The Rising Costs of Adverse Weather: Impacts on the Insurance Sector and Reinsurance Business

The adverse weather phenomena in recent years are a reality that is difficult to question. Insurance sector payments for rain, hail, drought or wind have skyrocketed in the last five years. The most important qualitative leap has occurred in agricultural insurance. In 2016, 485 million euros were paid in Spain for field incidents and in 2017 the figure rose to 734 million, and in subsequent years it has not fallen below 616 million until reaching 2023, when a record will be set. of 1,154 million, according to Sergio de Andrés, general director of Agroseguro. “Until August, payments have totaled 970 million euros,” he says.

Off the field, the oft-repeated climate change has also had an impact on accidents. In 2016, insurers paid 609 million euros in Spain for climate-related phenomena and in 2020 the figure shot up to 970 million. Mutua Madrileña explains that in recent years they have observed “an increase in the intensity of adverse atmospheric phenomena that have had an obvious impact on both the auto and home and care industries.” And they add: “If we compare the first nine months of this year with those of 2022, the increase in claims derived from climate activity greatly exceeds 100%.”

This phenomenon is not exclusive to Spain, but is global. Reinsurer Swiss Re’s annual report indicates that global insured losses from natural disasters amounted to $125 billion in 2022, well above the averages of the last five years ($110 billion) and 10 years ($81 billion). dollars), with figures adjusted for inflation. Without a doubt, recent years show the acceleration of the process: the annual total of insured losses from natural catastrophes in the world has exceeded the mark of 100 billion dollars, five times more than in 1970, and three times more in the last six years.

The consequences for insurers of this increase in natural catastrophes are being seen, above all, in the world of reinsurance, where the former seek to distribute risks and limit liabilities through a contract with a reinsurer. From Mapfre Re, Javier San Basilio, deputy general director, points out that the increase in weather claims has caused a tightening of the conditions of reinsurers towards insurers. “In general, all insurers have raised the price of their reinsurance and, in some cases, coverage has been limited. Added to this increase in accidents in the last year is the sharp rise in prices,” he acknowledges. Higher costs for the sector, which Arturo López Linares, Director of Claims at AXA Spain, abounds in: “The impact of climate change is also evident in the costs of reinsurance or in decisions such as the one experienced a few months ago in the US, where there are areas of California in which several companies have stated that they will not provide insurance for the impact of the fires,” he explains.

But insurers in Spain have buffers that make the increase in claims more bearable. The Insurance Compensation Consortium (CCS) and Agroseguro allow risks to be shared between the sector. The CCS is a public body attached to the Ministry of Economic Affairs, although it is financed with private money (a part of the insurance premium paid in receipt goes to the Consortium). It covers damage caused to homes, commercial premises, industrial warehouses and automobiles due to flooding caused by rain, melting ice, lakes, overflowing rivers and the onslaught of the sea. Also in the case of damage caused by winds exceeding 120 kilometers per hour or tornadoes. However, it does not deal with those derived from, among other phenomena, hail, snow and frost, which are borne by insurance companies. Of course, to benefit from the Consortium’s payments, the affected person must have taken out insurance. Otherwise, he will not perceive anything. As Arturo Pérez Linares indicates, “it is an instrument that reduces the direct financial impact on companies that, for their part, do directly manage all those damages that do not exceed the ranges, for example, of rain or wind.” Although it fluctuates every year, in weather incidents, insurers pay around 75% and the CCS, 25%.

Agricultural nightmare

The countryside is, without a doubt, the greatest victim of the increase in climate catastrophes. Agroseguro brings together 17 insurance companies that jointly offer an insurance product for farmers and ranchers. The general director of this organization indicates that in the new climate reality the adverse phenomena are more intense and extensive, and also occur outside the usual season. “Historically, hail is the atmospheric phenomenon with the highest number of accidents, although now the drought is increasing a lot. Before, lack of water occurred every seven or 10 years and now it is common every three or five years. This year the drought has been the most important item with a cost of 470 million euros,” he explains. Of the agricultural products, fruit trees (80%) and cereals (70%) have the greatest insurance coverage, while the olive tree is in last place, between 10% and 12% of the plantations.

The key to this private society is, on the one hand, coinsurance, where 17 private insurers share the risk, and, on the other, reinsurance, through the Insurance Compensation Consortium (CCS). The Consortium participates in payments when there is an excess of accidents. “A coverage system that other countries want to imitate and that places us, along with Canada and the United States, among the best valued in the world,” explains Sergio de Andrés. Once again, the participation of the Consortium avoids losses for insurers, although the general director of Agroseguro points out that it is not insurance to enrich insurers: “It would not make sense either since it is subsidized.”

The reinsurance business

The deputy general director of Mapfre Reaseguros, Javier San Basilio, highlights the strong impact that climate change is having on these companies that share risks with insurers. “Reinsurance accounts operate with income of 100, less expenses and less claims, and there is your margin, regardless of the financial business. In the last five years, the increase in claims has raised the cost for reinsurers above 100”. This explains the increase in insurance contracts, mentioned above, and the limitation of some risks.
Now, San Basilio considers that each company is a different story. “There are those that only dedicate themselves to catastrophes and now they are suffering more, and they earn more money when there are no catastrophes. At Mapfre we have managed not to lose money in any year: we have a more moderate risk profile, and in good years we don’t do so well, and in bad years we don’t do so badly. In addition, we have an insurance portfolio diversified geographically throughout the world and with other products, such as life insurance, automobiles, etc.,” he concludes.

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2023-10-10 04:07:23
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