➤ A climate change-induced rise in claims costs is unlikely to lead to negative rating actions for most rated primary insurers over the medium term.
➤ Insurers and reinsurers are not expected to materially withdraw from covering natural catastrophe risks.
➤ Underwriting actions could help mitigate climate risk for P&C insurers.
Primary insurers have varying levels of exposure to climate risk, with the property and casualty (P&C) markets in the US and Japan identified as the most sensitive to an increase in natural catastrophe claims, S&P Global Ratings analysts said during an Oct. 23 webinar.
The rating agency assessed the potential effects of climate change on insurers through a country-level analysis of the 10-year average effect of insured natural catastrophe claims on their expected underwriting profitability. This analysis found that most P&C markets will be resilient against an increase in the cost of natural catastrophe claims, according to analyst Charles-Marie Delpuech.
The effect of natural disaster-related costs on insurers' underwriting profitability is contained in most countries. In Australia, for instance, the expected level of profitability is "relatively better than most countries" despite the high impact of natural catastrophes on combined ratios, Delpuech said.
On the other hand, the underwriting profitability of P&C insurers in the US and Japan is among the most sensitive to an increase in natural catastrophe claims due to their claims profiles, which are more weighted toward natural catastrophe claims compared with other markets. Another factor is their underwriting margins, which are not as strong as those of insurers in other countries.
The US and Japan have the two largest natural catastrophe insurance markets globally, Delpuech said.
Insured annual catastrophe losses in the US was $66.2 billion based on a 10-year average, far surpassing that of other countries with the biggest natural catastrophe insurance markets. Japan, which recorded the second-largest insured annual catastrophe loss figure, had an average of $6.6 billion.
The analysis concluded that most rated primary insurers are unlikely to see negative rating actions due to a climate change-induced increase in claims costs over the medium term, even if profitability becomes more volatile.
However, insurers in certain markets that are most exposed to climate change effects could face a decline in profitability in the absence of underwriting actions to mitigate such effects. The rating agency said it does not rule out credit impacts on less diversified insurers with more physical climate risk exposure.
Mitigating factors
Some P&C insurers will likely need to take underwriting actions to offset the effects of climate change. These could include an adjustment in pricing and an increase in deductibles, as well as the exclusion of certain types of risk from coverage, according to lead analyst Taos Fudji.
Insurers could also share more risks with reinsurers as a de-risking strategy. The split of natural catastrophe losses between primary insurers and reinsurers could vary depending on retention levels and reinsurance structures, especially with the emergence of secondary perils in recent years.
These secondary perils, such as hail storms and convective storms, are not considered as particularly severe events and tend to fall largely within the retention rates of primary insurers, Fudji noted. Primary insurers in certain markets, particularly those that are more concentrated, could potentially be affected by a drastic change in the frequency and severity of such events.
In Japan, non-life insurers have reported moderate catastrophe losses in recent years due to midsized events like hail storms, thunderstorms and heavy rains, despite the absence of big typhoons in the past few years, according to analyst Kentaro Mukoyama. In response, insurers are raising prices, diversifying their overseas portfolios and changing underwriting conditions. These include shorter policy durations and increased deductibles, Mukoyama added.
P&C insurers could also consider diversifying away from certain areas and stopping coverage for certain types of properties that are "no longer economical" in order to tackle their climate risk. Despite that, Fudji said the withdrawal of coverage is not believed to be "a widespread phenomenon."
Lastly, Fudji noted that the analysis is concentrated on just the P&C insurance market as S&P Global Ratings sees a "much lower level" of physical climate risk in life insurance.
"We don't think life insurers are exposed to acute climate hazards," Fudji said. In terms of chronic climate change risk, the analysts believe that the level of global warming that would result in a spike in mortality is "quite distant and uncertain" at the present time.