As common as a billion-dollar climate catastrophe
The rising frequency and severity of extreme weather events is raising questions about the long-term sustainability of traditional natural catastrophe risk transfer mechanisms such as insurance and reinsurance. Last year, it turns out, was another chart-topper insofar economic and insured losses caused by floods, hurricanes and wildfires, among other natural disasters and manmade.
Global reinsurer, Munich Re, said that natural disasters caused total economic damage totalling around US$280 billion in 2021, with insured losses of approximately US$120 billion. These statistics were dominated by weather-related disasters, with the most costly events takin place in the United States. The reinsurer reported that this was the second-costliest insured loss year ever, tying with 2005 and 2011, but not as bad as 2017. The Swiss Re Institute, meanwhile, estimated total insured losses from global catastrophes at US$112 billion, with around US$105 billion of that total being due to natural catastrophes. And Aon, a leading global professional services firm, reported US$343 billion in global weather and catastrophe-related economic losses last year, up from US$297 billion in 2020.
Adapt and respond, or cough-up for mega losses
Estimates of catastrophe damages vary from one insurance stakeholder to the next due to the difficulty in accurately assessing and costing the losses caused by the hundreds of catastrophe events that take place globally each year. Insurers and reinsurers follow their own methodologies for compiling their loss estimates, including different qualifying criteria before ‘counting’ a loss event and different models for estimating property damages. Each report also warns that the published losses are based on preliminary estimates of property damages, and therefore subject to change.
Aon’s 2021 Weather, Climate and Catastrophe Insight Report contained 401notable disaster events last year. The report is aimed at assisting business leaders to quantify and qualify catastrophe-related risks and assess how their organisations can increase resilience in response to climate change. The firm concluded that there were 50 instances of disasters exceeding US$1 billion, with only 20 such events reaching the US$1 billion insured losses threshold. Among their findings, which were in line with those in other global catastrophe reports, is that a significant portion of such losses are uninsured.
“Clearly there is both a protection and innovation gap when it comes to climate risk,” said Eric Andersen, president of Aon, in a media release to coincide with the report launch. “As catastrophic events increase in severity, the way that we assess and ultimately prepare for these risks cannot solely depend on historical data; we need to look to technology like artificial intelligence and predictive models that are constantly learning and evolving to map the volatility of a changing climate”. The insurance gap, which sits at around 50% to 60% in developed economies and as high as 90% in developing countries, is cause for concern given the quantum of the losses in question. The insurance gap is defined as the ratio of uninsured losses to total economic loss.
A single hurricane tops US$50bn in property damage, easily!
According to Munich Re, Hurricane Ida was the costliest natural catastrophe loss event in 2021, causing overall losses of around US$65 billion, with just US$32 billion covered by insurance. Europe also suffered a US$54 billion ‘hit’ due to widespread flash flooding that occurred after extreme rainfalls across the region. Germany has already labelled these floods as the “costliest natural disaster on record” for that country. The reinsurer observed that many of the weather catastrophes playing out over the past few years fit in with the expected consequences of climate change. To support this, it turns out that 2021 was the world’s sixth-warmest year on record, with land and ocean temperatures at 0.84C above the 20th Century average.
Southern Africa was not spared the effects of climate change, with three notable disaster events in 2021. These included Cyclone Eloise in January 2021 with an estimated economic loss of more than US$90 million; flooding which cost the economy around US$75 million; and wildfires in the Western Cape in April 2021 that caused a total loss of around US$100 billion. This loss remains some way off the Knysna Fires of 2017, which caused around ZAR3.3 billion in total losses, or US$230 million at the time.
South Africa’s biggest 2021 loss struck from left field courtesy the ZAR50 billion or US$3.5 billion cost of a July 2021 looting spree that afflicted parts of KwaZulu-Natal and Gauteng. Nature, in our case, has some way to go to catch up with the destructiveness of socioeconomic factors such as inequality and poverty. PS: The writer believes that the root causes of this man-made catastrophe extend way beyond the two factors just mentioned.
More, worse extreme weather losses to follow
“Many global communities are exposed to increasingly volatile weather conditions that are in part enhanced by the growing effects of climate change,” said Steve Bowen, meteorologist and head of Catastrophe Insight at Aon. “This includes record-setting episodes of extreme temperatures, rainfall and flooding, droughts and wildfires, rapidly intensifying tropical cyclones and late season severe convective storms”. Swiss Re echoed this rather ominous warning in the introduction to its latest report, with all reports predicting that weather-related catastrophe losses will be more frequent and severe in coming years.
The report authors warned that natural catastrophe losses were likely to continue to grow by more than global GDP given increases in wealth, urbanisation and climate change. And Ernst Rauch, Chief Climate and Geo Scientist at Munich Re, and head of the reinsurer’s Climate Solutions Unit, went as far as saying that some of the extreme weather events contained in the 2021 disaster statistics were of the kind that will become more frequent or more severe as a result of climate change! Most notably, scientists anticipate that the proportion of severe storms and of storms with extreme rainfall will increase.
Munich Re took care not to brand all extreme weather events with the climate change brush, with Rauch offering the following disclaimer: “Even though [extreme weather] events cannot automatically be attributed to climate change, analysis of the changes over decades provides plausible indications of a connection with the warming of the atmosphere and the oceans”. Concerns over the rising frequency and severity of natural catastrophe events is exacerbated by the relative poor level of insurance against such losses. Globally, almost 60% of 2021 losses were not insured. And that means that communities and / or governments are left footing the bill for costly post-event recoveries.
How to tackle socioeconomic weather threats
The question becomes: How does the insurance industry respond to the growing economic and social threats posed by extreme weather events? “Greater insurance density can help people and countries to better cope with the financial consequences of a disaster and help them return to a normal life; developing concepts in partnership with governments certainly makes sense,” suggested Rauch.
Aside from developing innovative solutions in partnership, insurers and risk managers will have to consider alternatives to risk transfer. Jérôme Jean Haegeli, Swiss Re’s Group Chief Economist highlighted the need for significant investment in strengthening critical infrastructure to mitigate the impact of extreme weather conditions. “The insurance industry [in partnership with the public sector] will be critical for strengthening society’s resilience to climate risks, by investing in and underwriting sustainable infrastructure,” he said.
Aon also advocated for public private partnerships to tackle future weather-related catastrophes. “We can no longer build or plan to meet the climate of yesterday; the path forward for organisations and governments must include sustainability and mitigation efforts to navigate and minimise risk as new forms of disaster-related volatility emerge,” concluded Bowen. And that, dear reader, is a high level way of saying we must think smarter about our risk exposures, and find non-insurance ways to offset losses before they occur.
Writer’s thoughts:
January 2022 has already brought extensive localised flooding to parts of South Africa, coupled with the usual wildfires in the Western Cape. Have you noticed any policy changes or push-back from short-term insurers who are not keen to pay recurring flood-related damage claims? And would you, based on your experience, agree that extreme weather events, and insured losses consequent thereto, are on the rise? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.
