EUR 5 billion or above, the insurance and reinsurance loss from flooding in Europe over the last week or so will still be a relatively minor impact to the industry, but combined with other recent severe storm losses analysts at Bank of America believe there could be some upward pressure on pricing at the next renewals.

Flooding in Germany, photo from Christoph Reichwein - AFP

Flooding in Germany, photo from Christoph Reichwein – AFP

As we’ve explained in our recent coverage of the western and central European flood disaster, there remains significant uncertainty over how large the industry loss will eventually be.

It’s clear that it will be in the multiple billions of Euros, as Aon explained, but how high is harder to say.

Analysts at investment bank Berenberg said that it could be as high as US $3 billion, but as we explained our sources are suggesting it could run higher than that, and continue to suggest this.

Bank of America’s equity analyst team took an analytical look at the potential impact to the European insurance and reinsurance industry, using EUR 5 billion as a benchmark figure.

“To put it in the context of the current market capitalisation, even in the event of a EUR 5bn insured losses event, the impact is estimated to be 1-3%. In other words, the impact is likely to be small,” they explained.

At that level the impact to major European reinsurance firms could be between 9% and 21% of earnings, the analysts estimate, with SCOR and Swiss Re expected to take the biggest financial hit, with Munich Re and Hannover Re’s hit to earnings almost half theirs.

But, while this isn’t meaningful on its own, when you add the recent flooding losses to the expectation of June severe storms and hail across Europe driving some US $4.5 billion or more of losses as well, then you get something that could be sufficient to move the renewal market, the analysts believe.

The analysts are focusing on Germany in their analysis, where the June storms are estimated to have cost around EUR 1.7 billion.

For the German market they say, “Taking into account both the German June storms (EUR 1.7bn insured losses) and the current floods, this likely will support further upward pressure on pricing of the German books at 1/1 renewals.”

This is the first forecast for firmer pricing in European markets for some time.

Even while the global reinsurance market has firmed over the last few years, perhaps hardened in some areas, Europe has not seen anywhere near as significant rate increases, perhaps barely keeping up with inflation in many cases.

As a result, positive movement in reinsurance rates in Germany, or more broadly in Europe, may not be seen as firming, so much as still catching up to where they should be.

The European property catastrophe reinsurance market remains underpriced, in many markets view.

In particular, many ILS funds do not allocate a great deal of capital to European catastrophe risks these days, finding the pricing doesn’t cover the risks, in their view.

Could the recent flooding prove a catalyst for some much needed firming in this region?

Time will tell.

But the fact major reinsurers are said to be closely analysing this flood event and statements have already been made about the possibility of a link to climate change, it would seem imprudent if rates do not rise afterwards.

If major reinsurers are truly following an ESG-focused paths, in terms of decarbonising investment and risk portfolios, while also citing climate in relation to major catastrophe losses on their home turf.

Then, surely their only response to outsized losses, from an event they said themselves is likely climate linked, would be to raise pricing for catastrophe exposures of this nature in the region?

Whether that happens will, of course, depend on a number of factors. Supply and demand not the least of them, as well as how the rest of this year pans out for the big reinsurance firms.

But if Europe is getting riskier and these kinds of severe weather events are expected to become more frequent, as the reinsurers themselves claim, then pricing has to rise, to more than account for rising expected losses.

Also read:

European flood industry loss seen up to US $3bn by Berenberg.

European flood losses expected in the multiple billions of Euros: Aon.

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

Ongoing European flood event to drive industry losses in the billions.

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