Dom Lopes, AVP Property Underwriting & Engineering, reviews the impact of weather-related catastrophes on the insurance industry, and shares his forward outlook.
The reality of climate change
2017 was a devastating year globally, with natural disasters affecting millions. Changes in global weather patterns, and the human influence on the climate system have been indisputable.1 Snow in Los Angeles, major storms in Europe – while we’ve seen unique weather events in the past, unusual events are now occurring regularly. And as the Intergovernmental Panel on Climate Change has stated, the more we disrupt our climate, the more we risk severe, pervasive and irreversible impacts.2
These include physical impacts to our planet, including extreme weather, floods and forest fires, as well as long-term stresses, such as rising temperatures, shifts in biodiversity and melting permafrost. The World Economic Forum’s 2018 Global Risk Report listed extreme weather events and natural disasters as the highest risk in terms of likelihood and impact.3 Aside from physical impacts to the planet, climate change is also having a pervasive effect on industries such as tourism, agriculture and financial services.
The Task Force on Climate-related Financial Disclosures (TCFD) was created in 2017, to provide recommendations and a financial risk assessment framework to these industries, including physical risks, transition risks associated with the shift towards a less carbon reliant world, and opportunities to be found in mitigating and adapting to new world scenarios.4
Dom Lopes, AVP Property Underwriting at RSA Canada, spoke recently at the 2018 ORIMS March Professional Development Seminar about the various risks associated with climate change, and the potential impacts on the insurance industry.
Impact on the insurance industry
Because domestic prices are being driven by associated reinsurance costs, the implications to the insurance industry have been significant globally, says Dom. Economic losses from weather-related catastrophes continue to be two to three times the insured losses in developed countries. And because we live in an increasingly global, interconnected market, we’re not confined to the repercussions of catastrophes within our own country. What happens in Mexico or Puerto Rico also affects Canada when it comes to purchasing reinsurance.
Significant global insured loss activity in the past 30 years
In 2017, global natural disasters were estimated to have incurred over US$130 billion in insured losses to the private sector and government-sponsored programs. That’s 129 per cent higher than the US$56 billion in 2016, and significantly more than the 2006-2016 average of US$51 billion. In fact, only two other events in the last 30 years resulted in higher numbers than 2017 – Hurricane Katrina in 2005, and the 2011 earthquake in Japan.5
What made 2017 stand out?
After a relatively easy first half of the year, the latter part of 2017 was when things went awry. Last year’s estimated insured loss of over US$130 billion, indicates Dom, were due mainly to losses in Q3 and Q4 caused by hurricanes, severe weather and wildfires.6
Dom says it’s not unusual that the U.S. saw the most significant impact last year – our neighbours to the south continue to be the hub of catastrophic activity worldwide, whether it’s hurricanes, flooding or wildfires. Hurricane Harvey, Hurricane Irma and Hurricane Maria caused the most significant impact on the industry and it is only the second season on record to feature two land-falling category five hurricanes.7 Severe weather resulted in US$23 billion of insured losses in 2017, 90 per cent of which occurred in United States. Still in the U.S., the wildfires in California contributed an estimated US$10 billion of loss to the 2017 numbers, with insurance penetration near 100 per cent high risk and CAT reinsurance exposure.8
Most people don’t realize that the tourism industry is impacted most by these catastrophic events, especially in the U.S. Hurricane Irma’s path of destruction along the Florida coast significantly disrupted the region’s thriving tourism sectors. And because many destinations impacted by extreme weather events rely on tourism as a source of income, and it’s difficult and time consuming to rebuild damaged or destroyed infrastructure, they suffer the most.
A surge in alternative capital
With the rise in catastrophic weather events worldwide and their impact on the industry, the appetite for risk exposure is diminishing. This is evident in the surge in alternative capital – particularly in the form of catastrophe bonds – from investors who are looking at the insurance industry as a source of opportunity and a way to diversify to minimize exposure, says Dom.
The alternative capital sector now plays a significant role in global retrocession and U.S. property catastrophe reinsurance. It has outpaced traditional capital noticeably over the last few years, growing from US$10 billion in 2005 to an estimated US$90 in 2017, and currently making up 14 per cent of the total reinsurance market. Traditional capital, which has remained stagnant in the last few years, only saw a one per cent increase from 2016.9
In fact, the hurricanes in 2017 were the first real test of the alternative capital sector – a test which resulted in strong market response and promise for the future of the sector.
What’s next? A look ahead
While 2017 was the third-largest catastrophe year in the past 25 years, the impact on the insurance industry was not as significant as anticipated. Despite the devastating insurance losses, capital remains abundant, essentially consistent and stable, Dom clarifies. But weather will continue to be a factor, he warns. Weather patterns are changing all the time, and the impact of weather-related events will grow. It’s crucial that the insurance industry stays informed, flexible and creative when it comes to risk management solutions for catastrophe events.
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