Insurance and reinsurance needs to do more on climate change risks

by Artemis on October 24, 2014

A new climate risk report produced by Ceres reveals that an alarmingly low level of insurers and reinsurers are moving in positive ways to tackle the increasing threat of climate change risks and that more needs to be done.

The publication, “Insurer Climate Risk Disclosure Survey Report & Scorecard: 2014 Findings & Recommendations,” analyses 330 (about 87% of the U.S. insurance market by direct premiums written) U.S. re/insurers’ efforts and responses at tackling the growing impact climate change is having on economies and the insurance industry. And the general feedback throughout the study is that a potentially dangerous amount of re/insurers aren’t doing nearly enough.

Unsurprisingly, the larger re/insurers, which includes Swiss Re, Munich Re, ACE, Prudential, Allianz, The Hartford, Sompo Japan, Zurich Insurance and XL Group, provide a much more comprehensive view of the impact of climate change on the sector and offer ideas for future solutions, while the vast majority of the small-medium sized firms are failing to do even the basics.

Clearly, the larger companies have more resources at their disposal and are therefore better equipped to fund risk management solutions, but it’s the complete absence and limited efforts that roughly 83% of the 330 companies rated (Ceres rated firms on their climate change efforts on a scale of ‘Minimal,’ ‘Beginning,’ ‘Developing,’ and ‘Leading’) showed that’s concerning.

Out of all the companies Ceres’ report analyzed only nine (3%) of them received the top ‘Leading’ rating, with the majority of these coming from Property & Casualty (P&C) insurers. Although P&C firms appear to be leaps and bounds ahead of the Life & Annuity (L&A) and Health insurer sectors, still only eight out of the 193 P&C re/insurers received the top rating.

A section of the study reads, “P&C insurers are on the veritable ‘front line’ of climate change risks, and there is compelling evidence that those risks are growing. Rising sea levels and more pronounced extreme weather events will mean increasingly damaging storm surges and flooding.”

As reported previously by Artemis there is a concerning gap between insured and uninsured losses, and while economic damages from weather-related events is increasing so too is the amount of uninsured damages, causing a potentially very dangerous situation.

“In some high-risk areas, ocean warming and climate change threaten the insurability of catastrophe risk more generally. To avoid market failure, the coupling of risk transfer and risk mitigation becomes essential,” says Ceres.

An increasing number of uninsured regions, particularly on coastlines, lead to heightened pressures on public institutions and local populations abilities to fund post-disaster recoveries, a gap which provides opportunities to reinsurers with available capacity to fill it.

Ceres highlights this opportunistic environment saying that with “The development of new investment and securitization vehicles in clean energy, insurers are presented with unprecedented opportunities to profit from investments in climate change mitigation.”

Of course they also have a similar opportunity to use investment and securitization techniques to offload some of their risk through insurance-linked securities (ILS) and catastrophe bond type deals, creating a situation where re/insurers can benefit on both sides.

As well as posing a serious threat to local communities insurability and sustainability post-event, the study also reveals how climate change risks can have a negative impact on re/insurers’ ratings, through a sub-section via ratings agency A.M. Best.

The climate risk report concludes this notion by saying it’s “of key importance to regulators and investors, that insurance companies lead in developing business strategies that holistically address escalating climate risks will be significantly better able to manage wide-ranging and increasing threats from a warming world.”

With the economic cost of climate change set to rise dramatically and the gap between that economic cost and insured losses seemingly increasing, the role that risk transfer, insurance, reinsurance and insurance-linked securities (ILS) has to play is clear. This is a massive business opportunity for re/insurers and ILS investors, to provide products that financially protect communities from the impact of a changing climate and increasingly extreme weather variation.

The comprehensive and insightful Ceres report (available here) is the first of its kind and perhaps will go someway to ensuring re/insurers do their utmost to tackle the already burgeoning phenomenon of climate change risks, aiding to minimize the gap between the insured and uninsured.

Washington Insurance Commissioner Chair, National Association of Insurance Commissioners’ (NAIC) Climate Change and Global Warming Group, Mike Kreidler said; “There is no doubt that an early effort to adjust policies, premiums and insurance investments will result in less dramatic impacts later on, thus avoiding and reducing losses that we can already anticipate.”

Readers will be aware that there is an increasing focus on climate related risks thanks to initiatives from the UN, World Bank and World Food Program in recent weeks. A number of our recent articles on these topics can be found below.

Swiss Re pledges $10bn in re/insurance capacity for climate risks.

Climate change catastrophe bonds for Africa to be launched by ARC.

Reinsurers (and ILS) may underestimate climate change exposure: S&P.

Climate change could slash South Asian economy by 9% a year.

Weather & climate disasters have cost the global economy $2.4 trillion.

Economic cost of climate change projected to grow, ILS has role to play.

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