Insurers, Cat Bond Investors Pulling Back on Climate Risk

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Citing insured losses from natural disasters in 2023 of $118 billion, well above the 2017-21 average of $97 billion, Bloomber Intelligence (BI) says insurers have been forced to “hike premiums and exit high-risk areas” in the face of increasingly severe and frequent extreme weather events. BI says that a 360% rise in insured losses in the past 30 years from the increased frequency and intensity of natural disasters is leading insurers to hike premiums and exit high-risk areas. At the same time transition risk associated with the assets backing these liabilities is pressuring insurers to cut coverage of polluting sectors in their investment portfolios.

“A repricing of climate risks has seen global property catastrophe-reinsurance rates rise by as much as 30% at the start of 2024" wrote Grace Osborne, BI ESG Analyst. "Rising premiums have served to improve loss ratios (total losses paid by insurers plus adjusted expenses over total earned premiums), despite increased insured losses, only Allstate and RenaissanceRe seeing a rise in loss ratios in 2000-22. However, if the rate of increases continues consumer appetite to shift climate risk to insurers could decline. Increased frequency of climatic events has exposed insurers to more risk as reinsurers are reducing their exposure to secondary peril events by raising the loss threshold for reinsurance to kick-in. Smaller, more frequent events, such as the 25 Severe Convective Storms last year, are therefore creating balance sheet attrition volatility for insurers.”

BI also reported on a pull back in investor interest in catastrophe bonds heading into 2024. BI noted that fund managers like Tenax Capital and Fermat Capital Management that have large positions in catastrophe bonds have said they are pulling back despite estimates that cat bond issuance will rise by 20% this year to reach $20 billion (GAM Investments) and returned 20% in 2023 (Swiss Re). BI reports that the cat bond market is responding in part to climate-induced changes in weather patterns, particularly Atlantic ocean temperatures interacting with hurricane risk. A report by the National Oceanic and Atmospheric Administration released in March cited the “increasing odds” of a La Nina event this summer that in combination with warming ocean temperatures could drive record hurricane activity.

“The season could be pretty active,” said Toby Pughe, an analyst at Tenax Capital. “I’ve got the feeling we’re walking into a bit of disaster.”


Source: Bloomberg Intelligence,