Climate change gives rise to risks and opportunities for the insurance and reinsurance sector. Reinsurers are well placed to diversify risks, thus enabling primary insurers to provide insurance coverage, including for climate-related natural catastrophe (NatCat) risks. Yet increasing insured losses, partly due to climate change, are putting pressure on the availability and affordability of reinsurance coverage. This trend may have implications for the safety and soundness of insurers and reinsurers, as well as for the insurance protection gap.

Based on desktop reviews and interviews with a selection of insurance authorities, reinsurers, risk modellers and insurance brokers, this paper examines the structure of the reinsurance market and the role of reinsurance in the context of climate change –from both physical and transition risk perspectives. It describes regulatory and supervisory approaches to reinsurance pricing and underwriting in this regard, and lays out protection gap implications and how reinsurers can contribute to climate risk adaptation efforts to narrow the gap.

JEL classification: G18, G22, G28, Q28, Q54

Keywords: climate change, insurance supervision, financial stability