‘Nearing a turning point’: Reinsurers set to pay out as climate disasters loom
The insurance industry is bracing for severe losses in the next financial year as global natural disasters trigger higher claims from consumers.
Morningstar analysts predict reinsurance earnings to peak over the course of 2026, arguing that the industry is currently at the bottom of a low-loss weather cycle, meaning it is seeing the end of a minimal disaster stretch.
In turn, the financial services firm anticipates insurance claims will begin to pick up in 2027 as extreme weather events become more frequent, leading to higher losses and declining earnings across the sector.
In a research note, equity analyst Henry Heathfield, said: “Reinsurers typically see their earnings rise during catastrophe downturns. That is because their underwriting margins improve as they benefit from paying out less in claims.
“Historically, most natural catastrophe cycles have lasted, on average, from peak to trough around six years. Periods of higher or lower natural catastrophe losses affect property catastrophe pricing by altering the amount of available capital.
“Reinsurance pricing tends to peak a year or two after peak losses.”
Natural disasters and fossil fuels
Heathfield pinned his predictions on the shifting weather patterns, with cooler parts of the cycle coming to an end, bringing an El Nino event which leads to extreme warmer weather.
Every El Nino event in the past 60 years has had a significant impact on financial markets, triggering spikes in commodity prices, higher inflation, bond market volatility and sharp sector divergences across stock markets.
Meteorological agencies declared El Nino had formed at the start of June, forecasting a nearly two-thirds chance that it will rank “among the largest El Nino events in the historical record”, boosting the likelihood of “catastrophic” personal and property losses.
But the repercussions of the weather event are not expected to be felt until next year, meaning insurers will also not feel the brunt for the remainder of the year.
Heathfield noted that despite the global transition to green energy, “it is difficult to see that we are presently doing enough to achieve a meaningful reduction in the average annual temperature”.
He acknowledged that the burning of fossil fuels and rising greenhouse gas emissions will continue to lead to rising temperatures and “catastrophe severity”.
Heathfield said: “The market looks to be nearing a turning point. Reinsurers have been riding a wave of strong earnings, supported by several years of unusually low catastrophe activity and favourable pricing conditions, but those tailwinds look to be fading.
“The cycle looks like it’s going to turn, with El Nino conditions emerging and growing loss activity, we expect pressure on profitability to build, particularly for those with higher catastrophe exposure.”
What insurance stock will survive the storm?
While many insurers will be heavily exposed to incoming extreme weather, some European companies have taken steps to position themselves away from the fallout, with one in particular taking steps to protect capital.
French reinsurance company Scor is expected to handle the upcoming shift best off the back of its low exposure to natural catastrophes
Its property catastrophe insurance accounts for just 10 per cent of its total premium income, making it largely underweight compared to competitors who are likely to take a larger hit to profit.
Its share price is up 12.4 per cent since January, trading at €31.70 (£27.30) per share.