In 5 charts: continued high losses from natural hazards in 2022
In 2022, around 45% of USD 275 billion in global economic losses from natural hazards were covered by insurance. We see a long-term growth trend of 5-7% in annual insured losses, mainly driven by rising loss severity of individual catastrophe events.
1. Rising loss severity driving growth in insured losses
Over the last 40 years, medium- to high-severity secondary and high-severity primary peril losses have been driving the increase in annual losses. A breakdown of losses by severity shows that medium (USD 1-5 billion of insured losses) and high severity (more than USD 5 billion) events make up the majority of all insured losses. Additionally, the associated losses are rising faster than those from very low severity events (less than USD 0.5 billion), which occur more frequently. Between 2013-2022, there were on average 70 low severity events each year, yet their contribution to total insured losses was just USD 11.7 billion. During this same period, an average of just two high-severity events each year contributed USD 34.4 billion cumulatively to total losses. Value concentration due to economic development, urbanisation and growing populations – often in regions susceptible to natural hazards such as coastal regions or river fronts – are the main physical drivers of associated losses.
2. 5-7% growth trend of average annual losses set to continue
Insured losses from natural catastrophes have been rising for decades. Since 1992, the average annual growth trend of losses has been 5-7%. There was a dip from 2012-2016, but over the last six years annual average losses returned to the said growth trend. Regardless of year-on-year volatility, we project that insured losses will continue to grow at trend, even when amplifiers such as inflation wane.
From 2017 onwards, average annual insured losses from natural catastrophes have been over USD 110 billion, more than double the average of USD 52 billion over the previous five-year period. Factors contributing to these higher losses are asset value accumulation in areas prone to an extreme weather event and elevated construction costs. In the coming decade, hazard intensification will likely play a bigger role as well as higher loss frequency and severity due to climate change.
3. Two biggest perils account for more than 60% of global insured losses
Losses from individual perils fluctuate year on year, but trends emerge over the long-term. Since 1983, global insured losses from the two biggest perils – tropical cyclones and severe convective storms (SCS) – have been largely stable at 30% each on average. On the east coast of the US, hurricanes originating in the North Atlantic are the main threat to residents and businesses. While rare, this primary peril can incur severe losses when a major hurricane strikes an area of high economic value, urbanisation and population growth, as was the case with Hurricane Ian.
SCS, categorized as secondary perils, occur more frequently and happen all over the world. Typically, losses from SCS are lower than those from primary perils, but in the last decade there has been a notable increase in the share of all SCS to insured losses. Another longer-term trend is the doubling of the share of natural catastrophe insured losses from wildfires over the last 30 years. They reflect the rising risk due to more people living in the wildland-urban interface, particularly in California, and possibly hazard intensification from a warming planet. Meanwhile, losses from primary perils, such as European winter storms and earthquakes, have fallen in the last decade, but neither peril should be underestimated.
4. 2022: one storm, third most expensive North Atlantic hurricane season
Looking at the numbers, the 2022 North Atlantic hurricane season was relatively benign. There were 14 named storms, in line with the 14.4 annual average from 1991-2020. Insurance-relevant storm activity was below forecast with just two major hurricanes of category 3 or higher, below the historical annual average of 3.2 major storms. Yet the 2022 season was the third costliest on sigma records because of one storm: Hurricane Ian.
Resulting in estimated insured losses of USD 50-65 billion, Ian demonstrated that the main driver of losses is a hurricane's landfall location. Ian made landfall in western Florida in late September as a category 4 storm and hit an area that had seen rapid population growth, an increase in built areas and accumulation of physical assets. Since 1970, the population of the Ian-struck area in the Cape Coral-Fort Meyers metro area has increased by 620%, more than the population growth in the state of Florida at +217% and the entire US at +65%.
5. Gap between global reinsurance capital and exposure growth
Historically, large catastrophe events have led to a significant influx of fresh capital for reinsurers. But this did not happen after Hurricane Ian. By the end of 2022, traditional and alternative capital had declined by around 20-25% from year-end 2021. After adjusting for the interest rate impact of mark-to-market losses on fixed income securities, we estimate a decline in capital of around 5%. However, exposures – proxied by GDP in the chart above – continue to rise fast. This has created a gap between supply and demand.
Higher exposures and shrinking risk appetite typically result in rising prices, higher retentions and tighter terms and conditions. The prospect of still-elevated catastrophe losses and constrained capacity come as geopolitical, economic and environmental uncertainties remain omnipresent. These include loss uncertainty in specialty lines related to the war in Ukraine, the threat of a systemic cyber event, and the prospect of a renewed surge in COVID-19. With risks still elevated and higher interest rates raising returns elsewhere, we expect some reinsurers and ILS investors will wait to see proof in re/insurance industry profits before materially increasing capacity.