Extreme weather and cyber on (re)insurers’ radar in summer 2024
Moody’s Ratings’ Helena Kingsley-Tomkins on the need to respond to recent loss events.
During the 2024 summer vacation period, events such as Hurricane Debby and the CrowdStrike IT outage have served as a reminder of the global P&C (re)insurance sector’s exposure to extreme weather and cybersecurity risk.
An important trend affecting P&C insurance claims in recent years has been an increase in the frequency of mid-sized weather events such as wildfires and convective storms. These are individually less severe than peak perils such as Atlantic hurricanes. However, their growing cost has affected the industry, with insured losses from convective storms reaching an all-time high of $60bn in 2023, according to Swiss Re.
Global reinsurers in 2023 limited their underwriting exposure to events of this type. This is forcing primary insurers to retain more risk and absorb a higher share of weather-related claims, with some European players reporting a material deterioration in their property combined ratios in 2023.
With reinsurers considered to be unlikely to restore coverage to pre-2023 levels, the increase in primary insurers’ weather exposure now looks structural rather than cyclical. The primary sector may have to increase its prices to offset the impact of higher weather-related claims on its profit. However, since primary insurance prices have already risen significantly to counteract inflation, many are instead promoting prevention measures to reduce the initial impact of weather events.
On the reinsurance side, assuming no major catastrophe losses, Moody’s expects high reinsurance prices, stricter policy terms and conditions, low inflation and flat retrocession costs to lead to a further improvement in underwriting margins in 2024.
Prices are likely to peak this year as improving returns prompt some reinsurers to take on more risk and attract more alternative capital inflows. Even so, reinsurers’ overall earnings should remain strong provided they avoid relaxing their policy terms and conditions, helped also by better investment returns on the back of higher interest rates.
The CrowdStrike incident on 19 July, in which a flawed software update caused widespread computer outages, appears to be a limited event for P&C insurers, although it will take time to determine the final claims bill. Insurance services firm Parametrix believes insured losses are unlikely to exceed 10 to 20 percent of an estimated $5.4bn of economic losses from the event.
While policy features will likely help limit the cost of this event to insurers, the incident has highlighted the broad risks posed by a single point of failure and the degree to which many segments of the economy are interconnected and interdependent. Multiple industries were affected by the outage, including airlines, healthcare and financial services, and many Fortune 500 companies' IT systems were disrupted.
We expect underwriters to evaluate the scope and nature of the event and adjust their underwriting, focusing on systems failure coverage. The CrowdStrike outage is also likely to spur demand for cyber insurance. According to Munich Re, total cyber insurance premiums were approximately $14bn in 2023 and will grow to about $29bn by 2027.
Cyber insurance still accounts for less than 1 percent of US industry-wide premium revenue and falls short of demand. Cyber risks are therefore drawing interest from alternative capital providers, but their expansion into the sector is expected to be slow because of a lack of advanced risk modelling and comprehensive historical data.
Helena Kingsley-Tomkins is vice president – senior credit officer at Moody’s Ratings