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Reinsurers underestimate nat cat risk by up to 50%, warns S&P

Reinsurers could be underestimating their exposure to natural catastrophes by as much as 50% because of climate change, warns S&P Global Ratings.

In a new report based on stress tests, it says an exposure gap has been created by difficulties in modelling the impact of climate change on nat cat risk.

“Unmodelled risks and the inherent difficulties in attributing extreme events to climate change create the risk that climate change may not be fully reflected in reinsurers’ catastrophe modelling,” said S&P credit analyst Dennis Sugrue. He added that this is a particular problem in the short term.

S&P says its stress tests suggest that reinsurers could be underestimating nat cat risk by between 33% and 50%. This would account for almost all reinsurers’ buffers above the firm’s AA rating’s capital requirement. This scenario illustrates the significant potential for volatility in earnings and capital, S&P says.

It considers physical risks from climate change to be a key factor in its ratings of 19 of the top 21 global reinsurers.

The ratings agency found that 71% of reinsurers responding to its survey consider climate change in their pricing. But only 35% price for the impact of climate change and allocate a specific component of premiums to climate change, which ranges from 0% to 10% of the average premium.

S&P says reinsurers have stepped up work to incorporate climate change into their underwriting, but adds that only companies taking a more proactive approach to understanding and adapting their exposure to climate risk will be protected against volatility to climate-related losses.

“(Re)insurers may consider that the effects of climate change will not be felt for some time, and that at present, the ability to annually reprice most property policies provides them with some insulation. However, there is clear scientific consensus that climate change is already influencing the frequency and intensity of extreme weather – and therefore (where not suitably mitigated), insured losses – today,” S&P states.

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