The year 2023 is barely eight months old but the global insurance industry is already looking at losses of $50 billion during the first six months alone, as it battles to cover the cost of natural catastrophes – including a fair share of climate induced disasters.
With the worst of hurricane season still to arrive, the industry is bracing itself for a further financial hit in the short term. Furthermore, the
El Niño weather phenomenon is also predicted to cause even higher global temperatures, bringing more turbulent weather in the future.
The UN Intergovernmental Panel on Climate Change has concluded that even fractional degrees of global warming will lead to more frequent and extreme weather events.
According to a report in the Financial Times, this has been the insurance sector’s worst start to a year since 2011 and is indicative of the looming challenges insurers face as the planet heats up.
Two thirds of the accumulated losses for the first six months of the year – around $35bn – have been attributed to what’s been described as convective storms. These are characterised by heavy rain, strong winds and sharp changes in temperature.
Floods in Europe and New Zealand were also significant factors within the $35bn insurance liability, which was almost twice the annual average incurred over the past decade.
In their latest half-year financial report, the Swiss reinsurance group Re have said that convective storms are “one of the dominant global drivers” of insurance claims. With more extreme weather events being predicted, annual claims surging beyond $100bn could become the “new normal”.
The losses weren’t all caused by natural catastrophes, however, with the rising cost of urban expansion also playing a part.
“The effects of climate change can already be seen in certain perils like heatwaves, droughts, floods and extreme precipitation,” said Jérôme Jean Haegeli, Re’s chief economist. He said it was “high time to invest in more climate adaptation” and that “protective measures” were needed to be taken, if insurance was to remain affordable for properties constructed in high risk areas. Re increased prices for property and catastrophe reinsurance by 20% at the July renewals
“We are part of a system that needs to be economically viable and if society decides to do certain things that lead to climate change, this needs to be priced,” said Swiss Re’s chief executive Christian Mumenthaler.
For the first half of 2023, overall economic losses from natural catastrophes, including uninsured events, was $120bn – that’s more than 40% higher than the average for the past decade. The single costliest disaster was the February earthquake in Turkey and Syria.
With insurers hedging against natural and climate related events, reinsurers are raising premiums substantially due to the spiralling costs associated with these catastrophes – exacerbated by material and labour cost inflation. The knock-on effect has been that direct insurers have been squeezed, meaning higher bills for businesses and households.
Record levels of insurance-linked securities
As it becomes more expensive to insure against natural catastrophes, underwriters have issued record levels of insurance-linked securities in the first half of 2023. These include what’s known as catastrophe (cat) bonds, which pay the issuer for the occurrence of a predefined disaster. Wind events in the United States, like tornadoes and hurricanes, accounted for almost 70% of the total issuance of these securities in the first half of 2023, according to a Reuters report.
But whilst there is a big downside in all this for many, opportunity arises for others. A leading analyst told Reuters that, whilst homeowners faced the prospect of rising annual premiums or simply becoming uninsurable, the increased frequency and intensity of natural and climate disasters would be attractive for investors in major funds – drawn to the promise of higher returns.
Insurers rack up $50bn in losses from natural catastrophes this year | Financial Times (ft.com)
Swiss Re says natural catastrophe insured losses hit $50 bln in H1 | Reuters
