European floods make case for pools and cat bonds

Insurers and reinsurers are unlikely to be badly hit by the recent floods to hit Central Europe, which could be the worst since 2002. But a number of lessons could be taken from the recent losses, according to AM Best.

The rating agency said in a report that it anticipates rate rises and a reassessment of the scope of coverage in the aftermath of the event. Governments could come under further pressure to strengthen flood protections and set up flood insurance pools. The case for the use of catastrophe bonds could also be strengthened as a result.

Those are some of the conclusions of AM Best following a review of the situation in which the rating agency visited and interviewed a range of industry figures with involvement in the countries impacted by the recent floods.

The 2002 floods resulted in economic damage of €17 billion and estimated insured losses of €3.4 billion. However, it said that in the past decade, flood protection has improved and insurers have introduced higher deductibles or withdrawn coverage in loss-prone areas. Also, fewer major economic centres and municipal towns were flooded this time.

It said it expects a large portion of the losses will be borne by large Continental European reinsurers and notes that, in contrast to the US, the catastrophe bond market is not as well developed for European perils.

It also notes that many companies are still determining whether the floods will be categorised as a single event or multiple events. It anticipates that, for catastrophe reinsurance cover, it is likely to be deemed a single event. “For smaller stock companies and mutuals, reinsurance may be fundamental, and the use of such protection in the future may need to be reassessed,” it said.

It expects the losses to amount to an earnings event rather than a hit to capital for insurers and reinsurers. The first five months of 2013 were benign for natural catastrophes and large losses, and as a result, the flood losses are well within most companies’ cat loss budgets for 2013.

It expects the event to again prompt insurers to reassess coverage now though. Rate rises and higher deductibles are anticipated for flood cover, and possibly also for the non-flood components of retail and commercial property policies. Flooded regions may also be reassessed and flood zones remapped.

“Central European governments are likely to come under increasing pressure to protect citizens against further floods. In addition to increasing spending on flood prevention infrastructure, governments may explore the creation of flood insurance pools, or make flood insurance compulsory in flood-prone territories,” the report said.