Climate change to challenge re/insurers risk management: S&P

by Artemis on April 28, 2015

Catastrophe risk management efforts utilised by global re/insurers could be put to the test should scientific predictions for more severe and frequent climatic events take fold, according to Standard & Poor’s (S&P) Rating Service.

In a new report, titled “Climate Change Will Likely Test The Resilience Of Corporates’ Creditworthiness To Natural Catastrophes,” ratings agency S&P explores the impact of more devastating natural disasters in an increasingly interconnected world.

“While recent history shows that natural catastrophes may have not been a major rating factor on corporate credit quality in the past, their effect in the future may increase considerably if, as scientific evidence suggests, we experience more frequent and extreme climatic events,” explains S&P.

Using data from global reinsurance giant Swiss Re, S&P notes that the economic cost of natural catastrophes has risen sharply over the last decade.

But for the most part companies have managed to mitigate the impacts through a mixture of “liquidity management, insurance protection, disaster risk management and post-event recovery measures,” notes S&P.

This includes insurance schemes, reinsurance-linked investments, insurance-linked securities (ILS), catastrophe bonds and regional risk financing pools, like the CCRIF SPC (formerly the Caribbean Catastrophe Risk Insurance Facility), the African Risk Capacity (ARC), the Pacific Catastrophe Risk Insurance Pilot (PCRIP) and the Turkish Catastrophe Insurance Pool (TCIP).

All of the above mentioned risk transfer mechanisms provide quality, wide-ranging protection to economies and societies across the globe in the face of natural disasters, while parametric schemes like the PCRIP ensure rapid pay-outs post event.

However, and as highlighted in S&P’s report, while such risk finance tools may have been adequate for navigating through the last ten years or so, the report warns that “the world could be hit by events that are significantly more devastating than recent ones.”

The ratings agency confirms that natural catastrophes are rarely a contributing factor for any negative ratings action, noting that in the last decade just 60 negative actions were applied where a natural disaster was the main cause.

To put that into context S&P has applied roughly 6,300 negative rating actions to companies during the last ten years.

The problem, warns S&P, is that as climate change brings more extreme and frequent catastrophe events, coupled with intensified globalisation and an increasingly interconnected world, companies’ current disaster risk management approaches may fall short.

“Growth in exposure areas with high risk to extreme events, coupled with increased integration of the world economy through complex global supply chains, may exacerbate the impact of natural catastrophes,” advised S&P.

Adding; “At the same time, the effects of climate change may increase their severity and frequencies.”

Amplified migration to vulnerable coastal regions in Asia-Pacific, and wildland areas in the U.S., which are susceptible to wildfires, are two good examples of elevated exposure as a result of a rising global population.

Combine this with the fact that asset values around the world are persistently rising, and it’s easy to see why S&P predicts that should an extreme, climatic event take place in such a region the economic damages could be staggering.

“If such extreme events were to occur, companies’ catastrophe insurance and overall disaster risk management could, in our view, become considerably less effective,” said S&P.

To tackle the phenomena, S&P recommends; “That the international community as a whole will need to improve the resilience of the global economy to natural disasters so that their impact on companies is manageable.”

Adding; “Companies will in our view need to improve their level of disclosure about their exposure to such events. In that regard, we consider the 1-in100 Initiative should provide more insight into the resilience of companies to such events.”

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