Led by the deadly and costly Hurricane Ida and massive flooding in Europe, the world racked up $329 billion in economic losses linked to severe weather last year, and only 38% of that bill was covered by insurance.
Those results prompted major reinsurer Aon AON, -1.33% to warn in a report Tuesday that the mounting cost from climate change-fueled disasters is only in the early stages unless more complete insurance assessment and risk-pricing catches up. That could cost businesses and their customers more, make homeownership less accessible, and change how investors view stocks SPX, -0.49% in those companies seen most vulnerable.
Total economic losses tallied $343 billion, Aon said, $329 billion of which resulted from weather and climate-related events such as hurricanes, flooding, wildfires, tsunamis and drought. That left 2021 as the third costliest year on record after adjusting for inflation.
Natural disasters happen every year, but the collective scientific community has warned that warming global temperatures create more extreme weather, sometimes pushing hurricanes further inland or extending what is typically thought of as storm season for a particular region.
Wildfires in California and elsewhere increased in prominence as conditions have become more conducive for rapid fire spread. The term “fire season” is becoming officially outdated as the risk of dangerous wildfires is prevalent during the full calendar year, Aon officials said.
“There’s no question that the finger prints of climate change are already here today… more intense weather, impacting more things in harm’s way,” Steve Bowen, meteorologist and head of catastrophe insight at Aon, told MarketWatch. “When that happens, the insurance industry has to step back and recalibrate and determine where there need to adjustments in pricing.”
Modern life means both that it is more efficient to warn people when severe weather lurks, allowing for property protection and flight to safety, but also that ever greater development along vulnerable coasts and in population clusters puts more lives and structures in the path of destruction.
As the burning of oil CL00, +2.40% and gas NG00, +0.18% send the bulk of carbon and other emissions into the atmosphere, last year was the world’s sixth-warmest year on record. Land and ocean temperatures were 0.84°C (1.51°F) above the 20th century average, by some measures. The hottest temperature ever reliably measured on Earth was unofficially recorded in Death Valley, Calif., on July 9, 2021, at 54.4°C (130°F). And the decade that just ended was the hottest for a 10-year time span ever.
50 billion-dollar disasters
While 2021 economic losses were up from 2020, the number of notable disaster events slightly decreased, which means fewer events overall proved just as costly; 401 notable disaster events were recorded in 2021, down from 416 in 2020.
There were 50 instances of billion-dollar economic loss events, the fourth highest year on record. And only 20 of those had enough insurance on the property involved to cover the billion-dollar threshold.
Costs were even greater outside the U.S., as Germany, Belgium, Austria, Luxembourg and China recorded the costliest insurance industry events on record, Aon said. Floods were a major concern.
MunichRe, the German reinsurer, says its calculations show global losses caused by natural disasters came to $280 billion compared with $210 billion in 2020 and $166 billion in 2019.
“‘Climate change is not necessarily causing all these [storms], but it is enhancing these events and in areas where the impact was much smaller before.’”
— Aon’s Steve Bowen
Many insurance and reinsurance plans — coverage for the consumer-facing insurers themselves — are renewed on a short-term basis, often annually. It can be hard to account for the damages that unchecked global warming could bring in the coming decades, which influences everything from credit for major construction projects to preventative measures, such as sea walls.
“Climate change is not necessarily causing all these things, but it is enhancing these events and in areas where the impact was much smaller before,” said Bowen. “But we’re not pricing (coverage) for 100 years, we’re trying to price for next 365 days, so it can be rolling the dice. Still, the repetitive type of losses over 20 years makes it easier to get a sense where price changes are needed.” Aon says artificial intelligence and predictive models must evolve faster.
“Multi-peril” events are also on the rise. For instance, Hurricane Ida, which cost more than $75 billion in economic losses, hit several U.S. states in late summer 2021. Ida was not limited to its coastal impact along the Gulf of Mexico. Powerful storm remnants hit the populous Northeast, bringing costly flooding inland as well as tornadoes as far as Pennsylvania and other places.
High water, high stakes
The system for insuring against flood damage is getting increased scrutiny as climate change intensifies.
Currently, the federal government, via the National Flood Insurance Program (NFIP), is the primary insurer when it comes to floods, handling both the determination of what makes up a flood zone and the insurance claims. Flood zones, for instance, can influence what degree of insurance a lender might require if borrowing for a property.
But beginning last fall, the NFIP began a complete overhaul to make insurance pricing more accurately reflect each property’s unique flood risk, it says. And, finally, climate change will be factored in.
“No question that this is the most substantive change to the program going back to 1968,” David Maurstad, deputy associate administrator for federal insurance and mitigation and senior executive of the flood insurance program, said at the time.
Whether the changes and fresh eyes come about fast enough if still open to debate, said Aon’s Bowen.
“There’s a big challenge with flooding. We see changes in land use and altering the terrain on a daily basis… Texas, Florida, the Southeast (U.S.)… the government will really need to be updating these [flood-zone] maps more frequently. We see critical higher risk today than even five years ago,” Bowen said.
“‘No question that this is the most substantive change to the [national flood insurance] program going back to 1968.’”
— NFIP’s David Maurstad
Asked if there will be a market for private insurance to pick up where government insurance leaves off, especially when it comes to flood protection, Bowen added: “If private insurance sees that premiums are fairly priced for properties that are highest risk, we could see growing appetite for private to take a bigger role in the market.”
“That would require a fundamental change to flood insurance, but I think some [across the business community] would welcome that.”
Shrinking world, growing risks
Rising physical damage loss is leading to lingering global disruptions to supply chains, Aon said, particularly as in-demand consumerism and one-day delivery has goods and services shuttling around the globe and over U.S. roads faster than ever.
Even without the added risk of climate change, strained supply chains and the ripple effect of higher inflation are already showing what can happen in the face of a global pandemic that clamps down on trade flow.
“When your physical locations [such as a manufacturing plant or a logistics center] are damaged from greater weather events, business suffers from that interconnectedness and that can lead to longer waits or higher costs for the end-consumer,” said Bowen.
He explained that demand for the already existing “business interruption” policies — for instance the type of claims that kicked in when the Texas ice storm power outage shut down busy parts of that state — are likely to jump in demand as climate change persists.