Euro property cat no longer such a hedge, capacity to reduce sharply: Clyde & Co’s Barbosa

Given the catastrophe loss experience on the European continent this year, property catastrophe risks from the region are no longer presenting such a valuable hedge to the major reinsurance firms and this could contribute to an expected sharp reduction in capacity, Eva-Maria Barbosa, a lawyer at Clyde & Co, believes.

Barbosa forecasts a challenging reinsurance renewal for the European insurance market at 1/1 2024.

One key challenge is expected to be inflation, but another is the loss experience that has been seen.

Barbosa has highlighted a key trend, which is that traditional reinsurance capacity for property catastrophe risks in Europe may not be as abundant or cheap as it has historically been.

Europe has been a region where property catastrophe reinsurance rates softened but never responded much to the hard market over recent years.

At one stage, European cat programs were pricing at levels deemed so low that the insurance-linked securities (ILS) market shied away from the region, finding the returns on capital deployed were barely supportive and in most cases downright insufficient.

As a result, European catastrophe bond activity also dwindled.

But, in 2023, we have been seeing a bit of a resurgence in interest in catastrophe bonds as a way to secure reinsurance capacity in Europe, with both new and returning sponsors seen and market sentiment suggesting we could see more, as ILS capacity is now finding European property cat risk a more attractive prospect.

Barbosa explained that, looking out to 2024, the European property cat reinsurance market is going to see some changes, with inflation potentially seen as a “significant issue” at the upcoming January renewals.

But, Barbosa believes that a bigger issue could be emerging as, “The influence of climate change on natural catastrophe losses is causing reinsurers to re-think their approach to European exposures.”

She went on to explain that, “Whereas insurers have historically viewed European nat cat as a valuable hedge against US hurricane risks, recent events such as the flooding in Germany’s Ahr valley and the hailstorms in France are making the balance between US and European business unsteady.”

This is a particularly interesting and timely comment, as it is now the second time a region of the world has been said to no longer present the hedging opportunity that it used to, for the global reinsurance giants.

It was the CEO of the Insurance Council of Australia (ICA), who recently explained that, for reinsurers, writing risk in Australia is no longer seen as the diversifying hedge it used to be.

Which, the CEO of the ICA said is contributing to the development of insurance protection gaps in the country.

In Europe, it doesn’t seem so severe that protection gaps are emerging quite yet, but it is certainly getting more challenging to secure reinsurance and retentions for insurers, and for reinsurers buying retrocession, have risen across much of the region.

With the capital efficiencies gained from writing cat risk in diversifying peril regions now seemingly declining, it stands to reason there will be quite significant shifts in appetite and so also an opportunity for alternative forms of reinsurance capital, such as from the ILS market and through catastrophe bonds.

If reinsurers cannot, or do not have the appetite to, discount diversifying peril regions quite as much as they have been, it could present ILS fund managers an opportunity to grow these portions of their portfolios, which would benefit them by adding more geographic diversification back in.

However, appetite will likely remain limited in the ILS market, unless catastrophe reinsurance renewal rates show signs of a relatively significant increase in Europe, as the spread above expected loss still remains minimal compared to the US.

“The confluence of a higher frequency of European cat events, greater severity of losses from climate change driven perils such as flood, and the impact of inflation on the cost of nat cat claims is creating a perfect storm for (re)insurers of European property cat business,” Barbosa said.

Barbosa concluded, “With practically no alternative capital available for these risks currently, there is likely to be a sharp reduction in available nat cat reinsurance capacity at upcoming renewals, and this development is likely to extend well into next year.”

Our sister publication Reinsurance News reported last week that after a heavy year of weather and catastrophe losses, renewing aggregate reinsurance is expected to be a challenge for major Italian insurers, analysts at investment bank Berenberg said.

Read all of our reinsurance renewals coverage here.