S&P Report Says Insurers’ Climate Change Concerns are Real

May 23, 2007

A new report from Standard & Poor’s Ratings Services – “Insurers Seek To Weather Changes In The Weather” – stresses that for the insurance industry, “climate’s impact isn’t just a theoretical concern for the future.”

S&P rather cautiously points out that “over the past few years, extreme weather worldwide points to a possibility that a warming global climate trend might increase the likelihood of catastrophic weather events.” The predictable result would be “increased catastrophe losses for insurers, reinsurers, and investors in sidecars and natural catastrophe bonds.”

S&P found that the industry is responding to the situation by “changing how they manage the catastrophe risk in their portfolios, and investors are changing the way they assess these risks.”

According to S&P’s report the world’s scientific community generally attributes the recent increase in “catastrophic weather activity” (despite the relative calm in 2006) “to the sea surface temperature cycle’s current warm phase.” The cycles alternate between 20 and 50 years, and the warm phases “are known to correlate strongly with high cyclone or hurricane activity.” The current one began in 1995, and could last for at least another 10 years, during which “extreme weather conditions might remain, which could result in increased costs to the insurance industry.”

The real “wake-up call” for the industry were the 2004-2005 hurricane seasons, which saw widespread destruction from at least 8 tropical cyclones, including Katrina, the costliest natural disaster ever to hit the U.S. “The unprecedented losses from all of these storms forced insurers, reinsurers, and the modeling firms with which they consult to reassess their assumptions when modeling weather-related risk in the Atlantic basin and refine models to estimate and mitigate that risk more effectively,” said the bulletin.

The immediate effect saw the growth of risk-transfer vehicles -sidecars, cat bonds and “industry loss warranties” – as ways to mitigate the risks. “These instruments, all of which are largely funded by the capital markets, provide capacity while shielding issuers and sponsors from the risk’s direct financial impact,” S&P explained.

The report is available to subscribers of RatingsDirect, the real-time Web-based source for Standard & Poor’s credit ratings, research, and risk analysis, at: www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or sending an e-mail to: research_request@standardandpoors.com.

Ratings information can also be found on Standard & Poor’s public Web site at: www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search.

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