Whether or not a direct result of climate change, the number and frequency of extreme weather events have increased, but insurance and reinsurance companies have coped well so far.
"We believe the industry has been, and remains, well prepared to deal with weather events of the magnitude the world has been experiencing in the past two years. For that reason, the ratings impact of these natural catastrophes has been limited," said Standard & Poor's credit analyst Miroslav Petkov, in the report published today, "Are Insurers Prepared For The Extreme Weather Climate Change May Bring?"
Re/insurers generally have been able to manage the impact of the extreme weather events over the past two years because of their risk diversification, as well as their effective underwriting, risk management, and risk mitigation practices. However, while the events were extreme, they were not of historic proportions, and the 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.
Our view is that many of the insurers and reinsurers (re/insurers) we rate have processes in place to monitor the potential impact of climate change on extreme weather. We consider that re/insurers have the processes in place to ensure that they can adjust premiums for any gradual increase in weather-related claims in the future. However, even those that have invested the most in understanding the impact of climate change currently don't explicitly allow for it in their pricing and modeling.
Some scientists believe that climate change may lead to an increase in both the size and frequency of extreme events. However, due to the complexity of climate systems, there is significant uncertainty about the exact impact. Until a consensus emerges, we don't expect the industry to directly allow for the impact of climate change.
"Our view is that climate change is another factor contributing to the challenges of modeling extreme weather events," Mr. Petkov said. "For that reason, we take a favorable view of re/insurers that consider how climate change, despite its uncertainties, may affect extreme events in capital modeling and exposure management."
While the understanding of climate change is still developing, we believe a sudden spike in the frequency and severity of weather events could test the industry.
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