Little feels natural about natural catastrophes, and as we become accustomed to the consequences of the climate emergency, insurers are signing-off on a 10-year high of losses on the back of extreme weather events.
According to Steve Bowen, managing director and head of Catastrophe Insight on the Impact Forecasting team at Aon, data show that global insurers suffered a $42 billion (£30.6 billion) hit during the first half of 2021, with extreme cold in the US in February marking the greatest loss.
Yet this was only the tip of the meteorological iceberg. As the effects of climate change take hold, areas of the world that are not accustomed to extreme weather events are set to become increasingly vulnerable, with insurers set to foot the bill.
“If we look at somewhere like Texas, for example, it is not necessarily familiar with the prolonged cold that the state experienced in February,” says Bowen, highlighting an event in which 210 people died and a major power crisis resulted in a shortage of food, water, and heat, with 4.5 million homes and businesses in Texas being left without power.
“Many areas saw seven consecutive days of sub-freezing temperatures, which led to very extensive damage to property, the infrastructure grid, and subsequently resulted in roughly $15 billion in insured loss — by far the most expensive industry event we’ve ever seen for the peril.”
The events of February reshaped how the (re)insurance industry views the risk of extreme winter weather, and the value of losses that can occur.
Heavy Weather
The impact of extreme weather events in areas that do not typically experience them was the predominant driver of first half losses, while the regularly occurring severe convective storm events across the US contributed to the many billions of dollars’ worth of insured losses.
Convective storms, or thunderstorms, also reached historic levels in parts of Europe as separate outbreaks in late June combined to cause more than €4 billion in industry losses. Aon expects that the European flood event in July will be the costliest flood event on record for the continent, and second globally to the Thailand floods of 2011, resulting in a minimum insured loss of €9 billion. In Germany alone, at least 180 people died from the flooding and at least €7 billion worth of insured losses are anticipated. However, Aon highlights that the situation remains fluid and expects adjustments to the loss figures in the coming months.
But the correlation between climate change and extreme weather events is not as straightforward as it may seem. “We have not yet definitively seen a significant uptick in the overall number of events,” says Bowen.
“But what we are seeing is a change in the behaviour of the events that actually do occur. As a result, modelling the uncertainties of climate change is vast and complex, putting insurers in an unenviable position. There are a range of outcomes of the human impact on the environment, or biophysical processes, of which the scientific community is making progress in, but our understanding is still limited.”
With every 1° Celsius of warming, the atmosphere can hold 7% more moisture...[which] can bring a tremendous amount of rainfall.
However, there is a higher level of confidence in the impact of secondary perils — high-frequency, low-severity events, such as thunderstorms. Data and AI processes, and advancements in climate science, are enabling the industry’s understanding of how to accurately model the impact of these events.
But the climate is also quickly evolving. The historic rainfall seen in parts of Europe, as well as elsewhere in the world, can be accounted to global warming and the impact on atmospheric water retention. With every 1° Celsius of warming, the atmosphere can hold 7% more moisture, and when this coincides with a stationary atmospheric pattern, it can result in slow-moving storm systems that can bring a tremendous amount of rainfall over the same areas.
“We’ve seen the type of devastation that these patterns can bring, most recently in Germany, but we've also seen the impacts from temperature extremes as well, such as in the US in February and June,” says Bowen.
“Heat has resulted in both physical risk for people and livelihoods as well as non-physical risks, including direct impacts to infrastructure and supply chains. We are likely to continue seeing the fingerprints of climate change on individual events as they behave a bit more unusually, and in many cases, even more intense than what we've seen in the past.”
New Approach
It’s become necessary for the (re)insurance industry to change its approach to respond to climate change. That, in turn, is influencing the broader economy. Companies are starting to recognise that they need to have a plan in place to deal with increasing weather losses as climate disasters grow.
Bowen believes it’s essential to not simply rebuild properties damaged by extreme weather events to the same specifications as before, and we should consider retrofitting existing buildings to better withstand the growing risks.
“We're very optimistic that the tools and policies are more clearly coming into place, and if this momentum can be maintained across a series of different sectors, then we are on course to start putting a dent in some of the environmental trends we’ve seen in the past several decades,” he says.
“The insurance sector has really begun to change its thinking around climate risk, but these rhetorical plans must be quickly followed by actions.”
