Why mitigation matters amid US$100 billion plus cat losses

The 2023 weather, climate and catastrophe insight report revealed that natural disasters caused US$313 billion in economic losses globally in 2022, 4% above the 21st-century average.

Half of the total global losses occurred in the United States. About 42% of losses – US$132 billion– were covered by insurance, making 2022 the fifth costliest year for the industry on record.

“Mitigation matters, whether it’s better building codes, building away from the risk where possible, or doing whatever it takes to maintain properties,” said Dan Dick (pictured left), executive managing director & global head of property analytics, reinsurance solutions at Aon.

“We saw that in Hurricane Ian, where newer structures and roofs built to the more stringent Florida code performed very, very well.”

For Dennis Chua (pictured right), senior vice president, head of Canadian and Caribbean catastrophe management, reinsurance solutions at Aon, risk education will need all hands on deck.

“Education means helping insureds understand what the peril is and what they need covered, from the commercial as well as the homeowner side. Unfortunately, many don’t know what they’re supposed to know,” Chua said.

“How do we work together as an industry to help control that? How can agents and brokers do a better job at explaining what a policy does or doesn’t cover prior to binding? That’s one of the key takeaways from this report.”

Which natural disasters drove the most losses in North America in 2022?

Hurricane Ian dominated Aon’s list of disasters generating the most economic losses in 2022 at US$95 billion, US$52.5 billion of which were insured.

The storm was responsible for about 30% of economic and 40% of insured losses globally last year. It has also become the second costliest natural disaster ever recorded for insurers, surpassing 2005’s Hurricane Katrina.

Hurricane Fiona was the most intense post-tropical storm to hit Canada, causing US$4 billion in economic losses including US$1.6 billion in insured losses.

Meanwhile the May 21 derecho that lashed densely populated areas, including major cities in Ontario and Quebec, became one of Canada’s costliest severe convective storm outbreaks on record. The event drove payouts of US$900 million.

“Water perils have triggered some serious losses in the Canadian industry – of the top 10 costliest disasters ever in Canada, historically 60-70% of it is some form of water, either liquefied or frozen,” said Chua.

“These events are creeping up on the balance sheets of reinsurance companies.”

Closing the protection gap

The Aon report, which identifies global natural disaster and climate trends, also showed that the protection gap (58%) was the lowest on record in 2022.

But according to Dick, this is largely because the biggest losses were driven by disasters in the US and Europe, where insurance penetration is high.

“We did not see the insurance protection gap in 2022 that we’ve historically seen over the past several years,” he said.

Strengthening resilience will be paramount moving forward, the Aon report stressed. Adoption of effective adaptation strategies and better disaster management and warning systems will better protect communities in the face of new extreme weather records.

Educating people on the perils that come with the changing climate and getting adequate insurance coverage is also a key step, according to the two executives.

“We think there’s an opportunity to do more to close the flood insurance gap in the US. Not every consumer sees the value in buying flood insurance, especially if they’re not in one of the designated flood risk areas,” said Dick.

“Secondly, while the federal government does insure most of the special flood hazard areas, it’s hard for private carriers to get a good spread of risk – it’s a combination of both these factors that make it difficult to write business in the US.

“But there has to be more education on insurance and the fact that flood risk is, in essence, everywhere. We need to get a product out there that’s priced in a way that’s commensurate with the risk.”

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