DBRS Analysis Identifies Wildfires as a Structural Risk to Southern Europe's Insurance Sector
A new report by the credit rating agency DBRS Morningstar has concluded that the escalating intensity of forest fires across Southern Europe has become a "structurally relevant factor" that is affecting the profitability and stability of the insurance sector. The analysis, released on Tuesday, states that wildfire risk has transitioned from a secondary, sporadic peril to a primary driver of earnings volatility, capital requirements, and the pricing of new insurance policies. This shift has significant implications for property owners and insurers, particularly in Portugal, Spain, Italy, and Greece.
The report identifies key environmental factors, such as record-breaking summer temperatures and longer fire seasons, as the cause for the increased frequency and severity of insurance claims related to wildfires. This trend is straining the financial models of insurance companies, leading to more frequent instances where aggregate reinsurance limits are met or exceeded. DBRS warns that there is now a "higher probability of several medium-sized events exhausting wildfire risk budgets," which could lead to a systemic repricing of risk in the affected regions.
The analysis predicts that insurance terms and conditions are likely to become more stringent across the Iberian Peninsula and the Mediterranean. In Portugal, DBRS notes that the country's forest exposure was significantly tested again this year, with official data from the National Forest Agency showing that nearly 65,000 hectares have burned to date amidst thousands of separate fire incidents. The agency points out that Portugal's historically high cumulative burn footprint means that even a climatically average summer can now introduce significant profit volatility for insurance portfolios that are concentrated in the rural areas of the country's central and northern regions.
The financial impact is also severe in neighboring Spain, where DBRS highlights that the total burned area has almost tripled when compared to the annual average recorded since 2006. In other Mediterranean countries like Italy and Greece, the report notes that the economic consequences extend beyond property damage. The insurance sector there faces substantial claims related to business interruptions and liability exposures within the vital tourism industry, including costs associated with large-scale evacuations and health claims arising from smoke inhalation during the peak tourist season.
In light of this evolving risk landscape, DBRS has issued a warning regarding the potential for negative impacts on the short-term revenues of insurance companies. The alert is specifically directed at insurers with a heavy concentration of policies in the so-called wildland-urban interface zones of the Iberian Peninsula and Greece. These are areas where residential and commercial developments are in close proximity to fire-prone natural landscapes. The report does, however, offer a more stable outlook for large, diversified European insurers, stating that for them, "the risk remains manageable, given strong capital generation, better reinsurance availability, and growing access to alternative capital."
This analysis comes as mainland Portugal continues to battle multiple rural fires that have been active since July, primarily in the North and Central regions. The fires have been exacerbated by a period of intense heat, which prompted the government to declare a national situation of alert on August 2. According to the latest provisional data from the government, 172,000 hectares of land had burned in Portugal as of August 17, a figure that already surpasses the total area burned throughout all of 2024.
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