With climate concerns growing across the re/insurance market, Swiss Re’s Frank Reichelt warns that secondary peril losses will inevitably grow, meaning a year like 2021 in Europe is “no outlier on a global scale.”
With the January 2022 renewals coming up, reinsurance buyers are reflecting on what has been another active year for catastrophe losses, particularly in Europe, where devastating floods and wildfires ravaged many countries and caused billions in insured losses.
Speaking in an interview with Reinsurance News, Reichelt, who serves as Head of Northern, Central & Eastern Europe at Swiss Re, noted that the recent natural catastrophe events in Europe have been at the forefront of renewals discussions.
“Climate change and secondary perils, such as floods, wildfire, hail and convective storm have been the dominant topics in the discussions with our clients so far, certainly also driven by the huge natural catastrophe losses in Europe this summer like floods in Germany and Benelux or wildfires in Turkey and Greece,” he noted.
It’s thought that the losses in Europe will lead to more demand for reinsurance next year, as carriers react to the unexpected scale of losses in 2021 and seek to better protect their capital and Solvency II positions.
Another factor driving demand will be the growth in underlying business as the take up of certain insurance coverages in Europe increases, for example flood protection in Germany.
This dynamic should result in more favourable pricing for reinsurers, following several years of pressured rates, particularly as the level of losses experienced in Europe this year is likely to become a more common occurrence, Reichelt explained.
“The flood losses in Europe have been a reminder of scientific facts we have known for a while, facts we have been very outspoken about: The effects of climate change are manifesting in warmer temperatures, rising sea levels, more erratic rainfall patterns and greater weather extremes,” he told Reinsurance News.
“Taken together with rapid urban development and accumulation of wealth in disaster-prone areas, secondary perils, such as hail, floods or wildfires, lead to higher catastrophe losses, not only since June this year,” he continued.
“We expect the insurance and reinsurance industry to be on top of these developments and have loss picks that are commensurate with the trends triggered by climate and socioeconomic change.”
In recent years, reinsurance prices in the EMEA have been pressured by benign loss experience and significant overcapacity, but Reichelt expects that the magnitude of losses this year will finally cause rates to adjust to the new reality of climate-driven secondary perils.
“The market has clearly been a buyer‘s market in recent years; there has simply been too much capacity in the market,” Reichelt said. “Reinsurance prices, following the economic law of supply and demand, have therefore been constantly under strong pressure and have no longer reflected the actual risk situation properly.”
“In addition, it needs to be recognised that while significant progress in modelling capabilities has been made in recent years, secondary perils have in the past not received the attention by large parts of the insurance industry they should have. Compared to the high quality of modelling for primary perils, there is room for improvement. Adequate risk pricing needs to take this into consideration.”
Looking ahead to the January renewals then, it seems likely that reinsurance and retrocession prices are likely to rise significantly, in some cases combined with limitations on the scope of cover.
Reichelt added that, so far, discussions with clients have also focused on changes to the structure of reinsurance programs, such as attachment points, capacity at top end of the cover, and sideways protection.
And more than this, for reinsurers like Swiss Re, there will growing demand from clients for support in managing climate change and secondary perils with natural catastrophe models and analytical tools, as well as with reinsurance capacity.
“Despite the large global natural catastrophe events, the reinsurance capital positions of the reinsurers have not changed much. There will be no shortage of reinsurance capacity and clients will still have a lot of choice,” Reichelt noted.
“However, we experience that clients continue to demand excellent quality, professional know-how and strong financial security from their reinsurers. Challenging topics like climate change and sustainability require insurers and reinsurers to make our industry, our economy and our world more resilient. This is where differentiation comes into play. Swiss Re is a leading know-how provider in all these areas and this is why many insurance companies select Swiss Re as their leading reinsurer.”
Concluding Reichelt stressed that the re/insurance industry “must listen to scientists” and incorporate their findings into the risk assessment process in order to make sure that the consequences of climate change remain insurable.
“Climate change is not a static problem, it is a dynamic process,” he said. “Nowadays, climate change can be modelled, which is a prerequisite to assess the risk in insurance and reinsurance properly. “At Swiss Re, we have strongly invested in our natural catastrophe specific research over the past decades and have been turning science into actionable underwriting insights.”