S&P warns of strained profitability for insurers due to climate events

Last year was the fourth straight year insured losses surpassed $100b globally.

Insurers are expected to mitigate the growing risk of natural catastrophe-related claims through underwriting adjustments, with 2023 marking the fourth consecutive year in which insured losses from natural disasters surpassed $100b globally, according to S&P Global Ratings’ "Insurers Focus On Underwriting To Tackle Climate Risk” report.

However, some may face credit impacts in the medium term, particularly those more exposed to physical climate risk and with less diversification. 

The insurance sector's profitability has been under strain due to increasingly frequent and severe natural catastrophes, including damaging thunderstorms in the US, France, and Italy over the past two years. 

Insured losses are projected to rise further in the long term, driven by economic and population growth, alongside claims of inflation. Climate change adds another layer of volatility, affecting both the frequency and severity of events.

Despite the increase in claims, particularly within the property and casualty (P/C) sector, insurers are expected to manage the financial strain by adjusting their pricing, reducing exposure, and transferring a portion of risks to reinsurers. 

Reinsurance costs, though rising, are still seen as a critical component in managing volatility from natural disasters.

The report highlights that, globally, reinsurers absorbed around $50b in natural catastrophe premiums in 2023, covering a significant portion of primary insurers' exposure.

Whilst natural disaster claims continue to rise, they still represent a smaller share of total claims for most primary insurers, at an estimated 7%. 

This diversification in their portfolios helps protect insurers from excessive risk, but the ongoing unpredictability of extreme weather events requires continuous adaptation in underwriting approaches.

Insurers in markets like the US and Japan, where natural catastrophe claims are more prevalent, will likely face greater pressure on profitability. 

However, by adjusting underwriting margins and leveraging public-private partnerships, the insurance industry can remain resilient in the face of these challenges.

In areas more prone to natural disasters, higher premiums and deductibles are expected to become more common, which may raise concerns about the affordability of coverage.