Climate Change: Growing Concern for Global Reinsurers

Climate Change - Growing Concern for Global Reinsurers

According to recent data, cybercrime has been ranked the top risk for carriers worldwide, while climate change is the top risk for reinsurers due to an increase in natural disaster events. Climate change has risen to fifth place for the first time as against its former fifth position, which is the highest riser in this year’s study. This phenomenon, particularly catastrophe risks, was ranked as the top risk confronting reinsurers, reflecting a significant increase in losses from secondary disasters and catastrophic occurrences in general.

The consequences of climate change may not appear to be harmful to property and casualty (P&C) insurers at first glance. Though they can reprise and restructure portfolios based on the annual policy cycle and their advanced grasp of emerging risks to avoid long-term exposure to climate catastrophes. Increased demand for new insurance solutions and services, as well as possible volatility, should enhance demand for new and different insurance solutions and services, thus expanding the industry’s opportunities.

Insurers, on the other hand, must be wary about underestimating the genuine hazard posed by climate change. Climate risk is expected to burden local economies and, more worryingly, generate market failures that damage both consumers and insurers due to its systemic consequences. More frequent catastrophic events, along with the need to fulfill changing regulatory requirements, might jeopardize corporate business models, making some risks overpriced for clients or impractical for insurers to cover.

By providing dependable protection, the insurance business may help to build economic security. Consequently, insurers must consider climate risk when making business decisions. They should specifically use their knowledge of risk and climate science to protect themselves and their customers from the systemic impact of physical climate risk. The following are actions required to complete these assignments.

Total exposure to expected climatic dangers should be stress-tested.

Climate-related losses will most likely be spread across different types of coverage such as floods, property damage, and business interruption due to the globalized systems. As climate change increases the likelihood of systemic disruption, the aggregation risk of several claims being made in connection with a single event—will expand beyond geographic boundaries. Increases in average global temperatures, for instance, increase the likelihood of floods and wildfires, irrespective of location.

Restructure portfolios and improve resilience

Insurers can establish stronger resilience by evaluating low-probability catastrophic occurrences, diversifying their portfolio, and preparing to evolve exposure over time with such a rigorous study. Risk models that assume non-stationary risk and place less emphasis on previous data will be particularly useful.

Create original solutions to handle climate-related risk

Insurers have a unique chance to provide novel solutions to cover newer and more common disasters, both acute such as wildfire and chronic such as earthquakes or reduced crop yields. Solutions could be as simple as parametric pricing, which protects policyholders from catastrophes of a certain magnitude rather than guaranteeing the number of damages.

In light of this, the property and casualty insurance industry should adapt its business model. This proactive approach can not only better protect clients in the long run, but it can also secure society’s interests and serve the insurance industry’s core purpose. Insurers, on the other hand, must move swiftly because the time frame for a successful response is fast running out.

The Author

Oladotun Olayemi

Dotun is a financial enthusiast who specializes in first-in-class financial content, including crypto, blockchain, market, and business, to educate and inform readers.