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Re/insurers failing to adjust to climate change, reports University of Waterloo

16th May 2018 - Author: Matt Sheehan

The re/insurance industry is putting homeowners at risk by not sufficiently considering risks associated with a changing climate in their underwriting practices, according to a new study by the University of Waterloo.

University of Waterloo LogoThe University’s research, which looked at data from 178 re/insurers, concluded that most companies regard risk to property from extreme weather as static, and base their premiums on historical data.

It claimed that this approach does not adequately factor in the changing nature of extreme weather events, which are measurably increasing in severity, frequency, and unpredictability.

Jason Thistlethwaite, a climate change economist at the University of Waterloo, commented: “As extreme events become more frequent, insurers that ignore climate change will not put away enough money to cover their claims.

“To re-coup those losses, they’ll have to raise rates or pull coverage from high risk areas. When this shift happens, thousands of people will lose coverage or it will be unaffordable.”

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The study also claimed that reinsurers tend to be better at reacting and adapting to climate change-related financial risk than primary insurers, which, it speculated, could eventually lead to significant disruption in the global re/insurance industry.

“Some insurers are better at understanding climate change than others,” explained Thistlethwaite. “These organizations will survive, and likely be able to sell climate services to their counterparts struggling to understand the problem. Those that don’t, will fail. Insurers are supposed to watch our backs by looking into the future and protect us from unexpected events. We pay to not worry about these things.”

Insurers do use the latest available risk modelling tools and the fact that property insurance contracts typically only run for a year does mean that taking into account recent historical experience, long-term trends and using the latest model versions, does factor in an element of climate related change.

But they could always do more and as the research highlights it may be that some re/insurers are much better than others at factoring climate change into their underwriting decisions.

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