Global Reinsurers Grapple With Climate Change Risks

S&P Global Ratings report

Toronto, ON (Sept. 24, 2021) — Over the past two decades, the global re/insurance sector has experienced an increasing number of major natural catastrophes. So far this year, the industry has seen the second-largest amount of insured catastrophe losses on record, while so-called secondary perils (such as winter storms, wildfires, intense heatwaves, and severe flooding) have contributed a record amount to the total insured losses, according to Swiss Re.

There is increasing agreement from experts, including the Intergovernmental Panel on Climate Change (IPCC) report published in August, that the physical effects of climate change are contributing to more frequent and extreme weather events, which will in turn have a direct impact on the re/insurance industry. 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. If re/insurers are not properly accounting for the impact of climate change in their catastrophe modelling and pricing today, it could lead to significant unexpected volatility in their earnings and capital, resulting in pricing corrections that could have implications for the cost of reinsurance purchased by primary writers, thereby hitting their profitability and risk profiles as well.

Key Takeaways

  • Reinsurers have increased their efforts to incorporate climate change in their decision-making process, particularly in risk management, exposure management, and pricing. However, this is still nascent across the industry, and many companies are facing difficulties in implementing climate change considerations robustly.
  • Our scenario analysis suggests that reinsurers’ estimates of their exposure to natural catastrophe risk–and therefore physical climate risk–could be underestimated by 33%-50%, which is 91% of the sector’s buffer above the ‘AA’ capital requirement. While not our base case, this scenario illustrates significant potential for volatility in earnings and capital.
  • 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 catastrophe modelling, particularly in the short term.
  • 71% of reinsurers responding to our survey consider climate change in their pricing assumptions, but only 35% include a specific component of the price allocated to climate change. This ranges from 0%-10% of the rate charged on average, and does not appear to be a significant determinant of market pricing.
  • We consider exposure to the physical risks of climate change to be a key factor in our ratings on 19 of the top 21 rated reinsurers primarily through our forward-looking assessment of risk exposure. We believe that those companies that take a more proactive approach to understanding and adapting their exposure to climate risk will be better protected against future capital and earnings volatility linked to climate-related losses.

Read more, including:

  • Projecting The Catastrophe Risk Landscape
  • The “Empirical” Stress Scenario
  • Reinsurers Are Embedding Climate Change In Their Business Steering, But Challenges Abound And Practices Vary
  • How Do We Factor Climate Change Risk Into Our Ratings?


Global Reinsurance Highlights 2020: S&P Global Ratings

COVID-19 Pushes Global Reinsurers Further Out On Thin Ice

By Johannes Bender and Taoufik Gharib

2020 will be remembered for many reasons. The global outbreak of the COVID-19 pandemic, greater investor focus on environmental, social, and governance issues, the U.S. election, and a record number of natural catastrophes will all make their way into the history books. For the global reinsurance sector, 2020 was another tough year.

Because of significant pandemic-related losses, elevated natural catastrophe claims, and lower investment returns, the sector will again fail to meet its cost of capital. This follows three years in which the sector has struggled to meet its cost of capital due to large natural catastrophe losses, adverse loss trends in certain U.S. casualty lines, and fierce competition among reinsurers. Consequently, in May 2020, S&P Global Ratings revised its outlook on the global reinsurance sector to negative from stable, as we believe business conditions are difficult.

In our lead article, Black Swan Or Not, COVID-19 Is Disrupting Global Reinsurers’ Profitability, we discuss why we revised the sector outlook to negative after the pandemic started and highlight the sector’s main challenges and opportunities with regard to pricing, growth, capital adequacy, and earnings potential.

Reinsurers have suffered significant natural catastrophe losses in recent years. In Global Reinsurers Face Threat If COVID- 19 Losses Are Followed By A Major Catastrophe, we examine how reinsurers’ risk appetite has changed, and how the sector has equipped itself to face future natural catastrophes and rising COVID-19-related claims.

In Turning The Supertanker: Underwriting At Lloyd’s Market Changes Course, we take a closer look at Lloyds’s actions to improve underwriting performance, the prospects for individual syndicates, and the market’s ambitious “Future of Lloyd’s” project.

As the COVID-19 pandemic spread from region to region, it has drawn attention to a hitherto unnoticed protection gap in insured and noninsured property/casualty risks. Although the pandemic’s protection gap had not previously been recognized, other protection gaps have been raising concerns for some time. In COVID-19 Highlights Global Insurance Protection Gap On Climate Change, we analyze how reinsurers can help to close protection gaps in life, health, cyber, and natural catastrophe insurance.

The implementation of International Financial Reporting Standards (IFRS) 17 requires insurers and reinsurers—globally, but excluding those based in the U.S.—to restate their balancesheet comparatives with new key metrics. In Reinsurers And IFRS 17: Getting Balance Sheets Ready And On Time, we discuss the main challenges for reinsurers and users of financial statements resulting from IFRS 17.

The Asia-Pacific region’s insurance and reinsurance sector has seen its fair share of weather-induced woes over the past two years. In APAC’s Costly Catastrophes: Reinsurance And More Required, we discuss regional and global reinsurer’s appetite for the region, and its main challenges and opportunities.

Given that reinsurers exist to take on insurance risks, it is not surprising that they are more exposed to underwriting, reserving, and catastrophe risks than to investment risks. However, their investment risk has never been negligible, and a decade of low interest rates and tough underwriting conditions forced reinsurers to increase their appetite for investment risk. In Investment Caution Has So Far Paid Off For Global Reinsurers, we take a look at reinsurers’ asset risk appetite over time and how the sector would be affected by several stress scenarios.

In COVID-19 Market Volatility Tests North American Reinsurers’ Resilience, we conduct an investment asset stress test for the region’s reinsurers, and outline the impact of the results on capital adequacy.

Financial markets have recently proved to be highly correlated, as the COVID-19 pandemic cut a swath through various different industries. S&P Global Ratings’ article In A Correlated Market, Catastrophe Bonds Stand Out answers questions from market participants about how the insurance-linked securities market has been faring and what could happen as the pandemic continues. This year’s Global Reinsurance Highlights captures the key issues facing reinsurance management, investors, and other stakeholders. We hope you enjoy the 2020 edition and welcome your feedback on possible enhancements for future years.

Read the full report.

Black Swan Or Not, COVID-19 Is Disrupting Global Reinsurers’ Profitability

By Taoufik Gharib, Johannes Bender, Hardeep S Manku, and Ali Karakuyu

When analyzing the global reinsurance sector, S&P Global Ratings reviews operating performance on a multiyear basis rather than a single year’s results because of the nature of the business, which can result in elevated losses for any given year. The industry struggled to earn its cost of capital (COC) in 2017 and 2018, and barely did so in 2019. Reinsurance pricing reacted in 2019 leading up to the January 2020 renewals, but price increases were mostly in the U.S. and Japan, confirming the regionalization of pricing trends.

Read the full report.

About S&P Global Ratings

S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world’s leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years’ experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide. For more information, please visit

SOURCE: S&P Global Ratings

Tags: , ,