Smaller but More Frequent Catastrophes Loom Over Insurance Sector | Sidnaz Blog

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Less devastating than mega events such as earthquakes and hurricanes, these secondary perils, as they are known in the industry, happen relatively frequently and include hail, drought, wildfire, snow, flash floods and landslides.

Climate change and urban sprawl are driving a jump in secondary perils losses, said Tamara Soyka, Head Cat Perils EMEA at

Swiss Re.

Insurers and reinsurers, who traditionally focused on predicting big weather events that can cause widespread damage, are increasingly incorporating secondary-peril models.

Swiss Re, for instance, last year started considering pluvial—that is, heavy rainfall, similar to the recent European floods—flood zones when assessing risks.

A storm system over Europe dumped heavy rains in recent weeks, causing heavy floods in Germany, Belgium and parts of the Netherlands and Switzerland. The German Insurance Association on Wednesday said it expects insured losses could hit nearly $6 billion as a result of the flooding in North Rhine-Westphalia and Rhineland-Palatinate. It doesn’t yet have estimates for the damage in Saxony and Bavaria.

Before-and-after images show the extent of damage in German towns hit by the region’s worst flooding in decades. Visiting one inundated village, German Chancellor Angela Merkel called for more effort to combat future climate-related disasters. Photo: Satellite Image ©2021 Maxar Technologies

This year is expected to be the most damaging for the country since 2002, when insured storm damage totaled about €11 billion, equivalent to $12.98 billion, the association said. While mostly all residential buildings have windstorm and hail coverage, only 46% of homeowners have cover for heavy rain and floods.

Heavy rain, hailstorms and wind in Germany and Switzerland in June have already cost the industry an estimated $4.5 billion, according to analysts at Berenberg.

Analysts at

Moody’s Investors Service

in a note this week said German insurers “may find it challenging to protect homeowners against climate risk without significant price increases.”

Insurers paid out $81 billion for damages related to natural catastrophes in 2020, according to reinsurance giant Swiss Re, up 50% from 2019 and comfortably topping the $74 billion 10-year average for such losses.

Secondary peril events accounted for more than 70% of the $81 billion in natural catastrophe losses last year, according to the data.

Firms expected to take hits to their earnings from the European floods include Swiss Re,

Munich Re AG

and

Zurich Insurance Group,

according to analysts. Spokespeople for Swiss Re, Zurich and Munich Re declined to give estimates of the potential impact.

UBS Group AG analysts project $6 billion worth of losses for the industry, split into $2 billion for primary insurers and $4 billion for reinsurers.

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The prospect of more intense weather has insurers rapidly updating their risk-assessment models and recalculating the price of insurance. Property insurers faced an estimated $18 billion bill for damage to homes and businesses from the long stretch of frigid weather in Texas and numerous other states, the equivalent of a major hurricane, The Wall Street Journal reported earlier this year.

In some cases, the increased frequency of extreme weather events can lead insurers to drop coverage altogether. Some insurers in California chose to not renew insurance policies for homeowners in high-risk areas for wildfires, the Journal reported in 2019. California wildfires the prior two years had killed dozens of people and racked up more than $24 billion in insured losses.

Analysts say the losses from the European flooding will be manageable for the industry. While they may dent quarterly or yearly earnings, they won’t have a seismic effect on their capital. If the coming U.S. hurricane season is a normal one, that will likely crimp earnings further for some.

Flooding in Altenahr, Germany. In some cases, the increased frequency of extreme weather events can lead insurers to drop coverage altogether.



Photo:

friedemann vogel/Shutterstock

The Euro Stoxx Insurance index is up 7.6% this year, trailing the broad Euro Stoxx 600 stock-market index, which is up nearly 15%. The insurance index has fallen 6.4% since March 30, which Berenberg analysts attribute to fears of potential dividend cuts due to recent natural catastrophes.

The costs of reinsurance in Asia and the U.S. went up over the past couple of years owing to hurricanes and wildfires, said Berenberg analyst Michael Huttner. But prices in Europe didn’t increase significantly over that period. The floods will likely help catastrophe pricing increase, said Mr. Huttner.

Will Hardcastle, an analyst at UBS, says this year is shaping up to be the fifth consecutive year that natural catastrophe losses will be above reinsurers’ budgeted level.

“The last five years would suggest you’re not getting appropriate pricing for it,” he said. “It’s always difficult to determine whether the trend is short term. Now at this point you have to be thinking it’s more structural” because of climate change, he said.

Write to Julie Steinberg at [email protected]

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Coffee Prices Soar After Bad Harvests and Insatiable Demand | Sidnaz Blog

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Global coffee prices are climbing and threatening to drive up costs at the breakfast table as the world’s biggest coffee producer, Brazil, faces one of its worst droughts in almost a century.

Prices for arabica coffee beans—the main variety produced in Brazil—hit their highest level since 2016 last month. New York-traded arabica futures have risen over 18% in the past three months to $1.51 a pound. London-traded robusta—a stronger-tasting variety favored in instant coffee—has risen over 30% in the past three months, to $1,749 a metric ton, a two-year high.

Brazil’s farmers are girding for one of their biggest slumps in output in almost 20 years after months of drought left plants to wither. Brazil’s arabica crop cycles between one stronger year followed by a weaker year. Following a record harvest in 2020, 2021 was set to be a weaker year, but the drop is more severe than expected.

“I’ve been growing coffee more than 50 years, and I’ve never seen as bad a drought as the one last year and this year,” said Christina Valle, a third-generation coffee grower in Minas Gerais, Brazil’s biggest coffee-growing state. “I normally take three months to harvest my coffee; this year it took me a month,” she said.

Brazil’s total coffee harvest this year is expected to drop by the biggest year-over-year amount since 2003, according to the U.S. Department of Agriculture. Its arabica crop is forecast to be almost 15 million 132-pound bags smaller than in 2020.

Others are guarding for an even larger slump. Dutch agricultural bank Rabobank expects the harvest to be 17 million bags smaller, while commodities brokerage ED&F Man, whose Volcafe arm is one of the world’s largest coffee traders, expects a decline of more than 23 million bags.

“A drop that severe is unprecedented,” said Kona Haque, head of research at ED&F Man.

The pandemic shook up how consumers drink coffee. Demand for at-home machines and instant brews rose, compensating somewhat for closed coffee shops. The price rally comes just as Western nations are emerging from lockdowns and cafes are welcoming back customers starved of out-of-home coffee culture.

Global coffee consumption is expected to exceed production this year for the first time since 2017, according to the USDA. The department expects 165 million bags of beans to be consumed in 2021. That is 1.8 million bags more than last year. Meanwhile, global coffee production is expected to decline to 164.8 million bags.

There are other factors behind the price rally. Two other major producing nations, Colombia and Vietnam, have had much better harvests than Brazil but are struggling with a different issue: Port delays have left beans sitting idle on the dock.

Exports of Colombian coffee, particularly desired by baristas for its milder flavor, fell as antigovernment protesters blocked highways and ports. A shortage of shipping containers and rocketing freight costs hit Vietnamese farmers, who produce more than a third of the world’s supply of robusta.

“The whole supply chain suffered not only a significant increase in costs but also massive delays,” said Carlos Mera, head of agri-commodities market research at Rabobank. Unlike other commodities, coffee can only be moved around the globe in containers, he said.

Investors are also playing a role, betting that commodities will benefit from rising prices generally. Some investors bid up the price of coffee by putting money in commodity index funds that track broad baskets of commodities from industrial metals to coffee and cocoa, said Mr. Mera.

Coffee prices are heating up, and experts say an even bigger price hike could be coming. WSJ explains the web of economic forces that help determine the cost of coffee. Illustration: Mallory Brangan/WSJ

“There is a lot of money right now that is very keen on holding commodities as real assets, as hedges against inflation,” he said.

Coffee roasters have so far held off from passing higher prices on to consumers, said Ms. Haque. The higher costs of beans coupled with higher freight costs could mean roasters start charging consumers more if they think post-lockdown demand will be strong, she said.

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In Brazil, farmers say their stockpiles left over from last year’s bumper crop are dwindling and they are concerned they could run out before next year’s harvest begins.

“We’re a bit worried about having enough to sell next year,” said José Marcos Magalhães, president of the Minasul coffee cooperative. The cooperative is urging members to deliver whatever coffee they have to the cooperative so that it can keep meeting its orders, he said.

Coffee lovers could still find a reprieve. Brazil’s spring rains, which typically fall in September, will be crucial for determining whether damaged coffee plants can recover and produce enough beans during next year’s harvest, said Steve Pollard, a coffee analyst at brokerage Marex.

The alternative could see prices rise even higher, he said. Coffee plants take about 2½ years to develop, and farmers can’t respond quickly by simply planting more crops. “If there is a significant deficit then prices could skyrocket,” he said.

Dry river banks next to a coffee plantation show the extent of the recent drought in Brazil’s biggest coffee-producing state, Minas Gerais.



Photo:

Jonne Roriz/Bloomberg News

Write to Will Horner at [email protected] and Jeffrey T. Lewis at [email protected]

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