Reinsurance rates to climb on double whammy of climate change, market conditions

THE cost of insuring natural catastrophes will rise as the frequency and severity of natural disaster increase in the next few years, said Achim Kassow, a management board member at reinsurer Munich Re.

Exacerbating the price pressure are market volatility, rising inflation and interest rate hikes that are pushing reinsurance rates higher, said Kassow, who oversees Asia-Pacific for the company.

Rising inflation would translate into projection of higher losses, which would in turn lead to higher insurance premiums. 

Geopolitical uncertainty is also pushing risk premiums up across all asset classes, including natural catastrophe bonds. 

However, while prices have gone up, Kassow noted that the availability of insurance in Asia-Pacific, Africa and the Middle East has also increased. 

The German insurance giant has increased its exposure to Asia-Pacific, Africa and the Middle East by 21.5 per cent to 10.8 billion euros (S$15.9 billion) in 2022, from 8.9 billion euros in 2020. 

“The nature of insurance and reinsurance is to take risk. We’re not here to avoid risk. We’re here to take risk. And it’s this part of the world that is exposed to risk,” said Kassow in an interview with The Business Times. 

These regions, which largely consist of emerging markets, have typically been underinsured due to a lack of insurability, awareness and affordability, even though these are the areas more vulnerable to the effects of climate change. 

A recent separate report by Munich Re found that out of US$7 billion in overall losses incurred by natural disasters in the Asia-Pacific region in the first half of 2023, only US$3 billion was insured.

Kassow said there is a strong investment case and a clear view on how to price risk in these regions. 

Pricing risk, he said, could eventually provide guidance to policymakers on the best climate mitigation or prevention measures. 

Insurers typically price natural catastrophe risk using data on the types and causes of natural disasters, including their frequencies and severities.  

To make societies more resilient to natural disasters resulting from climate change, data such as potential flood zones or the risk of heavy precipitation are required. 

“With the level of data that you provide, you could then argue, if we were to invest an amount of X, we would basically avoid future losses, or a social cost to societies in the amount of Z,” said Kassow. 

He added that studies have shown that every dollar invested globally in mitigation measures leads to two dollars in saved infrastructure investments. 

“(By providing prices), reinsurers, insurance companies could provide guidance to policymakers where the investment would yield the highest return basically by just avoiding future losses,” he said.

“I think in quite some places in Asia, we still need to work on mitigation measures, rules, where things can be built, how things can be built.”

Although emerging markets are more exposed to the risk of climate change-induced natural disasters, Kassow pointed out that it’s not necessarily the case that insurance needs are more expensive in those markets.

Cheaper labour costs in emerging markets, for example, could mean that the size of the loss is lower compared to more developed markets.