Increases in the frequency and severity of nat cat events combined with advanced developments in event and climate modelling continued to highlight the “fingerprints of climate change” throughout this year’s conference season.

With mounting re/insurance losses and the landfall of game-changing Hurricane Ian, climate change was a staple of conversations across all four major industry events in 2022.

Not just rate hikes

Thierry Léger, group chief underwriting officer at Swiss Re, was unequivocal about the impact climate change would have on the reinsurance market, calling it “the biggest threat to humanity”, at the Monte Carlo Rendez-Vous (September 10–14, 2022).

Of the five things that he thought were likely to impact the market in the near future—climate change, inflation, the war against Ukraine, supply chain disruption, and cyber—the most pressing, Léger said, is climate change.

“It’s terrible. There are so many different headlines about it that I am concerned we’re forgetting that it’s the biggest threat to humanity. And it’s impacting us in different ways. It’s increasing exposures while at the same time forcing us to help the world reduce its carbon dioxide emissions,” he said.

Léger said that the most direct impact of climate change was on the appetite for natural catastrophe business. “Analysts are questioning the ability of the industry to keep up with the changes that are being induced by climate change. Investors are increasingly hesitating to put capital to work in this space.

“The same is true for some of our competitors. I have rarely seen a line of business so directly impacted,” he explained.

Bertrand Romagne, chief executive for International, Reinsurance, at AXA XL Reinsurance, told Intelligent Insurer that the idea that challenges such as climate change can be tackled by simply increasing rates is a misconception—as is the market’s obsession with describing a hard market. Instead, the focus should be on the nature of coverage and helping clients better manage risk, rather than rates alone.

He said it was important to talk about the future and how reinsurers can help with the prevention of losses, and help cedants manage the risk. “It’s not just about rates and money. That’s something we don’t do enough: understanding the risk so that we can prevent losses rather than just paying claims.”

The key to achieving this, Romagne said, is science, something AXA and XL collectively have invested heavily in over the years.

“That is where the innovation will come from. We believe that science is essential to what we are doing. We’ve seen some unexpected losses of late but we believe that using science is the key to better understanding risk and refining our position.”

The argument for science-led risk, he said, is particularly pertinent in the context of climate change. “You cannot deal with climate change just by increasing rates,” he said.

“We have to start thinking about how and where we build houses or industries, how we connect all those things together. It’s not just about the price and the reinsurance, it’s also about considering what is sustainable.

“The climate is changing, we see it in the losses and it will be even more difficult going forward. So we have to tackle that through different angles. Science is the key to that.”

Monumental opportunity

Aon chief executive officer Greg Case told delegates in Monte Carlo that the re/insurance industry has a unique opportunity to have a transformative impact in the face of climate change—but it needs to come together to achieve this, scaling concepts it has already proved can work.

Case highlighted the issue of volatility and the size of the challenge currently faced by the market—and emphasised how well the re/insurance industry is equipped to rise to this challenge.

“We know the challenge is monumental,” he said. “But equal in magnitude is the opportunity to have an impact in a way we’ve never had before. Standing before our industry is a generational opportunity for us to make a difference in the global economy.”

Case added that success is not guaranteed, but that re/insurers have a chance to define the relevance of risk capital for the next 30 years. He said that climate change must be a priority—and would drive the largest relocation of capital in history.

Pushing against this is the defensive posture of the industry. He cited conversations with clients who repeatedly say that the industry is leaving the playing field at a time when these risks are on the rise.

“We should navigate that and get bigger—instead, we are getting smaller,” he said.

Companies have complained about exclusions, climate-related triggers, and the re/insurance industry exiting different geographies.

Case said: “They say: ‘Your industry is taxing the transition, making it harder for me to go to zero carbon’. This defensive posture limits our ability to have an impact in a meaningful and substantial way.”

He believes the only path forward is to accelerate and scale the industry’s impact.

“That requires all our capabilities, and it requires we collaborate on a scale we have never achieved before,” he said.

At APCIA (October 2–4, 2022) in Texas, in the US, uncertainty around climate change, inflation and the five-year loss record in the cat space were big topics.

Mark Vaughan, deputy head of treaty reinsurance at Beazley, told Intelligent Insurer that Ian-driven rate hikes were unlikely to lure more property-cat capacity, heralding a market comparable with the post-Hurricane Andrew period in 1993.

He stressed that the industry needs significant structural change in price and terms across all markets for confidence to flow back—rate increases alone post-Ian are not enough to bridge the gap.

“There are small pockets among reinsurers that could increase by a small margin,” Vaughan said. “But it is hard to see anyone walking in and significantly increasing capacity.”

This means a change in dynamic in the market. He predicts that many cedants will end up doing private deals with reinsurers to secure the treaty capacity they need for the 1/1 renewal, outside of any form of open bidding.

The same thing happened in the mid-year renewal when, he says, a “huge proportion” of deals were done privately. Vaughan expects that 1/1 will bring “many more private placements to allow cedants to get their placements finished”.

The upshot: higher, uneven pricing on a volatile market. “That will become almost endemic in 2023,” Vaughan says.

In the most severe cases, reinsurers such as Axis Capital have dropped property altogether. Comments made by Albert Benchimol, president and chief executive officer of AXIS Capital in June 2022, following that announcement, perhaps sum up the concerns of reinsurers. “The decision to close our property reinsurance business was not taken lightly and was driven by the significant and increasing effects of climate change and the challenges faced by the catastrophe reinsurance market,” he said.

‘Fingerprints of climate change’

At the Baden-Baden Reinsurance meeting (October 23–26, 2022), as protesters unfurled a Stop (re)insuring Climate Chaos” banner at the Kongresshaus, Michal Lörinc, head of Catastrophe Insight at Aon, told Intelligent Insurer that catastrophe modellers were already seeing “the fingerprints of climate change” in global weather patterns and nat cat models.

But the question of how much impact climate change is having on natural catastrophes globally is very complex to answer, Lörinc said.

“The answer depends on the type of peril and region we’re talking about because the current scientific consensus provides a different level of understanding for different perils in terms of attribution for what climate change is actually causing, and what change is expected in the next decades.”

Perils such as drought, heatwaves, and cold spells, are understood with a higher level of certainty in the scientific literature, he said, while perils such as severe convective storms or tropical cyclones are less understood.

However, he said, in terms of the potential implications of climate change, “we can say that we are already seeing these fingerprints of climate change in the patterns we see around the world”.

AXA’s “Future Risks Report 2022”, published during the Baden-Baden conference, stated that climate change is now the number one risk in all geographies, followed by geopolitical risks.

The report was based on global research into the perception of risk professionals and, now in its ninth edition, marked the first time climate risk had topped the list of experts’ concerns in all regions of the world and had become the main concern of the general public in the US. In 2021, US experts ranked cyber risk first and Asian experts ranked pandemic risk second.

Thomas Buberl, chief executive officer of AXA, commented: “The 2022 edition of AXA’s ‘Future Risks Report’ describes an overheated world, where crises are stacked on each other. It also confirms underlying trends such as the fear of climate change, a heightened sense of vulnerability among populations and the decline in trust in major institutions to find sustainable solutions.”

New normal

At the 18th Singapore International Reinsurance Conference (SIRC) 2022 (October 31–November 3, 2022), increased catastrophe losses driven by climate change were high on the agenda.

Mukul Kishore, chief executive officer for the Asia-Pacific region at SCOR, told Intelligent Insurer that the reinsurer is meeting its top line growth plans in Asia-Pacific, but said that higher frequency of cat events and SCOR’s exposure to them, and a soft market that has spanned the past 15 years, which has meant covers have widened yet prices have gone down, had caused a “performance blip” for the firm.

“Even the frequency losses have been transferred to reinsurance,” he said. “This probably is affecting us more than anything else. If I were to look at the last five or six years, compared to a much longer period before that, we are looking at a new normal, which is affected by climate change.

“You have increased frequency and a higher severity of these natural catastrophe events driven by climate change.”

He said that no region of Asia is immune to climate change in terms of losses. Many different parts of the region have been hit by significant and often record-breaking events, such as the significant flooding in Australia this year.