Global reinsurance giant Munich Re has said that it sees climate change and La Niña as two of the drivers for a $120 billion annual disaster insured loss bill from 2022.
Chief Climate Scientist at the reinsurance firm Ernst Rauch said that it now appears that $100 billion or more is the “new normal” for the global insurance industry’s annual natural disaster loss total.
Total losses from natural disaster are provisionally estimated at $270 billion for 2022 (below 2021’s $320bn), with the insurance market taking $120 billion of that bill.
That $120 billion is very close to the 2021 total and significantly above the average of 2017-2021, which comes out at $97 billion, according to Munich Re.
“The continued high level of insured losses is impacting insurers at a time when they are having to deal with both high inflation rates and a shrinking capital base due to rising interest rates. In contrast, the positive effect on investments from higher interest rates will only come in time,” the reinsurance company explained.
As ever, the United States was home to the majority of the financial toll, with North America seeing $150 billion of the overall economic losses, of which around $90 billion was covered by insurance, 98% of the insured losses were from the United States.
Hurricane Ian drove the lions share, with overall losses of around $100 billion and insured losses of around $60 billion.
Commenting on the loss data, Thomas Blunck, Member of the Board of Management at Munich Re said, “Climate change is taking an increasing toll. The natural disaster figures for 2022 are dominated by events that, according to the latest research findings, are more intense or are occurring more frequently. In some cases, both trends apply.
“Another alarming aspect we witness time and again is that natural disasters hit people in poorer countries especially hard. Prevention and financial protection, for example in the form of insurance, must therefore be given higher priority.”
Ernst Rauch, Chief Climate Scientist at Munich Re, added, “Two factors should be kept in mind when considering the 2022 natural disaster figures. Firstly, we are experiencing La Niña conditions for the third year in a row. This increases the likelihood of hurricanes in North America, floods in Australia, drought and heatwaves in China, and heavier monsoon rains in parts of South Asia.
“At the same time, climate change is tending to increase weather extremes, with the result that the effects sometimes complement each other.”
Munich Re believes climate change and La Niña exacerbated certain natural disaster and severe weather loss events in 2022.
The reinsurance firm said that severe storms like hurricane Ian “fit in with the anticipated consequences of climate change.”
But they qualify that be saying, “Most researchers do not expect an increase in the overall number of tropical cyclones as a result of global warming. However, they do anticipate a rise in the proportion of particularly severe cyclones with exceptionally heavy rainfall.”
Commenting on the devastating flooding that hit Pakistan in 2022, which was the second costliest event on an economic basis, although little was insured, Munich Re said, “Researchers estimate that the intensity of an event of this kind has already increased by half because of climate change, compared to a world without global warming, and that it will continue to rise in future.”
The second largest insured loss from a single event was down to the flooding in Australia earlier in 2022. Munich Re notes that flooding caused $4.7 billion in insured losses in Australia last year.
The reinsurer explained that, “Natural cycles play an important role in Australian flood risk, as torrential rainfall is much more likely during La Niña years. However, researchers now believe that climate change is additionally influencing the intensity of the rainfall. The same is true for bushfires and heatwaves, which tend to occur in El Niño years, the opposite phase to La Niña.”
On the recent polar vortex and severe winter storm Elliott in the United States and Canada, Munich Re says the expectation is for “losses in the billions” but that it’s too early for an estimate at this stage.
Again, there is a potential climate angle here, and the reinsurer said, “Climate studies see a connection between such strong outbreaks of polar air from the Arctic, favoured by lower temperature differences between the polar regions and mid-latitudes. Overall, however, this question is still a matter for debate in the scientific community.”
Europe experienced extreme heat as well as drought in 2022, which was followed by severe storms and hail, but Munich Re notes that it is “difficult to quantify the indirect economic consequences of climatic events like these.”
However, the reinsurance firm points out, “What is known as rapid attribution analysis also perceives an influence from climate change on heatwaves and droughts. The more extreme a heatwave is, the more extreme the storms at the end of it can be.”
Commenting on the extreme financial impact natural disasters can have, especially in poorer countries, Rauch said, “Better prevention and early warning systems must contribute to improving protection for people. In addition, the Loss and Damage Fund agreed at the COP27 climate summit in Egypt and the Global Shield initiative presented there need to be promptly implemented as viable instruments. Also, binding, regulated compensation payments can help protect more people against the immediate financial consequences of disasters.”
If the new average for insured catastrophe losses across the globe is $100 billion, with that average likely to rise on the back of inflation and also be influenced by the effects of climate change and the ENSO cycle, it is perhaps no surprise reinsurance rates needed to rise.
The rising loss burden that insurers and reinsurers have been facing from natural catastrophe and severe weather events had been eroding earnings and profits, driving a need for more rate to cover loss costs, let alone enterprise costs in the industry.
Which is why, if the baseline for annual loss costs is on the rise as well as inflation, it is so important the industry sustain a baseline in pricing that allows loss and enterprise costs to be covered over the longer-term.