Aon: Uptick in Nat Cat Losses Drives Need to Communicate
As losses from secondary perils continue to reach levels typically seen from hurricanes and earthquakes on an aggregate or individual event basis, insurers need to lead the discussion on risk mitigation, says Dan Dick, Global Head of Property Analytics at Aon’s Reinsurance Solutions.
Meg Green (MG): Could you provide us with an overview of losses in the first half of 2022 and where that stands in the historic context?
Dan Dick (DD): The first half of 2022 was quite active. We had recorded significant billion-dollar events on virtually every major continent. The costliest for the insurance industry was in Australia, which is still seeing loss development today, that resulted from significant and historic flooding during February and March. It is currently the second-costliest event on record for the Australian insurance industry. Another notable event was a multibillion-dollar offshore earthquake that rattled parts of Japan. Multiple billion-dollar industry severe convective storm events in the United States also occurred.
All these bigger events have added up to an above average start to the year. We released an insured loss estimate of $39 billion in mid-July, but noted an important caveat that we anticipated notable loss development given the size of some of these events. That has been the case. We’ve already added another $5 billion in insured loss to the H1 total since publication. First-half totals this century have averaged $33 billion, so the globe has been active even before we reached the historical “peak” of losses in Q3.
MG: Are traditional secondary perils still considered secondary?
DD: That's an important question. Should we still be bucketing events as primary and secondary? There is a strong argument that we should treat most perils with equal response since we are seeing such increased growth of loss costs associated with these ‘secondary perils’ such as severe convective storms, floods, wildfires, winter weather, etc.
Moving forward we must be thinking about these events as having the potential to cause levels of loss that historically has been assumed that only hurricanes or earthquakes could cause. The $10 billion insured loss threshold has often been deemed that magic number that would put an event into rare air from a loss occurrence. But over the past five to 10 years, we have seen examples of virtually every major peril now have at least one individual event which has reached that $10 billion threshold. This reinforces that that even these ‘secondary’ perils can end up leading to ‘primary’ level impacts.
MG: What's your view on the future of cat activity? Do you expect to see this continue?
DD: It is essentially inevitable that we will continue to see losses increase, and we can say that confidently just based on socioeconomic factors alone. We simply continue to see people moving into risky and highly vulnerable areas. But it's not just the socioeconomics that we have to be looking at. The reality is that the influence of climate change continues to become more evident on individual weather and climate-related events. This is leading to more intense events and more unusual type of behavior that is changing our understanding of what to expect and where to expect events to occur. When you combine these hazard and socioeconomic factors together, it inevitably is going to lead to higher loss totals.
How we're preparing, how we're working across public and private sector entities to find ways to better mitigate, and how we’re smartly investing in ways to try to limit risk -- that's going to be critical for us to move forward and feel more confident in an approach of how to anticipate and respond to more expensive and more impactful events.
MG: Are there certain areas of the world that you see as a greater risk for a nat cat losses?
DD: That's a tough one to answer because you can point to every continent on Earth and see where climate and overall natural hazard risk is evolving and continuing to grow. For the insurance industry, we continue to see business growth into developing markets where ample opportunity exists to build an insurance presence. This will help bring down the wide non-U.S. protection gap that exists. As risk evolves and the focus of insurance business broadens, I believe there will be more focus in areas across parts of the Middle East, Africa, Latin America, and Asia. These are nontraditional areas where we have not seen many large industry events historically, but may take on more prominence in local and regional portfolios in the future.
MG: How are the models evolving to keep up with the trends and cat losses?
DD: The cat models have historically done a great job in terms of accounting for historical events and properly gauging what current or near-term risk looks like from a hazard footprint and financial loss perspective..
As we continue to shift our focus towards trying to anticipate what future environments may look like given climate change, it is forcing a re-calibration of how catastrophe models are going to be expected to function. Depending on the type of client, there will be an expectation to not only quantify portfolio risk in the next few years but additionally decades into the future. Real estate or asset managers, for example, will have a longer-term view requirement. The challenge beyond simulating future climate scenarios is additionally trying to anticipate future built environments and exposure. At Aon, there is a real push to collaborate with academic institutions who are leading in the space of climate change research. The value of working with researchers at places like Columbia University (Tropical Cyclone), the University of California-Merced & Los Angeles (U.S. Wildfire), the University of Illinois and Central Michigan University (U.S. Severe Convective Storm), or Karlsruhe Institute of Technology (European Flood & Windstorm) is invaluable to gain expert advice and bring leading peer reviewed science into the catastrophe model vendor space. We’re looking at various climate scenarios to get a sense of what future conditions may look like and use that information to develop new event sets which can allow a comparison of current conditions and what the future may bring. That allows you to quantify how the risk will evolve and give underwriters more help on how to better price or account for future risk.
MG: Is there anything else top of mind?
DD: The communication of risk. We really need to continue to press forward in terms of how we're explaining risk not just to our client base within our own industry, but we need to be working with government stakeholders, with academia, with emergency management groups to highlight where risk is evolving because all of us have a stake in this together to find solutions to help people. A collaborative spirit and goal to clearly identify and explain risk to a broader audience can and will pay dividends as people gain better perspective of what we’re facing. This will really help to not only minimize property damage, but more importantly, save lives.