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Climate change offers growth opportunities for re/insurers: Moody’s

27th March 2018 - Author: Matt Sheehan

Moody’s has suggested that the effects of climate changes may present many opportunities for re/insurers to expand their operations by introducing new products, expanding existing ones, and by closing the protection gap.

moodys-logo_blueA recent report by the company predicts that insurance will likely become a more widespread part of comprehensive risk adaptation strategies as the financial and economic risks associated with climate change become more pronounced, and as governments, businesses and individuals become more aware of these risks.

Moody’s notes that there remains a vast untapped market of underinsured or uninsured entities that will increasingly require re/insurance coverage as the risk of weather-related catastrophes grows due to climate change.

Its report points to Swiss Re’s estimate that the protection gap for weather-related catastrophic events averaged US $78 billion annually over the past 10 years, and $160 billion in 2017 alone – the highest level on record.

This protection gap represents a huge potential market for re/insurers, and whilst closing it remains a global issue, it is also one that is particularly pronounced in emerging economies, which often possess extremely low levels of insurance penetration.

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Moody’s notes that the scale of the protection gap is such that it will likely require a combination of public/private partnerships, government sponsored risk facilities and governmental coverage mandates to sufficiently tackle it, but stresses that this will constitute a vital area of growth for re/insurers in the future.

Existing efforts to address the protection gap include the California Earthquake Authority, the Florida Hurricane Catastrophe Fund and the National Flood Insurance Program in the US and Flood Re Limited in the UK.

Although re/insurance for catastrophic events will comprise a large part of climate change growth demand, Moody’s also anticipates growth for a range of other products that can transfer risks associated with more frequent extreme weather events, like agriculture and crop insurance, and flood insurance.

Similarly, there will likely be new opportunities for both property and liability coverage surrounding new infrastructure and technologies related to carbon transition, such as renewable and clean power generation.

Initially, this growth will be mitigated by an accompanying decline in insurance demand from carbon intensive industries, but Moody’s expects the aggregate demand for risk management products to increase alongside climate change.

However, these new opportunities will be frustrated to an extent by the uncertainties associated with underwriting new technologies or products without significant loss histories, and it may require some time to appropriately adjust the rate adequacy of premiums.

Moreover, despite the range of growth opportunities it outlines, the report by Moody’s concludes that the advantages for re/insurers are likely to be outweighed by the risks attached to climate change, as many sectors are significantly exposed to its economic consequences.

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