€15bn floods bill unlikely to further hurt insurance sector

Insurers and reinsurers are unlikely to face significant financial difficulties following serious flooding in central Europe that has caused damage worth around €15 billion, according to research by UBS Warburg.

As floodwaters in Germany, Austria and the Czech Republic have receded, the industry is estimating only 10–20% of overall destruction costs will fall on the insurance sector. The rest will be borne by taxpayers, particularly in the Czech Republic.

UBS Warburg’s insurance analysts Damien Régent estimated the cost to the insurance industry could be limited to €3 billion. Régent said this estimate is well within the ability of the insurance business to manage. “This is not a credit event,” Régent told RiskNews. Insurers are typically sophisticated at spreading natural disaster damage risks presented by hurricanes and floods through the use of reinsurers and capital market instruments such as catastrophe bonds. The most costly natural disaster in the past ten years, Hurricane Andrew, caused insured losses of $20.2 billion.

Credit default debt protection for the insurance sector initially widened about five basis points to 10bp as the flood damage worsened last week, but have since contracted as water levels abated. Credit derivatives traders said they are much more concerned about falling equity prices than the flood damage. Insurers typically hold a high percentage of equities in their portfolios. When equities fall, insurers must bolster their portfolios to ensure they can meet their liabilities, which in turn hits their profits.