Climate change creates significant challenges for the property and casualty (P&C) re/insurance industry, posing risk management and financial risks which account for a net negative credit impact on the sector, according to a recent Moody’s report.
“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,” said James Eck, a Moody’s Vice President.
The combination of increasing insured property values along coastlines with increased frequency of weather-related catastrophic events will magnify the risk for P&C re/insurers over time.
To keep up with the changing risk landscape, firms are tasked with the need to continuously assess, measure, and mitigate 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.
However, smaller, more geographically concentrated firms may struggle to adequately adapt to these challenges.
In addition, climate change adds a layer of uncertainty to risk modelling and pricing, and the industry runs the risk of pricing trends consistently falling behind actual losses and thus creating profitability challenges for firms in ‘catch up mode’.
Re/insurers could see investments in carbon-related firms lose significant value, although Moody’s said this risk is smaller given their low asset leverage and well diversified investment portfolios.
Additional risk could come from climate change related litigation, due to significant potential exposures under liability insurance policies provided to corporate clients, particularly if “these legal theories establish liability against carbon emitters,” warned analysts.
Thus, P&C re/insurers are forewarned to expect a negative credit impact from climate change correlated risks as the frequency and severity of natural catastrophe events increases.
The number of severe weather events has grown from around 60 events annually in the 1970s to an average of 310 events annually during the past 10 years.
Likewise, the amount of insured losses from weather-related catastrophic events, which include tropical cyclones, convective storms, floods, extreme temperatures, droughts and wildfires, has also trended strongly higher even after controlling for inflation, said Moody’s.
Not only are the effects of climate trends on catastrophic events difficult to predict, but the correlation of climate-exposed risks that span P&C re/insurers’ balance sheets increases the magnitude of potential losses, resulting in a negative credit impact for P&C re/insurers from correlated risks.