Number of insurers citing climate change as a key risk booms

Written by Adam Cadle

18/06/2020

Forty-six per cent of insurance firms have cited climate change as a key risk, significantly up from 18% last year, a new LCP report has revealed.

LCP’s analysis of the early Solvency II disclosures of 50 insurers across the UK and Ireland, showed that 30% of insurers identified Brexit as a key risk, down from 60% last year.

A key new risk for insurers is ‘unanticipated coverage’ where they find that they face claims for risks that they had previously believed to be not covered by their policies, particularly in light of the COVID-19 crisis. Insurers are also concerned about ‘conduct risk’ or the risk that regulators will take further steps with major financial implications following the publication of the FCA’s interim report into general insurance pricing practices.

Despite COVID-19 related uncertainty, over half of insurers (52%) did confirm they expected to continue to meet regulatory capital requirements. Forty-eight per cent either remained silent or said there was still too much uncertainty to confirm if they would be able to meet the requirements.

Insurers continue to be sufficiently capitalised with eligible own funds that are, on average, nearly double their Solvency Capital Requirement (SCR) at their 2019 year ends.

Fifty-four per cent of firms mentioned the impact of recent market turmoil on their investment holdings. The widening of credit spreads, decreases in interest rates and falls in equity markets have been key drivers of recent volatility on insurers’ balance sheets. "Although insurers typically have limited exposure to equities, we would expect those that have higher than average exposures to disclose more on the expected impact of recent falls," LCP said.

Seventy per cent of firms with a higher than average exposure to equities have eligible own fund ratios below the average.

"Whilst many of these firms remained well capitalised at their 2019 year ends, high and unhedged exposures to equity markets make them more vulnerable to adverse market movements," the report added.

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