World

Natural catastrophes and man-made disasters in 2018: “secondary” perils on the frontline

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Executive summary

The catastrophe experience of 2018 reaffirms that the loss impact of secondary peril events is anything but “secondary”. Total economic losses from natural catastrophes and man-made disasters in 2018 were USD 165 billion. Insurance covered USD 85 billion of those losses, the fourth highest one-year aggregate industry payout ever, and above the previous 10-year annual average of USD 71 billion. Of last year’s insured losses, USD 76 billion were due to natural catastrophes and of those, more than 60% of claims were to help populations impacted by secondary peril events. Tragically, 13500 people lost their lives in all catastrophes last year.

Secondary perils can be independent small to mid-sized events, or secondary effects of a primary peril. Their associated losses have been rising due to rapid development in areas exposed to severe weather conditions. We expect this trend to continue given ongoing urbanisation, growth in concentration of assets in exposed areas, and long-term climate change projections. The world is getting warmer, leading to more occurrence of extreme weather conditions and associated secondary perils (eg, drought and wildfires) and secondary-effect peril events (eg, torrential rains, storm surge-induced flooding). The single biggest natural catastrophe insurance loss-event of 2018 was Camp Fire in California (USD 12 billion), a “secondary” peril.

Indicative of a growing trend, the combined insured losses for 2017 and 2018 resulting from natural catastrophes were USD 219 billion, the highest ever for a twoyear period, with more than half due to secondary and secondary-effect peril events. Stakeholders in building resilience – including insurers ‒ are well advised to pay more attention to the growing risk these perils present. The global all-catastrophe protection gap of the past two years combined was also impressively large at USD 280 billion, and more than half of that resulted from independent secondary and secondary-effect peril events.

The paradox is that the insurance industry is well capitalised to absorb this risk. According to Swiss Re estimates, total capital in the non-life re/insurance market (including alternative capital) was more than USD 2 trillion at the end of 2018. Main explanations for the underinsurance are lack of consumer risk awareness and poor understanding of catastrophe insurance covers, and on occasion hesitation to provide cover where risk assessment is uncertain. Given their unique features such as being highly localised, modelling secondary peril risks can be difficult, more so than for peak peril losses where the industry has tended to focus.

The existing protection gap is an opportunity for the insurance industry to both grow and to help more of the global population be better prepared to manage the financial hardship that disaster events can inflict. This includes fostering consumer awareness, and developing a greater product range and targeted distribution for catastrophe covers. In the face of rising losses from secondary and secondary-effect peril events, by leveraging latest technologies insurers can focus more on developing appropriately regionalised models to assess the risk posed by the perils, the variables of which will likely be in a continual state of flux due to ongoing land-use changes and greater occurrence of extreme weather events.

Insurance’s main value proposition is to absorb and manage risk. Re/insurers can also build socio-economic resilience through their investment activities, in particular by being able to invest more in long-term infrastructure projects. There are many examples of disaster mitigating defences having been strengthened as part of reconstruction efforts after a catastrophic event. With a more conducive investment and regulatory environment, insurers can play a much more effective role in ex-ante preparation. According to Swiss Re Institute estimates, global re/insurance assets amount to approximately USD 30 trillion. Even a small part of this could unlock a significant amount of capital for deployment into long-term resilience-building infrastructure projects. In addition, public private partnerships in infrastructure would bring additional benefits of reducing the burden of project costs on governments and develop a broader culture of effective risk-sharing.