The climate cost comes due in Europe: rates on the way up, says Swiss Re

“Climate change has arrived in Europe, and we know it’s here to stay,” Swiss Re’s head of property underwriting for EMEA said, speaking at the company’s virtual Baden-Baden meeting on October 14. “Science tell us it’s even getting worse.”

As the company’s head of Northern, Central & Eastern Europe Frank Reichelt said, this was bringing increasing losses and would bring increased rates at renewals.

Swiss Re estimates that major flooding in July in Germany and Belgium will cost the industry around $12 billion—highlighting the increasing losses from so-called secondary perils that climate change is bringing. Countries such as France, Germany and the UK could see insured losses from flood triple in coming years, he said—putting irresistible pressure on rates.

“Climate risks have a price tag,” Reichelt warned. “In order for the reinsurance industry to fulfil its role as a risk-taker in the future, prices need to be adequate for the risks taken.”

Even without worsening conditions, losses should increase as insurers make progress in addressing the protection gap that recent events have highlighted. This had to be a priority, he suggested.

“Many still assume that state aid will be available after extreme weather events. This reliance on the state is one of the reasons that only around 45 percent of German homeowners have bought natural catastrophe insurance,” he told the audience. “If we had had full coverage, this loss would have been significantly higher.”

He added: “Going forward, society cannot afford to wait until the next event happens. Instead, pre-emptive actions have to be taken now.”

The role for the re/insurance was not just to provide additional capacity, however. Reichelt highlighted efforts to better understand climate risks through modelling and analytics, “turning science into actionable underwriting insights”.

“With natural disasters increasing and even more people and assets at risk, we know it’s not enough to look only at historical data,” he said.

Despite all this, he suggested that those untouched by the recent flooding could escape big rate hikes at the upcoming January renewals. “We expect prices to increase in loss-affected markets with ranges depending on market loss. In loss-free classes and regions, we expect prices to remain at a healthy level, with the pace of increases reducing,” he said.

A storm in casualty

The event heard from Swiss Re heads from other lines with their views on the market and what January renewals may have in store.

For casualty, Thorsten Steinmann, head casualty underwriting for EMEA, highlighted challenges around inflation and interest rates. While current inflation spikes arising from the COVID-19 pandemic would not persist, inflation would continue to be a key medium-term risk for non-life insurers, particularly for long-tail liabilities.

“This will be driven by higher medical and wage inflation but also by more expensive spare parts and repair costs,” Steinmann warned. “Unexpected inflation will impact new business and business which is already in the books of insurers as well as reinsurers, and reserve strengthening might become necessary.”

At the same time, the “evergreen” issue of low interest rates meant that the industry could not rely on investment returns. “We have to focus on the loss ratio and technical combined ratio in order to generate profits,” he said.

The macroeconomic issues coincide with a challenging short-term outlook in motor insurance across all major markets. Steinmann said Swiss Re expected loss frequencies in motor lines to return to pre-COVID-19 times. While there were longer-term opportunities from new technologies to boost safety, that meant the next two to three years were likely to prove difficult, he suggested.

“If normal frequency due to traffic meets low interest rates and the inflationary environment I described in a business line which has always been close to 100 percent combined ratio, you have the perfect storm,” he said.

Overall, while the casualty market was diverse, Steinmann expected lines that have seen rate increases in the last few years—financial lines, larger risks and US casualty-exposed business—to continue to see rate rises. The smaller and mid-market segment, however, might escape.

“We do not expect too much of a change there,” he said.

Back on property, Beat Kramer Mölbert, head of property treaty underwriting for EMEA, reminded the audience that it wasn’t just nat cat losses or the pandemic that continued to concern the industry. Cyber remains an important topic, he said.

“Three years ago, if I had to guess where the next big industry loss would come from, I would have said from an electronic virus rather than a biological one,” he said.

“While we can see the light at the end of the pandemic tunnel, the exposure to cyber threats has not diminished. We want to control our exposures and eliminate silent cyber from our property treaties,” he concluded.