Catastrophe loss activity has been on the rise in Germany and while there haven’t been any really major single event impacts the aggregation of these losses has been having a rising impact on insurance and some reinsurance capital deployed there.
Reflecting the increased catastrophe loss experience of recent years in Germany and the fact it is largely expected to persist at this higher rate, ratings agency Fitch Ratings is increasing the amount of catastrophe losses it factors into the ratings of insurance and reinsurance companies operating there.
Fitch explained that it is doing this because “average claims for natural catastrophe losses have increased in recent years” in Germany.
The increase is relatively meaningful as well, as Fitch is adding 20% to the total annual German insurance market catastrophe loss, which effectively means it is expecting insurance and reinsurance companies there to suffer 20% more cat losses than the expectation was prior to this change.
“We typically consider claims of up to EUR2.5 billion for natural catastrophe losses to represent a normal catastrophe year for the German non-life sector,” Fitch explained. “However, in future we will regard claims of up to EUR3 billion to be within the range of normal catastrophe activity.”
As a result of this change, the German insurance industry can expect an additional 4 percentage points added to its loss ratio.
Fitch undertook this change because the German insurance industry has poor experienced underwriting that has not improved, “because of increasing average claims expenses and high levels of natural catastrophe activity in 2018,” this despite strong profits and falling claims frequency.
Commercial insurance business in Germany has suffered though and as a result Fitch is expecting that rates will increase there in 2020.
Fitch also believes that property insurance could turn profitable, after rates have increased of late, barring catastrophe losses going above its new expectation for the German insurance market.
It’s interesting to be talking about the German insurance market in this way, as one where catastrophe loss expectations have risen 20% for the industry and rate firming is expected in commercial and buildings insurance lines.
The reason it’s interesting is that the German reinsurance market is almost permanently soft, given the influence of the giant re/insurers that hail from the country and maintain a stranglehold on the large reinsurance programs placed there.
Part of the issue, of course, is that Germany is not prone to the major catastrophes that tend to drive industry losses in the tens of billions of Euros. As a result and because Europe as a diversifier for global re/insurers is so attractive, the reinsurance market there is not facing the same pressures of competition from the capital markets as other more catastrophe exposed regions of the world.
The increase in catastrophe loss expectation is reflective of a greater incidence of losses from events including hail storms, tornadoes and severe convective weather in Germany. But without some much larger losses, from a major European windstorm for example, it’s unlikely to be sufficient to cause any upwards pressure on property catastrophe reinsurance rates in the country.