What's driving rising average annual loss figures?

Why "there's nothing secondary about secondary perils"

What's driving rising average annual loss figures?

Reinsurance

By Mia Wallace

Last month, Verisk reported that the average annual loss from global natural catastrophes hit US$151 billion in 2023, confirming concerns that loss years of over $100 million are becoming the ‘new normal’.

Addressing the key findings of the report, Jay Guin (pictured), EVP and chief research officer for Verisk Extreme Event Solutions highlighted that amid concerns about rising natural catastrophe losses, there is an emphasis on frequency – or secondary – perils. Whether in the form of convective storms, floods or wildfires, these have been systemically causing problems, he said, and primary insurers want more coverage for these perils which is creating a ‘push and pull’ between capacity providers and insurance markets.

What’s behind the average annual loss figures?

“Key drivers of the losses seen are issues around exposure growth and inflation,” he said. “We are seeing annual losses increasing at a compound growth rate of 7.2%. Four-to-five percentage points comes from exposure growth and inflation. Inflation is not quite as high as it was in the last two years but, nevertheless, claims inflation and the costs of rebuilding properties continues to accelerate.”

There’s a variety of factors behind the increase in global insured natural catastrophe losses but a main driver includes the increase of building and construction in high-hazard areas. Populations are migrating towards more hazardous locations, he said, which can be seen from the explosion of population growth in states like Texas and Florida, and in coastal regions around the world. Increased construction is necessary to sustain this population growth, and this urban expansion is directly linked to exposure growth.

Understanding the impact of climate change

“The other area is around climate change,” he said. “We believe that in today’s climate, 1% of the increase in losses can be attributed to climate change because climate change impacts different perils to different degrees. On aggregate, we believe 1% is a good estimate but that’s going to change as we move forward. In the outer decades, I think climate change is going to start becoming a more meaningful component of overall losses.”

The impact of climate change is being felt more keenly in the frequency perils space, Guin said, particularly with regard to how rising sea levels are leading to increased flooding and extreme precipitation while elongated periods of drought are leading to wildfires. However, climate change is also impacting severity perils including tropical cyclones and hurricanes.

Why “there’s nothing secondary about secondary perils”

With regard to these frequency events, Guin emphasized that “there’s nothing secondary about secondary perils”, with the market seeing losses in excess of $10 billion, $20 billion and even $30 billion. With that in mind, he said, over half of Verisk Extreme Event Solutions’ investment in research and development is devoted to the creation of a robust view of risk relating to these perils. “These are not necessarily the events that are going to create big challenges from a capital perspective,” he said. “But they will continue to create an earnings erosion problem for the industry. And with climate change, we’ll see more of these.

“As we stand today, more than half of the losses that we model are attributable to these frequency events, but on the annual expected basis in the far tail, it is still dominated by the peak perils - or severity events - like hurricanes, earthquakes and extratropical cyclone over Europe.”

As to the mood of the re/insurance market, given the challenges it faces, Guin said that it seems to be “quietly positive.”

“Everybody’s trying to solve their client’s problems and listen to what their needs are,” he said. “I think the mood on the ground is quite optimistic because everybody’s making sure they have the right tools so they can make the right decisions.”

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