The global insurance industry is becoming increasingly vulnerable to climate change as it threatens its ability to manage risk. Higher capital requirements and increase in weather-related claims can seriously affect insurers' capital positions.
The recent devastation caused by Hurricane Harvey and Irma has once again awakened the global climatic threat, which directly batters the insurance market. While it will take time to calculate the actual insured and uninsured loss from the two catastrophes, some initial conservative estimates for the loss to the global insurance and reinsurance market from Hurricane Harvey ranges $20-$50 billion. Other guestimates include $150-$200 cost to Lloyd's of London – the world's specialist insurance market for the damage caused by Hurricane Irma and Harvey.
Does this mean that the global insurance industry is hardening? The market does believe that the international insurance/reinsurance market is beginning to shrug out of the soft mould; the reinsurance market got severely hit during the period 2009-2012 as the world rocked with floods, earthquakes, Tsunamis, draughts etc. It was so bad that a number of big global reinsurance brokers closed shops.
However, beyond 2012, there has been a purple patch in the insurance market globally as no major catastrophic disaster occurred anywhere in the world until recently. Why was the market soft during this sanguine era? It was because new capacity for reinsurance was added and existing reinsurance firms had to lower their rates to remain profitable; hence, it had been good for the insurance industry in general.
However now with the new string of climate changes, there are concerns the reinsurance costs will start climbing once again, and hence, insurance companies can suffer from high reinsurance costs. Whether Hurricane Irma and Harvey will lead to a hardening insurance market, experts say that it is still too early to determine, but the shattering events should give the industry a jolt.
How will this impact Pakistan's insurance sector? In a recent conversation with BR Research, Mr. Tahir Ahmed, CEO of Jubilee General Insurance Limited highlighted that around 56-57 percent of the premium in the market is reinsured and that reinsurance rates are already seen stabalising (See Brief Recording section August 25, 2017 for full interview). The industry relies more on international reinsurance because of two key reasons: one, lack of local reinsurers; Pakistan Reinsurance Company is the only reinsurer in the country. And secondly, the insurance companies are relying more on reinsurance as the increased effective tax rate due to the changes in the tax structure for the industry in 2016 has impeded their ability to enhance reserves. This should keep the local insurance sector vulnerable to the changes in the global reinsurance market.