Study shows North America has biggest increase in weather catastrophes

The results of a study published today by the world’s largest reinsurer Munich Re shows that North America is the region which has seen the biggest increase in weather-related extreme catastrophe events in recent decades. The report looked at weather related perils and incidence trends, finding that North America was the most affected in recent decades and experienced the largest increase in weather-related loss events.

The publication titled ‘Severe weather in North America’ looked at the 1980 – 2011 period, during which time the overall economic loss burden from weather catastrophes amounted to $1,060 billion, at 2011 values. In terms of insured losses, it looks like insurance and reinsurance covered approximately 50% of the losses, totalling $510 billion, or 69% of the global total. According to the study, 30,000 lives were lost in North America from weather related catastrophes during the time frame studied. Hurricane Katrina remains the largest loss during that period, with $125 billion of economic losses, $62.2 billionof insured losses and causing 1,322 deaths.

In undertaking the study, Munich Re looked at both frequency and loss trends caused by different natural weather perils, from an insurance perspective. They found that nowhere in the world is the increasing number of natural catastrophes more evident than in North America.

Over the studied time period the number of weather-related loss events increased by a factor of five in North America, while in Asia they increased four-fold, Africa by 2.5 times, Europe two-fold and South America by 1.5. Munich Re says that anthropogenic climate changes is believed to contribute to the trend although they note it can affect different perils in different ways. They note that scientific findings are in keeping with this, that climate change affects frequency and intensity of certain perils, but note that to date most of the increase in loss amounts is actually down to socio-economic factors such as population growth, urban sprawl and of course insurance penetration.

The study provides new insights for the emerging impact of climate change, said Munich Re, with studies of specific perils such as thunderstorm suggesting that there is increasing volatility and a long-term upward trend in their incidence and severity even after taking into account socio-economic factors. Munich Re said that ” It is quite probable that changing climate conditions are the drivers”, suggesting that their data shows changing trends in weather catastrophes due to the impacts of climate change.

The Head of Munich Re’s Geo Risks Research unit, Prof. Peter Höppe, said; “In all likelihood, we have to regard this finding as an initial climate-change footprint in our US loss data from the last four decades. Previously, there had not been such a strong chain of evidence. If the first effects of climate change are already perceptible, all alerts and measures against it have become even more pressing.” Höppe continued that even without changing hazard conditions, increases in population, built-up areas and increasing values, particularly in hazard-prone regions, need to be on Munich Re’s risk radar. All stakeholders should collaborate and close ranks to support improved adaptation. In addition, climate change mitigation measures should be supported to limit global warming in the long term to a still manageable level. “As North America is particularly exposed to all kinds of weather risks, it especially would benefit from this”, added Höppe.

Peter Röder, Board member with responsibility for the US market, added; “Climate change-related increases in hazards – unlike increases in exposure – are not automatically reflected in the premiums. In order to realize a sustainable model of insurance, it is crucially important for us as risk managers to learn about this risk of change and find improved solutions for adaptation, but also mitigation. We should prepare for the weather risk changes that lie ahead, and nowhere more so than in North America.”

Tony Kuczinski, CEO of Munich Reinsurance America, commented; “This publication represents another contribution to the global dialogue concerning weather-related activities and their causes. What is clearly evident when the longterm data is reviewed is that losses from weather events are trending upward. To simply say that this trend is a statistical anomaly or part of a long-term cycle of activity misses the point of these efforts – we must set aside our biases and continue a meaningful dialogue in search of answers to mitigate the losses that we are experiencing.”

The study shows that storms, tropical cyclones, thunderstorms, winter storms etc, make up the bulk of the losses, accounting for 89% of insured losses or $454 billion. Floods don’t account for all that much but Munich Re note that without flood defenses they would be adding many more billions to the totals. Heat waves, drought and wildfires are playing an increasing part in losses, and Munich Re notes that crop insurance is going to become increasingly important, particularly if climate change is at play here.

The key message from this report is that frequency and severity of weather related catastrophes has increased in North America over the last three decades. Run this same study again in another thirty years and you’ll likely see that the biggest increase would come from Asia or Africa, with insurance penetration rates playing a major factor. For now though, the largest catastrophe insurance and reinsurance market in the world remains the U.S. and it is likely to always be the dominant source of losses over the coming few decades. This drives home the importance of peak coverage for insurers and reinsurers, with instruments such as catastrophe bonds and capital market solutions required to help spread the risks. The non-traditional reinsurance market, collateralized reinsurance players and ILS capital providers have a really important role to play, alongside traditional reinsurers in ensuring that the gap between economic and insured losses does not widen. That will require innovative approaches to structuring products that will service the needs of cedants in an increasingly volatile climate. With global insured catastrophe losses only coming in around the $12 billion mark so far in 2012, it is dangerous to get complacent.

You can access Munich Re’s press release here and access their report here.