Insurance and reinsurance industry losses from natural catastrophes and man-made disaster events during 2016 are expected to come out at around $49 billion by Swiss Re, up by 33% on 2015 but slightly below the 10-year average.
The gap between total losses and the amount covered by insurance and reinsurance is again wide, highlighting the much-discussed protection gap, as economic losses from natural catastrophe and man-made disaster events in 2016 hit $158 billion, an increase of 68% on 2015’s figure.
For the reinsurance sector another year of below-average catastrophe and disaster losses helps to ensure that reinsurance capital continues to increase, exacerbating pricing pressure and the returns of capital to shareholders will likely continue.
Natural catastrophes were the major source of both economic and insured losses in 2016, with earthquakes and flooding the leading causes, according to Swiss Re’s latest sigma report and its preliminary estimates.
Natural catastrophe events accounted for $150 billion of the global economic loss in 2016 and $42 billion of the insurance and reinsurance loss, which is significantly higher than the $28 billion of insured catastrophe losses seen in 2015, but still below the ten-year average of $46 billion.
Man-made disaster losses caused an additional $7 billion of insurance claims, down from $9 billion in 2015.
Swiss Re notes that earthquake losses highlight a “schism in insurance coverage needs” highlighting a major gap in protection and an opportunity for the insurance and reinsurance industry. Events such as those in Japan, Taiwan, Ecuador, Italy and New Zealand all show the gap between economic and insured losses and the need for greater coverage uptake against earthquake risks.
The Kumamoto, Japan earthquakes, which were the largest single loss event of 2016, resulted in an economic cost of around $20 billion but with just $5 billion covered by insurance and reinsurance.
The central Italy earthquakes in August are thought to have caused over $5 billion of economic loss but insurance may only pay for a paltry $70 million of this loss, largely from coverage of commercial assets, Swiss Re explains.
“Society is underinsured against earthquake risk,” Swiss Re Chief Economist Kurt Karl explained. “And the protection gap is a global concern. For example, Italy is the 8th largest economy in the world, yet only 1% of homes in Italy are insured against earthquake risk. Most of the reconstruction cost burden of this year’s quakes there will fall on households and society at large.”
The protection gap is seen as a huge opportunity by the insurance and reinsurance industry. But, while there are many reasons for the gap existing (political, social, economic etc), the fact that it has only become an area of focus in the last few years does highlight politicians and also this industry’s inability in the past to extend coverage to those who needed it most.
The industry is now focused on narrowing this gap and working hard to do so, with steps being made in many regions and for many perils.
It is to be hoped that the growing focus on the protection gap results in real action to close it and that with the application of efficient capital (the capital markets do have a role here), triggers such as parametric and index, as well as technology innovation, that real progress can be made.
In 2016 the protection gap in the U.S. came to light through the Louisiana and Mississippi flooding events, which are estimated to have caused $10 billion of economic losses but with private insurance only on the hook for $1 billion of the total.
Conversely, hailstorms that caused $3.5 billion of economic losses in Texas in April 2016 were majority covered by insurance and reinsurance, with the industry loss put at $3 billion.
2016’s catastrophe and disaster loss toll for the insurance and reinsurance industry has been entirely manageable and industry capital levels have not been eroded by the activity described in Swiss Re’s latest sigma report.
But the gaps which are evident provide examples of where this capital could be being put to work, if the industry can work with governments and society to increase the understanding of the benefits of risk transfer and the need for insurance and reinsurance capital to protect lives and livelihoods.
Data from the Swiss Re sigma estimates can be visualised on its website here.
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