According to Moody’s Investors Service, reinsurers are increasingly reconsidering their business in natural disaster-prone areas such as California and Florida as losses mount.
Climate change has increased wildfire risk in California, according to Moody’s, while hurricane losses in Florida have already caused a number of reinsurers to reduce exposure. According to the report, the five-year average loss ratios for homeowner insurance in Florida and California are among the highest in the country, at 80% and 117%, respectively.
Many reinsurers “are raising prices, limiting coverage, and even exiting some markets to improve returns,” according to Moody’s analysts such as Danielle Reed. “In order to continue to assume these increasing physical climate risks, they will need to continue to manage their portfolios effectively, look for new opportunities, and price risk appropriately.”
Climate change has increased the frequency and severity of weather-related natural disasters, posing a significant challenge to reinsurers, which absorb risk from insurance companies. According to the report, insured natural disaster losses have averaged around $100 billion over the last five years, with 71% of the losses occurring in North America.
Because not all property is insured, insured losses are distinct from total economic losses.
According to Moody’s, the industry is increasingly focusing on so-called secondary perils such as convective storms and wildfires. Historically, insurers regarded hurricanes and earthquakes as the disasters most likely to cause massive damage, with everything else relegated to a secondary category.
However, these occurrences are causing an increasing amount of economic damage. According to Moody’s, the share of total insured losses attributable to secondary perils has reached more than 60% on average over the last three years.