S&P Global Ratings (S&P) says in a new report that it expects rated insurers can mitigate the risk arising from the increase in natural catastrophe-related claims through underwriting actions.
In the report, "Insurers Focus On Underwriting To Tackle Climate Risk", S&P says that over the medium term, it does not rule out credit impacts on insurers that are more exposed to physical climate risk and less diversified.
S&P credit analyst Mr Charles-Marie Delpuech said, "An increase in insured losses could increase reinsurance costs and reduce underwriting margins at industry levels.
“However, insurers' ability to take underwriting actions or reduce exposure, as well as the expected long-term availability of reinsurance, will likely mitigate some of the risks."
He added, “We do not expect that insurers will materially reduce their natural catastrophe risk coverage on a systemic basis. Yet private-public partnerships will likely need to strengthen to address the increase in the cost and availability of insurance covers.”
Insured loss trend
2023 was the fourth consecutive year that insured losses from natural disasters exceeded $100bn globally. The insurance sector's profitability suffered from unusually frequent and severe natural catastrophes, including thunderstorms in the US, France, and Italy in 2022 and 2023.
S&P believes that insured losses will continue to increase over the long term. Economic and population growth, as well as claims inflation, are the main drivers of this trend, while climate change contributes to the volatility of both event frequency and severity. To quantify the effects of climate change, S&P highlighted the potential risk to credit ratings if primary insurers did not consider the effects of climate change in their underwriting approach over the medium term.
Risk diversification and reinsurance provide some mitigation against climate change
Climate change-induced underwriting losses will remain relevant, mainly for the property & casualty (P&C) sector. Of the three main insurance sectors—P&C, life, and health—only the P&C sector will experience a climate change-related rise in underwriting claims over the medium term, in S&P’s view. The risk of an increase in costs from natural disasters will have important effects on P&C insurers' pricing and insurance considerations, with the cost of physical damages or business disruptions mainly covered by insurers' residential or commercial property offerings.
Rated primary insurers generally exhibit diversified loss profiles because of their broad product offerings. Depending on the size of the property portfolio, climate risk could represent a medium-term business challenge. S&P notes, however, that most rated primary insurers' risk portfolio is relatively well diversified, with the property book representing, on average, less than one-quarter of total premiums. The motor book could be prone to weather-related damages that are caused by, for example, hailstorms or floods and could be a source of risk accumulation. On a global basis, however, S&P thinks motor books' exposure to weather-related damages is significantly lower than that of property books.