Insurance against damage to buildings due to climate conditions is becoming more expensive worldwide this year and in some cases even difficult to obtain. It is the result of recent months of unrest on the reinsurance market, about which two reports were published on Tuesday.
Reinsurers are insurers of insurers. If a company or consumer takes out insurance, a general insurance company takes over the risk of, for example, damage caused by a storm or car damage for a premium. These ‘ordinary’ insurance companies can, in turn, ‘roll over’ that loss: by taking out insurance themselves with a reinsurance company or a group of reinsurance companies. In this way, the risk of sudden major damage becomes tolerable for the insurance company. And as a result, risks can be insured at all or insured at an affordable price.
The reports from reinsurers Howden and Gallagher Re show that premiums have risen sharply from January 1 – an important date in the industry, as many 12-month contracts come up for renewal. It has even become difficult to reinsure at all – and thus to insure – for climate damage and damage caused by war. Coverage in Russia, Belarus and parts of Ukraine has been completely dropped by some reinsurers.
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2022 was a very expensive year for reinsurers, states insurance broker Howden in a market analysis. Last month, the world’s second-largest reinsurer, Swiss Re, spoke of a total cost of climate damage in 2022 of $115 billion (€109 billion) worldwide. In recent years, it has averaged DKK 81 billion. In particular, Hurricane Ian in North America caused many ‘insured losses’: the losses amounted to between 50 and 65 billion dollars. In Europe, hail damage in France caused €5 billion in damage; in the Netherlands, three February storms were an expensive cost item for insurance companies and therefore for reinsurers: more than 500 million euros.
Due to the high damage caused by Ian, it has now become 45 to 100 percent more expensive for the US market to insure against climate damage to buildings. In some regions, such as Florida, where Ian landed, reinsurance is no longer possible at all, notes Gallagher Re.
The highest increase in premiums, Gallagher Re notes in its report, is for aviation insurance. Reinsurance costs there increased by 200 percent because many claims were received last year due to the many stranded planes in Russia after the Russian invasion of Ukraine.
According to Howden, the current reinsurance market is “frustrating”. Reinsurers have only made last-minute offers to insurers in recent months, and negotiations are ongoing, according to the reinsurer.
Hans Mentink, director of Achmea Reinsurance, agrees that the internationally operating reinsurance market is currently “extremely tough”. Within Achmea, his department is responsible for finding reinsurers willing to take over risks from the Dutch insurer. The mood “has completely changed in a very short time,” he says. He expects that eventually it will be possible for the Dutch market to place all insurance policies with reinsurance. “But at a higher price.”
Mentink notes that not only are higher premiums required, but the terms and conditions of reinsurance are also becoming stricter. “There is a sharper definition of what exactly is meant by damage. You also see that reinsurance companies increase the ‘deductible’ for insurance companies: the damage is only reinsured if the damage exceeds a certain amount.”
According to Mentink, the tougher mood is not only due to the high compensation burden of recent years, which has meant that the reinsurance companies have been making losses for a few years now. The war in Ukraine also plays a role. “War creates uncertainty. And that’s exactly what insurance companies don’t like. And the war drives up inflation and therefore the prices to repair damage.”
Analysts from Howden and Gallagher Re also point out that there is less capital available in the reinsurance market. Investors who have suffered losses on their investments in the reinsurance market for several years in a row are hesitant to put money back into the industry. Rising interest rates also mean that there is less capital available for investment. As a result, the number of suppliers and products is decreasing, Mentink from Achmea sees this as well. “And less supply means a higher price.”
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The result of the more expensive reinsurance market will ultimately be that premiums for the insured – the owner of a business premises or a residential property – rise. It is not yet clear what the exact effects will be. Mentink: “But the higher premiums have to be paid by someone.”
According to Mentink, the higher prices are not isolated. “Most of it is due to natural disasters. There is extreme drought and extreme rainfall. As a society we have to pay for this increased damage – and insurance companies play an important role here.”
A version of this article also appeared in the newspaper on 5 January 2023