Whether climate change is here, on its way or non-existent, insurers have already accepted the need to prepare for it. But even as the industry confronts what might happen, it wants more certainty before fully embracing long-range changes in risk management, processes and procedures, Standard & Poor’s concluded in a new report.
“Many re/insurers are monitoring the possible implications of climate changes for their businesses as part of their emerging risk management,” the report by Credit Analyst Miroslav Petkov and others asserted.
The rating agency noted that a 2013 survey by the California insurance revealed significant climate change awareness and preparation based on the responses of 1,069 responding insurers and reinsurers. “However, even those that have invested the most in understanding the impact of climate change currently don’t explicitly allow for it in their pricing and modeling. One reason: They expect the impact will be felt only five or 10 years or more down the road,” the S&P report said.
Standard & Poor’s Petkov wrote that the rating agency agreed with industry views that “if climate change is happening, it may have a widespread impact in the long term, but isn’t likely to contribute to the size of the weather-related claims the industry expects in the next few years at least.”
He added that S&P sees non-life insurance businesses, based on yearly contracts, being well positioned to factor in climate change-related costs on a gradual basis as they emerge. Insurers and reinsurers have processes in place already, S&P said, to adjust premiums for any gradual increases in weather related claims.
The report also said that the rating agency doesn’t expect climate change per se to have a ratings impact over the next three to five years, “unless it causes a sudden increase in the number and magnitude of extreme events.”
While consensus on climate change remains elusive, volatile weather is getting more frequent, whether or not there are climate change connections. That means loss volatility may be rising for both insurers and reinsurers. Still, Petkov said, the details aren’t fully known and insurers want certainty before embracing more elaborate climate change preparations.
“Some scientists believe that climate change may lead to an increase in both the size and frequency of extreme events,” the report said. “However, due to the complexity of climate systems, there is significant uncertainty about the exact impact. Until a consensus emerges, we don’t expect the industry to directly allow for the impact of climate change.”
That said, S&P pointed out that it supported insurers and reinsurers that make an effort to model for climate change, even with the uncertainties that remain.
“Disregarding the possible impact of climate change may lead re/insurers to accept higher catastrophic risk than their risk appetite would usually allow,” the report concluded. “This could result in large losses and capital depletion if it turns out that climate change is indeed increasing the likelihood of extreme events.”