En 2022, a unique combination of financial and physical phenomena disrupted the global climate disaster reinsurance market. The sharp rise in interest rates, the inflation of repair costs, but above all the runaway extreme events have stressed this market, the function of which is to share risks between insurers – the reinsurer operating as an “insurer of insurers “.
At the end of 2022, the spectacular rise in the cost of reinsurance was not accompanied, contrary to the predictions of market theory, by an increase in supply. Demand has not been met and some insurers have had to keep more risk on their balance sheets than expected.
Insurers seem to have long had illusions about their ability to adapt to the risk of climate change. They thought they only had to revise their prices – upwards – every year. But the violence of the shocks, the uncertainty about their variability, the systemic nature of increasingly complex extreme events with poorly anticipated effects have shaken market certainties and beliefs.
The risk of climate change has nothing to do with climate risk, a risk well known in the past. The risk of climate change is the change in climate risk. It turns out, in fact, to be difficult to model, to quantify, to anticipate; and, therefore, to ensure. Let’s stop believing that the statistical modeling of climate change will make it possible to quantify and therefore control the insurance of this risk; let’s stop believing that the financial markets, through their innovations (such as “catastrophe bonds”), will be able to support private reinsurers in need of capital; let’s stop taking refuge behind the idea that capital and people will continue to accumulate in the places most exposed to climate change.
Growing insurability deficit
The warning signs of the crisis had been accumulating for several years, particularly in Europe, with the dramatic floods in Belgium and Germany in the summer of 2021. Forest fires have multiplied, especially in North America. The insurance crisis is therefore global, because it is an interconnected market through reinsurance, the purpose of which is to pool risks, in space and time. The symptoms of the crisis first proliferated in the United States: withdrawal of reinsurers and insurers; increase in tariffs and deductibles; State interventions to make up for a growing deficit in the insurability of property. Concern is rising inexorably among customers, citizens and, therefore, among their political representatives.
You have 54.2% of this article left to read. The following is for subscribers only.