40%+ chance of a $200bn catastrophe loss year in next decade: AIR

The 1% aggregate exceedance probability insured loss (also the 100-year return period loss) from global catastrophe events has been estimated as around $320 billion by risk modeller AIR Worldwide, while the average annual is now over $100 billion.

On an annual average basis, catastrophes around the world are now anticipated to cause around $106 billion in losses that will hit the insurance and reinsurance market, AIR’s research found.

While the five percent aggregate exceedance probability (EP) insured loss (or the 20-year return period loss) is roughly $203 billion, and the one percent aggregate exceedance probability insured loss (or the 100-year return period loss) roughly $320 billion.

“While there has been justifiable concern about extreme event losses over the last few years, outside of 2017, actual global insured losses have been below the modeled long-term average,” explained Bill Churney, president of AIR Worldwide. “Our report shows that the global insurance industry should currently expect a long-run annual average loss of $106 billion. This notably exceeds the actual average loss of the past decade of approximately $75 billion and is a stark reminder that we have been fortunate to not have had a major tropical cyclone or earthquake event in a highly populated region. However, such events can and will occur under the climatic conditions of today and society must continue to focus on ensuring resilience to the risks of today while also looking forward to how risk may change in the decades ahead.”

AIR said that because of the scale of recent catastrophe loss history and concerns over the ability of models to reflect extreme loss potential, it has added the 5% loss return-period to its reporting, “because losses in excess of $200 billion are a very real possibility.”

“There’s greater than a 40% chance the insurance industry will experience losses of greater than $200 billion in the next decade before accounting for growth in property exposure or climate change,” AIR warned.

Insurance and reinsurance market losses have concerned many in the industry again in 2021, with talk of climate influences, inflationary factors and frequency, secondary perils, as well as water-driven losses, all areas of concern.

As a result, it’s key to look at the possible, to enable insurance and reinsurance industry participants to manage their risks and portfolios, based on realistic scenarios of what could happen.

“AIR has been an industry leader in understanding the impact of climate change on atmospheric perils for over a decade,” Rob Newbold, executive vice president, AIR Worldwide said. “While it is certainly important to prepare for the business impacts of climate conditions that may exist in the long-term, our clients have stressed to us the reality that most financial decisions are made on a much shorter, under 10-year time horizon. We invest significant resources to ensure our models continue to reflect the impacts of our changing climate and provide a view of the 0 to 10-year near-present climate. As the risk continues to evolve, our models will incorporate the latest research on this evolution and our global modeled losses will be updated to reflect this changing risk.”

AIR’s research also shows that that global economic losses are about three times higher than global insured losses on average, when trended to 2020 dollars.

Which means that the global insured average annual loss (AAL) of $106 billion would correspond to an economic AAL of more than $320 billion.

Churney commented, “Businesses in all industries, as well as governments, are recognizing the need in a post-COVID world to demonstrate their resilience and sustainability to extreme events. Understanding the potential for global financial losses under current conditions is a requisite starting point and AIR’s models have successfully helped the insurance industry do this for over three decades. The global EP curves generated in this report give companies the knowledge with which to benchmark and manage extreme event risk in the near-present climate for more than 110 countries worldwide, and we look forward to partnering with the industry to provide the metrics and solutions that are most useful in also managing long-term climate risk.”

Protection gaps are also in-focus, with around 50% of economic losses covered by insurance in the United States, but as low as 12% in Asia and 24% in Latin America, demonstrating the very real job for the insurance and reinsurance market to get more of the exposure protected against loss and covered.