Cost of climate catastrophes on the rise, AIR report says
The extreme-event modelling company AIR Worldwide (AIR) has released its 2021 Global Modeled Catastrophe Losses report, detailing key global financial loss metrics based on its latest suite of models that reflect the near-present climate risk.
AIR estimates that on annual average, catastrophes around the world are expected to cause about $106 billion in insured losses. It says that the 5 per cent aggregate exceedance probability (EP) insured loss (or the 20-year return period loss) is approximately $203 billion, and the 1 per cent aggregate exceedance probability insured loss (or the 100-year return period loss) is about $320 billion.
“While there has been justifiable concern about extreme-event losses over the last few years, outside of 2017, actual global insured losses have been below the modelled long-term average,” Bill Churney, president of AIR Worldwide, said.
“Our report shows that the global insurance industry should currently expect a long-run annual average loss of $106 billion.
“This notably exceeds the actual average loss of the past decade of approximately $75 billion and is a stark reminder that we have been fortunate to not have had a major tropical cyclone or earthquake event in a highly populated region.
“However, such events can and will occur under the climatic conditions of today and society must continue to focus on ensuring resilience to the risks of today, while also looking forward to how risk may change in the decades ahead.”
In this report, AIR typically provides aggregate losses at the 100 and 250-year return period points from the full distribution of potential losses — and the company says that it continues to be important to discuss loss metrics in the tail of the distribution.
However, given the concerns about the scale of recent catastrophe losses and the ability of the current suite of near-present climate models to reflect extreme loss potential, AIR is also reporting an additional point on the EP curve representing the 5 per cent EP (or 20-year return period) because losses in excess of $200 billion, it says, are a very real possibility; there is a greater than 40 per cent chance that the insurance industry will experience losses of more than $200 billion in the next decade before accounting for growth in property exposure or climate change.
“AIR has been an industry leader in understanding the impact of climate change on atmospheric perils for over a decade,” said Rob Newbold, executive vice-president, AIR Worldwide.
“While it is certainly important to prepare for the business impacts of climate conditions that may exist in the long term, our clients have stressed to us the reality that most financial decisions are made on a much shorter, under-ten-year time horizon.
“We invest significant resources to ensure our models continue to reflect the impacts of our changing climate and provide a view of the 0 to 10-year near-present climate.
“As the risk continues to evolve, our models will incorporate the latest research on this evolution and our global modelled losses will be updated to reflect this changing risk.”
The 2021 report also provides estimates of global economic losses from catastrophes, which highlight the persistent insurance protection gap that will limit a country’s ability to recover from a major extreme event.
Global economic losses include insured and insurable losses, as well as losses from non-insurable sources, which may include infrastructure and lost economic productivity.
Based on its research, AIR has determined that global economic losses are about three times higher than global insured losses on average, when trended to 2020 dollars.
Compared with AIR’s modelled global insured average annual loss of $106 billion, this would correspond to an economic average annual loss of more than $320 billion.
On a regional basis, the percentage of economic loss from natural disasters that is insured varies considerably.
In North America, about 50 per cent of the economic loss from natural disasters is insured, while in Asia and Latin America, insured losses account for only about 12 per cent and 24 per cent of economic losses, respectively, reflecting the very low insurance penetration in these regions.
The portion of economic losses that is insured also varies significantly by peril, with coverage for flood and earthquake losses typically much lower than for risk from wind and fire.
For the first time, this year’s edition of AIR’s Global Modeled Catastrophe Losses paper also includes a section on the Intergovernmental Panel on Climate Change reports, which suggests how the protection gap might evolve in a warmer climate. AIR's report highlights the large and growing protection gap for many of the perils highlighted by the IPCC report (AR6), including coastal and inland flooding.
Mr Churney said: “Businesses in all industries, as well as governments, are recognising the need in a post-Covid world to demonstrate their resilience and sustainability to extreme events.
“Understanding the potential for global financial losses under current conditions is a requisite starting point and AIR’s models have successfully helped the insurance industry do this for over three decades.
“The global EP curves generated in this report give companies the knowledge with which to benchmark and manage extreme-event risk in the near-present climate for more than 110 countries worldwide, and we look forward to partnering with the industry to provide the metrics and solutions that are most useful in also managing long-term climate risk.”
The 2021 edition of AIR’s Global Modeled Catastrophe Losses report bases its global loss metrics on AIR’s latest suite of models, including new models and updates released during 2021, as well as updated industry exposure databases.
The report excludes losses from AIR’s pandemic, cyber and casualty models. The report includes AIR’s presentation of global EP metrics on both an insured and insurable basis, where insurable loss metrics include all exposures eligible for insurance coverage assuming standard limits and deductibles, regardless of whether they are actually insured.
AIR Worldwide, a Verisk company that founded the catastrophe modelling industry, today models the risk from natural catastrophes, supply-chain disruptions, terrorism, pandemics, casualty catastrophes and cyber incidents.