Reinsurers are concerned about climate risks on their model
Only the geographical framework has not changed. For the first “face-to-face” September Meetings since the start of the pandemic, the atmosphere of this great annual gathering which brings together global reinsurers in Monaco has something melancholic about it. However, the Fairmont Monte Carlo, headquarters of the festivities, houses a Nobu, a famous Japanese restaurant for the globalized elite, and a rooftop with a swimming pool labeled Nikki Beach: everything the hearts of reinsurers overwhelmed by the macroeconomic situation could desire.
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Their morality has something to be executed: It is the reinsurers (Scor, Munich Re, Hannover Re, Swiss Re, etc.) who, as “insurers of insurers” – carry on their balance sheet the very large risks – higher, in France, to one billion euros – where Axa, Allianz, and Covea intervene for frequent and low-intensity risks.
More and more expensive claims
However, the war in Ukraine, soaring inflation, shortage of raw materials, breaks in the usual supply chains, the energy crisis and the fall in the financial markets have, on the one hand, increased the costs of claims reimburse, and on the other hand multiplied the claims themselves since the beginning of the year.
According to the president of the association of reinsurance professionals (Apref) Bertrand Romagné, 2022 even promises to be a “dark year”. In France, it would even be the most spent on the sector since 1999, marked by the Lothar and Martin storms.
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Climatic disasters are at the heart of the concerns of reinsurance, whose market represents $375 billion in premiums at the end of 2021. Even before the start of the autumn hurricanes in North America, 2022 brought unprecedented forest fires in France, floods in Australia, drought in Brazil, Europe and the Horn of Africa… According to a study by the Potsdam Institute for Climate Changein Europe alone, episodes of major heat waves will be three to four times more intense due to global warming in the years to come.
Business model challenged
Or, reinsurers find their economic equilibrium in the geographical diversification of risks. The premiums paid by customers less exposed to natural disasters compensate for the losses caused by claims in damaged areas. “We are experiencing events that we have never encountered before, in particular extraordinary climatic events”, emphasizes Bertrand Romagné. These perils are becoming more and more intense and widespread, less and less local. If these phenomena multiply at the same time on the surface of the globe, it is the very economic model of reinsurance that is affected.
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Especially since “global warming has modified the loss ratio of perils on which we have invested less in modeling”, and therefore that reinsurers know less, abound Anne-Marie Cical, director of underwriting at Scor. These so-called “secondary” perils, such as drought, floods, forest fires, hailstorms generated perils of low and medium intensity. They attracted less attention from reinsurers, more worried about “primary” perils, which were much more designated – and therefore more expensive to insure.
However, these secondary perils, due to the effect of global warming, are becoming more and more spectacular: they are therefore in the process of changing category, and becoming “primary” – at least in the accounts of insurers.
For an investment bank specializing in financial products, the discourse of reinsurers is alarmist. “There are enough reinsurers to take the risks,” he said. Especially since the combined ratios of the largest reinsurers avoid 96%, according to Apref. ”
Two opposing strategies
According to Apref, the four European reinsurers (Munich Re, Swiss Re, Hannover Re and SCOR) are paying higher climate damage than the premiums that insurers have been paying them for five years already.
In Monte Carlo, the reinsurers gave some clues about their strategy: there are those, like Munich Re, who want to take the market by storm and continue to bear the risks. The German reinsurer showed good results in the second quarter, generating 768 million euros in profit. And others, like Scor, who deviate from it on the grounds that profitability is not there. A choice linked to the group’s poor half-year results: the reinsurer notably holds a large share of the agricultural insurance market in Brazil, and is bearing the brunt of the consequences of the drought in the largest economy in North America. South, with losses of 239 million euros in the first half.
An impact on individuals
A little music dominates the press conference in informal glasses: militant reinsurers to increase their rates by at least 10%; “reinsurance capacities are limited”, justifies for example Sven Althoff, CEO of Hannover Re, during a breakfast at Le Meridien Beach Plaza. “We don’t want to be punitive, but we have to think about adequate pricing”. The measure could have repercussions even on individuals: if reinsurers improve their “natural disaster” policies with insurers, insurers will try to pass on part of these increases to home insurance policies, which cover (along with car insurance ) climatic damage.
Reinsurers and their clients will continue talks in Baden Baden (Germany) next month, before prices are fixed for good around Christmas. Until then, more than one “Material girl”, the Fairmont’s favorite cocktail, will have to be shown to animate the negotiations.