Moody's: Climate Change Heightens Key Risks for P&C Re/insurers

Climate change creates significant challenges for the property and casualty (P&C) insurance and reinsurance sectors and has a net negative credit impact on the industry, according to Moody's Investors Service recent report. To a lesser degree, climate change also presents opportunities for firms to introduce new products and expand existing products.

"The effects of climate change on the frequency and severity of catastrophic events are difficult to predict, and the correlation of climate-exposed risks that span P&C re/insurers' balance sheets increases the magnitude of potential losses arising from the physical and transition risks associated with climate change," James Eck, a Moody's vice president, said.

Moody's said that, although catastrophic events have always been a key risk to P&C insurers and re/insurers, the continued increase of insured property values along coastlines, as well as the increased frequency of weather-related catastrophic events, will magnify the volatility for these firms over time and result in a number of risk management challenges associated with the assessment, measurement, and mitigation of catastrophic risks.

"We expect P&C re/insurers to continue to adapt to the economic and regulatory challenges that result from climate change, as these firms can reprice risk on an annual basis and further diversify their underwriting exposures and investment portfolios," Mr. Eck said. Smaller, more geographically concentrated firms may struggle to adequately adapt to these challenges.

Risk modeling and pricing will experience an extra layer of uncertainty, since climate change tends to produce an unpredictable environment that makes assessing and pricing risk more difficult. Moreover, an increasing risk exists that pricing trends could consistently lag actual loss experience, which may force the industry to play "catch up" in raising premiums to match increasing losses.

Other challenges from global climate change that will arise for P&C re/insurers include financial risks amid the transition to a lower-carbon intensive economy, including the potential for investments in carbon-related firms to lose significant value. However, this risk is smaller, given P&C re/insurers' low asset leverage and well-diversified investment portfolios.

P&C re/insurers also face emerging risk from litigation associated with climate change, due to significant potential exposures under various types of liability insurance policies provided to corporate clients. To date, however, the legal theories underpinning a number of legal actions have been unsuccessful in establishing liability. To the extent these legal theories establish liability against carbon emitters, climate change could represent a substantial exposure to re/insurers.

The report adds that as governments, businesses, and individuals become more aware of the financial and economic risks arising from climate change, P&C re/insurers could generate business growth by providing broader risk management solutions and products that help close the "protection gap" (the difference between economic and insured losses from catastrophic events).