Global reinsurers hugely underestimating climate change risks: report
One of the most visible effects of global climate change is an increase in the frequency and intensity of extreme weather events. Despite this, new analysis suggests that reinsurers may still be underestimating their exposure to natural catastrophe risk.
S&P Global's report titled "Global Reinsurers Grapple With Climate Change Risks" indicates that although reinsurers have increased their efforts to incorporate climate change in their decision-making process, many companies are facing difficulties in robustly implementing these considerations.
The agency's scenario analysis found that reinsurers' estimates of their exposure to natural catastrophe risk, and therefore physical climate risk, could be underestimated by 33 to 50 percent, which is 91 percent of the sector's buffer above the 'AA' capital requirement.
S&P noted that this scenario illustrates the significant potential for volatility in earnings and capital.
Seventy-one percent of reinsurers responding to the survey consider climate change in their pricing assumptions, but only 35 percent include a specific component of the price allocated to climate change. This ranges from 0 to 10 percent of the rate charged on average and does not appear to be a significant determinant of market pricing, it said.
Re/insurers may consider that the effects of climate change will not be felt for some time, and that at present, the ability to annually reprice most property policies provides them with some insulation. S&P, however, warned that there is clear scientific consensus that climate change is already influencing insured losses with the increasing frequency and intensity of extreme weather.
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, it stated.
Dennis Sugrue, S&P Global Ratings credit analyst, further explained: "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.
"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."
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