Challenges intensified by growing cost of reconstruction
Discussing the report with Insurance Business, Giovanni Garcia (pictured), SVP of business development of the extreme event solutions business unit at Verisk London noted that this figure is expected to continue to grow, and why the insurance industry should be prepared to experience total insured losses from natural catastrophes in excess of US$100 billion every year. In the last five years, this figure has been US$101 billion, he said, while for the prior five-year-period, it was circa US$70 billion.
What’s driving the increase in nat-cat losses?
Verisk has identified four key drivers behind this increase, he said, and while the natural inclination might be to assume climate change is the most pressing factor, in fact, the number one reason is that people keep building in high-hazard areas. It’s a challenge being accentuated by the fact that the price of reconstruction keeps going up year-on-year.
“Over the last few years, people have been talking about inflation increasing rapidly and there’s certainly been talk about the price of materials and, in particular, lumber, getting out of control,” he said. “It looks like it’s starting to normalise a little bit. The cost of reconstruction through to the end of July of this year – for the last 12 months’ change – is around 4.3%, which is close to being back to normal values.
“But even if we still took that value over the next 10 years, and everything stayed equal, in 10 years’ time a US$100 billion annual loss would be over US$150 billion, just based on that. Yet we think these are ‘normal values’. We are always going to see progression, these values are going to continue to increase. That’s why the number one reason for the increase in losses we’re projecting is that increase in reconstructive costs.”
Climate change takes second place as a key concern, Garcia said, as reflected in recent reports of record-breaking months and years for different weather patterns. Climate is therefore definitely a component behind increasing average annual insured losses with heat patterns and hydrological cycles continuing to see volatility across several regions.
The truth about secondary perils
Perils such as floods, wildfires and severe storms are increasing, as evidenced by Verisk’s report which revealed that, so far in 2023, severe thunderstorms have accounted for more than 70% of insured losses, with eight multi-billion-dollar events. Losses from hazards beyond the ‘traditional’ peak perils of hurricanes and earthquakes now account for a much larger proportion of the overall annual losses, he said, which is due to the combination of more frequent events and more valuable properties at risk.
“We at Verisk have always hesitated when it came to the use of the term ‘secondary perils’,” he said. “Of course, you would see hurricanes and earthquakes, including the recent one in Morocco, cause large losses with significant frequency and they’d grab a lot of headlines. These severe storms and hailstorms may be very local but they happen all the time. Maybe they’re attritional perils but they’ve never been secondary perils to us. And now they’re becoming more prominent.”
Garcia noted that the third core factor behind increasing natural catastrophe annual losses is the natural variability in when these events – both catastrophic and attritional – occur, and how often. The fact that the industry has seen this average figure rise from US$70 billion to US$100 billion could simply be a result of this natural variability, he said, and it’s possible that the world may go through a more benign period over the next five-to-10 years where it sees fewer storms and other weather-related activity.
“And then the last factor is definitely manmade,” he said. “And obviously, that could link to the first factors in some regards. But there are other considerations – including social inflation, regulatory changes, and legal changes – that at a local level may see larger losses. For instance, Florida is certainly one area where we have seen that larger claims are being paid.”
The complexities inherent in each of these individual factors alongside understanding their interconnectivity is an essential consideration for the (re)insurance marketplace, Garcia said. Insurers and reinsurers largely make use of catastrophe models to assess the risks facing the market and to monitor their appetite and capacity accordingly.
“It’s by the use of these models, and also ensuring that the values used in the models are up to date and accurate that insurers and reinsurers can assess the area where they should be able to operate and still make a profit,” he said. “And I think these reports are critical because they give their leadership a contextualisation of the losses that are happening and could occur in future years.”
“But I think what it really highlights is the need to use catastrophe models to manage property-cat around the world – that’s both insurers and reinsurers, but also the brokers that are helping to transfer that risk.”
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