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Insurers’ climate risk management adequate for profitability implications: DBRS Morningstar

23rd September 2022 - Author: Jack Willard

A new note from DBRS Morningstar highlights that even though there has been a number of record-breaking extreme weather events that have occurred across the world in H1 2022, the impact on the profitability of the global P&C insurance industry has been mitigated by the insurers’ response to climate change.

climate-changeDespite global natural catastrophe insured losses in H1 2022 being higher than the average of the past 10 years, they are manageable for P&C insurers.

DBRS Morningstar stated that it considers insurers’ risk management responses to climate change, which includes annual premium re-pricing and robust reinsurance programs, to be adequate in mitigating short-term profitability implications.

However, climate model risks are significant, in part because greenhouse gas (GHG) emissions are expected to have a greater impact on the climate and because they are difficult to predict.

Accordingly, DBRS Morningstar states that the estimated H1 2022 global natural catastrophe-related insured losses, which amounted to $35 billion, are only slightly above the 10 year inflation-adjusted average for the January–June period ($29 billion) and are significantly lower than the $46 billion of the same period last year.

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Therefore, from both a profitability and credit risk perspective, 2022 so far has been a year that has provided solid growth in premiums, and good underwriting income and profitability.

Furthermore, DBRS Morningstar highlights that a crucial risk management tool that is contributing to the cost of property insurance is the insurer’s utilization of reinsurance programs. After years of relatively modest gains, the reinsurance price index experienced its highest increase in 16 years, rising close to 15% for H1 2022 renewals. But, while climate change is not the only factor that is driving this trend, it is playing a contributing role.

Therefore, DBRS Morningstar expects continuing global reinsurance price increases at this higher scale, in part to compensate for prior years more subdued reinsurance price hikes. These increased reinsurance costs would likely be fed into higher property premium increases in the future, barring a substantial moderation or decrease in the climate change risk.

At the same time, climate adaptation measures, which includes investments in climate-resilient infrastructure such as by building structures that are better able to withstand higher intensity and volume of rainfall, for example, could mitigate climate change risks. But, DBRS Morningstar states that in the absence of such investments by public and private stakeholders, they expect to see premium rate increases above the rate of inflation for the foreseeable future.

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