Weather risks remain insurable (with adaptation actions), says Swiss Re

Insurance and reinsurance companies need to adapt to a “dynamic risk landscape” to incorporate socio-economic factors, climate change research and risk mitigation in their modelling, in order to keep weather risks insurable, Swiss Re warned today.

In 2019, extreme weather events were once again the main driver of losses for the insurance and reinsurance industry, and the impacts are expected to grow.

Increasing catastrophe severity, not least from climate change but also other socio-economic factors, means that Swiss Re expects that even larger losses will be seen in the future, making it vital underwriters incorporate adaptation measures within their modelling and pricing.

“To uphold the insurance risk transfer model as a powerful tool to foster resilience, insurers need to adapt before, not post events,” explained Martin Bertogg, Head of Catastrophe Perils at Swiss Re.

“To this end, insurers should be wary of historical loss records in understanding today’s state of the socio- economic environment and climate. Averaging out over a past spanning multiple decades can lead to distorted risk assessment.”

2019 actually saw below average levels of losses, on an economic and insured basis, Swiss Re said today.

Economic losses around the globe from natural and man-made disasters in 2019 reached US $146 billion, below the previous 10-year annual average of US $212 billion.

The global insurance and reinsurance industry covered US $60 billion of the losses, below the US $75 billion average of the previous 10 years, but up on the preliminary figure of $56 billion it reported in December.

Severe weather was the main driver and the reason the losses were below average was largely due to the absence of a major U.S. hurricane loss in 2019.

Losses are likely to increase going forwards though, as values at risk increase and economic development continues to put more assets in harms way.

“Economic development and ever-increasing population concentration in urban centres, alongside changes in climate, will continue to increase losses due to weather events in the future,” commented Edouard Schmid, Chairman of the Swiss Re Institute and Group Chief Underwriting Officer at Swiss Re.

“Our industry can play a key role by partnering with clients and governments to develop scalable solutions that support the transition to a low-carbon world by managing risks associated with renewable energy projects and making these more attractive to investors with re/insurance risk-transfer backing.”

Natural catastrophe and severe weather events in 2019 accounted for some US $52 billion of the total insurance and reinsurance industry losses.

A response is required broadly to combat rising losses due to climate change, Swiss Re believes.

This isn’t just a case of re/insurers repricing their risks, but it’s also a wider societal change to better protect people and assets.

“It’s difficult to quantify the exact effects rising temperatures have on specific weather related catastrophes, but climate change is a threat that demands immediate action due to its dire effects on both human life and the global economy,” explained Jerome Jean Haegeli, Group Chief Economist at Swiss Re.

The need for industry adaptation is clear, Swiss Re believes.

“Insurers need to adapt to a dynamic risk landscape by closely monitoring and incorporating socio-economic developments, the latest scientific research on climate change effects, and the status of local risk mitigation measures in their modelling. Many of today’s catastrophe models are benchmarked against historical loss data, which does not reflect the current level of urbanisation, and hence do not fully account for today’s quickly rising exposures, changing socio-economic environment and climate,” the company said.

Insurance-linked securities (ILS) specialists also need to follow this advice, to incorporate climate, socio-economic and climate related factors within their underwriting of risks and investment strategies.

The end-result should be something more robust and better protected against exponentially rising climate and weather risks due to rapidly rising exposures and social factors, creating a more robust industry for all participants.

As we explained recently, research suggests that economic losses from extreme weather related events could increase by 40% by 2040 due to the influence of climate change. The industry needs to stay ahead of that trend, by incorporating the right data into its models and pricing risks commensurately.