An industry expert believes that while insurance companies – particularly property underwriters – have managed to stay afloat despite the most recent string of natural calamities, they could still end up with unexpected losses if they fail to get a proper grip on their exposure.
Capgemini executive vice-president Seth Rachlin noted that there are typically two factors to consider when assessing how climate change alters catastrophe risk, namely the frequency and severity of such calamity events. While property insurance rates usually increase as the frequency of extreme weather is factored in, Rachlin found the industry’s projections based on increased severity lacking.
“The modeling has to catch up with the last season. Every year new models come out, but every year we see [events that should only happen every 100 years],” Rachlin told Financial Times.
Fortunately for insurers, the risk is somewhat mitigated thanks to reinsurers.
“With adequate reinsurance you can write any risk,” Rachlin explained, adding that reinsurers continue to attract the attention and capital of hedge funds and pensions.
But the expert believes that the other catastrophe-related threat to insurers lies from within their own investment portfolios. Investments can help insurers pay for claims in the event of a disaster, but if they fail to accurately calculate the risk that climate change creates for those assets, insurers could stand to lose a lot.
Carbon fuel is one such asset whose role in exacerbating climate change has environmentalists urging companies that have invested in the fuel to step away. Several insurers have realized this issue, and have taken steps to mitigate the damage. Companies such as Allianz and AXIS Capital have pledged to limit their investment in carbon fuel, and in companies that generate revenue from carbon fuel.
Investment management company BlackRock found in its annual global insurance industry research that over two-thirds of insurers are including sustainability considerations in their investment decisions, but some companies still have reservations about Environmental, Social and Corporate Governance (ESG) investing.
“The continued demand for sustainable investment opportunities is indicative of a broader industry trend, but insurers still seem to have some concerns about the return trade-off and how best to embed ESG principles into a portfolio,” BlackRock Financial Institutions EMEA head Patrick Liedtke told Financial Times.
