Baden-Baden 2019 Day 2

A perhaps unique characteristic of the European windstorm market is that it is remarkably stubborn.

It pretty much refused to budge in the wake of Hurricane Katrina and following the 2011 year of cats it was close to pancake flat. This despite long-run fears that the market is technically underpriced.

And it looks as though again it will refuse to follow in the footsteps of the Floridian and Japanese markets, where underwriters have said enough is enough after elevated claims activity and shock losses.

Higher retro costs, which started to make themselves felt in a big way at 1 January, did not make much of an impression on pricing at the beginning of this year, and once more there is scepticism that they will make much of a difference come 1 January.

Reinsurers and brokers themselves describe the market as boring – or stable if they are feeling diplomatic.

A prolonged period of benign windstorm losses in Europe has allowed this state of affairs to drag on longer than many feel it should have.

The European wind market has not seen a major windstorm loss since Kyrill in 2007, and losses from other cat events have been limited.

And even though global reinsurers may be hurting elsewhere, European cedants see little reason why they should pay more to compensate reinsurers for a hurricane in Florida or a typhoon in Japan.

As a result, the early indications for 1 January are that we will see yet another flat renewal for European wind – and another year below technical levels.

Europe may be pretty siloed from the rest of the cat world, as a balancing peril for reinsurers with big US wind bets, but it would do well to take note of some of the parallels from recent events.

There are lessons for writers of European windstorm to be taken from the recent wind losses In Japan.

After 25 years of pretty benign typhoon activity – which broadly led to softening – Japan has been hit by four meaningful landfalling storms in less than two years.

Typhoon Jebi, which struck last year, made itself felt for much longer than was welcome.

Market loss estimates seem to have settled at around the $15bn mark, but this is several times the size of initial estimates of $2.3bn-$4.5bn from AIR and $5.5bn from RMS.

The outcomes of Faxai and Hagibis for the reinsurance market are less certain but the damage wrought is extensive, and the 2019/20 underwriting year is going to be another period in which reinsurers are in huge deficit.

The experience – particularly the Jebi creep – has also laid bare that there is scope for model miss, particularly when a long period of low activity means they have not been tested.

This creates more room for shock losses to emerge.

For years in the run-up to Jebi, underwriters complained that Japanese windstorm was priced below technical levels, but for the most part they stuck in and left themselves exposed to a punishing series of losses.

What’s worse is that underwriters continued to write the risk even as the models warned about thin returns, only to find the models had woefully underestimated the losses.

There is a parallel to be drawn here with European windstorm, and the market should take note.

Writing major cat-exposed books based on a look at the recent loss record, even as the models point to pricing inadequacy, is a risky bet and one that has recently gone very badly wrong in the international cat market.

To view the second of our special issues from the Baden-Baden meeting please click here.

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