By Toby Belsom, Head of Research, ShareAction
Climate catastrophe losses have been a feature of the insurance industry for years – the Hiscox results this week were a timely reminder that these events have real implications for earnings, profits and business strategy. Climate events made sure 2017 was an expensive year for re-insurers – particularly those with poor underwriting skills. At their results yesterday morning, the CEO of Hiscox described 2017 as ‘an historic year for natural catastrophes’ and ‘the most costly year ever for natural catastrophes’ – many of these climate-related. The re-insurance sector has some bruises that will take time to heal.
Despite the bruises, the slightly counter-intuitive structure of this market means that, after a year of heavy climate losses, rates tend to rise in underwriting against these types of losses. Those with a better ability to operate in this area and manage climate-related risks more effectively benefit from both lower losses (better risk mitigation) and improving premiums (balance sheet is able to deal with volatility).
The $140 billion of catastrophe losses racked up across the sector in 2017 will inevitably lead to slowly improving margins as weaker players leave nursing capital losses and weakening reserves. This is particularly the case for catastrophe insurers operating in North and Central America which accounted for 83% of global climate related losses and 93% of global insured losses with 13 events resulting in overall losses of more than US$ 1bn. Evidence of this is starting to emerge with Hiscox reporting that catastrophe reinsurance pricing into the key 1 January renewal season saw average prices increase by 9%.
A backdrop of premium volatility, increasing prices and capital losses produces a market open for businesses with the foresight and ability to deal with climate risks. This is the type of business environment where better management of climate risk can result in improving profitability and strengthening market position.
As rising climate-related damages and claims tilt the balance of risk and return, underwriters are also involved in developing new and innovative products. Hiscox’s results highlight the FloodPlus product (designed as a commercial market alternative to the US government-backed National Flood Insurance Program) and the FloodXtra product (targeting the deregulating US flood market using advanced weather analytics and topological data).
One aspect that Hiscox seems to be lagging on is the integration of climate risk into its investment process and portfolio. Its 2017 climate report does cover incorporating climate change in investment strategies but these seem to be mainly focusing around research and relying on third-party managers rather than real implications on the capital allocation or portfolio construction in its £4.1bn portfolio. It may be a little unfair to highlight this in this context of Hiscox as others seem to lag further behind. This was certainly the message we took from the AODP 2017 survey, where many global insurers did little to integrate climate change into investment process.
So in an environment of raised climate volatility and losses, the industry has to be more acutely aware of the issues than ever before and yet the very preliminary results from our 2018 survey of the global insurance sector show a range of responses on how global insurers are dealing with climate risk across the asset and liability sides of the businesses.
Institutional investors in the sector – such as Invesco, MFS and Fidelity – the key holders in Hiscox – may find it difficult to predict and forecast specific exposures of various catastrophe insurance portfolios but they can try to differentiate on the basis of board responsibility for climate-related risks, reporting in accordance with the Task Force on Climate-related Financial Disclosures, innovative product development and an ability to migrate understanding in one area of the business to another (insurance risk to investment policy).
Our forthcoming survey on climate-related risk in the insurance sector will hopefully cast some light on the leaders and laggards. The report is planned to be published in April.