French stress test finds nat cat losses and rates would more than double by 2050

France’s financial markets supervisor ACPR has released the results of its second-ever stress test exercise for the insurance industry, and the results show that the sector is set to be severely impacted by climate change.

According to the report, losses suffered by French insurers due to climate events will double, and nat cat premium rates will go up by 158% by 2050, based on the worst-case scenario.

Even using the baseline scenario, where climate change has a moderate impact, nat cat losses will go up by 42% and rates will increase 127% in the next 30 years.

The worst-case scenario assumes that little, if anything, is done by governments and markets to break the pace of climate change, while the baseline scenario takes a more positive view of proactive measures. In both cases, a significant increase in losses caused by droughts, flooding and the submersion of coastal regions is projected.

Loss estimates for the impact of climate change vary according to where insured assets are located. In some French regions where nat cat exposures are significantly high, rates may go up by 200% by 2050, compared to 2022, based on a five-fold increase in losses, the stress test finds.

ACPR also estimates that investment returns will take a hit from climate volatility.

The report says that investment portfolios will suffer a 13% depreciation in the next five years, as capital markets adjust to measures taken by governments to promote decarbonisation.

It also warns that insurers must make investment decisions now that will prevent the negative impact of climate change on their portfolios in the decades to come.

The stress test exercise reveals the potential impact of climate change on the French insurers’ Solvency. ACPR estimates that the industry’s Solvency Capital Requirement (SCR) ratio will drop from 230% in 2022 to 170% in 2027, under a pessimistic short-term scenario.

Under such a scenario, nat cat claims paid by insurers would jump 141% compared to 2022. It would also increase health insurance claims by 13%.

In addition to the losses caused by such events, insurers that participated in the exercise were also told to estimate the impact of bearish capital markets on their solvency ratios. It finds that insurers believe real estate assets and investments in fossil fuel companies are the most likely to negatively impact their portfolios because of climate change. The depreciation of investment portfolios could reach 13% in the next five years, the stress test finds.

The report was based on the answers from 22 insurance companies, accounting for 90% of the French market.

“It is of essence that insurers continue to pursue efforts to fulfil their climate change commitment and to put in place measures to manage their assets and liabilities in order to cope with the consequences of extreme events on their loss levels,” said Nathalie Aufauvre, ACPR’s secretary general, in a statement.

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