2024 Global Insurance Market Report Highlights Climate and Geopolitics as Key Risks
In its 2024 Global Insurance Market Report (GIMAR), the International Association of Insurance Supervisors (IAIS) pointed out that natural catastrophes are expected to increase, along with the impacts of geopolitical trends. These issues will likely impact insurance affordability.
“Climate change remains an overarching global threat and a source of financial risk,” the report said.
The report anticipated that climate change is expected to continue. An increase in global warming of roughly 3.1 degrees Celsius during this century is likely, and reducing the global emissions that fuel climate change will be difficult, the report predicted. This will considerably affect the insurance sector, with the expectation that physical, transition, liability, and reputational risks will increase.
“Therefore, climate change as a cause of an overarching global threat and a source of financial risk is increasing,” the report said.
“One of the main effects of climate change on insurers is through the expected increase in [natural disaster] related claims,” an IAIS spokesperson says in an email to Security Management. “As the costs of claims increase, insurers are likely to increase premiums according, affecting the affordability of insurance.”
The report also noted that climate change increases the frequency of certain events, causing insurance providers to feel a strain on their ability to address losses, which could result in insurers withdrawing coverage offerings.
Most insurers (58 percent) that submitted data for the report said that they look at both the effect of climate-related risks on their risk profile and financial position and the impact their organization has on climate change through its operations, investments, and other business activities.
IAIS said it is also working with CLIMADA Technologies, a risk analytics firm, to create a tool that can help analyze the significance of natural disaster risks. The tool would rely on CLIMADA's open source global natural disaster model, which includes data that will highlight the expected impacts that climate change could have on natural disasters.
To assess the potential risks associated with the expected increase in natural disaster-related claims, “as a first step, supervisors need to have the data and tools to understand and monitor insurers’ current exposure” to natural disasters, the IAIS adds. And the second step should be for supervisors to consider how climate change and other relevant developments can affect the cost of natural disaster coverage in the medium and long term.
Having a better understanding of the impacts and significance of natural disasters and their relation to climate change can help supervisors and their clients understand what tools and framework they will need to determine sufficient pricing, underwriting, and risk management. For insurance supervisors, additional insight into changing natural disasters can uncover possible trends in the “availability and affordability of insurance.”
“Furthermore, it can help supervisors understand whether there could be any systemic impact to the sector or a significant part of the insurance sector,” the report added.
The effects of climate change reach beyond the insurance sector, as any damage that a provider does not cover will be felt by governments and the broader financial system, threatening potential financial stability. For example, if an uninsured business is damaged in a natural disaster, this increases the risk that it will be unable to pay a mortgage or back loans to the lender or bank.
The GIAMR also looked at the impacts of geopolitical events on the insurance sector. The report outlined the transmission channels of such risks, which can cause market volatility, affecting investment returns and the liquidity and solvency of insurers; can lead to cyber threats and operational disruptions; result in higher claims, particularly for non-life insurers because of inflation and other factors; reduce policyholders’ disposable income; and influence the cost and availability of reinsurance through higher reinsurance premiums.
“Furthermore, elections and ongoing geopolitical tensions introduce uncertainty and the potential for significant shifts in economic policies,” the report noted. “These factors could worsen debt dynamics and increase protectionism, resulting in negative cross-border spillovers.”
Each geopolitical risk factor affects the insurance sector and on the organizations they insure, according to the GIMAR, with the following focusing on the impacts to non-life insurance:
- Political instability (such as disruptive elections, conflicts, or civil unrest) can lead to higher claims related to property damage and business interruption, which would require adjustments in pricing strategies and would challenge business continuity.
- Trade disputes and economic sanctions can result in disruptions in global supply chain and regulatory challenges, in turn affecting business interruption claims and investment portfolios.
- Military conflicts and terrorism can result in property damage and business interruption claims, which will necessitate adjustments in pricing strategies and operational continuity plans.
- Cyber threats and cyber warfare can lead to increased claims for cyber insurance and higher underwriting risks, as well as the need for enhanced cybersecurity measures and pricing adjustments.
- Regulatory and policy changes (which can generate uncertainty and compliance challenges for businesses) can impact underwriting practices and market access, ultimately leading to higher compliance costs.
- Social unrest and civil movements (such as protests and strikes) can result in increased property damage claims and business interruptions, which would also require adjustments in underwriting and pricing strategies.
- Trade wars and protectionism (which disrupt global supply chains and increase the costs of goods and services) will likely result in higher claims expenses and business interruption, in turn leading to potential premium increases and cautious underwriting.
