Adjusting to the ‘new realities’ of nat cat cover: VIG Re

Countries in western and southern Europe have faced unprecedented nat cat events over the last five years beyond the European wind scenario, which is regarded as the main atmospheric natural catastrophe for the region. Floods, hailstorms, and heatwaves—including related wildfires and drought—the so-called “secondary perils” are affecting Benelux, France, Italy, Portugal and Spain to a large new degree.

Looking at 2022, the year started with Ylenia, Zeynep and Antonia windstorms mostly in Benelux and Germany. In France, following a late frost episode, multiple heatwaves came after May, triggering severe hailstorms. With unmatched severity, they deeply impacted a broad area across almost the whole country, resulting in more than one million reported claims and an estimated of circa €4 billion insured losses with an expectation that the average costs will rise.

Summer forest fires across Europe will also rank high. Deadly winds with gust speeds of over 220km/h battered Corsica and Northern Italy in mid-August. At the end of August, drought in Europe is said to be the worst in 500 years—all this with still four months of the year to go. Without being assertive it is difficult not to think about climate change in action before our eyes.

Such a high frequency of meaningful secondary perils events, combined with a sometimes opportunistic purchase of low or horizontal coverage of their clients, have led to poor results for many reinsurers involved. However, there are good reasons to remain optimistic—as reinsurance products responded, awareness spread swiftly and the leading insurers started sharing their view describing upcoming rising claims cost, questioning the balance of certain national nat cat schemes such as the French one.

In Spain, insurers needed to adjust their coverage as new claim patterns arose and recent weather-related events—Gloria or Filomena—were barely covered by the Spanish catastrophe insurer, the Consorcio. For risks becoming systemic in terms of geographies, public-private partnerships need to be reinforced or newly designed. A good example is the troubled Belgian calamity fund pool post Bernd, with current blurry lines yet to be clarified.

However, without proper insurance premium charged upfront, we may play around sharing the costs between insurers, reinsurers, retrocessionnaires or even national pools, favouring one party or the other depending on market cycle, but we will not make our industry sustainably resilient.

Confidence needed

For VIG Re, careful underwriting positioning, diversification beyond cat covers and a prudent gross to net approach has been paramount to manage the headwinds, but we are not unscathed. For the on-scope nat cat perils, VIG Re will not, unlike some markets, favour pay-back on existing covers, but continue to push for adjusted reinsurance structures and reasonable retentions to avoid money-swapping.

Broad horizontal protections as we have seen in the past, bought at opportunistic terms, will not find its supply. Contract certainty and proper risk alignment still remain a topic. In brief this is about basic underwriting focused on protecting our customers’ balance-sheets—not to subsidise premium or coverage gaps.

With all the above now magnified by high inflation levels I see the need to proceed with such reinsurance programme adjustments and to properly reflect in pricing the evidence of the unfavourable trends that we can witness almost daily. And I have not even started elaborating on the threats of the increasing economical and geopolitical risks we are facing.

Without restoring the confidence of investors and boardrooms that sustainable profit margins can be achieved over time or that our markets are capable of adjusting to the “new realities” we will see further reduction of capital deployed despite growing demand.

Heading towards the 1/1 renewals we stay committed to maintaining VIG Re’s sound and sustainable support. For this, we look forward to continuing the open and transparent discussion with our customers.