Climate change threat to insurers’ capital base

MANILA, Philippines – Climate change will increase risks on insurers’ capital adequacy, investments and ultimately, earnings.

According to Standard and Poor’s Rating Services (S&P), climate change could affected the insurers’ capital positions by lower investment income and higher capital requirements, as well as by the anticipated increase in weather-related claims.

“We cannot rule out the possibility that climate change could have a significant effect on insurers’ capital positions in future. For example, if market values are adjusted to incorporate the expected lower returns under climate change, it could reduce insurers’ capital adequacy by up to 10 percent,” S&P said in a recent report.

The insurance industry recognizes climate change as one of its top emerging risks and many insurers consider the potential consequences of the latest scientific findings for their operations.

Insurers do not typically view climate change as a major threat to their day-to-day activities. They are confident in annually re-pricing and renewing non-life policies offers protection against increases in weather-related claims attributed to climate change.

“Our analysis used a recent study by the Mercer Group, a consultancy, which indicates that climate change has implications for investment returns, and thus for earnings. In addition, we used an analysis by Risk Management Solutions Inc. (RMS), a catastrophe risk modeling company. RMS has reviewed likely changes to common perils, and considers that there is strong evidence that climate change will worsen the effect of tropical storms. This could increase capital requirements,” the report indicated.

The potential consequences of climate change on insurers’ capital adequacy will be felt albeit gradually starting next year.

Insurers’ capital management tools should be effective in handling the additional strain of climate change.

However, managing the repercussions of climate change may require insurers to balance maintaining capital adequacy against meeting the profit expectations of their shareholders.