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ESG In Credit Ratings Newsletter, October 2021

Reinsurers have increased their efforts to incorporate climate change in their decision-making process, particularly in risk management, exposure management, and pricing. However, this is still nascent across the industry, and many companies are facing difficulties in implementing climate change considerations robustly. Our scenario analysis suggests that reinsurers' estimates of their exposure to natural catastrophe risk--and therefore physical climate risk--could be underestimated by 33%-50%, which is 91% of the sector's buffer above the 'AA' capital requirement. While not our base case, this scenario illustrates significant potential for volatility in earnings and capital. We consider exposure to the physical risks of climate change to be a key factor in our ratings on 19 of the top 21 rated reinsurers, primarily through our forward-looking assessment of risk exposure.

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