Following the increased severity and frequency of wildfires, droughts and floods in recent times, the undeniable impact of climate change on water-related catastrophes is starting to get priced in and risk premiums are adjusting, according to Niklaus Hilti, Head of Credit Suisse’s Insurance-Linked Strategies division.
In a recent interview, experienced insurance-linked securities (ILS) executive, Hilti, explored the much debated influence of climate change risk and whether this is being fairly priced in the marketplace.
“It is undeniable that climate change is increasing the probability of water-related catastrophes, such as droughts, and pluvial (rain) floods (incidentally, floods are often not covered by insurance eg in Europe).
“The vast majority of scientists on the International Climate Change Panel agree on these things. Higher temperatures also increase the risk of heatwaves, droughts and wildfires. Heating up the atmosphere creates more water going up, which must come down, so there are more strong rainfalls, and hailstorms. The impact on US hurricanes is mixed,” he explained during his interview with a hedge fund journal.
Following a series of devastating hurricanes and record-breaking wildfires, climate change and climate risk continues to grow in importance across the insurance, reinsurance and ILS space.
The need to adequately factor in climate change and its risks into decision making and importantly pricing is becoming more apparent across the risk transfer industry, and Hilti explained that the risks are starting to be accounted for.
“After a recurring pattern of these events, they are starting to get priced in and risk premiums – which are reset annually – are adjusting to reflect the increased risk.
“US wind has also been repricing regularly as the risk assessment has gone up every year for the past 15 years. There has been a very significant repricing. The probability doubled from 1 to 2% after 2005, and is now 3%, but the yield has gone from 5% to 7%. In contrast, European wind risk has been repriced downwards partly due to the absence of an event,” said Hilti.
The risks of the changing climate and how they impact the re/insurance and ILS sectors are likely to be key topics of debate for some time to come.
It’s an extremely complex issue and one that is inherently challenging to predict and therefore model, which in turn hinders the ability to adequately price the risk.
Steps are being taken though and ILS fund managers are working to ensure that they are factoring what they know and understand about climate change into their underwriting decision making, a trend expected to accelerate over the coming years.