Insurers’ strategies for managing rising climate change risks

Moody’s Investors Service’s Brandan Holmes and Moody’s RMS’ Joss Matthewman explain how insurers are using increasingly sophisticated data and modelling to better understand climate risks.

What signs are there that climate change is impacting catastrophic risk?

Joss Matthewman: On average, between 1980 and 1989 there were just over 70 natural catastrophes per year; from 2013 to 2022, it was just under 200 per year according to Swiss Re. Economic losses are also increasing. Swiss Re classifies catastrophes as events which exceed given insured and economic loss thresholds, and as such, growing insured exposures and higher reconstruction costs will contribute to this increasing trend, which makes it challenging to isolate and attribute the impact of climate change alone. However, for some catastrophe perils in certain geographies, there is scientific consensus surrounding the historical increase in frequency of extreme weather events, which will therefore contribute to this upwards trend in losses.

Are insurers seeing climate change modelling as a priority?

Brandan Holmes: Yes. At our recent insurance conferences in New York and London, we asked insurers how physical climate change was being incorporated into their risk management and underwriting practices. Many respondents are prioritising the implementation of more sophisticated data and modelling capabilities, followed by repricing of property policies, policy terms and conditions changes, and business renewal decisions.

What does this mean in practice?

Holmes: Insurers are at various stages of evaluating the impact of climate change on their business, with some already incorporating climate change into strategic planning and stress testing.

Can you give an example of how exposure data is measured and managed?

Matthewman: Key data quality indicators for property insurers include location accuracy, and building attributes such as age, construction type and up-to-date replacement costs. Better quality data helps insurers to price risk more accurately and improve portfolio management, to gain an edge over less sophisticated peers, both in managing risk and in securing steady reinsurance capacity.

How does catastrophe model usage vary regarding climate change?

Matthewman: It ranges from insurers giving more weight to recent events in their catastrophe modelling to ‘conditioned’ catastrophe models that generate potential outcomes from current and future catastrophes by incorporating climate change scenarios. We are starting to see near-term future views from conditioned catastrophe models being used in portfolio management activities such as sustainable pricing and affordability, product innovation, selection of strategic reinsurance partners and wider business planning.

What impact is rising temperatures having on catastrophic risks such as flood?

Matthewman: Rising temperatures are increasing underwriting risks. Moody's RMS analysis shows that across most of Europe, compared with 1979-2010, modelled flood average annual insured losses would be 40-60 percent higher by 2050, using a climate change scenario with an increase in global mean surface temperatures of 2.3°C relative to pre-industrial levels. The change varies significantly across the region though, with modelled flood risk projecting higher increases in Germany and Central Europe, and lower increases in Southern Europe.

How might this insight impact the role of governments and others?

Holmes: More collaboration among reinsurers, primary insurers, governments, companies and individuals will likely be required to adapt and mitigate risk. For governments, mitigation could see investment in infrastructure improvements, implementation of stricter building codes and land use policies that reduce vulnerability to climate risks, while the insurers can develop new products and share their data and risk management expertise to help develop more sophisticated data and modelling practices.

This publication includes the views of Moody’s Investors Service and Moody’s RMS which is an operating unit of Moody’s Analytics. Moody’s Investors Service and Moody’s Analytics are separate divisions of Moody’s and may have different views from each other. The views expressed by each entity should not be attributed to the other entity or to any other Moody’s companies or divisions.

Brandan Holmes is vice president – senior credit officer, financial institutions group at Moody’s Investors Service, and Joss Matthewman is senior director – product management, global climate at Moody’s RMS