Morningstar DBRS Comments on the Impact of Severe Weather Events in Spain for Insurance Companies, and the Role of the Consorcio de Compensación de Seguros

On 29 October 2024, extreme flooding triggered by severe torrential rainfall affected the eastern and southern regions of Spain, ultimately leading to one of the deadliest weather events experienced in Spain. The heavy rains were mostly concentrated in the vicinity of Valencia, Albacete, Cuenca, and the eastern part of the Andalusia region, resulting in floods, numerous deaths and widespread damage to property and infrastructure. In some areas, the equivalent of one year's worth of rain fell in just eight hours. While it is still very early to provide a loss estimate, we expect that the economic losses of the weather event will reach several billion euros.

Insured losses are expected to be high, well above EUR 1 billion, given the significant damage to people, properties, vehicles, and businesses as well as to the region's agriculture sector. Part of the insured losses will be covered by the state-owned Consorcio de Compensación de Seguros (CCS), which manages the Spanish extraordinary risk insurance scheme. In Spain, the coverage of extraordinary risks, including floods and windstorms, is mandatory for any basic insurance coverage offered by private insurance companies. The CSS does not receive public funding, but it is ultimately funded by a surcharge to the policy premiums paid by policyholders. The CCS meets its obligations through the constitution of an equalisation reserve. At end-2023, CSS' total net equalisation reserve totalled EUR 10,319 million, increasing from EUR 10,242 million at end-2022.

The CSS is also expected to recover part of the insured losses related to the agricultural sector through its participation in Seguro Agrario Combinado (SAC), a form of coinsurance, which mostly covers risks related to adverse climate and meteorological events on the agricultural and livestock sectors. The CSS directly co-insures the risk, assuming a fixed quota share of 10%, but also acts as an excess-of-loss reinsurer for the other co-insurers. The SAC generally benefits from public support provided by either the central government, the regions, or both.

In a note published on 30 October 2024, the CSS confirmed it will cover damage to properties and vehicles attributable to flood. As a result, we expect that the insured losses caused by the severe flooding will be mostly absorbed by the CCS. Nevertheless, given the magnitude of the atmospheric events, we consider that the consequences for the private insurance and reinsurance sector will be consistent, with large claims undermining the underwriting profitability of Spanish insurance companies.

Notes:
All figures are in euros unless otherwise noted.