While it may seem that the ILS sector is powerless in facing negative trends due to climate change, scientific evidence suggests that the risk is heightened in some cases but not others.
Reinsurers should take care to accurately assess the extent of the risk of climate change and charge appropriate risk premiums, while ILS managers should adapt contract structures to reduce uncertainty and the risk of climate change.
The report says for many investors, the reason for high losses since 2017 is obviously climate change. “This reaction is (intuitively) understandable... however, the scientific situation is much more complex.”
It breaks down perils according to how affected they are by climate change; ranging from those where no influence is known and/or detectable; where an influence is possible but the impact on insurance assets is unclear, and where an influence is likely.
Over the past few years there has been an increase in the number of storms in the Atlantic Ocean, which is often attributed to climate change in the media. Although there is evidence that climate change impacts the risk of tropical storms and hurricanes, the extent of this impact is uncertain.
The frequency of tropical storms hitting land may remain constant despite climate change, and may even decrease in the long term, but it is possible that hurricanes which do reach the coast will carry more moisture and be more intense.
Earthquakes are assumed to not be impacted by climate change, which does not affect the movement of tectonic plates. Therefore, ILS claims due to earthquakes are “fundamentally and causally unaffected” by climate change.
Conversely, the expected frequency of severe weather and flood events as well as wildfires are expected to increase in the longer term due to climate change.
Siglo’s report follows a similar offering from Credit Suisse released last year, which found that the reinsurance industry has not sufficiently increased premiums in response to loss inflation caused by climate change over the past 20 years and argued that rates will need to rise at least 2% per year to keep up with increased climate risks in the future.