Weather disaster losses rise as economies grow and climate changes
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At USD 146 billion, economic losses from disaster events in 2019 were lower than the previous two years, due to the absence of severe hurricanes in the US. However, insurance losses were still significant at USD 60 billion, although below the annual average of the previous 10 years (USD 75 billion). Of the insured losses, USD 52 billion were due to natural catastrophes. Disaster events in Asia contributed about half to the global economic losses and about a third to global insured losses. In particular, typhoons Hagibis and Faxai in Japan were the biggest loss events in 2019, amounting to about USD15 billion in insured losses out of USD 21 billion in the Asia-Pacific region.
Both the number of and economic losses from storms, floods and other extreme weather-related events have risen significantly over recent decades. There are many underlying drivers to the rising losses, the main factor points to growing exposures as the world's population continues to rise and, with economic growth, urbanisation and asset values increase. In the 1950s, around 30% of the global population lived in urban areas. Today more than 50% does, and this is forecast to rise to nearly 70% by 2050. Other factors to consider include human-induced changes to land use, deforestation and soil degradation. All of these are relevant to Asia which has experienced fast economic growth and rapid urbanisation over the past decades. In many markets, the concentration of people and assets in urban, coastal areas that are more exposed to weather-related events has contributed to rising economic and insured losses.
Urbanisation puts more people and assets at risk
While proximity of people sparks enterprise and innovation, it also amplifies the loss potential from weather events by increasing the number of people and assets exposed, particularly when risk mitigation measures do not keep pace with the rise in value accumulation (human and physical capital). For example, even small changes in rainfall intensity can lead to strong increases in flood damage in urban areas, because the sealing of surfaces in cities increases the risk of damage from water run-off. If a natural catastrophe hits an urban centre, the resulting losses can be many times larger than in populations more homogenously distributed over a greater geographical area would collectively experience. In fact, Swiss Re Institute estimates that if population density increases by 1 percentage point, economic losses per capita go up by 1.2%.
In addition, many population centres in Asia have developed in coastal areas susceptible to tropical cyclones, storm surges and heavy precipitation. Since 2000 the number of people living in the low-elevation coastal zones which are exposed to storm surge events has grown by about 1.3% annually globally, or 0.8% faster than the overall population. The population growth in such areas has been particularly notable in Asia and Africa. Similarly, between 1990 and 2010, the number of houses in the wildland-urban interface (WUI) areas of the US which are susceptible to wildfires grew by 41%, with 60% of new homes built there.
With growing exposures due to economic development and urbanisation, insured losses resulting from natural catastrophes have also risen over time. This reflects increasing insurance penetration rates (premiums as a percentage of GDP) in different countries. As people become wealthier, they acquire more assets that they want to insure against unexpected losses. Nevertheless, the annual sigma report on natural and man-made disasters shows that economic losses have outpaced insured losses. The protection gap, that is the difference between insured and total losses, has widened in absolute terms over time, but has reduced in proportion. This highlights the ongoing under-insurance of societies even with growth in penetration. It also points to the still large insurance opportunity to fill the gap and build resilience.
Mitigating climate risk – Now is the time to act
The latest sigma on natural and man-made disasters also highlights the role of climate change in driving higher economic and insured losses. As indicated by Professor Adam Sobel of Columbia University, while the full extent of climate change's impact is difficult to predict, lack of proof does not mean that there has been no change. Climate change effects are already showing – warmer average temperatures, rising sea levels due to melting ice caps, more frequent and longer heatwaves, greater weather extremes, and erratic rainfall patterns. We expect warmer temperatures will lead to growing frequency of severe weather events, and that these will make an increasing contribution to rising losses in the coming decades. The impacts manifest most notably in more intense secondary perils events. These are smaller to mid-sized events, or secondary effects of a primary peril. For example in 2019, the heavy rains that came with Typhoon Hagibis in Japan, the storm surge after Cyclone Idai in Mozambique, and monsoon rains in Southeast Asia resulted in widespread flooding.
Yet, we believe weather-related risks remain insurable and the time to act is now. The long-term risk of unmitigated climate change is irreversible "tipping points" and in this scenario, climate change effects could bring the insurability of assets, particularly in highly exposed regions, into question. The industry needs to actively embed and dynamically track the effects of the warming climate, adapting models to a profoundly changing risk landscape so that insurers can respond accordingly. Many of today's catastrophe models are rooted in the past, and do not fully account for rising exposure from increased value concentration in a rapidly urbanising and, at times, more vulnerable world, especially when sprawling into higher hazard regions.
Furthermore, re/insurance companies face climate change risks on both sides of their balance sheets which can have potentially adverse effects on profitability, as well as solvency. On the liability side, the main risk is underestimating insurance premiums due to reliance on historical loss data or incomplete/outdated models. On the asset side, the exposure related to invested assets, including infrastructure funds and insurers' corporate bond holdings, in respect to physical and transition risks. As a first step to sustain profitability, re/insurers need to adjust to today's risk landscape, as represented by current climate change effects, and all other trends.