Climate change possibilities for reinsurers

Climate change presents growth opportunities for reinsurers. It’s raising limits on the amount of money potential losses can absorb, reinsurance industry members said during a Reuters summit recently.

Liability risks relating to climate change have so far remained under control. However, reinsurers’ reinsurance market could end up treating them more aggressively, said the leading executives.

“Once the developed world confronts the issue, we’ll see less risk taken in certain lines and more in emerging markets”. Luis Robaina, chairman of Lloyd’s of London, told the Reuters Summit in Sao Paulo.

The country’s leading reinsurer, Reinsurance Group of America, said last week there will be less economic growth in developed countries. In addition, this could strengthen the reinsurers’ hand in cutting risks.

“The average economic growth in the global economy this year may fall below 2 percent. However, global GDP will still surpass that of two years ago by about 2.7 percent”. Jay Fishman, CEO of RGA, told the Reuters Summit in New York.

“If I were the head of an insurance company in the United States, I would say: ‘Grow your business, increase your revenues because you have more stable returns there“. said Fishman.

Climate change could reduce or prevent growth in developed countries according to a recent study by Oxford University. It could reduce the countries’ gross domestic product by as much as 0.6 percentage points a year.

Emerging Markets

Reinsurers enjoy almost unlimited capacity to absorb risk under their own capital structures, except in extreme cases such as a severe hurricane, to take advantage of emerging market growth opportunities.

RGA’s Fishman said the business of reinsurance – the insurance of third-party liability of property, industrial or commercial enterprises – is fairly stable and that there would be no disruptions.

“We are not foreseeing any significant loss events in the immediate future,” he said.

“The important questions are not going to be in the short term. In the long term, the important question is whether we are going to protect ourselves. That requires changes in behavior.”

In general, the general view among the reinsurers is that climate change will be a competitive advantage for global companies at a time when their U.S. competitors face more regulatory pressure at home and their French counterparts are implementing a public shareholding scheme.

“There is also the potential that these companies (American and French) will face more limits on how much capital they can hold in order to manage the environment,” Reinsurance Group of America’s Fishman said.

But the CEO of London-based peer Arch Capital Group Ltd, Gerald Davies, was more pessimistic, predicting that climate change would be an increasingly frequent loss situation for reinsurers over the coming decades.

“My prediction, not my outright belief, is that we are in for quite a few more severe extreme events. I say this as a reinsurer, not as a scientist. I mean, it’s going to be very difficult to avoid them,” Davies said.

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