Reinsurers may be underestimating the impact of climate change: S&P

A scenario from Standard & Poor’s Ratings Services that seeks to test the potential impact of climate change suggests that reinsurers might be underestimating their exposure to catastrophe losses by an average of 50%.

The finding is outlined in the article, Climate Change Could Sting Reinsurers That Underestimate Its Impact, published Wednesday by Standard & Poor’s. The article offers an element of the overall picture in the company’s annual Global Reinsurance Highlights, to be released later this month, which details what it might mean to the reinsurance industry’s Cat exposure and, ultimately, to its ratings, if the Cat losses of 2005 and 2011 were to become the “new normal.”

The scenario is based on loss experience over the past 10 years, notes a statement from Standard & Poor’s.

Related

Severe weather in U.S. caused $1 billion of insured losses last month

The company reports that for most reinsurers, their highest catastrophe losses over the past decade occurred in either 2005 or 2011. “Under this simple scenario, we estimate that on a gross basis, reinsurers may be understating both the one-in-10 and the one-in-250-year loss by around 50%,” the statement adds.

“Some of the key ratings metrics that we use to assess reinsurers’ capital adequacy and catastrophe exposure are materially affected under this scenario,” Standard & Poor’s points out.

There is no scientific consensus on how much climate change may have contributed to extreme weather in recent years, and how much it is expected to contribute in the future, the statement notes. That said, “the reinsurance industry recognizes that climate change is likely to have a significant impact on future weather events.”

Many reinsurers are relying on their ability to adjust premiums in the future for any gradual increase in weather-related claims over time, as most non-life business is renewed yearly, Standard & Poor’s reports. “However, most reinsurers do not believe that climate change is having a material quantifiable impact on their current risk exposure, nor do they think it is likely to do so in the near future.”

Standard & Poor’s views it as “unwise to rule out the possibility that climate change has already begun to affect reinsurers’ risk exposure, especially given the number of catastrophe events recently triggered by extreme weather.”

Global Reinsurance Highlights will provide a detailed perspective on the market, focusing on the competitive pressures that will impede reinsurers’ ability to generate strong returns, and challenges for the sector to reinforce its relevance to existing and future clients as the global economy continues to evolve.