Australia headquartered global insurance and reinsurance group QBE warned today that parts of the globe risk becoming uninsurable as climate change is forecast to significantly increase claims costs and could make premium rates soar.
QBE announced results today that were hit by higher catastrophe and weather related claims across its property insurance, crop and reinsurance businesses.
The company has been putting significant effort into understanding what recent catastrophe and severe weather claims trends mean in the context of a changing climate and warns of the challenges consumers may face in affording or accessing insurance, as the industry is forced to raise its costs in response to higher losses and claims burdens.
QBE noted “adverse weather conditions” that hurt the companies U.S. crop insurance business as well as “significant bushfire claims” at home in Australia, while other recent severe weather events in Australia such as the hail storms in the Sydney and ACT area, as well as rainfall and flooding are also likely to dent the company.
QBE has been working closely with catastrophe risk modelling company RMS to understand how climate change could influence losses caused by hurricanes in the United States and more broadly tropical cyclones worldwide.
The analysis looked at the potential impacts to QBE’s existing portfolio of risk up to 2100 under scenarios consistent with a 2–3 ̊C global mean temperature rise.
QBE said that the analysis did not show material increases in expected claims and losses prior to 2050, but beyond that the expectation is that a significant rise in claims costs will occur.
“Our initial work supports the strong likelihood of a material increase in tropical cyclone-related claims under all scenarios,” QBE explained today.
Adding that, “Annual claims cost related to hurricanes and tropical cyclones could go up by more than 50% in the second half of the century, with a wide variation in local impact, and a rate of change that will depend on how the global community addresses this critical challenge.”
That’s a potentially significant increase in losses for QBE and the wider insurance and reinsurance industry, deserving of further analysis and consideration when rate setting.
“In the short to medium-term, the impact on tropical cyclone claims will be difficult to assess due to the inherent volatility of cyclones, which have a relatively low frequency and large variability in cost driven by whether or not they make landfall and impact on population centres,” QBE further explained.
But while there is a lot of uncertainty associated with any projections of industry loss costs and precisely how they will escalate due to climate change, QBE is taking this very seriously and is adjusting its business to account for the threat it perceives.
The insurer is actively dialling climate change related risks into its forecasting and analysis of risks, which also means it will flow through into its pricing of risks as well.
“We have started to adjust our catastrophe models to factor in the expected impacts of climate change until 2100. While we already have a robust quantification of QBE’s exposure to weather events, this refinement of our models can provide insights into the magnitude and timing of the impact that climate change will have on our business,” the insurer said this morning.
Reinsurance is likely to play a growing role in helping QBE to adjust its business to respond to climate change related risks.
The company acknowledged, “In the short-term, QBE will manage the high volatility of natural catastrophe claims by considering a wide range of event frequency and severity in our capital planning, and by deploying a comprehensive Group catastrophe reinsurance program.”
Ultimately QBE believes its products and services will face rising demand, in the face of rising climate risks.
Saying, “Over the long-term we anticipate that the physical impacts of climate change – even under scenarios consistent with the achievement of the Paris Agreement – will result in our customers seeking increased insurance for the protection of their assets and the services they provide.”
But there is also a threat to its business if climate related risks rise so high that areas of the globe become uninsurable, driving business way.
“We also recognise that over the longer-term, climate change will impact our customers and the communities that we serve,” QBE continued. “This may cause insurance premiums to become unaffordable, especially for customers in areas more exposed to weather-related events, potentially resulting in a loss of revenue.”
“In order to address this risk, QBE is engaging with external stakeholders, including national and local governments, to encourage adaptation and resilience measures against weather-related events.”
QBE said that it will continue to adjust its catastrophe risk models to account for climate change related factors, as it looks to both better understand their potential impacts and also to keep its product offering aligned with risk factors and relevant for its customers as well.
CEO of QBE Pat Regan is quoted as saying by the Sydney Morning Herald this morning, “Whatever your more broad thoughts on climate change are, the evidence is clearly there that the frequency and severity of weather events is increasing over time.
“The evidence is there for all to see that the amount of weather events globally, not just in Australia, is consistently rising and most of the worst years on record have happened in the last 10 years.”
QBE is just the latest major insurer to ramp up the tone of language it is using in relation to climate change and its impacts on insurance affordability.
Its research into hurricane and tropical cyclone trends suggests a heavy burden for the industry in decades to come, while more locally the recent loss experience in its home country of Australia also suggests the affordability of insurance will drop, as premiums are likely to have to rise.
Reinsurance providers are going to be key to large insurers ability to absorb more frequent and higher catastrophe or weather losses, but the costs there are going to have to rise as well.
Making efficient reinsurance capacity from the capital markets perhaps even more attractive as an alternative and diversifier for the growing reinsurance needs of major insurers, albeit at the higher rates that will be charged as loss activity rises.