In a recent report, Moody’s has underscored the increasing physical climate risk and its implications for the insurance and reinsurance industries.
The report highlights that the rising frequency and severity of destructive weather events are driving up underwriting risk, adding a layer of complexity to risk management strategies.
One of the key findings of the report is that reinsurers are shifting more risk back to insurers to manage earnings volatility.
Reinsurers have taken steps to reduce their exposure to more frequent but individually less costly weather events, such as convective storms, flooding, and wildfires.
This shift has led primary insurers to retain more risk while adjusting pricing, modifying terms and conditions, or shedding business in regions where risk-adjusted returns cannot be met.
The data also reveals that primary insurers have retained a higher proportion of risk relative to their gross exposure since 2019. In contrast, many reinsurers have reduced their exposure to higher frequency risks, with some maintaining existing exposure.
This difference in risk retention has been particularly pronounced in lower return periods, partly due to limited retrocession capacity, which has constrained reinsurers’ ability to reduce their retained exposure significantly.
To address these challenges, (re)insurers are increasingly turning to sophisticated data, modeling, and risk mitigation strategies. Some companies are incorporating the potential impacts of climate change into their strategic planning and stress testing.
Enhanced modeling based on higher quality data and catastrophe models that factor in climate change scenarios are expected to play a pivotal role in managing climate risk.
The report also suggests that shifting market dynamics may prompt increased governmental risk-sharing initiatives. A new equilibrium between risk and reward will likely necessitate collaboration between reinsurers, primary insurers, governments, corporations, and individuals to assess climate risk more effectively and develop robust adaptation and mitigation strategies.
This collaborative effort may involve a mix of public-private partnerships and government-sponsored insurance facilities to ensure that sufficient risk transfer capacity is available in high-risk areas.
