Risks of climate change outweigh opportunities for re/insurers: Moody’s

The property and casualty (P&C) insurance and reinsurance sectors have significant exposure to the economic consequences of climate change and has a net negative credit impact on the industry, Moody's has said in a new report.

It also added that, to a lesser degree, climate change presents opportunities for firms to introduce new products and expand existing products. But this is not enough to outweigh the downside.

“We see climate change as having a net negative credit impact on the P&C insurance and reinsurance sectors as the risks associated with climate change outweigh potential opportunities,” the report said.

“Not only are the effects of climate trends on the frequency and severity of catastrophic events difficult to predict, but the correlation of climate-exposed risks spans both sides of balance sheets and a number of line items on income statements for P&C re/insurers,” Moody’s said.

James Eck, a Moody's vice president, stated: "The effects of climate change on the frequency and severity of catastrophic events are difficult to predict, and the correlation of climate-exposed risks that span P&C (re)insurers' balance sheets increases the magnitude of potential losses arising from the physical and transition risks associated with climate change."

Moody's says that although catastrophic events have always been a key risk to P&C insurers and reinsurers, the continued increase of insured property values along coastlines, and the increased frequency of weather-related catastrophic events, will magnify the volatility for these firms over time and result in a number of risk management challenges associated with the assessment, measurement and mitigation of catastrophic risks.

"We expect P&C (re)insurers to continue to adapt to the economic and regulatory challenges that result from climate change, as these firms can reprice risk on an annual basis, and further diversify their underwriting exposures and investment portfolios," Eck said.

The report noted that smaller, more geographically concentrated firms may struggle to adequately adapt to these challenges.

It added that risk modelling and pricing will experience an extra layer of uncertainty since climate change tends to produce an unpredictable environment that makes assessing and pricing risk more difficult. Moreover, there is an increasing risk that pricing trends could consistently lag actual loss experience, which may force the industry to play "catch up" in raising premiums to match increasing losses.

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