Insurer Resilience in an Era of Climate Change and Extreme Weather: An Econometric Analysis

Abstract

Having sustained, over the course of more than two decades, record-breaking natural catastrophe losses, American insurers and reinsurers are justifiably questioning the potential linkage between anthropogenic climate change and extreme weather. Here, we explore issues pertaining to this linkage, looking at both the likely short-term implications for the insurance industry, as well as potential longer-term impacts on financial performance and corporate resilience. We begin our discussion with an overview of the implications that climate change is likely to have on the industry, especially as it relates to how catastrophic risks are construed, assessed, and managed. We then present the rudiments of an econometric analysis that explores the financial resilience of the property/casualty (P/C) industry in the face of both natural and man-made catastrophes. In this analysis, we explore the profitability consequences of several illustrative scenarios involving large-scale losses from extreme weather—specifically, a sequence of storms like those striking the U.S. in 2004—and a scenario that explores the prospect of a Katrina-scale storm in combination with a mass terror attack on the scale of 9/11. At systemic levels of aggregation, our analysis suggests a high degree of macro-resilience for the P/C industry. Moreover, we find that insurer resilience is higher for larger impacts, considering both the speed of recovery, as well as the inverse of the area under the unaffected system profile. We conclude with a summary of our findings and a closing commentary that explores the potential implications of these results for P/C insurers moving forward.