What are the effects of global disasters on insurance premiums?

5th December 2017

The year 2017 is one that many in the insurance sector will probably wish they could forget. It has been one of the worst years for natural disasters, with insurers facing hundreds of millions of pounds in claims. Many have been forced to issue profit warnings and policyholders are likely to receive unwelcoming premium increases come January 2018.

Three hurricanes, two huge earthquakes coupled with a host of fires and floods are just some of the natural disasters set to cost the global insurance sector around $95 billion (£72 billion). This is according to Swiss Re, the world's second largest reinsurer, who admitted that they alone face losses of $3.6 billion (£2.7 billion) so far this year.

Reinsurers insure the insurers and as a result are generally expected to carry the can. Swiss Re has already stated that the two powerful earthquakes to hit Mexico in September 2017  alone, will cause it to incur losses of approximately $175 million. Like most other insurers, their biggest proportion of claim deficit has come as a result of hurricanes Harvey, Irma and Maria.

Specialists estimate that the insured losses from the hurricanes have cost the industry around $100 billion, which would exceed the industry-wide losses of $74 billion that was caused by hurricane Katrina, that devastated the New Orleans in 2005.

Swiss Re is not the only reinsurer to be hard hit. Munich Re already posted bigger-than-anticipated third-quarter losses and Hannover Re has only reported a profit after selling a substantial stock portfolio.

For insurers, the pressure is even greater. Zurich Insurance Group announced that the trio of hurricanes would likely trigger around $700 million in claims while Allianz has downgraded its profit outlook for the full year after increased claims from the natural disasters in North America.

While increasing premiums has always been the solution to cover these losses, pressure is mounting on the sector to look at alternative ways of limiting the damage caused by climate change. This is becoming more pertinent given the frequency of extreme weather quickly becoming the new normal. 

ClimateWise, a coalition of global insurers, brokers and industry service providers, estimates that the consistency of weather-related catastrophes such as floods, windstorms and droughts have increased six-fold since the 1950s and experts at the London School of Economics have already forecasted that a global temperature increases of 2.5°C would put $2.5 trillion of the world’s financial assets at risk.

Some insurers, like Munich Re, are reacting to the trend, by creating new climate change-related products, like their weather insurance that is aimed at those in developing countries and has also set up the Munich Climate Change Initiative. Along with Allianz and Hannover Re, this public-private innovation lab helps develop and test new ideas with regard to climate change-driven extreme weather events.

Premium increases may be the short term answer, but it is simply not feasible on a long term basis.  Brokers too have a significant role to play and are urged to take the lead in guiding policyholders in all sectors to take practical steps in preparing for climate change. This includes encouraging homeowners and businesses to make buildings resilient to floods, fires, hurricanes and earthquakes.  

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