Extreme perception of climate change an opportunity for ILS market: Neuberger Berman

Lauren Crane, analyst in the Insurance-Linked Strategies team at Neuberger Berman, suggests that the extreme perception of climate change may “present an opportunity rather than a threat” to the ILS market.

Writing in a blog on the matter for global asset manager Neuberger Berman, Crane observed that climate change is often cited as the primary reason for insured loss growth.

However, according to Crane, this does not paint the full picture.

She noted that while climate change has a “significant long-term influence” on natural catastrophes, exposure growth and population distribution changes “appear to be the leading drivers” of elevated insured losses.

“Because ILS are short-term exposures while climate change is a long-term trend, we believe the extreme perception of climate change may present an opportunity rather than a threat to the ILS market,” Crane explained.

Citing data from global insurance broker Aon, she said that Severe Convective Storms (SCS) losses from 1900 to 2022 have increased at an annual rate of 8.9%.

“However, the report highlights little change in key ‘atmospheric ingredients’ that influence SCS. Instead, the analysis suggests that the uptick in insured losses associated with SCS has significantly more to do with differences in exposure,” Crane added.

She also stated that the combined impacts of GDP growth, property cost inflation, and population distribution changes amount to an annual 8.6% increase in exposure, “meaning over 80% of SCS loss growth can be explained by exposure changes”.

“Climate change is frequently named as the usual suspect for increasing losses, but year-over-year growth in exposure, driven by construction in high-risk areas and inflation, has had a far greater short-term impact,” Crane wrote.

She concluded that ILS products could experience higher demand as climate risk and exposures rise, “As rising catastrophe losses drive increased demand for protection, and thus potentially advantageous pricing for ILS investors, we believe ILS offers a unique source of portfolio diversification and profitability while promoting sustainability, disaster relief, and global societal resilience.”