Reinsurers must not take climate change for granted or underestimate its impact. If they do, they risk dealing with higher levels of catastrophic risks that fall way outside of their financial comfort zones, Standard & Poor’s concluded in a new article.
The piece – “Climate Change Could Sting Reinsurers That Underestimate Its Impact” – is another excerpt from S&P’s annual “Global Reinsurance Highlights” publication, which is set to come out during the 2014 Reinsurance Rendez-Vous conference. That event is set to take place in Monte Carlo from Sept. 13-18.
Standard & Poor’s in recent weeks has released other articles based on parts of the report, including a look at how the soft reinsurance market may jeopardize company financial ratings.
As far as climate change and reinsurance, Standard & Poor’s acknowledged in its article that scientists lack consensus about the degree climate change has contributed to extreme weather in recent years, and how much it may play a role in the future.
Still, reinsurers should spay close attention to the issue, S&P said, even as many “actively follow and sponsor scientific research” on the issue and gradually adjust future premiums to account for gradual increases in weather-related claims over time.
“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 wrote. But with that in mind, the article makes the case that “it’s 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.”
Standard & Poor’s points out that some of the biggest catastrophe losses for most reinsurers in the last decade took place in 2005, when Hurricanes Katrina, Rita and Wilma hit, and in 2011, when weather related losses included floods in Thailand and Australia, tornadoes in the U.S. and Hurricane Irene.
“Given this recent history, we think it’s prudent to ask: If the catastrophe losses of 2005 and 2011 were to become the “new normal,” what would it mean to the reinsurance industry’s catastrophe exposure, and, ultimately, to its ratings?” the Standard & Poor’s article asked. “While this scenario is simplistic, it illustrates that reinsurers’ exposure to catastrophe losses could be substantially higher than they currently estimate, with climate change likely being a major factor.”
At this point, it remains hard to accurately measure the potential impact climate change will have on extreme weather events. But Standard & Poor’s said it takes “a favorable view of reinsurers whose capital modeling and exposure management takes into consideration how climate change may affect extreme weather events.”
If reinsurers downplay this, reinsurers may find themselves accepting much higher catastrophe risks then they would typically be comfortable dealing with, Standard & Poor’s said.
Source: Standard & Poor’s