P&C vulnerability to non-peak weather perils ‘structural, not cyclical’ – Moody’s

Moody’s Ratings in its latest report has said that European primary insurers’ exposure to small but frequent weather events such as floods, hailstorms and wildfires remains above historical averages.

Retained exposures to these events These events, known as “secondary perils” or “non peak events” increased steeply in 2023 because of a reduction in the availability and an increase in the cost of reinsurance, Moody’s said.

With reinsurers unlikely to restore previous coverage levels, the rating agency sees the primary sector’s higher exposure as structural rather than cyclical. This may force primary insurers to raise

their prices, adding to recent inflation-related increases, the rating agency emphasised.

“2024 reinsurance coverage leaves insurers vulnerable to weather events,” Moody’s said.

“European primary insurers bore a much higher share of weather-related claims in 2023 than in previous years, leading in many cases to a material deterioration in their property combined ratios (claims and costs as a percentage of premiums, a key indicator of underwriting profitability).

“The increase reflected a spike in the cost of reinsuring weather-related risk after earlier sustained reinsurance losses. Survey data from our rated issuers show that primary insurers’ reinsurance protection has not improved in 2024, such that the sector remains vulnerable,” the report said.

Reinsurers are unlikely to resume previous coverage of secondary perils, the ratings firm’s paper observed.

“The reinsurance market is cyclical by nature and prices may peak in 2024, improving the supply of protection for primary players. However, we believe that reinsurers are for now unlikely to restore coverage of secondary perils, or of accumulations of such events, to pre-2023 levels,” Moody’s said.

Challenging price adjustments may be required, according to Moody’s.

“Primary insurers may have to increase their prices to offset the impact of higher climate related claims on their profit. However, accurately assessing these costs is becoming increasingly difficult.

“Recent inflation driven price rises also make pushing additional costs on to customers challenging. The alternative of withdrawing or restricting insurance capacity for certain risks may trigger social pressures, potentially leading government intervention. The sector is instead increasingly promoting prevention measures to reduce the initial impact of weather events, but these will take a long time to bear fruit,” added the report.