18 November 2015 Insurance

Climate change a top emerging risk for insurers: S&P

Climate change may present a wider range of threats for insurers, according to a new report by Standard & Poor's (S&P).

The report, Insurers May Anticipate A Smooth Road Ahead On Climate Change, But Their View Could Be Restricted, claims climate change is one of its top emerging risks for the industry.

It says that insurers do not typically view climate change as a major threat to their day-to-day activities as they anticipate that their ability to renew non-life policies annually offers them protection against increases in weather-related claims attributed to climate change. However, it argues that insurers' capital positions could be affected by lower investment income and higher capital requirements, as well as by the anticipated increase in weather-related claims.

“Taking into account those climate change effects that we currently consider to be quantifiable, our analysis indicates that insurers' capital management will be sufficient to manage the additional strain of a reduction of about 0.5 percent in capital adequacy per year, possibly at the expense of dividends being 5 percent -10 percent lower,” said S&P.

The firm also said that predicting how climate change with play out is “inherently uncertain”, saying the picture may change dramatically over time.

According to the report, the biggest danger to insurers from climate change is from unexpected and abrupt changes.

“We recognise that making decisions regarding risk-mitigating actions is difficult when any assessment of the potential impact of climate change is inherently uncertain,” said S&P.

“We consider that the industry has processes in place to implement the necessary risk mitigation actions, provided that it is affected gradually and with sufficient warning. That said, we see a small risk that climate change may hit without giving any clear signals to guide decision makers.”

S&P’s analysis used a recent study by the Mercer Group, a consultancy, which indicates that climate change has implications for investment returns, and thus for earnings. It also used an analysis by catastrophe risk modelling company Risk Management Solution (RMS), which reviewed likely changes to common perils, and considers that there is strong evidence that climate change will worsen the effect of tropical storms. This could increase capital requirements, according to the firm.

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