Moody’s, a credit rating agency, has released a report highlighting that European property and casualty (P&C) insurers are facing a structural, rather than cyclical, increase in vulnerability to weather events.
This change is primarily due to the steep reduction in reinsurance availability and rising costs, forcing primary insurers to bear a larger share of weather-related claims.
In 2023, the frequency and severity of weather events such as floods, hailstorms, and wildfires led to significant losses for European insurers. The diminished reinsurance coverage has exacerbated this issue, as reinsurers have scaled back their coverage and increased prices after years of sustained losses.
As a result, primary insurers have had to retain more risk, leading to a notable deterioration in their property combined ratios, a key measure of underwriting profitability.
Looking ahead to 2024, the reinsurance market remains challenging. Despite the cyclical nature of the market, with prices potentially peaking in 2024, Moody’s does not expect reinsurers to restore coverage for secondary perils to pre-2023 levels. This means primary insurers will continue to face elevated exposure to weather events.
Primary insurers may need to raise prices to offset the higher climate-related claims. However, passing on these costs to customers is difficult due to recent inflation-driven price increases.
Additionally, accurately assessing the costs associated with climate-related claims has become more challenging, as demonstrated by the unexpected costs of the 2023 hailstorms in Italy.
An alternative for insurers is to withdraw or restrict coverage for certain risks, but this could lead to social pressures and potential government intervention.
Instead, the industry is increasingly promoting prevention measures, such as flood defenses and the reinforcement of buildings, to mitigate the initial impact of weather events. However, these measures are costly and will take time to implement.
Moody’s report underscores that the increased vulnerability of European P&C insurers to weather events is a long-term issue. The industry must navigate these challenges by exploring new strategies for risk management and pricing to maintain profitability in the face of a changing climate.
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