Climate Risk Complicates Insurance Underwriting, CRE Transactions

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Moody’s Investors Service (MIS) has published a report " Rising physical climate risk generates uncertainty, complicates risk management" in which it finds climate-related hazards are contributing to current challenges in the insurance market.

The report cites Swiss Re's findings that the annual inflation-adjusted average economic loss in the 10 years to 2022 was around $220 billion, up from $37 billion in the decade to 1990 - and warns of rising cumulative losses associated with secondary perils like wildfires, floods and convective storms that now occur with increasing frequency and severity.

Moody's sees evidence of climate change driving extreme heat/drought as well as intense rainfall events and coastal flooding exacerbated by sea-level rise. Other connections like the impact on convective storm and hurricane development, particularly as relates to frequency, are less clear.

The report also finds that while some large reinsurers have leveraged their size and geographic distribution along with sophisticated data and modelling (including asset-level characteristics, and using both traditional stochastic and climate-adapted scenario analysis) to be able to continue writing property cat risk, many others have reduced their exposure or exited the market entirely.

This has helped reinsurers post comparatively stronger Q1/Q2 results in the face of $43 billion in insured and $110 billion in overall economic losses from catastrophes in that period. In contrast, primary insurers have retained a higher proportion of risk relative to their gross exposure while adjusting pricing, modifying terms and conditions, or being forced to exit high-risk markets.

In markets where insurability is becoming an issue, Moody's notes that public schemes shift the risks to taxpayers but have not yet shown long-term viability, leaving a clear need for enhanced public-private and insurer-insured cooperation on risk mitigation and adaptation.

The most recent report from Moody's follows their earlier analysis in July that cited the above trends contributing to overall insurance costs rising 74% for CMBS properties from 2017-2022, presenting significant challenges for CRE transactions.