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Higher prices not enough for insurers to deal with climate risks – analysts

Insurers need to do more than simply adjust prices to adequately respond to the changing nature of risk related to climate change and the increasing frequency and severity of catastrophic events, according to industry experts.

Dennis Sugrue, S&P Global Ratings' senior director and EMEA insurance sector lead, said insurers generally feel that they can rely on repricing because of the short-tailed nature of natural catastrophe liabilities. However, an analysis conducted by the French Prudential Supervision and Resolution Authority showed that global catastrophe rates online have not been able to sustain the type of growth that would offset increasing levels of insurance loss and frequency and severity of natural disaster events or the increased risk of climate change, Sugrue said during a webinar.

Sugrue does not expect any ratings actions to be taken as a result of the climate analysis because the industry remains "well-capitalized." However, insurers will see their capital buffer reduced and have "less resilience for more severe events," he said.

A recent analysis published by Willis Towers Watson PLC concluded that insurers can keep climate change from hurting their bottom lines if they manage relevant risks on their assets and liabilities and raise awareness of climate issues. The report, a collaboration between the insurance broker and Wellington Management Co. LLP, included an evaluation of analytical tools and models to assist the development and implementation of certain climate scenarios into insurers' risk modeling.

Those tools include scenario models that simulate realistic events against portfolios to provide stress tests for businesses' risk management processes, and vendor models that project past events into the future.

Yingzhen Chuang, deputy head of catastrophe analytics for Willis Re Inc., said there is a large amount of complicated data that insurers need to absorb.

"The challenge we have is being able to convert that science into something that we can apply in our day-to-day business and insurance," Chuang said in an interview.

Adhiraj Maitra, Willis Towers Watson's director of insurance climate risk, said P&C insurers cannot think just in terms of underwriting liabilities when addressing climate change and ESG-related risks.

"One should also think about other functions in their company, whether it is claims, human resources, risk management or investments, and it is that holistic view which we think is needed to crack this problem," Maitra said in an interview.