Further to the publication of the UN Intergovernmental Panel on Climate Change’s (IPCC) report on Managing the Risk of Extreme Weather Events, PwC warns that the insurance industry has work to do.

Bryan Joseph, global actuarial leader at PwC, said: “Despite the relatively few number of hurricanes that have come ashore over the last three years, the insurance industry still faces a number of challenges adapting to extreme weather events.

“The increasing wealth of populations brings a growing demand for insurance products, but this has not been matched by better coverage by catastrophe models and other tools that companies use for rating risks. Insurers therefore are caught in a perfect storm of increasing demand for their products, growing claims costs from catastrophic events and very limited information on which to base their premium rates."

As insurers continue to look to the emerging markets for growth opportunities, PwC advises they be mindful that claims severity is likely to increase in these areas in the short-term and will impact on their long-term underwriting profitability. "The pace at which emerging economies are developing and the large investment in infrastructure means that, even without any increase in frequency of catastrophic events, claims severity will increase," Joseph comments.

"The recent cost of flooding in Thailand, now thought to be as high as US$30bn, is a pertinent example of increased exposure in an emerging economy as a result of continued development and globalisation of production facilities. It is in insurers’ and reinsurers’ interest to encourage the development of better building codes and increased resilience in local construction requirements as this will lower the ultimate costs resulting from extreme weather events.

The changing risk environment also presents new opportunities for the industry. Governments have become increasingly involved in organising and pooling the protection of risks in their local areas, Joseph believes. "The Caribbean Catastrophe Risk Insurance Facility is a good example of where hurricane exposed territories have formed a risk pool to provide local protection from catastrophes by mutualising the first layer of risk. This has given these smaller economies, that are exposed to frequent and severe windstorm risks, the benefit of access to the reinsurance market as a collective and also the ability to access the capital markets via insurance-linked securities.

"We expect other regions or governments to follow suit and the industry would need to consider how to best respond to these developments.”

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