Nat cat costs to rise on increasing frequency, severity & migration: IFRC

A recent study from the IFRC echoes views that the severity and frequency of weather and climate-related disasters is on the rise, underlining a trend which presents both challenge and opportunity to the insurance and reinsurance sector.

According to the International Federation of Red Cross and Red Crescent Societies (IFRC)  317 disasters took place in 2014, the lowest amount of the last decade and roughly 17% below the yearly average. From the events, almost 107 million people were impacted; something the IFRC says is a relative increase on the previous year.

“But, this number is still well below the highest number of disasters in the past decade, which occurred in 2005 when a total of 810 disasters were reported. In 2014, disasters caused 8,186 deaths worldwide. Nevertheless, the mortality level was almost 90 percent lower than the decade’s average,” Mo Hamza, Lead Editor of the IFRC’s 2015 World Disaster Report, told Voice of America.

The issue of climate change, how and if it impacts the frequency and severity of natural disasters is a long running global debate, and one that’s often surfaced in the risk transfer landscape as insurers, reinsurers and similar work to build and strengthen disaster resilience efforts.

The IFRC is convinced that the most extreme weather related events are influenced by the changing climate, but also affecting the impact of these events, and extremely relevant to insurance and reinsurance, is the accelerating development of at-risk regions and migration to these hotspots.

“There is no doubt that extreme events impacted by climate change in terms of frequency and magnitude, that is no longer in doubt. But what matters as much is how vulnerable populations are in the hot spots, that is in low-lying deltas and in coastal zones, for example,” said Hamza.

The latter point here is extremely important, as the locations around the globe that are highly susceptible to flooding, cyclones and other adverse weather events, are occupied by some of the world’s poorest people, where rebuilding post-event can often seem impossible.

The study claims that Asia experienced 48% of all disasters in 2014, a region home to some of the world’s lowest insurance and reinsurance penetration levels, underlining the potential economic set-back that can and does occur each time a disaster strikes, particularly when compared to a more developed but still vulnerable region like parts of the U.S. and Europe.

Furthermore, as Asia and other emerging countries susceptible to natural disasters, continue to see economies grow, the potential losses from any event rises with the increase in asset values in hazard prone hot spots, a trend that is exacerbated by the wave of coastal migration and large-scale urbanisation.

As the threat of an increased frequency and severity of natural events continues to be predicted by global bodies, organisations and risk transfer experts/analysts, the opportunities to build resilience efforts become apparent.

The insurance, reinsurance and insurance-linked securities (ILS) landscape can provide a platform for post-disaster risk capital to reach those in the world most in need. The need for adequate protection will only increase as wealth in emerging regions increases and rising asset values and populations become concentrated in adverse-weather event hot spots.

Losses suffered by economies look set to rise, meaning that as insurance penetration increases there will be a growing reliance on insurers, reinsurers and risk capital providers such as the ILS market to support the risk transfer needs in at-risk regions.

Should predictions of an increase in the volume and magnitude of weather related catastrophe events prove true it’s likely that demand for insurance and reinsurance in vulnerable regions will rise also, signalling a need for the capital markets and ILS to provide some of the capacity and take on some of the risks as well.

But in order for affordable, adequate products to reach the world’s most vulnerable and poor people, the insurance, reinsurance and ILS markets need to come together to innovate and provide sustainable, effective risk transfer solutions which offer protection to people and companies, while being a valuable source of support for local economies.

Read our series of articles focused on the insurance protection gap – underinsurance in emerging and developing economies and the gap between economic and insurance losses – an opportunity that is on every reinsurance CEO’s lips and which presents the largest opportunity to put excess risk transfer capital to use, requiring both traditional and capital markets support.