Will Climate Change Ever Impact Reinsurance Rates?

• Author: Coleman, Key
• Position: FOREFRONT

In 2018, natural catastrophes wreaked havoc around the world. Windstorms caused massive losses in the United States, Japan and the Philippines. Droughts hit the United States and Europe, and unusually large wildfires caused devastation in California. Experts have suggested that at least a portion of the world's global catastrophes in 2018 can be attributed to climate change. Yet, while they could have raised rates after absorbing such large insured losses, reinsurers of property catastrophe exposures left their prices largely unchanged when it came time for renewal in January 2019.

Historically, the reinsurance market has been an efficient purveyor of pricing information to the direct insurance market. They, in turn, pass this information to insureds (often after regulatory approval), who are then able to make economically informed decisions. From asbestos to toxic torts, the reinsurance market has effectively acted as the "canary in the coal mine" by placing a price on insuring "bad acts." As such, the reinsurance market is uniquely poised to address the economic "externality" known as climate change. But when reinsurers fail to send their customary message that "we are not doing this anymore--at least not at this price" by passing on the cost of climate change to the insureds with the greatest exposure, it begs the question: Is the pricing mechanism broken or is there a back-story that we are missing?

CONNECTING CATASTROPHES AND CLIMATE CHANGE

According to Munich Re Japan suffered seven typhoons, flooding and two earthquakes in 2018, while the Philippines suffered a "super" typhoon and Indonesia endured a deadly tsunami. The United States saw $160 billion in catastrophe losses, which is higher than the 30-year average of $140 billion, but lower than 2017's $350 billion in losses. Approximately $80 billion of U.S. catastrophe losses in 2018 were insured. Hurricane Michael, which hit Florida's coast in October, accounted for $16 billion in losses, approximately $10 billion of which were insured. But the most extraordinary U.S. catastrophe losses in 2018 came from wildfire: California suffered its worst wildfire season in history, with extensive loss of life and monetary losses of $24 billion ($18 billion of which were insured).

While experts cannot tell us which disasters are attributable entirely to climate change, they have gone on record saying that the increasing frequency and severity of catastrophes like those experienced in 2018 can...