Lloyd’s of London: charging a premium for climate risks

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Understandably, insurers dislike destructive periods such as the US hurricane season. But at least they have plenty of experience modelling property risks in areas of the world prone to such disasters.

As the insurance market Lloyd’s of London points out, less costly but highly unpredictable events such as wildfires and extreme heatwaves bring bigger headaches. Climate change is increasing their frequency. This is driving up insurers’ underwriting risks, lowering returns on equity.

Lloyd’s has warned insurance prices in Europe will have to rise over the next two years as the industry responds to events such as this summer’s wildfires. Returns should improve in parallel. But premiums cannot rise indefinitely as the world heats up.

Investors across multiple sectors are underpricing climate risks, Lex argues. The insurance sector is a prime case study. Some — but not all — insurers and reinsurers have yet to include climate change in their stress testing.

Floods, wildfires and other climate-linked weather events accounted for on average 56 per cent of total insured losses across the industry between 2018 and 2022, according to Moody’s Investors Service. Catastrophe losses have been above average for six years.

This has resulted in five-year average returns on equity for reinsurers fluttering around a paltry 5 per cent for the past three years, the lowest levels in more than a decade.

Reinsurers and insurers are pushing through price increases to improve their returns. Lloyd’s said insurance and reinsurance prices rose 9 per cent in the six months to June 30. That helped its underwriting profits to more than double to £2.5bn.

In the US, the industry is adapting faster. There, reinsurance prices have risen 20 to 40 per cent in the past 12 months or so, says Lloyd’s. In Europe, prices have increased by much less, just 10 to 12 per cent.

Even so, some insurers in the US have begun withdrawing from areas that are increasingly affected by climate change. Others will no doubt follow.

If these trends persist then governments will find they must step in where climate change has caused insurers to retreat.

Can insurers cover every catastrophe risk due to climate change? The Lex team is interested in hearing more from readers. Please tell us what you think in the comments section below.