Why Europe still needs to get a grip on secondary perils

The cost of European secondary perils is still not fully reflected in reinsurance pricing, says Chris Killourhy, managing director of QBE Reinsurance. Here, he takes a look at what this means for the market and what QBE Re is doing to respond to the situation.

The reinsurance world has been caught unawares in recent years by rising losses from secondary perils, with wildfires, severe convective storms (SCS) and floods presenting carriers with losses they wouldn’t previously have expected to confront.

Wildfire and SCS events contributed to a major capacity squeeze at pre-2024 US property cat renewals. Reinsurers and their cedants sensibly addressed the situation with increased rates and, more importantly, higher attachment points, which helped restore reinsurer returns to more sustainable levels.

In general, the US remains an attractive market in which to deploy capacity, and attachment points are high enough to ensure alignment between the risk we are pricing for and the risk to which we are exposed. For this reason, we have grown market share in the US as we see opportunities to support cedants for the long term.

Europe, however, has not followed suit to the same extent, despite more frequent and severe secondary events. This makes it a more difficult market in which to operate. Events have included the hailstorms that swept through northern Italy in July 2023, which caused losses that are now approaching €4.5bn ($4.9bn) owing to significant loss deterioration, according to Aon’s Climate and Catastrophe Insight Report. The challenge here, for reinsurers, was as much the time it took to get a reasonable handle on the loss as much as the quantum of the loss itself. They also include the recent German and Central European floods, or Windstorm Emir/Ciaran, in the autumn of 2023, which Aon recently reported will cost over €1.9bn.

In Germany alone, the industry group GDV expects 2024 losses to be among the highest in more than a decade. Yet despite all this, attachment points have not yet fully corrected. Rate increases have also lagged the US and broader international markets, and reinsurers are taking losses from secondary perils that the market wasn’t traditionally designed to accommodate.

Part of the problem is that secondary perils are notoriously hard to model. A recent paper by the University of Cambridge’s ClimateWise and Deloitte cited various obstacles to risk management, information sharing, and appropriate pricing, including a historic prioritisation of modelling resources towards primary perils, a lack of consistent and quality data, and various commercial and competitive obstacles. A starting point, they suggest in a six-point programme, would be a standardised definition of these events.

For now, QBE Re has responded to this situation by maintaining a disciplined approach to client selection. We favour those who pick attachment points that reflect inflationary pressures on their underlying portfolio, on an ongoing basis, and help insulate reinsurers from attritional losses on perils. We value our relationships with clients and brokers immensely and are committed to playing our role in connecting risk to capital in a sustainable way. We have, therefore, worked hard to better define our appetite for risk and identify those cedants with whom we can partner for the long term.

However, market-wide, we need to see continued discipline and an acknowledgement that secondary perils are every bit as much of an issue in Europe as they are in North America. Action in the US has helped deliver a market where buyers and sellers can have greater confidence in price stability, and it is important that we follow suit elsewhere.

Secondary perils are obviously not just a (re)insurance issue. Whether floods in South Africa, or wildfires in Australia, they are causing misery in the developing and developed world alike and threatening societal and financial resilience in some of the poorest communities. The (re)insurance industry helps alleviate some of this pain by linking capital to risk but, in doing so, must continue to enhance its understanding of these perils and ensuring the risk is appropriately distributed across the (re)insurance chain.