Monetary Policy and Climate Change are Interconnected

Insurance blog Artemis has a great post from a few days ago titled Reinsurers (and ILS) may underestimate climate change exposure: S&P.

The first paragraph says it all (emphasis mine):

“Ratings agency Standard & Poor’s performed some analysis on the global reinsurance sectors exposure to climate change and found that, under a scenario it tested for, reinsurers may be underestimating their exposure to catastrophe losses by around 50%.”

This article confirms what I have long suspected. Reinsurers are more exposed to climate change than their rates would reflect. Living in a ZIRP environment is causing investors to chase yields into instruments like Insurance Linked Securities (ILS) with no clue as to the type of risk they are taking. I think the idea of alternative risk transfer has merit and that it is a great financial tool, however, I bet very few investors understand what they are buying and I question the incentive structure of reinsurers.

What’s the difference between packaging subprime mortgages and packaging the equivalent of “subprime” insurance risk? If a reinsuer can simply collect a spread but pass off all or the majority of their risk then their underwriting standards can (and will) quickly become compromised. Caveat emptor.

Solar subsidies vs oil subsidies Is Missouri the next Venezuela?