French insurers face unprecedented natural catastrophe losses

French non-life insurers face natural catastrophe losses on an unprecedented scale this year, exacerbating the pressure on profitability from claims inflation and a worsening macro-economic environment, according to Fitch Ratings.

Ratings are not at risk as rated French non-life insurers benefit from good business diversification and strong capitalisation relative to their ratings, but Fitch said it expects the sector’s financial performance to deteriorate noticeably in 2022 and 2023.

Losses due to frost, storms, drought and wildfires are already set to make 2022 one of the costliest years on record for French non-life insurers. The storms that struck several parts of France between May and early July caused total losses estimated at about EUR3.9 billion, according to France Assureurs, and the wildfires in July and August burned eight times more land than in a typical year.

Weather-related claims amounted to EUR4.3 billion in January-July 2022, according to France Assureurs, already more than the annual average of EUR3.5 billion over 2017-2021.

Natural catastrophe and weather claims are likely to significantly exceed insurers’ annual budgets in 2022, even after reimbursements under France’s natural disaster compensation scheme from Caisse Centrale de Reassurance, the public reinsurer. Insurers’ underwriting profitability will weaken as a result.

Fitch expects climate change to lead to more frequent and severe weather-related losses. France Assureurs forecast in 2021 that the cost of natural catastrophes in France would double by 2050 in comparison to typical levels in recent years. In the coming years, it expects French insurers to substantially increase premiums for property-catastrophe and agriculture insurance, and reduce their exposure to climate-related risks.

In the near term, however, Fitch doubts that insurers will be able to raise premium rates fast enough to keep pace with rising claims costs, particularly if inflation stays high. French insurers’ ability to pass higher costs on to customers is constrained by the competitive nature of the market and societal pressure, with the government putting pressure on insurers to offer rebates as consumers struggle with inflation. However, insurers may have more flexibility to increase rates for corporate clients.

French non-life insurers will face higher reserving requirements at least into 2023 due to higher-than-anticipated claims inflation. However, Fitch expects the reserve increases to be a drag on earnings rather than to deplete capital given the sector’s historically prudent approach to setting reserves.

Weather-related claims amounted to EUR4.3 billion in January-July 2022, according to France Assureurs, already more than the annual average of EUR3.5 billion over 2017-2021.

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