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Insurers are coping with climate change risks, says S&P

Reinsurers and insurers have so far coped well with climate change Standard and Poor’s has said, but the ratings agency believes a sudden spike in the frequency and severity of weather events could test the industry.


20 MAY 2014 | BY JUDITH UGWUMADU

In its report on whether the industry was ready for extreme weather risks, S&P concluded that the re/insurance industry was well prepared to deal with possible gradual increases in extreme weather events, even if they were not linked to climate change.

‘As such, we don’t expect climate change per se to have a ratings impact over the next three to five years, unless it causes a sudden increase in the number and magnitude of extreme events,’ its report, published yesterday, stated.

It added that the ratings impact of weather-related natural catastrophes had so far had been limited as the industry had comfortably absorbed the losses. This was attributed to risk diversification, as well as their effective underwriting skills and risk mitigation practices.

‘We don't expect that weather events, on a similar scale to those in the past two years, will lead to rating changes. We believe that even a gradual increase in weather losses won't affect the ratings because most re/insurers we rate have the processes in place to factor such a change into their underwriting,’ the report continued.

‘However, if there is an increase in the occurrence of extreme weather events, this could trigger negative rating actions, particularly if they weaken re/insurers' capital positions.’

The report continued: ‘While the events were extreme, they were not of historic proportions, and related losses were well within the re/insurers’ risk appetite and excess capital.

‘That said, widespread rating changes are unlikely unless the wider industry racks up weather-related losses that exceed those we expect to occur no more frequently than once in 250 years.’

The report also noted that the processes in place to monitor the potential impact of climate change on extreme weather ensured that re/insurers could adjust premiums for any gradual increase in weather-related claims in the future.

But it cautioned that even those companies that had invested the most in understanding the impact of climate change currently don’t explicitly allow for it in their pricing and modelling.

S&P credit analyst Miroslav Petkov said: ‘Our view is that climate change is another factor contributing to the challenges of modelling extreme weather events.

‘We take a favourable view of re/insurers that are considering the additional challenge that climate change poses in modelling extreme weather events, and its implications for exposure management.’