Analysts at Peel Hunt have noted that Munich Re now appears to be treating climate change as a systemic risk for the re/insurance industry, amid an ongoing rise on the probability of extreme weather events.
Last week, Munich Re presented its ESG credentials to financial markets, which included interesting insights in one of the largest reinsurer’s views on the impact that climate change is having on its exposures.
Peel Hunt argues that presentation shows Munich Re now views climate change as a systemic risk, meaning that it is highly correlated with Munich Re’s underwriting and investment exposures and therefore could have a profound impact on its capital structure.
This view comes against a backdrop of growing secondary peril risk, which are now exceeding primary perils in terms of insured losses.
Just in the past few days, a wave of tornadoes made their way through the US mid-west on Friday evening, leading to significant loss of life and calls for further investigations into whether climate change is triggering a rise in freak weather events
And analysts at Peel Hunt believe rate increases alone are unlikely to address (re)insurers’ exposure to un-modelled secondary perils and (re)insurers may reduce their risk appetite at the Jan renewals.
Looking at Munich Re specifically, the company’s concern focuses on the increased probability of extreme temperatures and new extremes.
The reinsurer is a contributor to the Conference of the Parties and is working towards the ambition of the Paris agreement to target a global increase in temperature of no more the 1.5 degrees Celsius.
This has implications for both how Munich Re structures its investment portfolio and the underwriting choices it will have to make in the future, Peel Hunt notes, and in particular how it can reduce its investment and underwriting exposure to industries which contribute significantly to CO2 emissions.
Munich Re also redirects investment to Green Tech and increases the underwriting exposure to long-term projects that will enable the transition from Coal & Oil to green energy which would otherwise not get off the ground.
In its presentation to financial markets, Munich Re indicated that it does not see the reinsurance industry alone as being able to absorb the systemic risk that Climate Change brings or help fund the protection gap that exists even in developed regions such as Europe.
It is therefore looking for partnerships outside of the reinsurance sector, including governments, to share the rising exposure risk to extreme events in the form of Public Private Partnerships.
“Amidst the rising frequency and severity of secondary perils it will be interesting to see whether the reinsurance industry reduces its exposures at the upcoming January renewals,” Peel Hunt concluded. “What is becoming increasingly clear is that the industry’s exposure to secondary perils is likely to be re-priced, in our view.”