At EUR 5 billion or more, the insurance and reinsurance loss from flooding in Europe over the past week or so will still have a relatively minor impact on the sector, but combined with other recent major storm losses, analysts at Bank of America believe that there will be some upward pressure on pricing in subsequent renewals.
As we explained in our recent coverage of the Western and Central European flood disaster, there remains great uncertainty about how great the industry’s loss will ultimately be.
Obviously it will be in the many billions of euros, as Aon explained, but how high is harder to say.
Analysts at investment bank Berenberg said it could be as high as US$3 billion, but as we’ve explained, our sources suggest it could be higher than that, and continue to suggest it.
Bank of America’s equity analyst team took an analytical look at the potential impact on the European insurance and reinsurance industry, benchmarking EUR 5 billion.
“To put it in the context of the current market capitalization, even in the case of an insured damage of EUR 5 billion, the impact is estimated at 1-3%. In other words, the impact will likely be small,” they explained.
At that level, the impact on major European reinsurance companies could be between 9% and 21% of earnings, the analysts estimate, with SCOR and Swiss Re expected to take the biggest financial hit, with Munich Re and Hannover Re’s earnings nearly will yield half of their profits .
But while this doesn’t make sense on its own, if you add the recent flooding floods to: the forecast of severe storms and hail in June across Europe leading to losses of about $4.5 billion or more also, you’ll get something that could be enough to get the renewal market moving, the analysts think.
The analysts focus their analysis on Germany, where the storms of June are estimated to have cost about 1.7 billion euros.
For the German market, they say: “Taking into account both the German June storms (EUR 1.7 billion insured losses) and the current flooding, this is likely to support further upward pressure on German book pricing at 1/1 renewals. “
This is the first forecast of firmer prices in European markets for some time.
While the global reinsurance market has solidified in recent years, and may have hardened in some areas, Europe is far from seeing significant rate hikes, and in many cases may have barely kept pace with inflation.
As a result, a positive move in reinsurance rates in Germany, or more broadly in Europe, may not be seen as strengthening, but catching up on where they should be.
The European real estate catastrophe reinsurance market remains undervalued in many markets.
Many ILS funds in particular do not allocate much capital to European catastrophe risks these days, because they believe the pricing does not cover the risks.
Could the recent floods be a catalyst for much-needed fortification in this region?
Time will tell.
But the fact that major reinsurers would closely analyze this flood and any statements about the possibility of a climate change link would seem imprudent if rates don’t rise after that.
If large reinsurers are really taking an ESG oriented path, in terms of decarbonising investment and risk portfolios, while also referring to the climate associated with large catastrophic losses on their own turf.
Surely then their only response to excessive losses, from an event they said is itself likely climate-related, would be to drive up prices for catastrophic exposures of this nature in the region?
Whether that happens, of course, depends on a number of factors. Last but not least, supply and demand, as well as how the rest of this year is going for the major reinsurance companies.
But as Europe becomes riskier and these kinds of severe weather events are expected to become more frequent, as the reinsurers themselves claim, then pricing will need to increase to more than make up for the mounting expected losses.