Swiss Re calls for industry focus on European catastrophe loss creep issue

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Swiss Re has proposed an industry focus on the issue of loss creep after natural catastrophe events in Europe, calling it an industry-wide phenomenon, which shows the “pressing need” for a more precise reserve setting after nat cat events.

swiss-re-logoThe reinsurance giant explained that achieving this requires up-to-date valuations of what is insured, knowledge of what is insured and a better flow of information throughout the insurance value chain.

A recent paper authored by Rita Müller, Head Claims Western & Southern Europe, and Balz Grollimund, Head Catastrophe Perils, (both of Swiss Re), explained that recent insurance industry loss creep after European catastrophe events risks the industry’s reputation.

They both used the example of Italy’s severe convective storms and hail losses that were seen in July 2023, and noted that the industry loss estimate began at US $2.2 billion, but has since expanded to a staggering US $6 billion.

They explain that the loss creep is an “extraordinary example” of an issue that is gripping the insurance industry, and one that “we need to urgently tackle” in order to safeguard the industry’s reputation and resilience.

“The trend of losses climbing dramatically from initial estimates and resulting in higher-than-expected losses – or loss creep – is an industry-wide phenomenon. And while Italy’s situation presents a very tangible example, severe hailstorms are far from being the only European natural catastrophe where loss creep has occurred,” Müller and Grollimund wrote.

They point towards several other major events that have taken place across Europe throughout the last few years, such as the 2021 flooding in Germany, the French hail events from summer 2022, and more recently, the earthquakes that took place in Turkey/Syria in 2023.

“When it comes to extreme weather events as we have seen in Italy, loss creep fundamentally boils down to the massive underestimation of loss exposure, risk values and inflationary impact. This was exacerbated by insufficient availability of loss adjusters, experts, builders and building materials as well as a lack of claims handling resources at these times of high demand. And although the industry has recognised the growing prevalence of loss creep for some years, it has largely failed to act on many of its drivers,” the paper reads.

Müller, explained: “This is a market-wide problem. As an industry, we need to get better in the early estimation of the
real loss exposure after an event. Ongoing underestimation of losses leads not only to underpricing but also to a loss of trust in the industry. As we expect more extreme weather events in the future, systemic loss creep is not acceptable and not sustainable for our industry.”

Furthermore, the paper explains that the key cause for underestimating the cost of extreme weather events boils down to a lack of data about the up-to-date exposure and the current risk values.

“Frequently, many of the multiple data points re/insurers use to assess risk are missing or outdated. And as an industry, we consistently give too much weight to previous events when modelling losses,” the paper reads.

Meanwhile, inflation has also been an added complication within recent years, raising the price of repair and adding to the argument against leaning too heavily on historic data.

“We have seen insurers base their initial reserve estimations in French severe convective storms in 2022 on a reserving model from an event that happened in 2014,” added Müller. “You can’t do that. You have to take repair cost inflation, the increase and concentration of values and all other up-to-date exposure factors into account.”

Looking back, the French hail events of 2014 totalled US $1.4 billion, while the 2022 hail events ended up at a total of US $5.5 billion – a significant increase that is the result of a combination of frequency and severity.

The pair explain that the argument for limiting loss creep is clear, and now we need coordinated action to tackle
the problem.

“The priority is tackling data and transparency across the value chain – this starts with keeping exposure information up to date at the point of primary underwriting. Valuations need to represent true replacement costs and new investments by homeowners must be captured in a timely fashion. With a clearer view of the true costs, re/insurers can more accurately price the risks. And as a consequence, initial reserve setting after an event can be based on realistic exposure data rather than outdated historic events,” the paper reads.

“It’s about getting a few very basic things right from the start,” said Grollimund. “We need to be diligent from the beginning of the value chain to the end about insured risks. We need to have frequent reassessments of the sums insured. And reassessments of what is actually covered by a policy.”

Additionally, preventing loss creep of this magnitude will ensure “the sustainability of our exposure assessment and pricing in the industry, while also offering fair premiums and adequate self-retentions for insurer,” the pair explain.

The post Swiss Re calls for industry focus on European catastrophe loss creep issue appeared first on ReinsuranceNe.ws.

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