Sigma No 1/2018: Natural catastrophes and man-made disasters in 2017: a year of record-breaking losses
Total insured losses from natural catastrophes and large man-made disasters were USD 144 billion in 2017. An active hurricane season in the North Atlantic, and a series of wildfire, thunderstorm and severe precipitation events across different regions pushed global catastrophe claims to their highest level ever recorded in a single year. Total economic losses were USD 337 billion, making an all-peril global catastrophe protection gap of USD 193 billion in 2017. Globally, more than 11000 people lost their lives or went missing in disasters, while millions were left homeless.
A notable feature of last year's losses is that atmospherically-induced risk factors contributed the largest part. In particular, a cluster of category 4+ hurricanes (Harvey, Irma and Maria (HIM)) in the North Atlantic left a trail of destruction across the Caribbean Islands, Puerto Rico, Texas and parts of western Florida. According to latest estimates, overall insured losses from HIM were around USD 92 billion. The hurricanes struck multiple locations in quick succession and impacted many lines of business. The final loss total will only be known once all claims have been processed but even so, 2017 is likely to go down as one of the costliest North Atlantic hurricane seasons on record. Ongoing urbanisation, human development in exposed coastal territories and effects of climate warming added strongly to the mix, and will likely do so again in the future.
In other disasters, wildfires ravaged parts of California and other countries. Insured losses from wildfires worldwide last year were the highest ever recorded, totalling USD 14 billion. Projected changes in climate, including warmer temperatures and prolonged periods of drought, are expected to continue to increase the frequency and severity of large fire events. Associated insurance losses will likely grow with more assets exposed to fire risk such as, for instance, the many new homes in the US that have been built on land adjacent to forests and undeveloped natural areas.
There were also a number of severe precipitation events in 2017, which once again highlighted the vulnerability of an increasingly urbanised world to flood events. Coastal megacities such as Houston have repeatedly suffered major flood events in recent years. And in last year's monsoon season, very heavy and long running rains caused huge damage and loss of life in Nepal, India and Bangladesh. The severity of precipitation cannot be controlled, but higher investment in flood protection defences and urban planning can strengthen hazard mitigation.
This sigma includes a special chapter on HIM. From a risk management perspective, the HIM experience highlights that aside from focus on the severity of a single storm, hurricane frequency is an as-important variable to consider in modelling loss scenarios. So too are secondary risk factors like excessive rainfall that can come with hurricanes, as was the case of Harvey which led to widespread flooding in Houston. Indications are that the North Atlantic remains in an active phase of hurricane activity, and climate models predict more frequent occurrence of various characteristics observed in the HIM storms. The follow-through is that hurricane clustering will likely occur more frequently in the future. This is cause for concern, not least because HIM do not represent a worst-case scenario: Swiss Re's natural catastrophe model contains various scenarios where annual insured losses resulting from hurricanes exceed USD 250 billion. In the interests of societal resilience, further research on clustering of hurricanes and the impact of global warming on storm formation is required.
It may take a long time for communities in the Caribbean to recover from the wrath of HIM. Despite insurance industry pay outs, the amount of uninsured damage remains large. The Caribbean Catastrophe Risk Insurance Facility has covered part of the losses, paying out USD 54 million to help those Caribbean islands affected by Irma and Maria, which provided governments with liquidity for immediate post-disaster response efforts. The fast payout (within 14 days) and subsequent liquidity, while small relative to the overall losses, highlights an important benefit that insurance can provide, and speaks to the utility of insurance in reducing existing protection gaps.