Natural disasters… no more ostrich syndrome

In an industry where reinsurers are constantly commenting on the fact that rates are somewhat soft in the market, a number of insurers and re-insurers have released claims statistics where the amount of claims paid as a result of natural catastrophes – when compared to 2015 – is frightening.

This once again raises the debate in the industry as to whether we are moving towards a cycle of hard risk pricing and whether insurer’s hands are being forced in this regard.

Global worries
Swiss RE reports that total economic losses from natural catastrophes and man-made disasters amounted to $175 billion in 2016, almost twice the $94 billion seen in 2015. Global insured losses from disasters were $54 billion in 2016, up from $38 billion in the previous year.

The losses in 2016 – both economic and insured – were the highest since 2012 and reversed the downtrend of the last four years. This was due to a high number of sizable disaster events, including earthquakes, storms, floods and wildfires in 2016 across all regions.

Some events struck areas with high insurance penetration, which accounted for the 42% increase in insured losses. That also means that many people in those areas were better equipped to recover from the shock of a disaster, for example with prompt settlement of their insurance claims.

Running the numbers
Globally, there were 327 disaster events in 2016 of which 191 were natural catastrophes and 136 were man-made.

Swiss RE points out that as in the previous four years, Asia was worst hit in terms of the number of disaster events, 128, and resulting economic losses, which was estimated to be approximately $60 billion.

On the local front
In announcing its results, Santam noted that the group paid out R16.1 billion in claims over the period, including more than R500 million in claims for catastrophic events such as flash floods and hail storms.

Santam added that following the severe drought conditions during the 2015/16 crop season, which resulted in lower production, the crop insurance business showed significant growth of 17%.

Gross drought claims of R231 million were incurred during 2016. The crop business achieved a net underwriting profit of R69 million (2015: R131 million). “This was as a result of disciplined underwriting and fewer hail-related claims during the crop season due to the drought.”

The drought may have also had an impact on the life insurance industry. Liberty recently released its claims statistics and showed that the suicide rate among farmers in farming areas across South Africa is growing because of the tough economic conditions that they face.

Relief or peril?

After one of the worst droughts to hit the country in over a century, South Africans – and farmers in particular – were delighted by the news that South Africa could be facing a La Niña cycle which promises plenty of rain. But when does relief turn into peril? There were also many severe precipitation events in 2016, which in turn triggered major flooding over large areas.

The Swiss RE report shows that at the end of May and the beginning of June thunderstorms, torrential rain and flooding hit France, southern and central Germany and Belgium, leading to combined economic losses of $3.9 billion, and insured losses of $2.9 billion.

In China, there was extensive flooding along the Yangtze River basin in July. The economic losses were estimated to be $22 billion, making it the costliest Yangtze River flood event since 1998. Here, however, with low insurance penetration, the insured losses were just $0.4 billion.

What is startling about the Swiss RE results is the difference between economic losses and insured losses. While small in developed markets, it shows that there is a trend of a widening insurance gap. This will be more pronounced in South Africa where the uninsured gap is high, and by all indications growing. If South Africa was affected by significant floods, what would the country’s economic and insured losses be? We are once again reminded of the critical role we as an industry are playing in the bigger economy.