Industry must get better grip on flood risk across Europe

The re/insurance industry must get a better handle on flood risk in Europe, which remains underestimated and underinsured, Michael Pickel, member of the executive board of Hannover Re responsible for target markets in P&C reinsurance, told Baden-Baden Today.

Floods in 2013 caused around €10 billion worth of damage in Bavaria, Saxony and Saxony-Anhalt, as well as in neighbouring countries, and many affected people lacked suitable insurance coverage.

“Flood remains an underestimated and underinsured risk, as we have seen in the US with hurricanes Harvey and Florence,” Pickel said.

In 2017, Harvey unleashed an unprecedented amount of accumulated rain in the US, causing catastrophic flooding in some of the most populated areas of the Gulf Coast. Around 200,000 homes were flooded, and 500,000 vehicles damaged. Total economic losses resulting from Harvey are estimated at $85 billion; around $30 billion of this was insured.

Pickel suggested that flood models for Europe need to be improved to provide better transparency on existing risks and improve mitigation strategies.

“We should support existing and new initiatives in risk assessment and risk modelling, and align forces to help close this protection gap,” he said.

Researchers are predicting a significant increase in storms in Europe, and climate change is believed to be a driver for this.

This has motivated some re/insurers to redesign their risk models to calculate potential losses.

Floods are among the most costly natural disasters in Europe, according to a publication on the European Commission’s online science and knowledge service. Their impact has grown steadily in the past decades due to population growth and more development in areas prone to flooding.

A study by the EU, Multi-model projections of river flood risk in Europe under global warming, suggests climate change will make the frequency and intensity of floods worse.

“Mid-sized storms are currently a bigger challenge for primary insurers in Europe than major storms, which we haven’t seen for a while,” Pickel said.

“More cedants buy aggregate excess-of-loss (XL) coverage to help protect against a frequency of mid-sized losses. Solvency II has helped increase demand for natural catastrophe coverage during the past two years, but the focus was on the top layers in cat-XL programmes, so it didn’t materially impact market premiums.”

More demand

Hannover Re is observing additional demand for capital optimisation products on the life and health and property/casualty sides of the business.

“We also continue to see growth opportunities in parts of Asia and with larger clients on a more holistic basis and in cyber protection for small and medium-sized enterprises,” Pickel said.

Overall, reinsurance rates are lower than they should be, Pickel said, but he expects any meaningful change to be driven only by more losses.

“We have seen a quiet first half-year regarding catastrophise. If losses from natural disasters remain benign in the second half of the year, we might be struggling to achieve modest increases at the January 2019 renewals,” he noted.

There have been several significant events in the second half of 2018 including typhoons Jebi and Trami in Japan and hurricanes Florence and Michael in the US.

Independent of price development in the January renewals, Hannover Re is finding attractive business in a number of areas.

“In markets such as specialty or long-tail lines, we benefit from our strong rating and we see price increases in other areas such as German motor or in US casualty including workers’ compensation,” Pickel said.

For Germany, Hannover Re expects slight rate increases in the motor liability market in non-proportional business and stable pricing on the proportional business.

The reinsurer also expects at least unchanged prices and improved terms and conditions in industrial and commercial business due to continuing losses. For cat-XL and comprehensive motor XL coverage it expects rate increases in loss-affected lines and regions and at least stable rates and conditions in loss-free treaties.