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Insurers often face challenges during destructive periods like the US hurricane season. However, they have significant experience in modeling property risks in disaster-prone areas worldwide.
Lloyd’s of London, the insurance market, highlights that more unpredictable but less costly events such as wildfires and extreme heatwaves pose even bigger complications. The increasing frequency of these events due to climate change is raising underwriting risks for insurers and reducing returns on equity.
Lloyd’s predicts that insurance prices in Europe will need to increase over the next two years in response to events like the recent wildfires. This should result in improved returns. However, premiums cannot indefinitely rise as global temperatures continue to rise.
According to Lex, investors across various sectors are undervaluing climate risks. The insurance industry serves as a prime example of this phenomenon. While some insurers and reinsurers have integrated climate change into their stress testing, others have not.
Moody’s Investors Service reports that floods, wildfires, and other weather events linked to climate change accounted for an average of 56% of total insured losses from 2018 to 2022. Catastrophe losses have been above average for the past six years.
As a result, reinsurers have experienced an average return on equity of just 5% over the past three years, the lowest in over a decade.
To improve returns, reinsurers and insurers are implementing price increases. Lloyd’s states that insurance and reinsurance prices rose by 9% in the first half of the year, leading to underwriting profits more than doubling to £2.5bn.
In the US, the industry is adapting more quickly, with reinsurance prices having risen by 20% to 40% in the past year. European prices have increased by a smaller margin, around 10% to 12%.
Nevertheless, some US insurers have started withdrawing from areas increasingly impacted by climate change, a trend likely to continue.
If these trends persist, governments may need to intervene in areas where climate change has caused insurers to withdraw.
The Lex team is interested in hearing readers’ thoughts on whether insurers can cover every catastrophe risk due to climate change. Please share your views in the comments section below.
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