APAC reinsurers have been warned they are set to be tested as ongoing inflationary pressures are compounded by the impact of climate change on their bottom lines.

Rating firm Fitch has published a new report in which it highlights the need for reinsurers  to boost risk mitigation capability to help manage the complexity and uncertainty surrounding climate change.

It added: “For example, Asia-Pacific reinsurers face weather-related catastrophe losses from flooding and drought, such as the major floods in eastern Australia and China in 2022.”

Fitch added: “We take into account reinsurers’ ability to apply appropriate risk modelling in order to quantify potential climate-change related losses. Insured losses have so far been low, despite the cumulative economic impact from flooding, due to a wide protection gap.”

The report warned: “A greater awareness of environmental, social and governance (ESG) issues, particularly extreme weather and natural catastrophe exposure, has led reinsurers to adjust policy terms and conditions, especially in serial loss clauses. More overseas retrocessions are also refining their underwriting positions on fossil fuels, making ESG a higher priority for Asian reinsurers’ underwriting risk assessments.”

Inflation is having an impact according to the report.

“Reinsurance market growth is likely to be hampered by uncertainty from surging inflation and geopolitical risks,” it cautioned. “Persistent inflation is likely to pressure non-life reinsurance claims amid rising vehicle and housing repair costs. Meanwhile, lower economic growth could stifle demand for reinsurance, resulting in continued price rationalisation during reinsurance policy renewals.”

Fitch added Covid-19 pandemic-related claims are likely to linger for the remainder of the year, but analysis expect claim severity to subside as the world continues to adapt.

“That said, the risks posed by persistent inflation could dampen the profitability of the reinsurance market, while weather-related catastrophe losses are likely to climb as the climate continues to change,” It warned. “We believe prolonged high inflation could raise claims and reserve deficiency of reinsurance. It could also slow business growth as purchasing power is eroded, leading reinsurers to focus on price adjustments and underwriting discipline.”

Reinsurers are also boosting risk mitigation capability to help manage the complexity and uncertainty surrounding climate change, fitch noted.

“Reinsurers are re-assessing risk modelling and catastrophe management frameworks to help quantify potential natural-hazard losses for underwriting, pricing and capital setting,” it added. “We expect continued market momentum for catastrophe bonds, with two catastrophe bonds issued in Singapore so far this year. Hong Kong also issued the second insurance-linked securities catastrophe bond sponsored by Peak Reinsurance Company Limited to cover industry losses inflicted by typhoons in Japan.”

The report said reinsurers are likely to face ongoing challenges in catastrophe-risk mitigation as climate volatility rises. The Asia-Pacific region accounted for more than $20 billion in natural disaster losses in first half of 2022, according to Munich Re Group, exceeding the region’s average. Insured losses totalled $8 billion.

“We expect the capital positions of Asian reinsurers to remain commensurate with their business profiles, based on available statistics for selected reinsurers. The quality of shareholders’ equity is sound, consisting of capital stock and retained earnings.”