Primary insurers have varying levels of exposure to climate risk, with the property and casualty insurance markets in the US and Japan identified as the most sensitive to an increase in natural catastrophe claims, according to S&P Global Ratings report.
The rating agency conducted a country-level analysis on the potential impact of climate change on insurers, focusing on a 10-year average of insured natural catastrophe claims and their effects on underwriting profitability (see TOP 100 Property & Casualty Insures in the U.S.).
In 2023, for the fourth year in a row, global insured catastrophe losses exceeded $100 bn. The trend continues this year: In the first half, losses have reached $62 billion and are tracking well above the 10-year average of $37 bn.
Ordinarily this shouldn’t trouble primary insurers, which can offset some of that risk by buying reinsurance. But it’s getting harder for them to do so. In a world of climate change, inflation and growing property exposure, reinsurers have ramped up their prices and are demanding more favorable terms, such as raising the level at which a policy will pay out.
The numbers show just how much better reinsurers are doing as a result. S&P’s data on the top 19 global reinsurers shows that while their annual share of natural catastrophe losses had historically been in the 20% range, it fell sharply in the last three years, sliding to about 10% in 2023.
The key reason is the reinsurance industry has become more averse to backstopping “secondary perils,” which are smaller but more frequent extreme weather events such as tornadoes, thunderstorms, fires and floods. These localized events are harder for the insurance industry to model and manage, partly because they’re driven by climate change.
P&C insurance markets appear resilient

Most P&C insurance markets appear resilient against a rise in natural catastrophe costs.
In Australia, expected profitability levels remain relatively high, despite significant natural catastrophe costs impacting combined ratios.
In contrast, P&C insurers in the US and Japan show greater sensitivity to increasing natural catastrophe claims, due to a higher proportion of these claims in their portfolios and comparatively weaker underwriting margins (see Re/Insurers’ Survey about ESG Strategy & Climate Risk Modelling).
The US and Japan have the largest natural catastrophe insurance markets worldwide, with insured annual catastrophe losses in the US reaching an average of $66.2 bn, outpacing Japan’s $6.6 bn.
The analysis concluded that most rated primary insurers are unlikely to face negative rating actions from a climate-related rise in claims costs over the medium term, although profitability may become more volatile.
However, insurers in particularly exposed markets could see reduced profitability if they do not take proactive underwriting steps to counteract these effects. The agency does not rule out credit impacts for insurers with less diversified portfolios and higher physical climate risk exposure.
According to Climate Risk & Weather-Related Insurance Losses Review, Climate risk has once again been the catalyst for insurance and reinsurance market change.
Major losses caused by extreme weather events in recent years exceed historical precedent, driven by a myriad of factors from exposure growth and rising insured values to climate change, demographics and even some randomness.
Climate change, ESG responsibilities and cyber risks are just some of the key concerns facing the insurance industry in 2024. Climate change, ESG, cyber and the continuing conflict in Ukraine remain centre stage for the insurance industry, creating both new opportunities for insurers and new challenges from a claims and coverage perspective.
P&C insurers need to adjust pricing & raise deductibles

To offset climate risks, some P&C insurers may need to adjust pricing, raise deductibles, or exclude certain risks.
Insurers might also share risks with reinsurers, a strategy that could shift depending on retention levels and reinsurance structures, particularly given the rise in secondary perils, like hail and convective storms.
These events, typically covered within primary insurers’ retention rates, could significantly impact insurers in concentrated markets if their frequency or severity increases.
In Japan, recent non-life insurer reports show moderate catastrophe losses from events like hail storms and heavy rains, with fewer major typhoons recently.
According to S&P, insurers have responded by raising prices, diversifying internationally, and adjusting underwriting conditions, such as shortening policy durations and increasing deductibles.
P&C insurers will reduce insurance coverage

P&C insurers may also consider reducing coverage in specific areas or ceasing coverage for properties deemed economically unviable. However, widespread withdrawal of coverage is unlikely.
The analysis focused solely on the P&C sector, as S&P Global Ratings perceives significantly lower physical climate risk for life insurers.
Life insurers are less exposed to acute climate risks, and the likelihood of global warming severely impacting mortality remains uncertain and distant at this time.
The U.S. property and casualty insurance sector experienced subdued statutory financial performance, primarily due to a decline in personal lines.
Analytics anticipates a modest improvement in the segment’s underwriting results and profitability in 2024, although risks from catastrophe events and variable loss costs remain.
For 2024, the U.S. P&C insurance sector holds a neutral outlook across both commercial and personal lines, expecting stable or better results, especially with the anticipated recovery in personal auto and steady performance in commercial lines.
Notwithstanding a robust 9% increase in earned premiums for 2024, the sector’s overall performance was impacted by weak auto insurance and higher-than-average catastrophe losses.
FAQ
The US and Japan’s P&C insurance markets are the most sensitive to an increase in natural catastrophe claims, primarily due to a high concentration of natural catastrophe-related claims and weaker underwriting margins.
Climate change increases natural catastrophe costs, which can impact underwriting profitability. While most P&C markets remain resilient, profitability may become more volatile in highly exposed markets without proactive measures.
The US and Japan have the largest natural catastrophe insurance markets, with high average annual catastrophe losses. The US averages $66.2bn, and Japan averages $6.6bn annually, creating a greater exposure to climate risk.
Insurers may need to adjust pricing, raise deductibles, limit certain types of coverage, or share risks with reinsurers. Additionally, insurers might exclude certain areas or properties from coverage if deemed economically unfeasible.
No, life insurers have significantly lower exposure to physical climate risks. S&P Global Ratings indicates that life insurers are less affected by climate hazards compared to P&C insurers.
While most rated primary insurers may not see negative credit actions in the medium term, insurers with higher exposure to physical climate risk and less diversified portfolios could experience credit impacts.
The sector holds a neutral outlook with potential stability or modest improvement in both commercial and personal lines. Challenges remain, particularly in personal auto and catastrophe-related costs, but steady performance is expected in commercial lines.
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AUTHORS: Charles-Marie Delpuech – Associate Director Insurance EMEA London at S&P Global Ratings, Kentaro Mukoyama – Associate Director at S&P Global Ratings in Tokyo, Taos Fudji – analyst at S&P Global Ratings