Perilous times ahead for Europe’s risk carriers

“The most apparent area of ‘earnings-driving’ perils in Europe is related to flood and increased levels of downpours, which can be rain, snow or hail,” said Tobias Andersson, head of Continental Europe at Howden Re. It is well accepted in the scientific community that higher temperatures and warmer air allows for more moisture to be carried. 

Allied to changes in global circulation patterns, these shifts in climate patterns means more extreme downpours. In addition to this development for the peril, societies have developed to be more densely built with increases in urban areas, which of course further levers the consequences to the peril. 

“Reinsurers have struggled to capture this for some time, and following the hardening during 2023/2024, it’s now reflected in pushed up retention levels and increased pricing. However, we do not believe we are at an optimum, neither for insurers nor reinsurers,” said Andersson.

“It’s not the same trend everywhere, and for all the ‘earnings-driving’ perils there is an obvious need to further improve understanding and impact from the changes in order to create the best solutions,” he pointed out. 

Andersson acknowledged the complexity in addressing shifts in loss activity patterns. “We’ve all seen the commonly shared statistics of headline nat cat activity, which show a pattern of increased losses before any exposure growth is taken into account,” he said.

“You can debate how much of this headline growth is due to actual increased peril activity versus society being more vulnerable. It’s not an easy question, and it varies by geography,” he added.

Reinsurers are in a better position today than a couple of years ago, as retention levels have risen and pricing has increased. However, cedants are currently in many cases carrying more risk than they would like and this should be viewed as an opportunity for reinsurers to do more business, Andersson said. 

Howden Re’s 2024 “Beyond the Horizon” report highlighted that for an average year for nat-cat, that cedents are retaining an additional $15 billion of nat cat losses in aggregate, at 2024 retention levels relative to 2022.

“We need to keep working to find better solutions—not just limitations on how the risk is transferred, but solutions that ensure the risk is transferred in a way that works for reinsurers while solving problems for insurers,” Andersson noted.

Howden Re has been at the forefront of these innovations, particularly through advanced modelling tools.

“At Howden Re, we spend a lot of time ensuring we do whatever we can to provide advice for re/insurers, ensuring that models properly reflect current climate conditions, not just those observed in history,” Andersson said.

“Regulators are acting on these trends now. The proposed changes to the European Insurance and Occupational Pensions Authority (EIOPA) standard formula based capital requirements will also contain more of the earnings-driving perils,” he added. 

“In many parts of Europe, the EIOPA standard model capital requirements previously included only windstorms as a peril. Now, earnings-driving perils are part of the equation—it’s something that can no longer be neglected.”

“We’re making updates to the flood models in Europe.”

Thinking ahead

Andersson stressed the importance of forward-thinking solutions. “Modelling and analytics are absolutely key. While the only thing we can know for sure is that no model is perfect, the models play a very important role in providing the best possible points of reference of current and future climate conditions for the market,” he said.  

“We invest a lot of time and effort at Howden Re into improving this space to help clients and reinsurers better understand, make adjustments and progress in their views of risk.

“We’re making updates to the flood models in Europe, and that’s an area we find of great importance,” he explained. “It adds real value to our clients.”

As the industry looks toward renewals, Anderson believes the cautious approach taken in 2023 has carried into 2024, albeit with some shifts in the market landscape. 

“We saw a clear hardening in the market at the 1/1 2023 renewals, and that level has been largely maintained at 1/1 2024,” Andersson said. “However, we’ve also seen appetite and capacities grow. 

“Reinsurers’ discipline around retention levels for cedants has been kept, but we can now identify an increase of appetite and capacity in the market,” he posited.

“Results have significantly improved for reinsurers and insurers are left to face some challenges in managing their theoretical net loss positions.

“Now is therefor a time to work hard but also to be innovative.”

One of Howden Re’s strengths, according to Andersson, lies in the company’s ability to innovate and collaborate. 

“We’ve been successful in a number of cases, and we’re trying to leverage that further by being creative to find solutions that fit reinsurers’ appetites while helping insurers improve their theoretical net loss positions.

“That’s key—let’s keep talking about solutions, let’s continue to be creative and innovative, and we will get there.”

Tobias Andersson is head of Continental Europe at Howden Re. He can be contacted at: tobias.andersson@howdenre.com 

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