Latest sigma: Insurers hit by USD 89 billion of losses from disasters in 2020

30 March 2021

Ob River Flood June 2015 Aerial View of same houses in vicinity of Nizhnevartovsk, Tyumen region, Russia. Aerial view of the residential area of the suburb of Nizhnevartovsk during the flood of 2015.

According to the latest sigma report from the Swiss Re Institute, insured losses from all of last year’s disaster events around the world were USD 89 billion which the Institute says is the fifth highest on sigma records.

The report’s findings show that global insured losses from natural catastrophes were USD 81 billion in 2020 and man-made disasters resulted in USD 8 billion insured losses.

Secondary peril events accounted for more than 70% of the natural catastrophe insured losses, resulting mostly from severe convective storms (SCS) and wildfires. In the last 10 years, SCS have contributed more than half of global insured losses from secondary perils. Given the high losses, this latest sigma includes an in-depth focus on severe convective storms.

The report cautions against forgetting primary perils, noting that 2020 serves as a reminder of the peak-loss potential from primary perils. In particular, the new sigma report notes last year’s North Atlantic hurricane season was very active and it was purely by chance that the storms hit areas of low population density/activity and/or low insurance penetration.

The report goes on to say that history indicates a similar trend of rising losses from primary perils, suggesting that future peak-loss scenarios could also grow significantly. For example, the Swiss Re Institute estimates that in a year of both a peak-loss inducing hurricane season and multiple secondary peril events, combined annual insured losses could be as high as USD 250-300 billion.

The underlying factors influencing primary and secondary peril event outcomes are the same, says the sigma report, including changing socio-economic developments and climate-change effects. Primary perils are well-monitored by the insurance industry, but secondary-peril risks less so. Risk assessment efforts need to rebalance to make secondary perils a priority.

The Swiss Re Institute advises that, given the dynamic nature of risks, forward- rather than backward-looking data analysis is paramount to not underestimate the scale of potential present-day and future losses. To this end, the Institute says that risk model build also needs to de-bias away from reliance on historical data observations, which may not be a good proxy for present-day conditions.

Jérôme Haegeli, Swiss Re Group Chief Economist said: “2020 will be remembered for the global health and economic crisis triggered by the COVID-19 pandemic. But while COVID-19 was a stress test for society and the economy, it has an expiry date – climate change does not. In fact, climate change is already becoming visible in more frequent occurrences of secondary perils, such as flash floods, droughts and forest fires.

“Natural disaster risks are increasing and climate change will significantly exacerbate them. This underlines the urgency to better protect our communities against catastrophic losses while dramatically reducing carbon emissions. Unless mitigating measures are taken, such as greening the global economic recovery, the cost to society will increase in the future,” Haegeli continued.

“In many regions of the world, the need to close protection gaps persists for both primary and secondary peril exposures. Re/insurers can do more to help people, businesses and societies become more resilient,” Haegeli concluded.

Martin Bertogg, Swiss Re’s Head of Cat Perils said: “We have seen an increase in losses from secondary perils in recent years, such as severe convective storms, floods and wildfires. The same upward loss trend for primary perils and 2020 serves as another reminder of their peak loss potential. The two peril types are affected by the same loss-driving risk trends, including population growth, increasing property values in exposed regions and the effects of climate change. This suggests that with climate change, future peak loss scenarios could also increase significantly.

Bertogg continued: “There were a record-breaking 30 named storms during hurricane season 2020 and a further record was set when 12 of those made landfall in the US. It cost the insurance industry USD 21 billion in claims. Yet, incredibly, we would regard that as somewhat of a lucky escape.

“Given the dynamic nature of risks, re/insurers’ risk models need to increasingly consider forward-looking risk trends, such as climate change, urbanisation and socio-economic inflation – rather than relying on historical data observations – when assessing the potential magnitude of losses,” Bertogg concluded.

Download the report

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