Different approaches needed to manage future nat cat risks, says Moody’s RMS

The magnitude and frequency of secondary perils such as floods, wildfires and severe convective storms have highlighted the rapidly changing risk landscape, and the insurance industry and regulatory bodies must take different approaches to managing future risks. This is according to Moody’s RMS in its 2022 Catastrophe Review.

It says that the immense economic and insured losses from events in 2022, from Hurricane Ian to flooding in Australia, and heat waves, wildfires, and hailstorms in Europe, make it critically important to meet the significant challenges of understanding, managing, and pricing future weather-related risks.

“The increase in frequency and severity of weather-related events was a major contribution to overall losses in every region. The record losses of 2017-22 are a wake-up call for the industry to better assess, manage, and transfer the risk of future climate-related events,” says Mohsen Rahnama, Moody’s RMS chief risk modelling officer in the report.

Moody’s RMS notes that secondary perils, along with large exposure changes, social inflation, and non-modelled losses, have contributed significantly to overall economic and insured losses over the past five years. “Specifically with regard to floods, there are additional increasing trends of losses across the US, Europe, Asia, Australia, and Latin America. The previous ‘century return’ period for floods is much shorter, mainly due to climate change,” it states.

The report says the unprecedented losses year after year in the last six years, with an average of more than $100bn per year, pose significant challenges to understanding, managing, and pricing future weather-related risks. Hurricane Ian alone is estimated by Moody’s RMS to have caused US insured losses between $53bn and $74bn, with a best estimate of $67bn.

“Traditional P&C underwriting and risk management will need updating in light of changes in physical risk – due to the increase in frequency and severity of events caused by climate change. Going forward, insurers must evaluate and revise underwriting approaches to consider climate change in their risk selection process while also accounting for attritional losses, changes in exposure, undervaluation, and post-event loss amplification,” the report states.