Money & Banking

Cyclones, severe weather drive century’s global insurance costs

Vinson Kurian | | Updated on: Jan 28, 2022

**YEARENDERS 2021: ENVIRONMENT** Mumbai: A signboard blown away by Cyclone Tauktae near Gateway of India in Mumbai, Tuesday, May 18, 2021. (PTI Photo/Shashank Parade) (PTI12_14_2021_000006A) | Photo Credit: -

Climate disasters account for as much as 98 per cent 

US-based insurance giant Aon has assessed that natural disasters have inflicted insurance losses of $130 billion in the year just past (2021) well above the 21st century average of $74 billion and median of $66 billion, and 18 per cent higher than in 2020. 

Aggregated costs for insurers have been largely dominated by the tropical cyclone and severe weather perils this century. The two perils combined for more than $1 trillion, or 60 per cent of the total cumulative industry losses, of which roughly 74 per cent was reported from US. 

Protection gap at 62 per cent

It was also the fourth-costliest year on record for public and private insurance entities; only behind 2017, 2011, and 2005. Roughly 38 per cent of global economic losses were covered by insurance, which translates to a protection gap of 62 per cent, the second lowest on record behind 2005 (60 per cent). 

The global protection gap is the difference between total economic losses and what is covered by insurers. This remains a critical reference point for the insurance industry, financial markets and governments as it highlights the vulnerability of communities and the opportunity for new solutions. 

Weather- and climate-related disasters accounted for $127 billion, or 98 per cent of natural disaster losses, according to the Aon assessment made available to BusinessLine by Global Strategic Communications Council. It was another largely manageable with the earthquake peril.

Expanding insurance cover

Global insured losses have steadily increased in recent decades, Aon observed. Much of this growth can be tied to continued improvement in expanding the number of people with active insurance policies, especially in parts of the world where insurance availability has only recently become more widely available. 

However, the influence of more substantial catastrophe events – especially by perils not previously identified as expected to have a major impact on an insurance portfolio – has resulted in more claims being filed and processed, the Aon report pointed out. 

‘Secondary’ perils, including severe convective storms, wildfires, flooding, winter weather or drought, are more frequently driving annual loss years. Years dominated by ‘primary’ perils (tropical cyclone and earthquake) are occurring with less regularity, though it does not minimise the potential risk. 

Primary, secondary perils

Such a trend suggests that the terms ‘primary’ and ‘secondary’ are increasingly out of step since many of the largest individual ‘secondary’ peril events in the last decade have approached or exceeded $10 billion for insurers. 

The US, which boasts the most robust insurance industry in the world, accounted for 71 per cent of the global insured losses. It was the second year in a row that it topped 70 per cent. The combined US insured loss in 2020 and 2021 was $176 billion, the highest two-year total on record, surpassing 2004/2005 ($174 billion). 

Tropical cyclone, costliest

The costliest peril for the insurance industry in 2021 was tropical cyclone at $39 billion. At least $36 billion of that total came from Hurricane Ida (US) alone. Another very active year for severe weather (severe convective storms) saw insured losses top $30 billion. 

Winter weather was a substantial 436 per cent higher than average following a historic US event in February. The only peril that was well below its 21st-century median was the European windstorm. 

Convective storm peril 

The severe convective storm peril has also increasingly separated itself as accounting for the highest number of billion-dollar events, the Aon report said.

There were at least 20 individual billion-dollar events for the insurance industry in 2021, well above the 21st century average of 12 and the fourth-highest total on record behind 2020, 2018, and 2011. The US accounted for 14 of these 20 events. 

Published on January 28, 2022
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