The overall ability of insurance to offset financial risks stemming from catastrophic events, including climate-related events, is relevant to the creditworthiness of issuers and debt instruments outside of the insurance sector, according to S&P Global Ratings.
In a new report released by the firm, it states how insurers do not “bear the brunt of extreme weather alone.”
In fact, insured parties face the prospect of increased premiums, reduced coverage, and, for those within certain industries and regions, major difficulties securing insurance, especially after a previous claim.
“That should make insured parties more aware of their risks, but could also affect the credit quality of both debt issuers and debt instruments,” analysts commented.
Moreover, S&P also explained how insurers are in the business of assuming and managing risk for entities that wish to offload at least some of that risk, yet they also expect to generate a profit and proactively manage their capital, at the same time too.
“Insurers have scope to make changes to those terms and conditions as policies renew, and the majority of property and casualty insurance policy contracts, including those providing protection against climate-related physical risks, have one-year terms,” the firm added.
In addition, S&P highlighted how the insurance sector’s profitability, particularly in the United States, has been affected by unusually frequent and severe natural catastrophes, including convective storms, floods, and wildfires.
Readers will recall that a previous report by Gallagher Re stated that global insured losses amounted to $108 billion in
the first nine months of 2024, however that sum excludes the losses from Hurricane Milton, which made landfall in the US during the fourth quarter of 2024.
S&P also warns that insurance coverage could become less affordable if the frequency and cost of claims increases significantly, as insurance companies have to manage their own risk too.
Focusing attention on risk management, analysts stated that if climate change causes catastrophic events, or increases the frequency of severe events, it could exacerbate the complexity of risk management.
In turn, this could affect insurers’ risk calculations, and therefore lead them to change the insurance policy’s terms and conditions at renewal.
It’s important to remember, that it is the policyholders that have to bear the consequences of a mismatch between their insurance coverage, as well as any losses stemming from damaging events.
However, beyond the issues that are centered around insurance’s ability to mitigate credit risk, changes in the frequency and extent of catastrophic events – including those related to climate change – could force entities to grapple with more fundamental questions of access to insurance, S&P warns.
“The evolution of insurance coverage and availability could also lead some governments to take a more active role in supporting access to insurance, in the form of financial support or legislation, or even as insurers of last resort. Recovering from a disaster, or replenishing reserves for insurance programs of last resort, means governments’ priorities for resources and funds could change,” S&P added.
Adding: “The wider trend of price increases could accelerate and spread if extreme weather events become more frequent and severe. That could add uncertainty to insurance costs and further complicate risk-mitigation calculations for issuers seeking protection.”
