Climate change poses several threats to the insurance industry, particularly to the property and casualty insurance and reinsurance sectors, Moody's Investors Service said in a March 15 report.
"The risks associated with climate change outweigh potential opportunities" and could have a "net negative credit impact" on property and casualty, or P&C, insurers, Moody's said.
Increasingly frequent and more severe catastrophic weather events, ongoing climate change litigation, and the possibility that the transition to a lower-carbon economy could reduce the value of assets with high emissions are some of the biggest problem areas for insurance companies, the report said.
Moody's noted that the number of annual natural catastrophes has increased from around 60 events annually in the early 1970s to an average of 310 events annually during the past 10 years. Moreover, the insured losses from weather-related catastrophic events has also increased, even after inflation.
While insurers and reinsures can reasses their risk and raise premiums annually, climate change creates an unpredictable environment that make those tasks more difficult and increases the likelihood that companies will not recover the costs of those increasing losses, the report said.
That trend has already started. The U.S. P&C industry's net underwriting loss grew 10-fold in 2017 to about $20.16 billion from $2.10 billion in 2016 as insurers confronted the most active North Atlantic hurricane season in more than a decade and unprecedented autumn wildfires in California, S&P Global Market Intelligence recently reported.
Climate change litigation also poses liability risks, Moody's said. A number of lawsuits have been filed claiming that companies are liable for damages caused by climate change. New York City earlier this year sued five of the biggest oil companies to recover potentially more than $20 billion in costs the city paid to recover from Superstorm Sandy in 2012.
"To date, the legal theories underpinning these legal actions have been unsuccessful in establishing liability," Moody's said. That said, "to the extent these legal theories gain traction by establishing liability against carbon emitters, climate change would represent a substantial exposure" to P&C insurers and reinsurers.
More than just losses in court are at stake, the report said, noting that cases settled out of court are routinely covered under liability insurance policies.
In addition, investors can sue publicly traded companies for failing to mitigate climate risks or for not disclosing in financial reports the extent to which they were exposed to climate change risk.
Another risk is the potential devaluation of carbon-related financial assets such as those held by energy utilities. However, insurers tend to have well diversified portfolios which makes the devaluation risk modest, the report said.
Moody's foresees some opportunities for growth, including revenue increases as states push for companies and individuals to buy bigger plans to address coverage gaps, the report said. Likewise, new infrastructure and technologies such as renewable generation could increase the demand for both property and liability coverage, the report said.
