Climate-change induced rise in claims costs unlikely to lead to negative ratings: S&P

Global ratings agency S&P Global has stated that for most rated rated primary insurers, a climate change-induced rise in claims costs is unlikely to lead to negative rating actions over the medium term, even if profitability was to become more volatile.

2023 marked the fourth consecutive year that insured losses from natural disasters exceeded $100 billion globally, as  sector’s profitability suffered from unusually frequent and severe natural catastrophes, including thunderstorms in the U.S., France, and Italy in 2022 and 2023.

“Insured losses will continue to increase over the long term. Economic and population growth, as well as claims inflation, are the main drivers of this trend, while climate change contributes to the volatility of both event frequency and severity,” S&P explained.

“To quantify the effects of climate change, we highlighted the potential risk to our credit ratings if primary insurers did not consider the effects of climate change in their underwriting approach over the medium term.”

Interestingly, S&P noted, that out of the three main insurance sectors: property & casualty (P&C), life, and health, only
the P&C sector will experience a climate change-related rise in underwriting claims over the medium term, in S&P’s view.

The agency explained that the risk of an increase in costs from natural disasters will have important effects on P&C insurers’ pricing and insurance considerations, with the cost of physical damages or business disruptions mainly covered by insurers’ residential or commercial property offerings.

“An increase in insured losses could increase reinsurance costs and reduce underwriting margins at industry levels. However, insurers’ ability to take underwriting actions or reduce exposure, as well as the expected long-term availability of reinsurance, will likely mitigate some of the risks,” S&P Global Ratings credit analyst Charles-Marie Delpuech said.

Furthermore, the agency said that it does expect insurers or reinsurers to materially withdraw from covering natural catastrophe risk, however they may likely choose to do so within areas that become riskier.

Nonetheless, S&P added that insurers could also choose to increase property insurance premiums and deductibles significantly in an increasing number of places globally if claims were to become more frequent, which could ultimately make natural catastrophe risk coverage less affordable or even inaccessible for homeowners or businesses.

In fact, the reduced affordability of natural catastrophe risk coverage raises public awareness of the insurance protection gap.

“Policymakers’ increasing focus on the lack of mandatory property insurance against natural catastrophes in countries such as the U.S. and Germany could reinforce the role and relevance of insurers in mitigating risks,” S&P said.

Adding: “Closing the insurance protection gap, however, requires more than public intervention to make natural catastrophe risk insurance mandatory. It also necessitates government support to guarantee affordable premiums.”

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