Do you know? The growing impact of severe storms

When discussing natural catastrophes (Nat Cat for insurers, as opposed to “Man Made” losses), what comes to mind for most of us are earthquakes and then floods, wildfires, and thunderstorms. 2023 is a record-breaking year for Nat Cat.

According to Swiss re, the economic losses from Nat Cat in 2023 are estimated to be USD260bn, and the insured losses amounted to USD100bn. These numbers do not reflect tragedies such as the loss of human life, injuries, or displacement of communities. In the total Nat Cat cost, the share of weather events (blizzards, cold waves, droughts, heat waves, wildfires, floods, tornadoes, and tropical cyclones) keeps growing. Enterprises urgently need to (re)assess their risk exposure.

Insured losses and economic losses

The terms « insured losses » and « economic losses » are critical in understanding the financial impact of Nat Cat. They represent two distinct facets of the cost that these disasters impose on societies and economies.

· Insured Losses refer to the financial losses directly covered by insurance policies. These losses are compensated by insurance companies up to the limits specified in the policies held by individuals, businesses, and other entities. Insured losses cover damages to property, vehicles, and other insured assets. The extent of insured losses depends on the levels of insurance penetration and coverage in the affected area. This figure does not encompass the total cost of a disaster, but rather the portion that is financially protected through insurance mechanisms.

· Economic Losses, on the other hand, represent the total financial impact of a natural disaster, including both insured and uninsured losses. This broader measure includes the cost of damages to uninsured properties, infrastructure, and assets, as well as the indirect costs such as lost productivity, business interruptions, and the effect on economic growth. Economic losses provide a comprehensive picture of the financial toll of a Nat Cat on an affected region or country.

The difference between the two is significant because it highlights the gap known as the « protection gap » – the portion of economic losses not covered by insurance. Understanding this gap is crucial for policymakers, urban planners, and the insurance industry to identify areas of underinsurance and to develop strategies to mitigate financial vulnerabilities to future natural catastrophes.

A growing cost and impact of thunderstorms: very large, but also low to medium ones

Severe convective storms (SCS) are characterized by intense rainfall, damaging winds, hail, and occasionally tornadoes. In the US and Europe, SCS have been “more destructive than ever before” in 2023 according to Munich Re. SCS resulted in insured losses that reached an all-time high of $60bn in 2023 – almost 90% more than the previous five-year average of $32bn.

Storm Daniel is the deadliest Mediterranean cyclone in recorded history. In September 2023, the storm affected Greece, Bulgaria, Turkey and the coast of Libya, where it caused catastrophic losses, destruction and flooding. This resulted in more than four thousand deaths, over 10,000 people missing, and an economic in excess of USD20bn. In the US alone, there were 18 events, each with an individual loss of USD1bn and above.

But maybe the biggest concern is the multiplication of low-to-medium-severity events. SCS were often referred to as a “secondary” peril. SCS are far from “secondary” anymore and have become the main contributor to Nat Cat losses, with increased frequency and intensity.

Mitigation actions are challenging and urgent

The human cost is huge albeit difficult to quantify. As for economic losses, they are:

– primarily the damage to infrastructure, homes, properties and vehicles, and agriculture,

– secondarily the disruptions such as business and supply chain interruptions, reduced crop yields, etc.

Several actions could be considered (Source Allianz Risk Barometer):

vulnerability assessments,
enhanced weather prediction technologies,
improved infrastructure resilience,
comprehensive disaster preparedness and response strategies, including adopting measures to improve the ability of sites to cope with extreme weather,
transitioning to low-carbon business models,
insurance gap assessment and protection, and financing mechanisms

The development of weather-related events is a long term phenomenon: functions such as Operations (BCM), but also control functions (risk management, IA) have a role in developing awareness and readiness of enterprises.

Sources:

Allianz Risk Barometer 2024

Swiss Re Institute https://www.swissre.com/press-release/Insured-losses-from-severe-thunderstorms-reach-new-all-time-high-of-USD-60-billion-in-2023-Swiss-Re-Institute-estimates/4a15acf7-64b4-4766-8662-1c35d268ab12

Do you know? The growing impact of severe storms

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