WASHINGTON—Standard & Poor’s Ratings Services says in a new paper that reinsurers are taking a “huge risk” by ruling out the potential that climate change is already impacting their exposure to catastrophic losses.
Indeed, reinsurers might be underestimating their exposure to extreme weather by an average of about 50%, the paper says.
The paper argues that the possibility that climate change is already affecting the frequency and severity of extreme events cannot be ruled out, even if it cannot be quantified exactly.
To examine the potential impact, S&P analysts created a scenario based on the past 10 years’ loss experience to test the potential impact of climate change.
The paper cited the data reinsurers use to project estimated risk.
“However, most reinsurers do not believe that climate change is having a material quantifiable impact on their current risk exposure, nor do they think it is likely to do so in the near future,’ the paper argues, and that could be costly.
The projection that reinsurers might be underestimating their exposure to catastrophe losses by an average of about 50% was based on this scenario.
“It’s unwise” to rule out the possibility that climate change has already begun to affect reinsurers’ risk exposure, especially given the number of catastrophe events recently triggered by extreme weather.
Reinsurers are taking a huge risk by not taking potential climate into account in evaluating their potential exposure to catastrophes, the analysts said.
The scenario is based on the fact that for most reinsurers, their highest catastrophe losses over the past 10 years occurred in either 2005 or 2011. Specifically, these events included Hurricanes Katrina, Rita, and Wilma, which occurred in 2005 in the U.S. In 2011, catastrophe losses included weather related events: Thai floods, tornados in the U.S., Hurricane Irene, and flooding in Australia.
“Given this recent history, we think it’s prudent to ask: If the catastrophe losses of 2005 and 2011 were to become the new normal’, what would it mean to the reinsurance industry’s catastrophe exposure and, ultimately, to its ratings?” the analysts said.
They acknowledge that, “While this scenario is simplistic, it illustrates that reinsurers’ exposure to catastrophe losses could be substantially higher than they currently estimate, with climate change likely being a major factor.”