Catastrophes around the world are expected to cause about US$106 billion (around NZ$147.91 billion) in insured losses on an annual average basis this year, according to extreme event modelling firm AIR Worldwide.
According to AIR’s 2021 Global Modeled Catastrophe Losses report, the 5% aggregate exceedance probability (EP) insured loss (or the 20-year return period loss) is about US$203 billion, and the 1% aggregate EP insured loss (or the 100-year return period loss) is about US$320 billion.
“While there has been justifiable concern about extreme event losses over the last few years, outside of 2017, actual global losses have been below the modelled long-term average,” said Bill Churney, president of AIR Worldwide. “Our report shows that the global insurance industry should currently expect a long-run annual average loss of US$106 billion.
“This notably exceeds the actual average loss of the past decade of approximately US$75 billion, and is a stark reminder that we have been fortunate to not have had a major tropical cyclone or earthquake event in a highly populated region. However, such events can and will occur under the climatic conditions of today, and society must continue to focus on ensuring resilience to the risks of today while also looking forward to how risk may change in the decades ahead.”
AIR has always provided aggregate losses at the 100- and 250-year return period points in the report. However, given concerns about the scale of recent catastrophe losses and the ability of the current suite of near-present climate models to reflect extreme loss potential, the company is now also reporting the 5% EP (or 20-year return period) because losses in excess of US$200 billion are a real possibility. AIR predicts that there is a greater than 40% chance that the insurance industry will experience losses of greater than US$200 billion in the next decade before accounting for growth in property exposure or climate change.
“AIR has been an industry leader in understanding the impact of climate change on atmospheric perils for over a decade,” said Rob Newbold, executive vice president of AIR Worldwide. “While it is certainly important to prepare for the business impacts of climate conditions that may exist in the long term, our clients have stressed to us the reality that most financial decisions are made on a much shorter, under-10-year time horizon.
“We invest significant resources to ensure our models continue to reflect the impacts of our changing climate and provide a view of the zero- to 10-year near-present climate. As the risk continues to evolve, our models will incorporate the latest research on this evolution and our global modelled losses will be updated to reflect this changing risk.”
The report also provided estimates of global economic losses from catastrophes, which highlighted the insurance protection gap. According to AIR’s estimates, global economic losses are about three times higher than insured losses on average. This would correspond to a global average annual economic loss of more than US$320 billion, AIR said.
The percentage of economic loss from natural disasters varies from region to region. In North America, about 50% of economic loss from natural disasters is insured, while in Asia and Latin America, insured losses account for only about 12% and 24% of economic losses, respectively. The portion of economic losses that are insured also varies widely between perils, with coverage for earthquake and flood losses usually much lower than for losses from wind and fire.
“Businesses in all industries, as well as governments, are recognising a need in a post-COVID world to demonstrate their resilience and sustainability to extreme events,” Churney said. “Understanding the potential for global financial losses under current conditions is a requisite starting point, and AIR’s models have successfully helped the insurance industry do this for over three decades.
“The global EP curves generated in this report give companies the knowledge with which to benchmark and manage extreme event risk in the near-present climate for more than 110 countries worldwide, and we look forward to partnering with the industry to provide the metrics and solutions that are most useful in also managing long-term climate risk.”