In a new report, ratings agency Fitch says climate change is driving the development of the catastrophe bond market as demand for protection increases and capital markets provide an effective source of reinsurance against catastrophic weather-related events.
While the reinsurance market faces challenges from macro factors such as inflation, a lingering threat is that “weather-related catastrophe losses are likely to increase as the climate continues to change,” explained Fitch Ratings today.
Reinsurers are building their risk mitigation capacity to better manage the complexity and uncertainty surrounding climate change, says Fitch.
They are also reassessing risk modeling and disaster management frameworks as they seek to quantify potential losses from natural hazards for underwriting, pricing and capital pricing.
Of course, this also means focusing on retrocessional reinsurance and using third-party capital to manage catastrophe exposure and the uncertainty around weather-related events as well.
For this reason, Fitch Ratings says, “We expect the catastrophe bond market to continue to grow given the increase in catastrophic events in the context of climate change.”
Further market momentum for catastrophe bonds is expected in Asia, which is the focus of the report.
But so is the rest of the world, where reinsurance companies and insurers are also grappling with the uncertainty and volatility of weather-related claims and looking to bolster their protection against them.
“Demand for bonds issued via private placement by ILS is on the rise,” Fitch said, with regular injections of capital into the reinsurance sector via ILS instruments now being seen in Asia.
“Reinsurers are likely to face ongoing disaster risk mitigation challenges as climate volatility increases,” which the rating agency says will continue to drive bond activity disasters, as a tool for reinsurers to mitigate exposure to climate risk.
While reinsurers in Asia are well capitalized, Fitch sees them increasingly turning to capital markets for reinsurance and retrocession support, particularly to help manage exposure to climate risk, it seems. he.
Of course, climate change is not the only driver of the insurance and reinsurance market’s desire to better protect and insulate itself against regular and serious natural disasters, it is also the historical recent claims history and the availability or cost of cover alternatives, particularly in retro markets. .
But, as concerns about weather-related climates and natural losses grow, catastrophe bonds are likely to be seen as an effective tool to secure the capacity of capital markets that can cushion the financial effects of weather-related disasters. climate.
When Fitch talks about driving the development of the catastrophe bond market, it really means in terms of usage and volumes issued.
However, we strongly believe that climate change will drive market development in the direction of providing better climate-related ILS risk transfer solutions, as well as potentially longer-maturity instruments that can also provide capital to protect against the onset of climate change.
At the heart of the matter, risk transfer supported by capital markets has a key role to play in supporting climate change adaptation and mitigation efforts. We therefore anticipate that risk transfer instruments will be integrated into the climate response of countries and companies around the world.
The catastrophe bond certainly has a role to play here, providing effective risk capital to help financially protect and absorb climate risk exposures.