Analysts at Jefferies have suggested that reinsurers’ data capabilities should provide them with a pricing advantage as environmental, social and governance (ESG) considerations are increasingly integrated into the insurance sector.
The firm believes that climate change presents both significant opportunities and risks for the non-life insurance industry, although it says many potential rewards have been overlooked.
For instance, analysts noted that increased frequency of weather events presents opportunities by raising awareness where there is a structural demand for insurance, particularly in emerging/developing markets where insurance penetration is low.
Similarly, as catastrophe models are adjusted to reflect higher probability and magnitude of losses, the industry will increase prices in order to reflect the new and elevated view of risk.
And as some capital that had previously supported catastrophe risk has exited or is trapped, overall capacity to protect against property catastrophe risk is diminished, resulting in more pricing power for the remaining available capacity.
Jefferies further observed that insurers and reinsurers that write more catastrophe insurance have enhanced data capabilities, providing them with a pricing advantage which ultimately should improve market share.
Of course, for insurers that have more exposure to catastrophe-exposed lines of business, climate change does also resents a risk of elevated future claims as the frequency and severity of weather events rises.
Additionally, uncertainty arising from climate change could lead to underwriting volatility impacting both earnings and the balance sheets, and having an adverse cost of capital impact.
Against this backdrop, Jefferies continues to favour insurers that have been able to grow volumes in a hardening environment across property catastrophe lines, as well as reinsurers due to their strong data capabilities.
Going forward, analysts will continue to watch for actual losses reported by insurers arising from catastrophe events and how these compare against corporate budgets and realistic disaster scenarios, as well as any notable changes in reinsurance protection and business.
A rise in P&C insurance penetration, particularly in emerging markets, as well as a favourable pricing environment in property catastrophe lines should also be positive catalysts.
