Not every record that gets set is a good one- just ask Bill Bergen, Tim Hardaway, or the 2008 Detroit Lions.  2017’s slate of natural catastrophes, which included a record for weather-related losses and a whopping $353 billion in total natural catastrophe losses was not exactly a year to remember.  But perhaps we should, particularly as we are in the midst of the same natural-disaster-heavy months that brought the most losses last year.

Of the $353 billion lost in 2017, 38% were insured losses (a nearly record-setting $134 billion, falling just short of 2011’s $137 billion record.)  This was up over a massive 139% from 2016, although not exactly an outlier- in this millennium, 9 of the 18 years have seen natural catastrophe losses top $100 billion.  For specifically weather-related losses, 2017 was a record year, with $132 of the $134 billion total insured losses due to weather-related incidents.

In 2017, 31 natural catastrophes crossed the $1 billion mark in economic loss, and a large portion of that $132 billion in insured losses to weather-related incidents came from the three North American hurricanes: Harvey, Maria, and Irma.  For a breakdown of their costs, see the chart below.

Natural Disasters in 2018, To Date

Fortunately, thus far this year, global natural catastrophe losses have been significantly reduced versus 2017.  Hurricanes Michael and Florence have maintained the unfortunate trend of costly North Atlantic weather events, but their effects have thankfully not reached the heights of 2017’s trio.

Over the ocean, Hurricane Florence had reached a Category 4 classification, but when it made landfall on September 14, it had degraded all the way down to Category 1.  As such, the majority of its damage was not wind damage, but rather due to the 50 plus inches of rain it dumped across the Carolinas.  For loss purposes, this is an important distinction, as an estimated 70% percent of those flood losses were uninsured.

Michael’s effects are still being estimated, but it appears it will be evaluated at a lower economic cost, although with the majority of its damage coming from its winds, the insured penetration is likely to be significantly higher than Florence’s.  The agricultural toll alone from Michael has been estimated at over $2 billion, with Georgia estimating $300 to $800 million in losses to their cotton industry and Florida estimating a $1.3 billion hit to their timber.

Numbers are all estimated.  Estimations were taken from a number of sources and the numbers displayed above are from the higher end of those estimations.

Florence, in combination with Typhoons Jebi and Mangkhut, has made September the costliest month of 2018, according to reporting by Aon.  However, thanks to a “relatively benign” start to the year, September and October have simply pushed 2018 closer to a “normal” catastrophe loss year, according to Fitch Ratings.

Impact on the Insurance Industry

So were 2017’s losses an historic outlier, given how far they stand above the years that bracket them?  Or were they a portent of what’s to come, considering 2017’s record output and the year-to-year consistency of North Atlantic weather events?

The UN’s Intergovernmental Panel on Climate Change will tell you it’s the former.  In this month’s Climate Change report, the panel examined potential differences between limiting global warming to a 1.5 degree Celsius raise (versus the 2 degree target intended by the Paris Climate agreement).  The report alleges the difference of just 0.5 degrees would amount to a significant difference in loss-creating weather activity.  If the global temperature is not managed by an embrace of clean energy, the panel warns, we will see more violent storms, more severe droughts, and thereby more economic loss via natural catastrophe.

A recent report by Alison Martin, Zurich Insurance Group’s Chief Risk Officer, apprises that the insurance and re-insurance sector is “one of the most vulnerable to climate change.”  The report urges businesses to develop a “climate resilience adaptation strategy”, decoupling economic growth from greenhouse gas emissions.  Failure to do so, the report contends, will result in a continually rising global temperature, and with it, increased physical risk.

Major agricultural losses in the timber and cotton industries make up a large portion of the economic losses sustained from Hurricane Michael.

This is not to say insurers have been caught unawares by the massive insured losses from recent natural catastrophes. Re-insurers have not had much difficulty absorbing Michael and Florence due to a large reserve of capital.  However, that strength of capital is owed in part to a relatively calm Q1 and Q2, and 2018’s status as a relatively “normal” natural catastrophe year thus far.  It’s certainly possible to imagine substantially more material losses if we’re subjected to another unfortunate year like 2017, but so far, insurers and re-insurers have managed the losses well.  

The Zurich report wonders if there may be even more room for improvement.  It outlines a five-step approach to environmental risk management that emphasizes a “granular view of the risks involved” (for instance, location profiling).  But they also advocate that companies develop a mitigation strategy, with Martin noting that “We don’t just want to insure people against an event happening, we want to make sure that whatever the impacts of the event are, it’s less than it would have been.”  Included among the suggestions in the report is for businesses to monitor the transition to greener energy, not simply for the sake of the environment, but as potential investments.   As an example, the report cites a 2017 International Finance Corporation suggestion that climate change could create investment opportunities worth over $20 trillion by 2030, solely from emerging markets.

Reports like the IPCC’s and Zurich’s make plain their belief that we’re headed for more years like 2017, not less.  A glance at the catastrophe trends of our recent past would seem to corroborate that, with both reported natural disasters and economic losses from natural disasters experiencing a sharp increase post-1980 (although, mercifully, death rates are in decline).  The insurance industry remains a driving force in determining the economic response to these catastrophes, and these reports are making the case that better accounting for environmental factors might not be just ethical, but profitable, as well.

Although this article references a “relatively benign” year for natural disasters, ACS does not diminish the incredible loss of life and property caused by these events.  To help with hurricane Florence relief efforts, please see the resources here.  To help with hurricane Michael relief efforts, please see the resources here

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