"It Will Be a Difficult Renewal"
Eric Sugier, Liberty Mutual Re’s Head of Property, describes how the growing risk of flood is changing reinsurers’ approach to property, and how the industry already has the tools to help manage the threat of more frequent extreme weather events.
How would you describe the state of the reinsurance market entering the renewal season?
It will be a difficult renewal, I think. Last year’s big Covid-19 losses seriously impacted reinsurers, but the market couldn’t properly assess its impact on treaties last year, so that will have to be resolved in this year’s renewals.
Also, this is the fourth year in a row in which there’s been a lot of big natural catastrophes. This year has seen Winter Storm Uri, which badly hit Texas, July’s flood in Europe and Hurricane Ida, as well as other disasters. In the past, we used to have some quiet years, but this doesn’t seem to be the case now. We must reassess the situation with natural catastrophes. So, I think renewal discussions will be intense.
Renewal discussions will be intense.
How much of an impact will the European floods have?
It’s hard to say what impact it will have globally, but in Europe it will be significant. In Germany, the market loss is expected to be north of €8 billion. In Belgium, it will probably be between €1.5 billion and €2 billion, and when you add in France and Switzerland, we are probably looking at an overall cost of €10 billion. That’s a serious loss. So, I expect a strong reaction from the European market. Reinsurers will want some payback, but there will also probably be a reassessment of the flood risk.
How will the market deal with the increasing risk of flood?
Flood is a hot topic now. There is a focus on wind and quakes, but water is also a very destructive natural hazard.
Flood is a hot topic now.
Everyone remembers the flooding caused by Hurricanes Katrina and Sandy, but there have been other major flood losses for our industry. Flash flooding from a cloudburst in Copenhagen in 2011 caused a €1 billion market loss, which is big for a country the size of Denmark.
Flood is more difficult to model, and more progress must be made in that. It is one of the most complex hazards to predict: the models must take account of the accumulation of water, topography, the physical defences that are in place and the potential weaknesses of that infrastructure, the storm pressure on water as well as tide intensity, among other factors.
The good thing is that governments are investing in infrastructure to mitigate the risk. For example, Austria and the Czech Republic have carried out major work to prevent flooding: raising permanent walls or watertight partitions that can be installed very quickly in case of an alert, as well as setting up pumping stations and creating artificial lakes upstream. The size of Copenhagen’s drainage network has been doubled following the 2011 flood. In Switzerland, there is a highway which can be used to store the excess water and protect exposed cities.
But, sometimes, the infrastructure that’s put in place isn’t always up to the job. Everyone can remember the disaster that was created when the levees in New Orleans failed after Hurricane Katrina.
Also, we need to bear in mind that recent studies have shown that the frequency of floods is increasing because of climate change. This summer, there have been major floods in the US, Europe, China, and Japan. Scientists think that higher atmospheric moisture and the fact that storms are now moving more slowly increases the amount of rain that falls in a localised area, meaning that the flood risk could be greater than had previously been forecast.
National or regional natural-catastrophe schemes have failed to support the insurance industry.
Another worry is that there are an increasing number of examples where national or regional natural-catastrophe schemes have failed to support the insurance industry, and so reinsurers have had to foot the bill. This was the case in Spain, when many areas did not receive pay-outs from the Consorcio, the government’s compulsory nat cat scheme, following storm Philomena last winter. This could also happen in Belgium after July’s flooding, where the Wallonian regional scheme probably will not pay for damage claims above the legal minimum limits, contrary to expectations.
All these issues need to be factored into the models and pricing. But it isn’t just a question of price this year or next. We take a long term-view and want to be an environmentally responsible organization, and so Liberty is working with universities on developing AI technology, and with MIT [Massachusetts Institute of Technology] to improve our flood modelling capabilities to find ways to mitigate losses.
What can the (re)insurance industry do to help clients manage the growing risk from the increasing frequency and severity of natural catastrophes?
I think we already have the scientific and technical means to do it. For example, the agriculture industry is very sensitive to changing weather patterns, and the increasing trend for more adverse weather patterns has long been accounted for in crop insurance and reinsurance. Parametric covers are common in that market, with payouts triggered by the temperature or the amount of rainfall.
As one of the market leaders in parametric covers, we’re using our expertise to develop new flood products that take more account of climate trends and will provide more customized solutions to our clients.