The Impact of Climate Change on the Insurance Market: Challenges and Adaptations

The insurance market is experiencing significant disruptions due to climate change, leading to unprecedented levels of insured losses and raised premiums. Companies are compelled to reassess their risk evaluation methodologies, driven by severe weather events that have highlighted the inadequacies of traditional models. Brazil, in particular, is witnessing a rise in catastrophic incidents previously deemed unlikely, prompting industry leaders to advocate for enhanced education and collaborative efforts within the sector.

The insurance market is facing significant challenges as a direct result of climate change. Although insurance coverage for disasters has existed for years, the increasing occurrence and intensity of extreme weather events demand a reexamination of risk classification models. According to reinsurer Munich Re, natural disasters led to $120 billion in losses within the first half of the year, with a notable 68% attributed to severe weather phenomena such as storms, flooding, and wildfires. During this period, insured losses reached $62 billion, a substantial increase from the $37 billion average of the past decade. Brazil, which historically accounted for only 1.5% of global disaster-related losses, now faces escalating disasters, with recent floods in Rio Grande do Sul incurring damages of nearly R$6 billion. Furthermore, a report by the Swiss Re Institute revealed that 27 disasters in Latin America resulted in $5.1 billion in insured losses and approximately $16 billion in economic fallout in 2023. Around 76% of global insured losses stem from extreme weather events, including costly storms in the United States and unprecedented flooding in Dubai, leading experts to express caution about estimating losses for 2024. Karsten Steinmetz, CEO of Munich Re, warned that the impact of future weather events could drastically adjust projections for losses exceeding $150 billion related to excessive weather events. Swiss Re indicated that it is essential to amend the assessment and calculation of risks to accurately reflect the new realities of climate extremes. Fred Knapp, President of Swiss Re Brazil and Southern Cone, emphasized the importance of educating brokers and clients in adapting to these changes in risk evaluation. He noted the emerging need for a detailed view of risk, especially concerning landslide and other indirect exposures. Insurance costs are rising as well, with the Marsh Global Insurance Market Index reporting a 2% increase in property risk insurance rates in Latin America, predominantly influenced by the events in Brazil. Insurers are compelled to modify underwriting criteria and restrict coverage for specific weather-related events. The introduction of new predictive modeling tools, such as the one launched by Guy Carpenter in Brazil, aims to better assess potential climate risks, providing vital data for estimating financial impacts. Despite facing challenges globally, Brazil’s insurance market remains robust; the National Confederation of Insurers (CNseg) reported functional market conditions with the capacity to handle risks, though there is a need for raising the low coverage rates among properties and small businesses in the wake of increasing climate events.

Historically, the insurance market has had mechanisms in place to cover losses from natural disasters. However, the frequency and magnitude of extreme weather events are escalating due to climate change, creating a pressing need for the insurance industry to adapt its risk assessment models. With mounting losses reported globally, particularly from events linked to climate phenomena, companies are beginning to implement innovative approaches to address these new risks. This evolving landscape not only affects loss calculations but also challenges regulatory and operational frameworks across the industry.

In summary, the insurance sector is facing transformative pressures due to climate change, necessitating adjustments to risk assessments, policy costs, and coverage options. With increasing natural disasters leading to substantial financial losses, it is crucial for insurers to enhance collaboration and education about the climate-related risks they contend with, while also adapting to new market demands for sustainable investing and risk management.

Original Source: valorinternational.globo.com