Nat cat review only adds pressure on underwriters

Europe’s financial regulator has launched a consultation on the threat posed by natural catastrophes on its member countries.

The result of the consultation may well put further strain on the (re)insurance sector’s ability to underwrite the risks.

The European Insurance and Occupational Pensions Authority (EIOPA) has begun a public consultation on reassessing natural catastrophe risks in the standard formula. EIOPA said its review of the parameters aims to better capture the risks stemming from perils such as earthquake, flood, hail and windstorm based on new insights, new data and new models that have come online since the last reassessment in 2018.

Natural catastrophes are becoming more frequent and more severe across Europe due to climate change. Against this development – and with a view to ensuring the continued protection of policyholders and the stability of the EU’s insurance market, EIOPA has said it is important that insurers’ capital requirements for natural catastrophe underwriting risk continue to reflect the excepted impact of climate change.

It added the regulator has therefore reviewed natural catastrophe parameters in the standard formula to see if previous parameters needed recalibrating in light of new evidence, but also to assess whether new perils or regions should be included.

As a result of the 2023/2024 (re)assessment exercise, EIOPA is proposing new risk factors for 25 perils/regions across five perils (flood, hail, earthquake, windstorm, subsidence). Flood risk, for instance, is to be (re)calibrated for 10 countries.

Additionally, EIOPA suggests including more countries in the standard formula for which certain natural catastrophe risks were previously not covered. Nine countries including the Netherlands, Ireland and Finland are suggested to be added for flood risk.

Beyond the five perils already included in the standard formula, EIOPA said it is also monitoring emerging perils across Europe that could have a material impact on the region’s insurance sector. EIOPA is considering including wildfire, coastal flood and drought in the future as new perils to be covered under the standard formula.

The reassessment exercise, which is undertaken every five years, is part of EIOPA’s broader work related to natural catastrophes, which, among others, includes the analysis of insurers’ exposure to physical climate change, the insurance protection gap dashboard for natural catastrophes and the analysis of insurance-based solutions for natural catastrophe protection gaps.

The consultation comes hot in the heels of Swiss RE’s estimates that the insured cists of natural catastrophes last year was $108 billion in a year when there were no real stand out losses anywhere in the world.

Of more concern was the total is said to have been driven by the scale of the serious connective storms (SCS) in Europe and the United States across 2023, with the scale of increase in Europe outstripping that of the US were SCS have been long established secondary perils.

The consultation period will last until the third week in June therefore the outcome is likely to be revealed in the final quarter of the year.

EIOPA under the EU#s solvency II rules have long sought to ensure that the insurance industry is capable meeting the claims arising from the business they underwrite. There is a clear weighting in the level of reserves needed to underwrite low volume high value claims such as natural catastrophe.

It comes at a time when reinsurers are already questioning the rationale of the natural catastrophe exposures they are being asked to assume and despite a continued hard market there is talk of a need for greater adaptation and resilience measures rather than a simple reliance that underwriters will pick up the costs when disaster strikes.

Jon Guy, Editor,

Emerging Risks