“Major, but not mega events” vaulted 2018 into top five years of insured losses

“Major, but not mega events” vaulted 2018 into top five years of insured losses | Insurance Business

“Major, but not mega events” vaulted 2018 into top five years of insured losses

Losses stemming from manmade and natural disasters in 2018 may not have eclipsed those seen in 2017, but the year still held its own, ranking as the fourth costliest in Swiss Re’s sigma records based on losses covered by the insurance industry. Total economic losses from disasters were estimated to be US$155 billion, down from the more than twice as much US$350 billion seen in 2017. Meanwhile, global insured losses from catastrophic events were estimated to be US$79 billion, which is higher than the annual average of the past decade.

“2018 was a significant step down, in terms of the severity of economic and insured losses, from 2017,” said Thomas Holzheu, Swiss Re’s chief economist for the Americas. “Nevertheless, it was the fourth highest year in terms of insured losses, so, in that respect, it’s an interesting year because it was not [a result of] a single or a series of mega-cat events, like we had seen in 2017 with big hurricane losses. [Rather], it was the accumulation of large catastrophes and it was a mixture of events. There were significant hurricanes, with Michael and Florence making landfall in the US, we had typhoons in the Pacific, and we had heat waves, droughts, and wildfires.”

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In fact, 2018 was another year marking major wildfire exposures and losses in the US, added Holzheu. The Camp Fire turned out to be the biggest wildfire loss in history and it was also the largest insured loss of the year.

“It shows that among the experts in the industry what you would consider secondary perils are again moving up in terms of importance, and a larger number of major, but not mega events accumulates to a very significant overall loss exposure,” said Holzheu.

A silver lining to the losses was that a larger-than-average proportion of them came from the US, which was part of the reason that almost half of the losses were insured.

“If you look at a historic longer term context worldwide, this is usually more around 70% that’s uninsured and only 30% that is covered,” said Holzheu. “One of the main reasons for that is that a lot of losses happened in the US where insurance penetration is higher, but then also wildfire losses are better covered than flood losses or earthquake losses that were more prominent in other years.”

Swiss Re however also identified the vulnerabilities that contribute to natural catastrophe exposures, namely a higher concentration of people, the ongoing development and popularity of coastal properties, and the fact that people are living in areas with more wildlife.

“The growth in exposure is driven by human activity to a large degree. We do have a climate-driven phenomenon of longer wildfire seasons that start earlier in the year and last longer. This has to do with temperatures and then also related to that, there are larger such events,” explained Holzheu, adding that nonetheless, “The main driver is the fact that human [and] urban development grows into this urban-wildlife interface.”

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Because land is running out in less exposed areas, a lot of development is moving into higher risk zones that, for example, leave homes and businesses surrounded by vegetation prone to turning quickly into kindling. This situation is repeated when it comes to hurricanes and windstorms, where the exposed areas globally tend to be places where economic development is strong.

“We see more population growth and economic development in the US in coastal zones, and also in the southwest of the US where earthquake exposures are high,” said Holzheu, adding that exposure also increases as manufacturing and other economic activity moves outside of the developed world and into Asia. “It happens to be that a lot of these economic development regions are coastal areas where you have windstorms, and often also flood or earthquake exposures. A lot of the exposure drivers are again related to migration and economic activity that happens to move and shift towards higher risk zones.”