Fitch Ratings highlights the growing vulnerability of European insurers to weather-related losses, primarily attributed to reinsurers reducing coverage against medium-sized natural catastrophe risks.
The trend, which commenced in 2022, is exemplified by results from the Italian non-life market, demonstrating a notable impact on profitability following reinsurance cutbacks.
Global reinsurers have responded to the escalating frequency and volatility of weather-related losses due to climate change by tightening terms and conditions, limiting aggregate covers, and reducing protection for lower layers of natural catastrophe risks.
This strategic shift has left insurers less shielded against secondary peril events, with some opting to purchase less coverage due to higher reinsurance prices.
The third-quarter results for Italy’s major non-life insurers, including Generali, Unipol, and Allianz Italy, underscore the increased exposure to weather-related losses.
Natural catastrophe losses, net of reinsurance, played a more significant role in their loss ratios during the first nine months of 2023 compared to the same period in 2022.
While Generali’s ratio decreased, Unipol and Allianz Italy experienced higher loss ratios, mainly attributable to reduced reinsurance protection.
Italy, like several other European countries, has grappled with substantial natural catastrophe events in 2023, such as floods in central Italy and hailstorms in the north.
However, the cost to insurers has been notably higher due to decreased reinsurance cover. For instance, the Allianz group in Germany reported a 19.1 percentage point impact from natural catastrophes in the third quarter of 2023, compared to 14.3 percentage points in the same period in 2021, despite the latter experiencing severe flooding.
Italy’s insurance against natural catastrophe risks is relatively low by European standards. The majority of large commercial buildings are insured, but only 15% of SME commercial real estate and 5% of residential real estate have coverage.
Additionally, only 5% of motor insurance policies include catastrophe cover, according to ANIA, Italy’s national association of insurance companies.
The Italian parliament is considering a proposal to mandate natural catastrophe insurance for businesses by the end of 2024, potentially creating a business opportunity for insurers but introducing greater volatility to their results if reinsurers do not reverse recent restrictions.
Despite the higher loss ratios for Italian insurers in the first nine months of 2023, it does not impact their ratings significantly. The three largest companies still reported combined ratios below 100%, indicating an underwriting profit.
Analysts anticipate premium rates to rise, potentially offsetting some or all of the future impacts of increased exposure to weather-related losses and higher reinsurance costs.
Notably, the motor insurance sector, a primary business line, is expected to see substantial premium increases, given its largely loss-making nature, partly attributed to heightened exposure to natural catastrophes.
