Underwriting actions will mitigate the impact of a surge in natural catastrophes on property and casualty insurer earnings, S&P says.

Insured losses will continue to increase over the long term and climate change will contribute to the volatility of peril frequency and severity, the ratings agency says.

But profitability will only come under pressure if the average cost of natural catastrophe claims doubles and insurers take no mitigating underwriting action.  

“The potential rise in claims is therefore unlikely to significantly affect our view of P&C insurers’ profitability,” S&P says.

Natural disaster claims not covered by reinsurers represent on average about 7% of those paid by primary insurers and “are not the main source of insurance claims for most primary insurers”.

S&P says its outlook reflects “rated insurers’ generally well-diversified loss profiles and our expectations that insurers and reinsurers will continue to have access to reinsurance and retrocession markets to spread the risk”.

It says insurers are likely to use derisking strategies such as adjusting pricing, reducing exposure through higher deductibles or insured retained limits, and sharing more risks with reinsurers.

Insurers can also diversify away from areas in which they cannot offer adequate coverage.  

For most insurers, a climate change-induced rise in claims costs is unlikely to lead to negative rating actions over the medium term, the agency says.

“We do not rule out credit impacts on insurers that are more exposed to physical climate risk and less diversified.”

Private-public partnerships will need to strengthen to address challenges around cost and availability of insurance, S&P says.

“We think most primary insurance markets’ profitability will not deteriorate significantly over the medium term. Even if insurers do not take any mitigating underwriting actions, the resulting 33% increase in the cost of natural catastrophe claims in most countries remains well below the increase that we estimate would make most P&C insurers unprofitable.”

About $50 billion of natural catastrophe-related premium is ceded to the reinsurance industry – about one-third of primary insurers’ natural catastrophe premium, S&P says.