Marc Hengen, managing director of the Luxembourg insurers association Aca. Photo: Matic Zorman/Maison Moderne/archives

Marc Hengen, managing director of the Luxembourg insurers association Aca. Photo: Matic Zorman/Maison Moderne/archives

The increase in natural disasters is putting pressure on reinsurers. Reinsurers play a key role in the handling of these catastrophes in Luxembourg. Is the current model reaching its limits? Marc Hengen does not believe so.

On the ground, the damage from last July’s floods is being dealt with one by one. , managing director of Aca, the Luxembourg insurance industry group, estimates that 95% to 97% of claims have been closed. The remaining 3% is due either to a lack of agreement between the insured and the insurance company, or to delays due to a lack of manpower on the part of the craftsmen and the lack of necessary materials in the construction and automotive sector.

In short, “this disaster is completely under control of our members,” said Hengen. The cost is now estimated at €135m.

This is a questionable sum when put into perspective with another figure: the €800m in premiums collected in 2020 for all non-life insurance lines. “Clearly, we can say that the cost of this flood--and only this one, as there have been other less spectacular ones--greatly exceeds the premiums collected for this guarantee in that year. This was not the case in previous years.”

The question arises: are Luxembourg companies strong enough to deal with such incidents, which are becoming more frequent? “Yes, and I say that without reservation or hesitation. For several reasons: firstly, Luxembourg companies meet all the solvency requirements and exceed them by far. I think that the companies involved in these claims all have capitalisations that are at least twice the minimum requirements set by the Commissariat aux assurances [Supervisory Authority for the Insurance Sector]. The second reason is that, in the risk management of any insurance company, there is recourse to reinsurance. Without knowing in detail the conditions that each insurer has negotiated with its reinsurer, there is a cushioning of the shock through the use of reinsurance.”

This cushioning was confirmed by two of the major players in the Luxembourg insurance sector: Foyer and Lalux. (When contacted, Axa and Bâloise did not wish to answer our questions.)

According to Franck Marchand, director of operations at Foyer, the floods should cost €60m. Lalux’s the general manager, , reports a bill of around €40m.

“It’s a considerable sum,” but it doesn’t compromise the financial solidity of the Foyer group, whose “solvency ratios are the equivalent of a triple A for companies,” stated Marchand. Strasser agreed, insisting that “fortunately, such amounts are not borne by the company alone. Generally speaking, reinsurance is a way for the insurer to protect itself and anticipate risks, and therefore to deal with incidents of this magnitude.”

Marchand also mentioned reinsurance: “the event that took place in Luxembourg is being pooled almost worldwide.” But the system is showing its limits.

Reinsurance under pressure

It is less the capacity of the reinsurance sector to cope that worries him--“When global reinsurers do not have enough capacity, they turn to the financial markets. And there, Luxembourg’s needs and even the world’s needs are a drop in the bucket compared to the mass of existing capital”--but its ability to correctly estimate the cost of natural catastrophes. “And to have a good price, you have to be able to correctly estimate the potential extent of the damage,” Marchand said. “While reinsurers have managed to create models for very large natural disasters that approximate reality fairly well, for more recurrent disasters--increasingly frequent mid-range disasters such as the floods last July or the tornado two years ago--the models do not approximate reality well enough precisely because of global warming." This has led to a sharp increase in reinsurance premiums, Marchand explained.

This increase has been aggravated by the multiplication of these climatic events on a global scale--“we are talking about geographical mutualisation”--and by the multiplication of other claims such as cybercrime, the cancellation of events or the multiplication of lawsuits against companies--“we are talking about mutualisation between branches.”

The premiums we collect are insufficient to cope with this increase in events.
Franck Marchand

Franck Marchanddirector of operationsFoyer insurance group

Foyer’s director of operations therefore expects an increase in rates for policyholders, “because the premiums we collect are insufficient to cope with this increase in events”. Likewise, the general manager of Lalux said that “a rate increase is expected on the Luxembourg market following the increase in the number of natural disasters, which has an impact not only on the amount of claims borne by companies, but also on reinsurance premiums”.

Hengen similarly sees rate increases coming. “Market conditions will change. For Luxembourg companies, as for all others, reinsurance is also a cost that must, at some point, be passed on to clients in the form of premiums. This is the law of the market.” However, Aca’s managing director does not see a short-term increase, as the event is still recent. He definitely expects limited increases in premiums. “Prices for insuring certain risks may increase until the customer says stop.” This is the law of the market.

But the law of the market can work the other way round, i.e., that companies give up insuring risks that would become out of control. This is not a textbook case. “In the jargon of insurers, we talk about a 100-year event to describe episodes like the July floods. The whole country was concerned and affected at the same time. Jean-Paul Lickes, the director of the water management administration, said in the media something important: we must now prepare for a 30-year recurrence.” This, Hengen said, is the trend we are heading towards and will force insurers to review their products and pricing.

Pooling or obligation

Could pooling these climatic risks on a Luxembourg-wide scale be the solution to avoid a rise in rates--a hike that no one wants to quantify--and improve residents’ cover?

Aca is not proposing this plan, said Hengen. But the possibility has been raised. “It is above all a political question which raises the issue of how to feed such a fund.”

Not such a good idea, in Marchand’s view. “If the reinsurers, who are colossal players responsible for pooling risks at the global level in different branches, have difficulties in determining the financial amounts required, how could Luxembourg alone do it in such a small territory? The government would have to put a significant part of the state budget into a reserve fund. Personally, I don’t think it’s relevant when there is a private market that regulates this in a much more efficient way thanks to geographical and inter-industry diversification and competition.”

Marchand is in favour of a more proactive approach to encourage policyholders to take out this type of protection, which is still optional. By increasing the guarantees, for example. As Lalux has just done, where the compensation limits that varied according to flood zones have been completely lifted. “Our customers insured against flooding now have unlimited cover,” said Strasser.

This could switch from voluntary to obligatory, according to Marchand, “but not with rates set by the state. The market should be allowed to play its role and premiums should be adjusted according to the risk exposure of each individual.”

Such an obligation is not on the agenda for the Aca. “I think these disasters show that insurance is a useful thing. For the 2019 tornado, almost 95% of the damage was covered by private insurance. So the system works.”

Originally published in French by and translated for Delano.