In 2023, the European property and casualty (P&C) insurance market has been hit by a wave of reduced reinsurance protection, resulting in increased volatility for primary insurers, according to a recent report by Moody’s.
The shifting landscape has prompted primary insurers to retain more catastrophe risk, with significant implications for their financial stability.
As reinsurers have scaled back their coverage of natural catastrophe risk and hiked up their pricing, primary P&C insurers across Europe are finding themselves with greater exposure to potential losses.
This shift in strategy to maintain reinsurance budgets has left them more vulnerable to fluctuations in their net results, a credit negative development.
Diversified global players in the insurance sector, such as Allianz SE, AXA SA, and Zurich Insurance Company Ltd, have managed to navigate this challenging environment by strategically reducing their exposure to certain catastrophe-prone regions or lines of business while expanding into more stable markets.
This approach has allowed them to mitigate the impact of reduced reinsurance protection and maintain a more balanced risk profile.
However, insurers with limited or no geographic diversification are facing more significant challenges. Moody’s estimates that these undiversified insurers will bear approximately 10% more of the claims costs for small to medium-sized catastrophe events compared to previous years.
As a result, their combined ratios, a key measure of underwriting profit, are expected to deteriorate more than usual when such events occur.
While reinsurers’ reduced coverage primarily affects small and medium-sized catastrophe events, larger catastrophes, occurring once every 250 years, have seen a less significant reduction in reinsurance protection.
This is crucial for insurers as exposure to large events has a more substantial impact on regulatory capital requirements. Consequently, insurers with more modest reinsurance programs have not seen a material effect on their solvency positions.
Undiversified insurers focusing on one or two territories face limited options for adjustment. Increasing reinsurance budgets could be one solution, but it comes with the risk of reduced market share.
Moreover, their narrow geographical footprint makes it challenging to offset losses with alternative profitable business. Raising prices is another option, but the industry’s pricing power is currently constrained by inflation and sluggish economic growth.
