AIR’s catastrophe loss report highlights the ‘insurable’ opportunity

Catastrophe modelling and risk analytics firm, AIR Worldwide (AIR), estimates that on average just a quarter of annual global economic losses from natural disasters are insured, while covered losses from all regions and perils modelled by AIR have increased over the last four years.

AIR has produced its Global Catastrophe Loss Report since 2012, examining global aggregate annual loss (AAL) and AIR’s exceedance probability (EP) curve losses from natural disasters, utilising its comprehensive industry exposure databases (IEDs).

But for the first time since the white papers launch several years ago the catastrophe modelling firm has provided metrics on insured and insurable losses, “where insurable loss metrics include all exposures eligible for insurance coverage assuming standard limits and deductibles, regardless of whether they are actually insured,” explains AIR.

“By providing both global insured and insurable loss estimates based on the EP curve, the gap between covered and eligible exposures becomes evident, suggesting opportunities for the insurance industry to offer essential protection to vulnerable home and business owners, in addition to avenues of potential business growth,” said Bill Churney, AIR’s Chief Operating Officer (COO).

The 2015 global loss report shows that comparing insured and economic loss estimates from the last 15 years or so, suggests that global insured losses amount to roughly 25% of overall economic losses on average, if trended to present-day dollars.

Key loss metrics from AIR’s global industry EP curve for all regions and perils. (Source: AIR)

Furthermore, when looking at the data with AIR’s modelled global insured AAL metrics, the company says this translates to an economic AAL of beyond $300 billion. Meaning that $75 billion, or 25% of this figure is uninsured, signalling a vast opportunity and need for innovation and growth to the global insurance, reinsurance and insurance-linked securities (ILS) industry.

It’s important to note here that AIR’s AAL and EP methods and resulting estimations of insured, insurable and economic losses are only for regions and perils currently modelled by the company.

Something AIR says it’s always striving to expand in the future, as it did this year with the inclusion of results in the report from two new models; Canada winter storm and tropical cyclone, and updated models for; U.S. hurricane, U.S. flood, Canada severe thunderstorm, South American earthquake, and expanded tsunami modelling coverage to; Ecuador, and European inland flood expansion to; Switzerland, Austria and Czech Republic, a new storm surge module was also included in AIR’s Japan typhoon model, and finally; updates to AIR’s IEDs for South America to include Ecuador and U.S. Offshore assets.

Despite clear advances and rapid expansion with its reach and modelling capacity, AIR notes that there are still regions and perils that it doesn’t currently model. In fact, AIR estimates that its models covered roughly 76% of global insured losses reported in 2014, including some events that caused insured losses of more than $2 billion.

This suggests that the global estimated economic and insured loss totals provided by AIR are likely significantly higher, further underlining the huge opportunity for growth for the global risk transfer markets.

By peril, tropical storm and severe storm contribute the most significant portion of global insured losses, amounting to 30% and 31% respectively, of the total in 2015. However, for insurable losses AIR’s data reveals that earthquake represents the largest share of global losses, at 33%, with tropical cyclone dropping to 22%.

Broken down by region and unsurprisingly Asia shows the broadest protection gap within AIR’s report, with just 8% of economic losses modelled by the company estimated to be insured. Latin America insured losses in respect of economic losses represents just 13% and is the region with the second widest protection gap, followed by Europe, Oceania and North America, at 34%, 37% and 44%, respectively.

Insured and economic AAL by region. Note that there is considerable uncertainty in the estimated percentage of economic losses that is insured, which partly stems from uncertainty in reported economic losses for actual catastrophes.

Clearly, and as noted by numerous organisations ranging from Governments, insurers and reinsurers, to the World Bank, the Geneva Association and similar, Asia provides a wealth of expansion and innovation opportunities for the re/insurance, ILS and catastrophe bond sectors, to mitigate the impact of natural disasters and hike re/insurance penetration levels to ensure social and economical sustainability and resilience.

But AIR note that while the emerging markets signal the greatest opportunity and are at the greatest threat from natural disasters, take-up of flood and earthquake insurance is low in the U.S. as they are typically excluded from homeowner’s policies.

“While this gap is very pronounced in Asia, a gap remains even in the U.S., where a significant portion of earthquake and flood risk is not insured. Economic loss estimates can be used to facilitate public risk financing and the development of regional resiliency plans to help societies better prepare for catastrophes and reduce the ultimate costs,” explained Churney.

Discussions in the past have noted that protection against natural catastrophes should be a basic human right, bringing the re/insurance and ILS world at the heart of disaster resilience efforts.

But whether in agreement or disagreement to that notion, it’s hard to argue with the ability and need for the global risk transfer markets, including public and private sector entities, to ensure adequate, affordable and comprehensive protection can reach developed and emerging economies and societies of the world.

“In situations where insurance is not feasible or cannot be offered at an affordable price, catastrophe modelling can be used to inform public disaster financing, risk pooling, and other government-led risk and loss mitigation initiatives. AIR is actively supporting many such initiatives through organizations such as the World Bank and the Asia Development Bank, and through its support of efforts such as OpenQuake, an open source modelling platform initiative led by the Global Earthquake Model”, said AIR in its report.

While Churney concluded; “This is the real value of having credible catastrophe models across multiple perils and regions that can be analysed together seamlessly, to better anticipate possible global outcomes, including future catastrophes and future years that may produce losses exceeding any historical amounts.”