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Dec 2021

Global reinsurers grappling to incorporate climate change risks

Source: Middle East Insurance Review | Oct 2021

The world is experiencing increasingly frequent and extreme weather events, which scientific consensus links to the physical effects of climate change. While reinsurers have increased their efforts to incorporate climate change in their decision-making process, many companies are facing difficulties in robustly implementing these considerations, according to a report by S&P.
 
S&P’s scenario analysis suggests that reinsurers’ estimates of their exposure to natural catastrophe risk could be underestimated by 33%-50%, which is 91% of the sector’s buffer above the ‘AA’ capital requirement. This scenario, said the ratings agency, illustrates the significant potential for volatility in earnings and capital.
 
“Unmodelled risks and the inherent difficulties in attributing extreme events to climate change create the risk that climate change may not be fully reflected in reinsurers’ catastrophe modelling, particularly in the short term,” said S&P Global Ratings credit analyst Dennis Sugrue. “We believe that those companies that take a more proactive approach to understanding and adapting their exposure to climate risk will be better protected against future capital and earning volatility linked to climate-related losses.”
 
The report said 71% of reinsurers who responded to the S&P survey consider climate change in their pricing assumptions, but only 35% include a specific component of the price allocated to climate change. This ranges from 0%-10% of the rate charged on average and does not appear to be a significant determinant of market pricing.
 
(Re)insurers may consider that the effects of climate change will not be felt for some time and that at present, the ability to reprice most property policies annually provides them with some insulation. However, there is clear scientific consensus that climate change is already influencing the frequency and intensity of extreme weather- and therefore, where not suitably mitigated, insured losses today.
 
A comparison between the historical premium rate movements for global catastrophe insurance versus the amount of estimated rate increases required to account for future climate-driven losses demonstrates why annual repricing is not a solution on which reinsurers should rely too heavily. M 
 
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