Analysts at Bank of America (BofA) have argued that the worsening loss experience for European reinsurers observed in recent years is indicative of widespread underwriting issues, rather than a structural problem for the industry at large.
The firm attributed the poor large loss experience to the fact that reinsurers are generally taking a higher share of overall losses.
This seems to be driven by climate-induced changes to natural catastrophe activity, in combination with less disciplined underwriting practices, such as growing aggregate covers and lowering attachment points.
“In our view, these issues can be addressed by pruning the portfolio and reducing exposure to some of these problem areas,” analysts at BofA said, adding: “in our view, the overall insurance industry has no structural issue with NatCat losses.”
BofA further noted that, while the absolute amount of economic and insured losses increased over the past 10-20 years, this is likely a reflection of GDP growth and higher insurance penetration.
Looking at the first quarter of 2021, analysts believe that the level of nat cat and man-made losses during this period will cause most European reinsurers to report large losses well above budget.
“We estimate that Q1 large losses might count for 21-42% of the full year large loss budget, with Munich Re at the low-end of the range and Swiss Re at the high-end of the range,” BofA stated.
Assuming large loss experience for the remaining 9 months of the year will be in line with budget, Hannover Re and SCOR are tracking at an estimated 108-109% of FY budget and Swiss Re at an estimated 124%, according to BofA figures.
Munich Re is the only large European reinsurer expected to report large losses below budget for Q1, although this may largely reflect is relatively higher budget for the quarter.
However, despite a poor start of the year and continued elevated large losses, analysts note that Swiss Re already took steps to address many of its underwriting issues last year, while Munich Re and SCOR also demonstrated a focus on underwriting reforms at the 1/1 renewals.
All four European reinsurers raised their 2022 large loss budgets, with Munich Re maintaining the highest budget at 8.5%pts for nat cat and 13% including man-made losses, and SCOR reporting the biggest increase in budget, at +43% in 2022 compared to 25-27% for its peers.
In addition, BofA reports that Munich Re and SCOR both increased retro protection in 2022, while Hannover Re reduced retro protection.
“Taking this all into account, Munich Re and SCOR are likely best positioned to see improving large loss experience going forward,” analysts concluded.