“Insured natural catastrophe losses hit USD 125 billion in 2022, with about half from Hurricane Ian. But Ian was no fluke storm. Its high cost stems largely from its landfall in fast-growing coastal Florida. Rising exposures in places like this, coupled with surging economic inflation, send a clear signal to re/insurers: We must remain vigilant so we’re well-prepared when nature throws even more our way,” writes Urs Baertschi, Chief Executive Officer, Property & Casualty Reinsurance at ICMIF Supporting Member Swiss Re.

We are pleased to share this guest blog from Urs, which is reproduced here for the benefit of ICMIF members with permission from Swiss Re. The article was originally published in April 2023.

Insured natural catastrophe losses hit USD 125 billion in 2022, with about half from Hurricane Ian. But Ian was no fluke storm. Its high cost stems largely from its landfall in fast-growing coastal Florida. Rising exposures in places like this coupled with surging economic inflation – as we document in our sigma publication “A perfect storm” — send a clear signal to re/insurers: We must remain vigilant so we’re well-prepared when nature throws even more our way.

We’re coming off consecutive years where insured natural catastrophe losses exceeded USD 100 billion. These numbers are above the annual GDP of most countries, but as high as they are, they’re still shy of the record USD 144 billion loss figure our industry recorded in 2017.

For six straight years now, we’ve seen above-average losses. This re-affirms the 5-7% annual growth trend in catastrophe-related insured losses over the past three decades. The natural catastrophe protection gap is more of a chasm, since less than half of the USD 275 billion of global economic losses incurred in 2022 were insured.

As we consider the magnitude of these losses, in both financial and human terms, it’s important to note that in most cases they weren’t the result of truly historic weather events. The hail-laden convective storms that hit France, last year’s South African and Australian floods, and Hurricane Ian on the US Atlantic Coast were all powerful in their own right, but their dimensions actually fell on the spectrum of what we might expect in any given year.

As Swiss Re’s latest sigma illustrates, the continuing trend toward elevated global insured natural catastrophe losses is being fuelled by forces that may not make headlines like a “storm of the century”, but which are equally as powerful: Increasing exposures from valuable assets that accumulate rapidly with economic development, urbanisation and growing populations.

Amplified hazards

Often, these activities take place in areas with a long history of vulnerability to natural hazards. Much of the development and population growth in recent decades has come in coastal regions, increasing exposures to their unique perils: Storm surges, hurricanes, cyclones, among other threats.

Rising exposures in risk-prone places, combined with external factors like soaring economic inflation that’s returned after a decades-long absence in the wake of the pandemic and Ukraine war, will result in costlier future events. At Swiss Re, we expect the trend of annual losses to continue, assuming warmer, wetter climate fuels more frequent, more severe weather.

As re/insurers, we must always consider the potential for severe catastrophes to strike simultaneously, as we’ve observed in recent weeks.

After all, there is no seasonality to earthquakes: Just as a destructive series of deadly temblors shook southern Turkey and Syria in early February, killing more than 50,000 people and reducing much of the region’s infrastructure to rubble, New Zealand in the southern hemisphere was hit by flooding caused by an atmospheric river and then, weeks later, Cyclone Gabrielle.

Here to stay

Another important conclusion we must draw from the natural catastrophe loss trend we’ve observed since the early 1990s is that we must not be lulled into complacency by any single year, or even several years, where we might experience below-trend loss growth. Consider 2012 to 2016, a period when natural catastrophe activity was temporarily more benign – only to be followed by six years when things went in the other direction.

With this in mind, it’s increasingly important for re/insurers to better leverage risk data in order to improve our understanding of escalating risks posed by evolving natural and macro-societal hazards. It’s critical we proactively update industry models to accurately reflect dynamic, interrelated trends like economic growth, the increase in built-up land and vulnerability changes like the proliferation of solar panels in storm-prone regions.

The good news is that most natural catastrophes can be modelled. And if they can be modelled, they can be appropriately priced. This is key, since we’re only now emerging from a period in which an overabundance of capital and capacity fuelled by low interest rates led to a softer reinsurance market. Now, programme structures, wordings and rates are being updated to better reflect the severity of risks that reinsurers are taking on.

Risk awareness reloaded

We’re finally seeing a long overdue shift in risk awareness. We’ve seen some capacity providers pulling back, holding out for better alignment of pricing and anticipated losses. We expect a healthy trend toward more sustainable pricing to continue into 2023, as attachments and rates move up in coming renewals.

Following recent challenges navigated by reinsurers on numerous fronts – costly catastrophes, but also social inflation and ultra-low interest rates that until recently weighed on investment returns – our industry’s increased emphasis on covering cost of capital has a clear objective: Ensuring we can continue to fulfil our role as society’s shock absorber.

Such measures will bolster reinsurers’ performance while ensuring we remain a key participant in supporting effective long-term adaptation to climate change. We do this in numerous ways, including via underwriting policies aimed at helping enable a global transition to net-zero emissions by 2050. Our asset management activities are important, too, as they enable us to dedicate capital to projects designed to future-proof our built environment for threats to come.

With the trend of elevated global insured losses from catastrophes expected to be here to stay, our industry has a responsibility to help educate the broader public, including policymakers, about the necessity of incorporating appropriate risk awareness and prevention strategies into their decision-making. By acknowledging growing exposures and responding swiftly, we can fulfil our mission of creating a more resilient society that’s well prepared for the years to come when nature may throw even more our way.