CLIMATE CHANGE
Climate Change Could Sting Reinsurers That Underestimate Its Impact
By Miroslav Petkov, Mark Coleman and Dennis Sugrue
The possibility that climate change is already affecting the frequency and severity of extreme events cannot be ruled out by reinsurers, even if it cannot currently be quantified exactly, and they may be underestimating their exposure.
There is no scientific consensus on how much climate change may have contributed to extreme weather in recent years, and how much it is expected to contribute in the future. However, the reinsurance industry recognizes that climate change is likely to have a significant impact on future weather events. To prepare for that, many reinsurers actively follow and sponsor scientific research into the topic. Moreover, they rely on their ability to adjust premiums in the future for any gradual increase in weather-related claims over time, as most non-life business is renewed yearly. However, most reinsurers do not believe that climate change is having a material quantifiable impact on their current risk exposure, nor do they think it is likely to do so in the near future. However, what if climate change is already having an impact and will keep doing so through more frequent and extreme events, as some scientists believe? Standard & Poor’s Ratings Services believes it’s unwise to rule out the possibility that climate change has already begun to affect reinsurers’ risk exposure, especially
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given the number of catastrophe events recently triggered by extreme weather. For most reinsurers, their highest catastrophe losses over the past 10 years occurred in either 2005 or 2011. Hurricanes Katrina, Rita, and Wilma occurred in 2005. In 2011, catastrophe losses included weather related events: Thai floods, tornados in the U.S., Hurricane Irene, and flooding in Australia. Given this recent history, we think it’s prudent to ask: If the catastrophe losses of 2005 and 2011 were to become the “new normal”, what would it mean to the reinsurance industry’s catastrophe exposure and, ultimately, to its ratings? While this scenarios is simplistic, it illustrates that reinsurers’ exposure to catastrophe losses could be substantially higher than they currently estimate, with climate change likely being a major factor.
Projecting The Catastrophe Risk Landscape Under The Impact Of Climate Change Due to the complexity of climate systems, there is significant uncertainty about the impact of climate change and how that impact will develop over time. Nevertheless,
we consider that the possibility that climate change is already affecting the frequency and severity of extreme events cannot be ruled out, even if it cannot be quantified exactly. To understand the effect climate change could have on reinsurers’ financial strength, we have analyzed a simple scenario based on the assumption that the catastrophe experience over the last 10 years indicates the current probabilistic distribution of extreme events—in other words, that it represents a typical decade.
We have chosen a period of 10 years because the industry has experienced a significant increase in weather-related losses over that past 10 years, even after allowing for inflation and exposure growth. Although natural statistical variability of probabilistic events could cause this, it could also be due to a worsening of the underlying catastrophe risk environment, to which climate change may have contributed. This probabilistic view, based on the past 10 years, implicitly incorporates any impact that climate change has already had on catastrophe losses in that period.
We recognize that 10 years is a short period from which to build a robust
Global Reinsurance Highlights 2014
SHUTTERSTOCK / LEXAARTS
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