The global insurance sector is preparing for a substantial increase in losses over the coming financial years, driven by a predicted surge in natural disaster claims. Analysts at Morningstar suggest that the industry is currently at the tail end of an unusually low-loss weather cycle, with earnings for reinsurers expected to reach their peak in 2026 before a downturn.
This shift is anticipated to lead to a significant rise in insurance claims from 2027 onwards, as extreme weather events are forecast to become more prevalent. Such a development would likely result in higher payouts and a subsequent decline in earnings across the reinsurance sector, impacting profitability.
Henry Heathfield, an equity analyst, highlighted in a research note that reinsurers typically see their earnings improve during periods with fewer catastrophes, as underwriting margins benefit from lower claim payouts. He noted that natural catastrophe cycles have historically averaged around six years from peak to trough, with pricing adjustments often following a year or two after peak losses.
Heathfield's predictions are largely based on evolving weather patterns, particularly the conclusion of cooler cycles and the onset of an El Niño event. El Niño, known for bringing warmer extreme weather, has historically triggered significant impacts on financial markets, including spikes in commodity prices, increased inflation, and volatility in bond markets. Meteorological agencies confirmed the formation of El Niño in early June, forecasting a nearly two-thirds probability that it will rank among the most severe on record, heightening the risk of substantial personal and property damage.
Despite the global push towards green energy, Heathfield cautioned that current efforts may not be sufficient to achieve a meaningful reduction in average annual temperatures. He acknowledged that the ongoing burning of fossil fuels and rising greenhouse gas emissions are expected to continue driving temperature increases and an escalation in the severity of catastrophes. He concluded that the market appears to be 'nearing a turning point', as the favourable conditions that have supported strong earnings for reinsurers, such as low catastrophe activity and advantageous pricing, now seem to be diminishing.
While many insurers face considerable exposure to the impending extreme weather, some European firms have proactively taken measures to mitigate the potential fallout. French reinsurance company Scor, for instance, is considered well-positioned to navigate this shift due to its comparatively low exposure to natural catastrophes. Its property catastrophe insurance business accounts for only 10 per cent of its total premium income, making it less vulnerable to the anticipated profit hits that competitors with higher exposure may experience.