Extreme weather and changing climate a growing risk to re/insurers

by Artemis on September 26, 2012

A stormy future lies ahead for U.S. property and casualty re/insurers according to a new report from Ceres, a nonprofit group advocating for sustainability leadership from businesses and investors. The report suggests worsening weather in a warming world poses a growing risk to the financial stability of insurance and reinsurance companies, and this has broad ramifications for the wider economy and society as a whole.

The report titled ‘Stormy Future for U.S. Property and Casualty Insurers: The Growing Costs and Risks of Extreme Weather Events’ outlines a proactive approach that insurers, reinsurers, regulators and investors can take to address the risks of a changing climate. Scientific evidence suggests that the changing climate is contributing to variations in weather patterns, stronger climate extremes, more violent storms, more frequent heat and drought events as well as more extreme precipitation events as well. The increasing intensity and frequency of these events will clearly hit the insurance and reinsurance industry hard so it is imperative that the industry is prepared.

“The report makes clear that extreme weather losses are escalating and pose enormous challenges for U.S. insurers that they should pay far more attention to,” said Mindy Lubber, president of Ceres. “A small number of insurers have stepped to the plate in mobilizing a response to this global threat, but far broader engagement and action from the industry is needed.”

“Insurance is the first line of defense against extreme weather losses, but climate change is a game-changer for the models that insurers have long relied on,” said Washington State Insurance Commissioner Mike Kreidler, who wrote the report foreword. “Companies will need to adapt if insurance is to remain available and affordable.”

The report recommends that insurance and reinsurance companies improve the way they evaluate and price the changing weather risks in their underwriting process. They advocate achieving this through development and use of more robust research and development of new catastrophe models which better reflect the latest science on weather extremes. They also note that insurers and reinsurers need to exert pressure on where and how buildings and infrastructure are built to help reduce vulnerability and exposures and also lobby for government policies which work towards cleaner energy and reduction of carbon emissions.

Of course the other angle which the report does not cover is whether the traditional insurance and reinsurance market will be able to assume the growing weather and climate risks, how these risks should be transferred and the likely growing requirement for the capital markets to shoulder a portion of the risks, as they do today through instruments such as catastrophe bonds, investor backed collateralized reinsurers and other methods. As the risks grow, exposures increase and re/insurers alone lack the capital to underwrite the growing climate and weather risks, the capital markets are a vital piece of the risk transfer chain and their involvement in discussions around weather and climate risks is growing in importance.

You can access the full report from Ceres via their website.

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