Climate-related nat cat premiums to grow 50% by 2030: Howden & BCG

“Insurance is the financial bedrock needed to de-risk investments and attract the additional capital necessary to mobilise the climate transition,” Rowan Douglas of Howden said today. To meet this goal, with exposure growing fast, there will be a significant need for more insurance capacity, with a role for the insurance-linked securities (ILS) market in delivering that.

A report from broking group Howden and consultancy BCG suggests that insurance premiums for climate-related natural catastrophe events will grow by 50% by 2030.

The report puts the premiums needed to cover climate-linked catastrophe events at between $200 billion and $250 billion by that stage.

Rising direct losses from climate events are just part of the driver there, alongside accelerating exposure growth, the insurance needed to underpin and support climate related disclosures and governments transferring risk to private markets.

The report explains that, “If insurance providers are to meet the expected increase in demand in a way that remains affordable for customers, then buyers and insurers will need to work together to push for change in several key areas. The more that businesses invest in resilience measures the greater the positive impact on premiums, but to support these initiatives insurers will need to improve their analytical tools and their collection of risk data to ensure that risk is priced as accurately as possible. Reinsurers will also need to be encouraged to increase coverage of local secondary perils.”

Capital and capacity are going to be required to support the world’s transition needs and Howden and BCG are making clear that the industry needs to ready itself to support the need for capacity that they see as coming.

The report from the pair states that over half of the $19 trillion already committed to financing the climate transition through to 2030 will require additional insurance coverage.

“The acceleration in demand means that corporates should engage the insurance industry from an early stage in their climate risk management planning to secure adequate supply of capacity and long-term coverage. This could be a game changer in unlocking climate finance at the speed and scale required,” the pair stated this morning.

With this rising demand and reliance on insurance and reinsurance capacity to support the climate transition, the report authors state that, “These stresses will place unprecedented structural pressure on insurance systems across public, private and mutual markets and there is no guarantee that the market will meet this demand.”

Adding that, “Whilst insurance promises to be a great enabler to unlocking the transition and adapting economies to a new climate era, it will require a paradigm shift in how risk management is prioritised if climate finance is to be deployed and businesses are to secure their futures.”

The report calls for a shift away from annual insurance procurement to a longer-term view of risk and protection.

“Which in collaboration with insurers, could lead to multi-year coverage, public-private insurance solutions and forward-looking analytics as a basis for developing forward curves for risk. This approach will enhance the bankability and insurability of new investments and support businesses to achieve their transition strategy and greater climate resilience,” the report explains.

On the supply side, the insurance and reinsurance market must innovate to deliver the capacity required to support the financing of the climate transition, while also playing a central role in de-risking discussions in the finance community, to strengthen the global response to climate change.

Rowan Douglas CBE, CEO, Climate Risk and Resilience, Howden, explained “Insurance is the financial bedrock needed to de-risk investments and attract the additional capital necessary to mobilise the climate transition. Astute companies are now elevating future insurability to boardroom level discussions because it will be essential to maintain access to capital. The key is developing long-term partnerships with insurers to build shared expertise and trust and optimise future access to scarce underwriting capacity. The alternative is an invitation to climate valuation risk.”

Lorenzo Fantini, Managing Director and Partner, Boston Consulting Group (BCG), added, “Achieving net zero and climate resilience with adaptation strategies is an unprecedented challenge for all economies. Without sufficient insurance to de-risk markets, a smooth transition will be impossible. The insurance market must lead the de-risking dialogue to ensure the insurability and bankability of climate action.”

There are concerns over capacity availability to support the necessary climate de-risking, which is where we expect a growing role for the capital markets.

As insurability and climate become part of the boardroom discussion, the corporate and financing worlds are going to broaden their search for solutions and hedging instruments, securitzation and other capital market standards are going to become embedded in balance-sheet management for those seeking to de-risk their transition efforts.

As investors look to pressure corporates to de-risk, so too will investment managers need to de-risk their own portfolios and insurance-linked securities (ILS) have already shown how this can be achieved.

We’ve already seen use-cases for the catastrophe bond, where large investors are effectively carving natural catastrophe risk out of their asset portfolios, most recently with Gallatin Point, but previously with the real estate portfolio de-risking of giant investor Blackstone too.

Working alongside traditional insurance and reinsurance, ILS products such as catastrophe bonds can be integrated into the range of financial de-risking technologies that corporates and institutions mobilise to support and de-risk their climate transitions efforts.

There are now established examples for how sophisticated risk managers can directly access the capital markets for insurance risk transfer in securitized forms, a trend we have anticipated for well-over a decade and one we expect to continue to grow in importance.

With growing exposure and need for climate-related catastrophe premiums and capacity, the traditional market will also need to lean on the ILS market more, to augment its own capacity and provide the necessary reinsurance and retrocession.

ILS and the capital markets can play a significant supporting role in the efforts to risk finance the climate transition, alongside modern risk transfer techniques such as parametric triggers (something Howden itself has been readying for).

The new report from Howden and BCG makes clear the challenges faced, but also the opportunity to reimagine the financial plumbing that underpins the transfer of climate-linked catastrophe risks, bringing efficiency and capital to support the climate transition.