Climate change's impact on European programmes: a challenge that can no longer be ignored
Climate change is a major concern for our societies as a whole and our industry in particular.
For decades, the frequency and intensity of natural events have been on the rise all over the world. The damages are increasing with an acceleration in recent years and can no longer be ignored by the (re)insurance industry, nor can they be considered “exceptional events” anymore.
Notably, 2021 ended up becoming the fourth costliest year since 1970 for cat business and the fifth consecutive year that the cat segment saw a negative result on a worldwide level. While Hurricane Ida has been the costliest individual event, more than 50% of the total 2021 cat loss was driven by secondary perils. This illustrates that floods, convective storms, tornadoes, winter freezes, wildfires, and droughts, which are often local events, are becoming more and more costly. Europe particularly suffered from the flooding provoked by weather system Bernd, which quickly proved to be Europe’s highest loss that year.
This trend is found again in the current year with extreme events in Australia (flood), Brazil (drought), and France (hailstorms, wildfire, and drought). While climate change signals may be less evident when it comes to the frequency of windstorm in Europe, analysis by Scor in 2021 identified an emerging trend of increased clustering of storms; indeed one such cluster materialised shortly thereafter with the trio of storms which hit part of Northern Europe in February 2022. As it looks now, 2022 will be again a tough year.
The (re)insurance industry has suffered from losses for five consecutive years. This has had a predictably negative impact on the overall P&C results, preventing us from achieving an acceptable return on capital. By the January 1 2022 renewal, many players had already reviewed their risk appetite and strengthened terms and conditions with rate-increases at a level not seen in Europe for decades. This was true across all European markets, even those that had not yet experienced significant losses. The expectation for the forthcoming renewal is that the cat segment will further strengthen.
The purpose of a reinsurer is to absorb shocks and to defy a volatile risk landscape, enabling society to remain resilient.
But resilience is not just about surviving sudden shocks, it is also about anticipating and managing longer-term trends that can lead to structural changes in our industry and our business.
Natural Perils related reinsurance, whether proportional or non-proportional, has yet to adapt to the global increased frequency of medium sized events and particularly the striking impact of secondary perils.
Hence, there is a need for climate impact adaptation, which is multi-faceted:
First, proper risk assessment is needed. Existing models especially addressing secondary perils need to be further improved, continuously reviewed, and adjusted based on the latest observations and scientific findings. Consequently, underwriting approaches will need to be redefined as well.
Second, insurance and reinsurance programs against natural perils require structural changes to cope with the increasing exposure. Premiums must adequately reflect the risk taken and attachment levels and sideway protections particularly impacted by secondary perils need to be revisited.
Third, and most importantly, the (re)insurance industry must acknowledge its role in promoting awareness and helping to develop a risk culture that will play an essential role in meeting the challenge of prevention and mitigation of climate risks.
The challenge before us now is to ensure that climate risks are properly priced, structured, and mutualized, because this is the only way to provide sustainable protection.
Our industry has faced big challenges before and has always overcome them. There is no doubt that we all as an industry, and SCOR in particular, will manage again, by leveraging our expertise, embracing innovation and collaboration, and by never losing sight of our raison d’être.