Insurance Insider: Industry Is Underpricing Climate Disaster Risk

A risk modeler employed by a major insurance company is warning that the industry is systematically understating the financial dangers posed by natural disasters, a practice the insider says could destabilize the broader global financial system if a catastrophic event occurs.

The anonymous professional, who evaluates natural disaster risk for properties ranging from private residences to multibillion-dollar commercial real estate worldwide, told the Bureau of Investigative Journalism that internal pressure to reduce loss forecasts is routine. The motivation, the modeler says, is commercial rather than scientific: lower projected losses translate into lower premiums, making the insurer more competitive in a crowded marketplace.

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While the modeler acknowledges that scrutiny of risk models is sometimes warranted to improve accuracy, the concern raised is that revisions are too frequently driven by a desire to artificially suppress prices rather than to produce more reliable projections. The source states that if this is occurring at their firm — which is already struggling to match rivals on pricing — it is almost certainly occurring across the industry.

The warning carries systemic implications. Insurers that chronically underprice climate risk accumulate exposure that is not adequately reserved against. A single severe catastrophe — a major hurricane, prolonged flooding, or a cascading series of extreme weather events — could produce losses that outstrip what those firms are financially prepared to absorb, with potential knock-on effects for reinsurance markets and, ultimately, the wider economy.

The account was originally published as part of the Bureau of Investigative Journalism's Secret Source series, which gives industry whistleblowers an anonymous platform. Continue reading at Business | The Guardian.