- June 16, 2023
- Posted by: SHMA Consulting
- Category: Newsletter
Climate change affects living creatures across the world in many ways, including excessive rainfall, violent storms, drought, wildfire, and so on. The calamities, ups, and downs also have an influence on insurance firms internationally, since disasters are becoming more frequent and costlier, making the industry more vulnerable, even though opportunities abound.
Furthermore, disasters are becoming more expensive, and human factors play a role as a catalyst, for instance, people moving to higher-risk areas due to denser populations. Growing risks from climate change and rising reinsurance costs have caused insurers to raise premiums and pull out of markets, leaving homeowners with fewer choices, less protection, and more financial distress. According to a research, hurricanes cost the economy over 125 billion dollars in 2017. In 2020, an estimated billion animals were killed in Australian bushfires, resulting in $4.4 billion in damages.
Taking into account variations in risk perception, demography, and environmental dynamics, the potential for third-party liability claims arising from climate change is not well understood. However, there is a significant likelihood that it will impact the industry. In response, maintaining a capital buffer has proven effective in meeting such claims. Insurers can leverage the annual policy cycle, as well as their advanced grasp of shifting risks, to reprice and restructure portfolios in order to prevent long-term exposure to climate catastrophes. Furthermore, an increase in the value at risk—and possibly volatility—should increase demand for new and different insurance solutions and services, potentially expanding the industry’s opportunities.
However, insurers must be cautious not to underestimate the true threat posed by climate change. Climate risk is expected to impact local economies and, more frighteningly, generate market failures that damage both consumers and insurers due to its systemic consequences. More frequent catastrophic events, combined with the need to fulfill evolving regulatory requirements, can jeopardize firm business models—and make insuring certain risks unaffordable for customers or impossible for insurers.