Standard & Poor’s: reinsurers underestimate impact of climate change

Rating agency Standard & Poor’s (S&P) has warned that most reinsurance companies do not believe that climate change is having “a material quantifiable impact on their current risk exposure”, despite evidence that extreme weather is likely to cause huge damage over the coming decades.

S&P takes a sceptical approach to the issue of climate change, saying there is “no scientific consensus” on how much climate change is responsible for extreme weather in recent years, but it says the industry believes it 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”, the agency says in a new analysis.

“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.”

Such behaviour, S&P says, can be harmful and is ‘unwise’ for reinsurance companies – the insurers of the insurance firms – given the many disasters triggered by extreme weather over the past decade, which has already affected the industry.

The agency suggests a future scenario based on the past 10 years’ loss experience, which could become “the new normal”, to assess how climate change would affect the industry, finding that reinsurers might be underestimating their exposure to catastrophe losses by an average of about 50%.

S&P says, “The scenario’s pessimistic estimate of potential exposure to catastrophe risk indicates the scale of the impact climate change could have on catastrophe risk and ratings.”

Earlier this year, insurers Lloyd’s of London warned the insurance industry must incorporate climate change into its models, in order to avoid huge financial losses.

Photo: Shaun Dunphy via flickr

Further reading:

Insurers should consider climate risks, says Lloyds of London

Rising sea levels ‘greatest threat’ for insurers

US states to require insurers to take part in climate risks survey

Insurance, reinsurance and climate-related risk management

Insurance industry can help drive renewables, says Swiss Re report