According to S&P Global Ratings, insurers are expected to mitigate the rising risk from natural catastrophe-related claims through revised underwriting strategies.
S&P warns that while these measures may help, credit impacts on insurers with greater exposure to physical climate risks could become more likely over the medium term, particularly if their portfolios are less diversified.
This warning comes as 2023 marks the fourth consecutive year where global insured losses from natural disasters have exceeded $100 billion. The insurance industry has seen profitability take a hit due to increasingly frequent and severe events such as thunderstorms across the US, France, and Italy in both 2022 and 2023.
S&P notes that economic growth, population growth, and claims inflation continue to drive long-term increases in insured losses, while climate change adds volatility to the frequency and severity of events.
S&P suggests that insurers in the property/casualty (P&C) sector will continue to face the most significant impact from climate change, while life and health insurers are less exposed to these risks. P&C insurers, especially those with substantial property portfolios, may find climate risk a medium-term business challenge, according to the report.
However, S&P points out that most rated insurers have well-diversified risk profiles, with property-related premiums typically representing less than 25% of total premiums.
While motor insurance portfolios are also susceptible to weather-related risks, such as hailstorms or floods, these risks are less pronounced than those affecting property books. S&P estimates that natural catastrophe premiums make up 20-25% of policyholders’ property premiums globally, with less than 10% of global P&C premiums set aside for natural disaster costs.
Reinsurers bear a significant share of the natural catastrophe burden. S&P estimates that in 2023, $50 billion of natural catastrophe-related premiums were ceded to the reinsurance industry, representing one-third of primary insurers' natural catastrophe premiums. On average, reinsurers covered around 7% of natural disaster claims paid by P&C insurers.
According to S&P, the impact of natural disaster claims on insurers’ financial performance is unlikely to be substantial due to the well-diversified nature of insurers' portfolios and the ability to access reinsurance markets.
Nonetheless, the division of catastrophe losses between primary insurers and reinsurers varies by event and the structure of reinsurance agreements. In years with major events, such as 2017's US hurricanes, reinsurers typically cover a larger portion of losses. In contrast, in 2023, the top 19 global reinsurers covered only about 10% of insured natural catastrophe losses.
S&P highlights that not all insurers are equally vulnerable to climate risks. While most P&C markets remain resilient, the risk of climate change could lead to adjustments in S&P’s Insurance Industry and Country Risk Assessments (IICRAs), particularly in markets where underwriting profitability is most sensitive to rising natural disaster costs.
For example, US and Japanese P&C markets, which have claims portfolios heavily influenced by natural disasters, may see a more significant impact due to their exposure to such events.
S&P’s analysis suggests that, in most countries, P&C insurers’ profitability would only come under pressure if the average cost of catastrophe-related claims doubled, assuming no mitigating underwriting actions were taken.
However, insurers in some markets may need to adopt de-risking strategies, such as adjusting premiums or limiting coverage, to offset the effects of rising catastrophe claims.
As climate risks continue to rise, S&P notes that public sector involvement will likely become increasingly necessary to maintain insurance affordability. Insurers may need to raise property insurance premiums and deductibles in regions more prone to natural disasters, which could make coverage less accessible for homeowners and businesses.
Policymakers are paying closer attention to the insurance protection gap in regions like the US and Germany, where mandatory property insurance against natural catastrophes is not yet in place.
S&P highlights that government-backed insurance programs, such as France’s system managed by Caisse Centrale de Réassurance (CCR), could serve as models for other countries.
However, public intervention will be needed not only to mandate coverage but also to ensure affordability, particularly as contributions to central funds are likely to increase in the coming years.
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