BADEN-BADEN ROUNDUP
Hard choices over flooding: secondary perils in the balance at 1.1 renewals
Secondary perils were the primary topic at Baden-Baden this year. The consensus is that they mean Europe can no longer escape rate rises, and who pays will determine whether we’re truly seeing a hard market. Intelligent Insurer reports.
The fading importance of the COVID-19 crisis at the Baden-Baden Reinsurance Meeting was most apparent in the fact that the event went ahead in person. The facemasks, testing and limited attendance were a reminder of residual concerns, but the pandemic no longer dominates reinsurers concerns.
As attendee Johannes Martin Hartmann, chairman of VIG Re, the Prague-based reinsurance arm of Vienna Insurance Group, put it: “The industry has found a way to cope.”
Ahead of the meeting there was little doubt about what would replace the pandemic as the main talking point: natural catastrophes—and particularly secondary perils.
Recent years have brought a “dramatic increase” in losses from secondary perils, said Monica Cramér Manhem, president of international reinsurance and managing director of SiriusPoint, which launched in February.
“This fundamental change is one of the main challenges we are facing as reinsurers internationally. Frequency and severity losses are not limited to perils such as earthquake and wind but extend to flooding, hail, drought, and wildfires.
“The frequency and severity of these losses mean that the assessment and pricing of the risk have to change,” she said.
Years of wildfire losses in North America have already dented the reinsurance industry’s confidence in its ability to assess the actual risks it faces. The July floods in Belgium, Germany, and elsewhere have brought this home to Europe.
A clear trend
Even without such context, the scale of the July floods—and the fact they hit Germany so hard—guaranteed they were going to be a big topic of discussion in the Black Forest. In the run-up to Baden-Baden, the loss estimates from re/insurers were coming through: $220 million for Everest Re; $725 million at RenaissanceRe; $55 million at AXIS Capital.
In Germany alone, the German Insurers Association estimated insured losses at €7 billion ($8 billion). Another €2 billion from Belgium and additional losses from Luxembourg, the Netherlands, Switzerland and elsewhere add to the final tally.
“The frequency and severity of these losses mean that the assessment and pricing of the risk have to change.”
Monica Cramér Manhem, SiriusPoint
Yörn Tatge, senior vice president and director of cat risk modellers AIR Worldwide, summed it up. “When you look at the total insured losses from this particular event as it looks now, it’s the biggest insured loss event ever in Europe. In Germany, it was the biggest by far.”
However, it could be possible to write these losses off as a freak event. The circumstances were peculiar. First, there was the rain—100mm to 150mm in 24 hours in many areas. “It was record-breaking,” explained Laurent Marescot, a senior director at risk modellers RMS.
“The preceding weeks had left the soil saturated so that it couldn’t absorb any more water. That was the second factor,” he added.
Even then, other elements are needed to explain the extent of the damage, according to Tatge. They include the steep slopes along the river Ahr that helped the water build speed and sweep in logs and debris that clogged bridges, leading to the large surges.
The strength of the water flow and the debris ultimately combined to “torpedo” buildings. It was this that led to much of the unprecedented damage.
“Normally, you would see waters rise and buildings underwater—it’s a big loss but manageable. In this case, many buildings were destroyed by the amount of water, its speed and the debris,” he said.
It was not simply the scale of the loss that concerned those at Baden-Baden, but the potential for repeat performances. Swiss Re estimated industry losses at around $12 billion, but there was also a broader lesson to draw, it insisted during its virtual Baden-Baden meeting.
“Climate change has arrived in Europe, and we know it’s here to stay,” said the reinsurer’s head of property underwriting for EMEA, Beat Kramer Mölbert.
“Science tells us it’s even getting worse,” he added.
Marescot agreed. Regardless of the peculiarities of any particular event, most understand that the risk is not going away. “While it’s difficult to link any individual event to climate change, there’s consensus on the overall trend,” he said.
Swiss Re predicts that countries such as France, Germany and the UK could see insured losses from flood triple in coming years.
Challenges for modelling
There is more than one way the industry can respond to that. Most obviously, there’s a challenge for modelling—and for re/insurers’ use of it. Mölbert’s colleague at Swiss Re, Frank Reichelt, said: “The industry needs to redouble its efforts to understand climate risks through modelling and analytics, turning science into actionable underwriting insights.”
The focus on flood modelling is perhaps overdue. It is, after all, the costliest peril globally, as Adam Podlaha, head of impact forecasting at Aon, pointed out. The recent losses have added to the impetus to improve models.
“With the recent losses, what it will give us—despite its being a terrible tragedy—is lots of valuable insight, especially in terms of claims information,” he said.
“Every time we have an event, and we learn something from it, we incorporate it into our models,” agreed Tatge.
The European losses underline the need for building resilience. That’s something that has long been pushed by organisations such as Flood Re, the UK government and insurance industry joint initiative to ensure continued coverage for homes at significant risk of flooding.
“I don’t think there’s enough attention on adaptation at the moment,” Andy Bord, Floor Re chief executive officer, said. The impacts of climate change are “already in the system”, he insists. The key is understanding how to adapt.
Part of that will be down to the government: a joint Association of British Insurers and Flood Re report, published in June 2021, found that every £1 spent on flood defence maintenance saves £7 in spending on new defences. But the industry can also play a role.
“From Flood Re’s perspective, that’s how to adapt homes to make them more resilient against flooding, planning to make sure we’re not making the situation worse and that we’re building in the right places in the right way,” Bord said.
“In this case, many buildings were destroyed by the amount of water, its speed and the debris.”
Yörn Tatge, AIR Worldwide
Its “build back better” campaign, which it plans to launch in the first quarter of next year, reflects this. It would permit the payment of claims to include not just repairs on a like-for-like basis but an additional amount for resilient or resistant repair, above and beyond the actual damage.
“It is a way for the insurance industry to ensure that a home that’s been flooded isn’t put back into the same state at the same risk of future flooding, and that can make a real difference,” said Bord.
As Swiss Re’s Reichelt said: “Going forward, society cannot afford to wait until the next event happens. Pre-emptive actions have to be taken now.”
A legacy of losses
Those actions will include rate rises, and how long reinsurers can wait for these is also open to question.
It’s not just floods that are adding to the pressure. There are other secondary perils, particularly wildfires, and losses are compounded by increases in repair and construction costs. And even if it’s no longer the headline topic, COVID-19 has not gone away.
“We cannot talk about the 1/1 renewals without speaking about the impact COVID-19 will have on reinsurance treaties. There is still so much uncertainty around the true impact of this unprecedented pandemic,” said SiriusPoint’s Cramér Manhem.
And, of course, there are the traditional nat cat losses to look forward to. As Michael Pickel, head of property and casualty reinsurance at Hannover Re, pointed out, the year is far from over.
“There are still winter storms possible; earthquakes are likely; and there could be high industrial losses,” he said. “The year has already reached a very significant loss burden, and this is the major focus which we want to convey with what we are doing.”
What it was doing at Baden-Baden was warning of double-digit rate increases. As Pickel put it: “To expect something which is flattish is absolutely off the table—it was already off the table in Monte Carlo.”
It is not just 2021 bothering reinsurers. The industry has suffered years of heavy losses, while low interest rates have limited scope to rely on investment returns. As a result reinsurers have failed to meet their cost of capital for years, S&P Global Ratings pointed out.
The sector might have “pushed hard on the pricing”, but its director and lead analyst, insurance, Ali Karakuyu is still not convinced that is enough.
“We are not yet comfortable to say we think the sector is going to meet its cost of capital over the next two years,” he said. Consequently, the agency has retained its negative outlook for the global reinsurance sector.
Hard talk
The one thing that might prevent rises is capacity, which remains plentiful. While there are definite signs of hardening in some segments for re/insurance, it’s far from universal.
“It’s capital that drives market conditions more than anything else, and at the moment, an influx of opportunities has come in,” said Acrisure Re partner David Sowrey. “In the reinsurance and retrocession markets, there remains plentiful capital to meet demand.”
For Hartmann at VIG Re, this is the “missing ingredient” in the recipe that would otherwise result in a hard market. There have been significant nat cat losses and a reappraisal of models that traditionally made European risks look attractive.
“Climate change has arrived in Europe, and we know it’s here to stay.”
Beat Kramer Mölbert, Swiss Re
There’s also the pressure on the investment income, inflation growing and the years of losses. “Reinsurers have not really made money since 2017,” Hartmann noted.
While a lot of factors suggest a hardening, the one that doesn’t is capitalisation. “If you look at the of the reinsurance industry, it’s very comfortable. Even after the events we’ve seen this year, it’s not eroding capital,” he added.
Few, if any, expect those heavily hit by the recent flood losses to escape rate increases, but there will be a range even here. Juan England, partner at reinsurance broker TigerRisk, said: “Loss-affected business will see a much wider range of increases that will depend on seasonal conditions, the size of the loss and any restructuring of programmes, but there will be an element of price increases.”
“Rate adequacy” will mean something different to every insurer, he added.
The question will be what happens to those that escaped—this time. Will predictions, such as Swiss Re’s, that Germany’s fate awaits France, the UK and elsewhere be enough to support rate rises?
That question will be behind the toughest discussions and decisions to be made for the January renewals, said Hartmann. With plentiful capacity, he’s doubtful. If it does come, however, we can say for certain that climate change has arrived not just in Europe but in European reinsurance.
“If that happens, then it will really be what I call a hard market,” he said.
Image: Shutterstock / r.Heide Pinkall, Fotorufis, Nick_ Raille_07
