Europe’s primary carriers to see 10% claims costs hike amid reinsurance market shift: Moody’s
Europe’s primary carriers will likely see an increase of around 10 percent in catastrophe claims costs this year on the back of moves by reinsurers to reduce their exposure to more attritional loss events.
Analysis by Moody’s suggests primary carriers have looked to keep their reinsurance spend flat during recent renewals, resulting in them ceding less risk as the cost of reinsurance rises.
Moody’s analyst Benjamin Serra said this is leading to a 10 percent increase in claims costs for primary European insurers for small to medium-sized cat events.
Serra said retentions have increased for virtually all European primary carriers, with only a handful increasing their reinsurance protection where there has been a need to strengthen solvency.
These changes mean French primary P&C insurers would have incurred an additional €0.7bn in losses from the hailstorms that hit the country in 2022 if reinsurance protection had been at current levels.
For the German flooding of 2021, the country’s primary insurers would have faced an extra €0.8bn in losses.
Primary carriers also currently have limited scope to increase their own prices, with Moody’s warning that “the current economic environment, with high inflation eroding household purchasing power, is not conducive to price increases”.
“Most European retail insurance markets are also extremely competitive, and policymakers are increasingly putting primary insurers under pressure to limit price increases,” the report said.
Moody’s said primary carriers’ net combined ratio would have increased by 1 percentage point in both of the examples above. For more significant events with a return period of at least 10 years, net combined ratios would increase by 1 to 2 points on average.
For larger events, such as those occurring once every 250 years, the drop in reinsurance protection is less significant, with net exposures having only risen by between 1 and 3 percent compared with 2022.
Given that claims from large events typically drive regulatory capital requirements under Solvency II and the Swiss Solvency Test, Moody’s said the recent decline in reinsurance protection has not affected insurers’ solvency position materially.
Solvency II requirements focus on catastrophe losses with a 0.5 percent probability, equal to a 1-in-200-year event, while the Swiss Solvency Test looks at those events with a probability of below 1 percent, equal to a 1-in-100-year event.
Major European carriers such as Allianz, Axa and Zurich have all taken steps to lower their aggregate cat exposure amid the hard market while increasing overall gross written premiums, in part helped by their large diversified books and global presence.
In contrast, Moody’s said insurers with a narrower geographic or business diversification, such as those with a retail focus, have not significantly changed their gross exposure to catastrophe risk.
Reinsurers take lower share of losses
In the year to date, reinsurers have consistently taken a lower share of market losses. Despite H1 catastrophe losses in excess of $50bn, reinsurers have largely reported strong results with primary carriers retaining a larger share of risk than has historically been the case.
This trend has continued into the second half of the year, with single-digit billion dollar loss events such as Hurricane Idalia and the Hawaii wildfires expected to be largely retained by primary carriers.
This has followed a conscious shift away from more attritional losses by reinsurers as they seek to reduce earnings volatility.
Idalia was the latest event to demonstrate this trend, with the storm’s landfall in a sparsely populated area of Florida’s coastline keeping losses below the level expected to trigger reinsurance attachment points.
ILS manager Plenum Investments this week said a continuation of smaller losses may lead to a further erosion of annual aggregate structures which have been hit by previous events, although it said it remains “significantly underweight” in such aggregate cat bonds.