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Global insurers take $28bn catastrophe hit

18 March 2008 Gareth Stokes

Leading global re-insurer Swiss Re released its latest sigma study titled “Natural Catastrophes and man-made disasters in 2007” recently. The study investigates the impact of 142 natural disasters and 193 man-made disasters which occurred during that year. And “although 2007 was not an exceptional year in terms of either fatalities or losses” there is a definite trend toward an increase in both the number of catastrophic events and the cost associated with such events.

For the purposes of the report a natural catastrophe is defined as any event triggered by natural forces. Man-made disasters include any loss event triggered by human activity. The minimum loss incurred before either event is included in the report is $82.2m (although shipping, aviation and other property claims have slightly lower thresholds). There have to be 20 dead, 50 injured or 2 000 left homeless before a casualty event is included in the report.

The majority of catastrophe-related economic losses in 2007 related to flood damage. The report concludes that economic losses from catastrophes exceeded $70bn for the year. More than 20 000 lives were lost and insurers had to cough up almost $28bn in insured losses for the period.

An African disaster in the top five ‘victim’ catastrophes

Four of the top five ‘victim’ catastrophes in 2007 were weather related. India, which is one of the most populous regions in the world, suffered the three largest catastrophes in this category. In July heavy rainfall resulted in 1 500 people declared dead or missing in Bangladesh. A month later monsoon rain, flooding and landsides caused 678 deaths in the same city. The largest loss recorded in the year occurred when Cyclone Sidr hit the Indian capital leaving 4 234 victims in its wake. North Korea recorded the fourth largest ‘victim’ catastrophe with 600 perishing in floods as a result of heavy rainfalls in August.

Africa crept into fifth position on the list with the most significant man-made ‘victim’ catastrophe for the year. Riots and arson in the wake of the Kenya’s disputed elections had resulted in approximately 600 deaths when the report was compiled. The event will probably move higher on the list after a full ‘body count’ is made.

The report also reveals how costly a single event can be to the industry. The list of largest insurance losses was headed by winter storm Kyrill which battered a number of European countries (including Germany, the UK, the Netherlands and Belgium) with winds of up to 190km/h. The storm caused damages in excess of $6.097bn. Position two and three on the list were occupied by massive rainfall and flooding in the UK. The first event costs $2.488bn with the second coming in at $1.991. The single largest event in the US was put at $1.1bn due to urban forest fires in California.

Property insurers hardest hit

Property insurers suffered the largest losses. The report reveals that: “Property insurers paid out losses in excess of USD 23bn for natural catastrophes… This shows that loss to property is by far the largest contributor to insurance losses.

An analysis of catastrophes by region shows that Europe was hardest hit in terms of insurance losses. The country paid out $12.431bn (or 45.1% of the total). The US was the second hardest hit, paying out $8.767bn. Asia, meanwhile, suffered the most catastrophic events at 146 (43.6% of the total). These statistics indicate the difference in development in the Europe and the US compared to Asia. While Asia suffered the most floods, storms and other events the insured property in the region pales into insignificance when compared with the world’s economic powerhouses.

Tougher times ahead

2007 was not a record year for insured losses. In fact it was fairly mild compared to 2004 when insured losses topped $100bn. But experts warn tougher times are ahead. Rudolf Enz, one of the authors of the study noted that: “Long-term figures indicate a steep upward trend, particularly in flood losses. Since 1970, losses have risen annually by an average of 12% (7% when adjusted for inflation). This translates into a doubling of the nominal burden in just over six years.” He believes insurers will have to work hard to adapt their models to reflect this data. A major problem is that most flood loss models “rely heavily on data from the 1960s to the1980s, when the incidence of flooding in Europe was below the norm.” The obvious risk is that flood frequencies are too low in most flood models.

The report also found that insurers would have to “focus on the transfer of catastrophe risks to the capital markets.” The industry is working on creating transparent indices outside the US. “Under the guidance of the CRO Forum (Chief Risk Officer Forum of the Geneva Organisation), the insurance industry in Europe has launched an initiative aimed at developing loss-based indices for Europe,” read the report.

Editor’s thoughts:
South African catastrophes only warranted brief mentions in the report. A fire at St Helena mine in Welkom caused 23 deaths and is listed in the ‘victim’ catastrophe section. And 22 deaths due to cold and frost in the Eastern Cape also got a mention. Are you aware of any catastrophes which cost the South African insurance industry more than $82.2m in 2007? Add your comment below, or send to gareth@fanews.co.za

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