Extreme weather events hit insurer risk appetite

Extreme weather events in 2021, including Europe’s worst flooding in living memory and an active US hurricane season, are causing some insurers to reassess their appetite for catastrophe risk in a move that will likely support higher pricing at future renewals. There are longer-term fears that changing weather patterns could see some parts of the world and certain risks become uninsurable. “The appetite for catastrophe-exposed business is generally declining among the large commercial insurers and reinsurers. On the reinsurance side, this has resulted in reinsurers re-focusing on higher layers and being more selective on the regions and perils that they’re covering. The less attractive business is finding a home, but perhaps at lower limits and higher prices, with smaller companies or new entrants that may not have the same high level of financial strength,” said Dan Ryan, senior director in the P&C ratings division at AM Best. Insurability will be a key topic in a warming world, one insurer told CRE. “There is a chance of some risks or regions becoming uninsurable and premiums unaffordable. Insurability challenges will manifest differently for different peril, for example wildfire and coastal storm surge being perils of concern,” the insurer said. This year is on course to be another costly 12 months for catastrophe losses. Swiss Re puts insured losses from natural catastrophes in the first half of this year at $40bn, well above the ten-year average of $33bn and the second-highest loss on record for a first half after 2011. Winter storm Uri, which brought Texas to a near standstill in February, caused an estimated $15bn insured losses in H1, the highest ever recorded for a US winter storm. Insured catastrophe losses are on the rise, according to Yordanka Velichkova, catastrophe perils portfolio lead at Swiss Re. Inflation-adjusted natural catastrophe insured losses have grown by 5% to 6% per annum since the reinsurer started tracking losses in the 1970s. “The annual insured nat cat loss burden today is 20 times bigger than 50 years ago,” said Ms Velichkova. The dominant drivers for rising losses are economic growth, urbanisation and asset growth in exposed areas, as well as socioeconomic trends such as changing claims behaviour, according to Ms Velichkova. While not the main driver today, climate change adds to the trend and makes certain events more severe or more likely to occur, she said. Climate change For example, the July floods in Europe were in part a product of climate change, according to the World Weather Attribution (WWA) group, a collaboration of US and European climate scientists. It found the likelihood of such an event had increased by as much as a factor of nine when compared with a 1.2°C-cooler global climate. “We are living in a world that is approximately 1.09°C warmer than 1850-1900, where climate change is already affecting every inhabited region across the globe. Hot extremes have become more frequent and more intense, while cold extremes have become less frequent and severe. The frequency and intensity of heavy precipitation events have significantly increased, while the changing climate exacerbates the favourable conditions for devastating wildfires,” said Ms Velichkova. According to AM Best’s Mr Ryan, there appears to be a growing consensus that changes in climate risk are a key contributing factor to rising catastrophe losses, but not the only one. “While the size and frequency of events seem to have increased over the last two decades, it is difficult to distinguish, given the relatively short time history, between random fluctuations, short-term factors and long-term trends,” he said. In California, which suffered the single largest wildfire ever in 2021, population density has been growing in the wildland-urban interface (WUI), an area where homes and wildlands meet, increasing the risk of wildfires and property losses. Many climatologists also attribute recent extreme fires to excessive dryness in the region. “As a consequence, insurers and reinsurers alike are very keen on managing the aggregation of risk and their susceptibility to extreme weather patterns,” said Mr Ryan. Climate change is likely to influence future hurricane activity, according to KBRA. “While there are differing views within the scientific community as to whether climate change is helping to generate increased frequency of hurricanes, there is general consensus that climate change has contributed to greater storm severity,” the analyst said. Catastrophe modelling firm Karen Clarke & Company (KCC) says scientific studies have shown that climate change has led to increased intensity of extreme tropical cyclones, as well as increasing frequency and severity of the heaviest precipitation events and wildfires. “Collectively, these trends have led to enhanced coastal and inland flood, wind and fire risk globally. The new IPCC Sixth Assessment report confirms these findings,” said Daniel Ward, senior atmospheric scientist at KCC. Cheryl Fanelli, head of global catastrophe modelling at Lockton Re, meanwhile, said: “Climate change is likely to have been a factor in the 2020 hurricane season, while this year was also an intense year for wildfires in the western US. These are just a few examples that could lead to a conclusion that natural catastrophe events and losses are increasing with climate change.” Rising costs Whether climate change-induced or not, extreme weather events during the past five years have steadily driven reinsurance pricing higher and some insurers with unfavourable loss experience have restructured their reinsurance programmes to manage sharply rising costs, explained KBRA. “If the recent pattern of active hurricane seasons has ushered in a new reality of natural catastrophes, property/casualty insurers will need to redouble their focus on underwriting profitability and risk management to protect their financial strength,” KBRA said. Across the insurance, reinsurance and retrocession markets, the cost of catastrophe cover has been steadily rising in recent years. This is driven by a number of factors, but is principally due to the continued above-average loss activity since 2017, said Matt Foreman, head of non-marine retrocession and property specialty at Lockton Re .“[This year] seems to be continuing that trend, with first-half losses significantly above near-term averages,” he said. US and Japan reinsurance rates have increased following recent losses, but the European market has remained broadly flat, said Mr Foreman. But he added that the European floods will lead to European reinsurance rate increases at renewal. According to Jennifer Marshall, director in the P&C ratings division at AM Best, the cost of catastrophe insurance and reinsurance has been rising since 2018. “In the US, many of the large commercial insurers have been reassessing, and continue to reassess, their appetite for catastrophe-exposed business,” she said. Traditional reinsurers are looking to improve and stabilise underwriting margins against the backdrop of low interest rates, explained Ms Marshall. “Many insurers and reinsurers are either raising rates, tightening terms or rebalancing their risk appetites in certain territories. Reinsurers are doing the same by either reducing exposures in catastrophe-prone areas or moving their lines up higher in the reinsurance tower. As such, retention levels for many insurers have been increasing over the years, with limits either remaining the same or being reduced,” she said. With recent loss trends, major reinsurers have frequently exceeded their annual cat budgets, said Mr Foreman. “In fact, some large insurers and reinsurers have recently increased their annual cat budgets due to recent losses and the potential impact of climate change in the future – this will no doubt result in further increased pricing,” he said. History suggests some markets may become so unattractive that they are uninsurable in the private market, as happened in Florida after Hurricane Andrew in 1992, said Ms Marshall. “Some would probably argue that there are already places where so much capacity has exited markets that coverage is unaffordable. Regulatory intervention, such as restrictions on cancellations and price increases, may provide temporary relief, but in the long run could drive insurers out of certain locations entirely, having an impact beyond the property market,” she said. Increased costs There will be increased costs along the entire insurance supply chain, for insureds and insurers alike, if loss costs increase, she continued. “Given the fire activity of late, we are beginning to see an exodus from the California wildfire market. This began after the 2018 wildfire season, prompting the state to place a moratorium on insurers non-renewing or cancelling property policies,” she said. In parts of Australia – which has seen big losses from bushfires, floods, hail storms and cyclones in recent years – there are concerns that catastrophe insurance for some perils and regions will become unaffordable. In response, the Australian government is establishing a reinsurance pool for cyclone and flood insurance in 2022, backed by a $10bn state guarantee. According to Marsh, natural catastrophe coverage continues to be a major issue in Australia. Flood, wind, hail and bushfire limits are being imposed, with further restrictions introduced by limiting coverage to annual aggregate limits. Insurers continue to pursue significant rate increases for insureds that have significant natural catastrophe exposures, Marsh says in a recent report. In its half-year results, QBE said it continues to view catastrophe exposure with caution after losses in the period exceeded its recently increased allowance. The insurer is currently reviewing its catastrophe-exposed portfolios. According to Ms Marshall, it remains to be seen if catastrophe insurance will become unaffordable or unavailable for certain high-risk perils. “But as long as events continue to occur with increased frequency/severity from historical levels, prices likely will continue to rise,” she predicted. Insurers and reinsurers in the US are taking similar measures to manage cat exposure, according to Mr Ryan. “In previous years, natural catastrophe budgets for major global reinsurers typically ranged from 5% to 7% of loss ratios. This year, however, a number of companies have doubled their nat cat budgets, at least temporarily until other exposure-management efforts take effect,” he said. Catastrophe reinsurance will remain readily available in the near future as long as reinsurers deem pricing adequate for the increased volatility that secondary perils and climate change might bring, said Mr Foreman. “The pure supply-and-demand equation still favours the buyer, but capacity continues to be price sensitive and wary of the increased impact of climate change and secondary peril losses,” he said.

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Higher costs and insurability a concern for buyers

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