Moody's Highlights Climate Credit Risk Facing Insurers

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A new report from Moody's has highlighted increasing exposure to extreme weather events as one of the two main credit risks (alongside claims inflation) for European property & casualty (P&C) insurers in 2024. The rating agency says that during the January 2024 reinsurance renewals period, primary insurers purchased insufficient protection against weather related events as catastrophe loss trends pushed reinsurance pricing upwards, leaving them "exposed to a repeat of 2023, when they absorbed most of an above-average weather-related claims bill in some countries.” Moody's analysts also noted that reinsurers have restricted their appetite for underwriting more frequent but smaller scale events such as hail storms. As a result, Moody's estimates that "European insurers’ risk retention has risen by 10% on average for most catastrophe events, with retention rates rising fastest for low-frequency events."

The report comes on the heels of Moody's November 2023 assessment, at which point its analysts found that rated European insurers are well-positioned to manage rising credit risk, with strong diversification across sectors, a robust average Solvency II ratio above 200%, and the positive impact of rising interest rates.

Moody’s also reported that rated debt held by sectors with high or very high environmental credit risk now exceeds $4 trillion, and has notably more than doubled since the Paris Agreement climate change accord was signed. Moody's breaks down this risk exposure by five categories - physical climate risks, carbon transition, waste and pollution, water management, and natural capital - and found that physical climate risk tops the list, spanning 14 sectors that collectively hold $6.1 trillion in rated debt with "high" inherent physical climate exposure (as relates to rising sea levels, wildfires, water stress, extreme heat, and increased frequency and severity of hurricanes).

“That means a range of global sectors will see their ability to pay their debts exposed to potentially greater risk from rising sea levels, hurricanes, carbon emissions, pollution, threats to biodiversity, and other environmental pressures,” said Moody's. "Geographic location can be a primary determinant of a company or government’s exposure to climate-related risks, but it is far from the only factor. For instance, the climate exposure of a large manufacturing company with factories in different countries will also depend on the relative importance of each factory to the company’s overall profitability and related transportation and supply-chain issues. Extreme weather events can also create credit challenges for regional and local governments. During the summer of 2022, heatwave-fueled wildfires raged across France and Spain, leaving a swath of economic losses and environmental damage in their wake."

Moody's analysis points to the challenge of measuring, quantifying and pricing inherent physical (and even moreso, transition and liability) climate risks embedded within credit exposure and debt issuance - and the need for risk transfer alongside mitigation and resilience funding.

Source: Moody's,