Insurers and reinsurers are increasingly confronted with the physical impacts of climate change driven in part by the rise in losses from what is being defined in the industry as secondary perils. However, the challenges are more than just concerning the weather.
We’ve unquestionably been confronted with the physical impact of climate change in recent years, particularly with floods, wildfires and convective storms. We are aware that there’s more extreme weather events due to such factors as rising temperatures and sea levels.
In 2022, global insured losses from natural disasters, once again, surpassed $100 billion, leading many to question if losses of $100 billion+ in a single year is simply the new norm.
While last year included Hurricane Ian, which looks to be the second most expensive cat loss event in recorded history, as in prior years, 2022 also included a range of costly losses from such secondary perils as wildfires, droughts, floods and convective storms.
While the research currently suggests that the overall frequency of hurricanes, storms and landfalls is not necessarily out of line with the longer-term trend, we are seeing more intensive storms.
Also, these storms generally last longer and are wetter than storms in previous years, so they are a very different type of risk and loss event that we’re now dealing with.
Alongside wetter and longer lasting storms, it’s apparent that climate change has led to an increase in wildfires, droughts and floods around the world, while convective storm losses in the U.S. also have ticked up in recent times.
Clearly, the physical impacts of climate change are an ongoing challenge, yet there is more to it for providers of risk transfer to take into consideration.
The challenges associated with climate change are not only the physical aspects of that weather, it’s also the distribution of wealth and demographic changes that we’ve seen over recent decades. People are simply moving to more catastrophe exposed areas. We’ve obviously seen it in Florida, but we also see it all over the world. And so, I think these socioeconomic elements are as much a driver of loss as the climate change itself.
Insurers and reinsurers of all shapes and sizes have and continue to adopt measures as they try to account for climate change adequately in their underwriting and broader businesses. It’s no easy feat and requires constant attention and adjustments as we learn more about the changing climate and how it impacts weather events around the world.
At Aspen, the ongoing mission is to embed a thoughtful climate change framework into our business and underwriting, in particular.
Over the last 18 months, this work has been extensive, notably in property reinsurance.
Really, the idea around it is to enhance and improve our understanding of the potential financial impact of climate change. And, to test the resiliency of our business model.
This framework extends throughout underwriting but, equally, towards exposure management and risk management. What we’re doing is to think about specific, underwriting measures or actions that we should take. These actions can be quantitative as well as qualitative, and can vary according to territory, region and perils.
Our framework gives underwriters a very clear guide on how to think about climate change and how to reflect it in their underwriting.
As an example, the company’s property reinsurance team now explicitly tracks and records how they are considering the impacts of climate change on each piece of business that they write.
It’s about establishing that framework and approach to estimating the financial impact of climate change on our portfolios.
We’ve recently published our second annual ESG report, which encompasses climate change alongside our other ESG principles, all of which are central to Aspen’s business strategy. It’s a clear commitment to building a more sustainable business, while facing the challenges that climate change presents.