Changing climate increasing challenges for California re/insurers: AM Best

A new report from AM Best cites that the latest winter storm that has been affecting Southern California underscores the growing risk of financial volatility that weather-related losses pose for the insurance industry.

The report highlights that the recent winter storm in California – the nation’s largest state by population and gross domestic product – is among the growing list of key examples of how climate-related risks are “changing the landscape for property insurers.”

The agency warns that the impacts of changing climate conditions and weather patterns could worsen if extreme events continue to occur with greater regularity. Best cited how insurers whose property portfolios are concentrated in the state will feel the effect the most.

The most recent storm was primarily a snow event for California’s mountainous inland areas, as well as the storm that occurred in late December which caused mass flooding and mudslides in coastal regions.

Best notes that for the areas that were flooded just a couple of months ago, the spring snow melt could exacerbate problems. Illustrating the recent and volatile weather patterns in the state, these two events were preceded by persistent drought conditions.

Additionally, the report states how a surge in population within catastrophe prone areas in California has led to significant economic and insured losses, despite less intense natural catastrophes.

“Flooding, snowstorm, mudslides and wildfire risks continue to worsen and could cause more reinsurance capacity to retreat from property risks and insurers will reassess their opinion of rate adequacy for their property insurance risks in the state,” said David Blades, associate director, industry research and analytics, AM Best.

“Because secondary peril losses due to hail and shifting weather patterns continue to escalate, modeling and risk mitigation have never been more important.”

Furthermore, Best adds that pricing property risks based on prior experience can be particularly challenging because catastrophe models have not fully taken into account what is becoming a new normal.

Another major risk that is leading to losses includes the potential for heightened business interruption following a severe weather event, as well as agricultural losses because of droughts.

Best concludes by warning that as reinsurers continue to increase rates, limit capacity and tighten terms and conditions, the challenge for primary property insurers in California, along with other states facing similar challenges, will only continue to grow.

Source: Reinsurance News, Changing climate increasing challenges for California re/insurers: AM Best - Reinsurance News