Climate Change, risk to Reinsurance companies

Reinsurance companies face significant potential risks related to the effects of climate change, particularly in the European and Asian regions, according to new research from Munich Re.

The reinsurer’s analysis shows that global climate change might increase natural catastrophes but that the claims could be manageable for the world’s largest reinsurers. Munich Re nevertheless warns that future reinsurance increases in policies will become more costly to reinsurers as global warming pushes up claims costs.

“Damage caused by extreme storms and floods, earthquakes and drought will increase in the future but the impact on property damage from natural catastrophes is relatively modest today,” Matthias Warnig, head of Munich Re’s climatology and weather research group, said.

Munich Re warned, however, that it was important for reinsurers to retain a reserve for expected loss and incorporate any related economic loss impact. “In the course of the research, Munich Re did not find evidence to suggest that natural catastrophes cause major economic losses in any single country. But, just as with floods, these risks could affect the weather in a country in a different way in the future,” Warnig added.

“It’s therefore important for reinsurers to retain sufficient risk reserves. And, in order to do so, the principle of pricing risk should be fully considered. For instance, future climate change might mean a reduction in the number of natural catastrophes, but it could also increase the economic costs from those catastrophes if more insurance claims are required in the future,” Warnig concluded.

Research for the new report was prepared in partnership with the Finnish Meteorological Institute (METI) and published in Munich Re’s Geophysical Research Letters.