20 October 2013Re/insurance

European floods are a stark reminder of perils

Although the European market generally enjoys fewer big losses in comparison with the US, the recent flood losses in Germany and Central Europe represent a stark reminder that big losses do occur and can hit the market’s insurers hard.

That is the view of Bertrand Romagné, general manager of the French Branch covering reinsurance at the XL Group, when asked how the European market compares with other parts of the world.

“It is difficult to compare market performances as each market has its own pattern of losses. Generally speaking, North America produces a greater frequency of losses than Europe but this is also reflected in the premium,” he said.

“If we think about Europe, it has a low frequency loss pattern – so it is not abnormal to see a long period of minimal loss activity. But the recent flood losses in Germany and Central Europe reminded the reinsurance industry that the exposures in Europe are significant and that the market could see a loss that would represent many years of premium.”

He said that some of the flood protection measures introduced in 2002 helped the situation but the losses also highlighted the need for better risk information and aggregate controls. And he added that other recent losses should not be ignored.

“And in addition to the floods, there were hailstorms that caused significant damage in Germany. The damage was very localized and received little media attention,” he said.

“The market had not experienced such significant losses in the region since 1984 and for some underwriters this was the first time they had seen such losses.

“Again, the market (insurance and reinsurance) must factor those types of perils into the pricing as they maybe infrequent but they can be quite costly – models will need to improve to better address this type of exposure in Europe.”

Romagné said he is seeing more competition in the European market – mainly driven by the influx of alternative capacity – and this trend is gradually moving the market away from its traditional roots.

“Lately we have seen more third party capital entering the market and more ILW and cat bonds being placed for the continental European market,” he said. “Europe has some large buyers with sophisticated buying strategies. This non-traditional reinsurance is also not only restricted to wind but cat bonds for earthquake have also been placed in the market. Reinsurance appears to be an attractive area for the capital markets.”

When asked whether the move of many players to Zurich has made a difference to competition, he says that it has not altered capacity has but highlighted the importance of a European strategy for international players.

“Most players that are active currently were active before but maybe from different locations,” Romagné said. “What is certain is that the European market is seen as an essential contributor to worldwide diversification of the market. It is clear now for most reinsurers that you cannot write a balanced book by writing only US or European business. This means that our business is truly global.”