Climate Change Impacts on Insurers as Reinsurers Withdraw
The insurance industry is facing significant challenges in the face of climate change, with reinsurers pulling back and leaving primary insurers to bear the brunt of losses. As natural disasters become more frequent and severe, insurers are struggling to keep up with the rising costs of claims.
In 2023, global insured catastrophe losses exceeded $100 billion for the fourth consecutive year, highlighting the ongoing trend of increasing losses due to climate-related events. In the first half of this year, losses have already reached $62 billion, well above the 10-year average of $37 billion, according to a recent analysis by Munich Re.
Reinsurers, who traditionally provide coverage to primary insurers to help spread risk, have been scaling back their involvement in the face of mounting losses. This has left primary insurers in a precarious position, as they are now forced to bear more risk on their own.
The Changing Landscape of the Reinsurance Industry
The reinsurance industry has undergone significant changes in response to the growing impact of climate change on insurance claims. In a bid to protect their bottom line, reinsurers have raised prices and imposed stricter terms on policies, making it harder for primary insurers to secure the coverage they need.
Charles-Marie Delpuech, an insurance credit analyst at S&P Ratings, notes that insurers are being forced to take on more risk as a result of these changes. This structural shift in the market has left primary insurers vulnerable to the increasing costs of natural disasters and other climate-related events.
While reinsurers have historically played a key role in covering natural catastrophe losses, their share of these losses has dwindled in recent years. The reinsurance industry has become more risk-averse, particularly when it comes to smaller but more frequent weather events known as “secondary perils.”
Secondary perils, such as tornadoes, thunderstorms, fires, and floods, pose a unique challenge to the insurance industry due to their unpredictable nature and association with climate change. These events are harder to model and manage, making them a significant source of insured losses for insurers.
The Impact on Primary Insurers
Primary insurers, particularly those in regions prone to severe weather events like the United States, have felt the brunt of these changes. With reinsurers pulling back from covering secondary perils, primary insurers are left exposed to higher levels of risk and potential losses.
In 2021 and 2022, reinsurers saw significant losses from secondary perils, prompting them to reduce their exposure to these events. As a result, primary insurers bore the majority of losses in 2023, particularly in regions where severe convective storms are common.
Despite the increasing challenges facing primary insurers, most reinsurers remain well-capitalized and able to weather even the most extreme events. S&P’s analysis indicates that the sector as a whole would still be financially stable even in the event of a once-in-a-100-year catastrophe.
The Future of the Reinsurance Industry
As reinsurers solidify their position in the market, they are looking to expand their operations and increase their capital deployment. Moody’s Ratings recently raised its outlook for the global reinsurance sector to “positive,” citing factors such as higher premiums, tougher policy conditions, and reduced exposure to secondary perils.
The top 19 reinsurers have increased their overall risk exposure to natural catastrophes by 14% based on January renewals, indicating a growing confidence in their ability to manage these risks. With a combined budget for absorbing natural catastrophe losses on the rise, reinsurers are poised to weather the challenges posed by climate change and other external factors.
In Conclusion
The insurance industry is facing unprecedented challenges as climate change continues to impact the frequency and severity of natural disasters. Reinsurers are adjusting their strategies in response to these changes, leaving primary insurers to navigate a more complex and riskier market.
While primary insurers may face difficulties in the short term, the overall stability of the reinsurance sector suggests that the industry is well-equipped to handle the challenges ahead. By adapting to the evolving landscape of climate-related risks, insurers and reinsurers can work together to ensure the long-term viability of the insurance market in the face of climate change.