Climate risk means we’re not far off a $300bn loss year: Flandro, Hyperion X

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The insurance marketplace is not that far off a $300 billion loss year and it’s vital reinsurance and ILS markets price adequately for climate change risk, according to David Flandro, Managing Director of Analytics at Hyperion X.

David Flandro, Hyperion XLeading a virtual panel discussion as part of the ILS Bermuda Convergence 2020 event this week, Flandro explained that his team’s analysis shows that the industry’s annual catastrophe and major loss loads are rising significantly and before long we will see figures that not that long ago would have been thought impossible.

“We’re not that far off a $300bn loss year and people used to get really freaked out about a $50bn loss year,” Flandro said.

Adding that because of climate change, “Loss trajectory is changing and loss exposure is changing.”

Which is making it harder for risk models to keep pace with change and also to project potential loss scenarios, the panellists discussed, all of which is also playing into factors around the upcoming reinsurance renewals.

Flandro said that, “There was quite a significant increase in the cost of reinsurance at June 1st.

“But then if you look at June 1st over a 30 year period going back to the early 90’s we’re still not anywhere near where we were around hurricane Katrina.”

“If all of this is true, if the climate is changing, if indeed risk is misplaced. Why is it mispriced?” Flandro asked.

He noted that while reinsurance pricing seems to rise it never seems to break outside the bounds of a channel in which it has sat for 30+ years.

“Why are we still bouncing around in a pricing channel if it’s (the market) significantly underpricing the risk?” he posed.

The panel concluded that the implications of climate change and climate related exposure for insurers, reinsurers and of course insurance-linked securities (ILS) specialists are particularly significant, making accurately pricing risk in the first place of upmost importance.

“We all agree that risk pricing is not accounting for climate change and the industry needs to rise with the tide,” Flandro urged.

As risks inflate, $300 billion loss years suddenly don’t seem that wild a prospect, which makes dealing with the accurate pricing of risk and inclusion of climate change related factors all the more urgent for the entire insurance, reinsurance and ILS industry.

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