Climate change is expected to have little impact on insurance ratings despite the serious challenge it represents for the industry and the questions it raises for cover affordability as prices increase, Fitch Ratings says.

The ratings firm says the frequency and severity of natural catastrophes is expected to increase but regulators and business partners such as modelling companies and reinsurers offer research capabilities to help the industry step up to the challenge.

“In contrast to liability claims, property losses caused by nat cats settle in a relatively short time period, rarely exceeding two to three years,” it says in a report. “This limits the uncertainty around ultimate losses and the risk of inadequate pricing.”

Reinsurance companies are also important in managing natural catastrophe exposures and can typically diversify their risks on a global scale.

The report focuses on underwriting exposure to natural catastrophe event risks rather than impacts such as heightened regulatory or public pressures to avoid investing or insuring certain industries.

“The industry has various tools at hand to manage this risk effectively,” the company says. “Fitch therefore believes climate change has a minimal impact on the ratings of most of the insurers in its portfolio.”

The European Insurance and Occupational Pensions Authority has published a discussion paper that looks at how to include climate change in natural catastrophe solvency capital requirement calibrations. A final report is due in the first half of this year.

Fitch says the paper shows European Union regulators are concerned about climate change risk for the insurance industry and capital charges for natural catastrophe risk exposures are set to increase in the future, with repercussions for pricing and insurability of risks.

The firm says higher capital requirements would lead to increased tariffs to meet financial return requirements, which may see insurers encountering increasing problems as clients may be unwilling or unable to pay for natural catastrophe protection.

“One answer could be the gradual withdrawal from insuring nat cat risks, triggering the need for state intervention,” it says.

“As is already the case in Florida, for example, governments may decide to provide insurance cover above and beyond what the insurance and reinsurance industry may be willing or able to offer.”