A protection & innovation gap, just 38% of cat losses insured: Aon’s Eric Andersen

Global economic losses from natural catastrophes reached $343 billion in 2021, but only $130 billion of the total was covered by insurance or reinsurance, which Aon’s President Eric Andersen said demonstrates both a protection and an innovation gap, when it comes to climate risk.

At $130 billion, Aon’s estimate of global insured catastrophe losses for 2021 is higher than the $120 billion estimated by reinsurance firm Munich Re and the $105 billion preliminarily estimated by Swiss Re in December.

The $130 billion of insured catastrophe losses in 2021 was well above the 21st Century average of $74 billion and the median of $66 billion, while even being 18 percent higher than in 2020.

It makes 2021 the fourth-costliest year on record for nat cat losses borne by public and private insurance or reinsurance entities, only behind 2017, 2011, and 2005.

With a protection gap of 62%, as only 38% of economic losses were insured, it demonstrates both the need for more insurance uptake around the world, as well as the opportunity to deploy more capital.

One factor in the size of the catastrophe and climate risk protection gap is the cost of coverage and it’s increasingly apparent that, for these protection gaps to be meaningfully narrowed, the cost of insurance and reinsurance would ultimately have to come down in order to extend coverage to the poorest.

But Andersen of Aon rightly notes that there is more to this, as innovation is also needed to drive greater options for coverage, through risk transfer product design focused on delivering protection to those most exposed to significant catastrophes and climate loss events.

“Clearly there is both a protection and innovation gap when it comes to climate risk,” Eric Andersen, president of Aon explained.

“As catastrophic events increase in severity, the way that we assess and ultimately prepare for these risks cannot depend on solely historical data. We need to look to technology like artificial intelligence and predictive models that are constantly learning and evolving to map the volatility of a changing climate.

“With scalable solutions, we can help organizations make better decisions that make them more resilient as they continue to more frequently face interconnected and increasingly volatile risks.”

Steve Bowen, meteorologist and head of Catastrophe Insight at Aon also commented, “Many global communities are exposed to increasingly volatile weather conditions that are in part enhanced by the growing effects of climate change. This includes record-setting episodes of extreme temperatures, rainfall and flooding, droughts and wildfires, rapidly intensifying tropical cyclones and late season severe convective storms.

“We can no longer build or plan to meet the climate of yesterday. With physical damage loss costs rising, this is also leading to lingering global disruptions to supply chains and various humanitarian and other asset-related services. The path forward for organizations and governments must include sustainability and mitigation efforts to navigate and minimize risk as new forms of disaster-related volatility emerge.”

The United States accounted for 71 percent of the global insured losses, resulting in a combined U.S. insurance market loss across 2020 and 2021 of $176 billion, the highest two-year total on record.

That drives home the pressure that has flowed through to renewals for reinsurance programs focused on the US and suggests this pressure will continue.

Interestingly, Aon pegs hurricane Ida’s insured losses at $36 billion, although this is public and private insurers, so we assume includes the NFIP’s flood insurance share.

Andersen’s point on an innovation gap is interesting and worth reflecting on, as many might suggest insurance and reinsurance markets have been innovating rapidly for the last few years, largely thanks to increasing digitalisation and use of technology.

But, this isn’t resulting in a commensurate increasing uptake of insurance coverage around the globe, it seems, despite the monetary size of investments being made.

This might be because a lot of innovation is inwardly focused, on improving the economics for individual companies, while there is far less true innovation going on that seeks to lower the cost of risk capital, or streamline the matching of capital with risk.

Where start-ups or initiatives are looking to streamline parts of the market chain, they unfortunately come up against incumbents that are not incentivised to really lower expense in that chain, which holds the industry back in how much it can deliver efficient risk financing, it seems.

Societally, large insurers, reinsurers and brokers have stated ESG goals, that expanding protection to close these gaps would seemingly support.

So we expect the focus on narrowing gaps will persist.

But, time will tell whether the industry is brave enough to embrace disruptive innovation and really double-down on what is actually needed to increase the insured percentages.

Which means reducing excess costs in the market chain, as well as the costs of accessing risk capital, in order to properly narrow the gaps between economic and insured.