Insurers have more to fear from Mother Nature through 2010
Some risks are more difficult to assess than others. A proper inspection of a factory or warehouse at underwriting stage will certainly mitigate the insurer’s risk. But it’s more complicated when insuring against natural disasters. A skilled assessor can easily spot potential flashpoints and recommend corrective action while walking through an insured’s premises, but can hardly be expected to pinpoint the next hurricane, nor predict its severity.
Keith Kennedy, managing director of Mutual & Federal and president of the Insurance Institute of South Africa, says short-term insurers have faced their share of major natural and man-made disasters over the past few years. “A sample of international events since 2006 provides a clear illustration of the challenges the global industry has faced over the past few years,” he said. Natural catastrophes and man-made disasters claimed more than 31 000 lives in 2006, with global economic losses topping $48 billion. In 2007 global catastrophe-related economic losses increased to $70 billion with 20 000 fatalities. And two years ago (2008) insurers paid out $52.5 billion in compensation for catastrophic losses against a backdrop of 240 500 deaths. Things calmed down a bit last year.
2009 – A very good year
Global re-insurer, Swiss Re, has a finger on global insurance and reinsurance statistics. According to the group’s latest sigma study, natural catastrophes and man-made disasters claimed approximately 15 000 lives and cost insurers $26 billion in 2009. In their estimates, the total cost to society topped $62 billion. The good news for citizens of planet earth is 2009 was a good year thanks to a slow US hurricane season. Swiss re said their were approximately 155 man-made disasters and 133 natural catastrophes last year, which proves nature remains the largest risk to insurance companies by a long margin. Of these 288 events six caused insured losses in excess of a billion dollars. Says Swiss Re: “The costliest event was the European winter storm Klaus, which struck France and Spain in January, and led to insured losses of $3.4 billion.”
Global catastrophe losses have been trending higher (in US dollar terms) for some years now. Volatility aside, total insured losses increase by approximately 10% per annum. And although some of the increase can be attributed to inflation, most is due to lifestyle changes. As individual wealth increases so to does the concentration of wealth in high risk areas. Think, for example, of some of South Africa’s more popular coastal holiday areas. Local insurers have described areas of our coast as veritable time bombs should we suffer a freak tidal wave or similar!
It’s up to 2010 to set the record straight
Mother Nature isn’t resting on her laurels and 2010 looks to be another “high loss” year. Thomas Hess, Chief Economist of Swiss Re, says: “The probability that we see natural catastrophe losses as low as those in 2009 is less than 35%!” To back his assertion he points to winter storm Xynthia in Europe and earthquakes in Chile and Haiti. “Given their high volatility, losses could easily be three to five times what they were in 2009,” he says. The record single-year natural catastrophe loss is $120 billion in 2005.
A mistake many insurance players make is to focus on the so-called primary perils such as earthquakes, hurricanes and winter storms and in so doing neglect the dangers posed by secondary perils. Natural phenomena such as flooding, landslides, hail storms, tornadoes, snow and ice storms, droughts and bush fires can cause just as much damage. The bulk of insured loss in the local market is probably due to flooding. “As risk mitigation specialists, it is the social responsibility of all players in the insurance industry to help reduce the economic impact and, more importantly, the fatalities associated with disasters,” says Kennedy.
Editor’s thoughts: Stakeholders in the insurance industry would do well to follow the age old English saying, prevention is better than cure. Financial losses can be significantly reduced by identifying risks at underwriting stage and taking the appropriate steps to mitigate them. Do you think local insurers pay enough attention to risk identification and mitigation? Add your comment below, or send it to [email protected]
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