How natural catastrophes and inflation are creating a perform storm for insurance

The 34-page report revealed that the main driver of growing losses are economic growth, accumulation of asset values in exposed areas, urbanisation, and rising populations – often in regions susceptible to natural perils – rather than the physical destructive force of natural catastrophes themselves.

Swiss Re’s experts expect these and the evolution of a range of present-day risk factors like climate change effects and – of late – inflation, will continue to drive losses higher unless the industry gets to grip with these risks and works with policyholders and legislators to address these issues.

When Swiss Re took a deep dive into factors causing problems in the last 12 months, pandemic-induced supply chain disruptions and large monetary as well as fiscal stimuli plus soaring food and energy prices due to the war in Ukraine were found to have compounded inflation pressures.

Inflation increased the nominal value of buildings, vehicles and other insurable assets, in turn pushing up insurance claims for damage caused by mother nature.

According to Swiss Re, the impact of the events of the past 12 months has been most immediate in the construction sector with increases in the costs of materials and labour shortages leading to claims for greater amounts of cash to cover the price of building repairs.

Holistic roadmaps

To address the combination of today’s risks that are causing a perfect storm for insurers, Jason Richards, chief executive of UK and Ireland for Swiss Re, said holistic adaptation roadmaps that cut across all levels of society and sectors are vitally needed, and the public sector were required.

He said it is then down to insurers and other parties to embrace the measures agreed upon in these roadmaps and further scale, maintain and embed the appropriate management actions.

Without such action, the report makes it clear that natural catastrophe insurers may find themselves struggling to keep pace with pricing 12-month policies that will keep up with the cost of a claim.  

As inflation has increased the nominal value of insurance assets, Swiss Re found this has pushed up insurance claims for natural catastrophe damage and calculated insured losses from natural catastrophes have confirmed the long-term expectation that these will grow 5% to 7% a year.

When it comes to global trends, Swiss Re pointed out rather than the physical destructive force of catastrophes themselves, found the main driver of natural catastrophe losses was economic growth and accumulation of asset values in exposed areas, as well as urbanisation and rising populations, often in regions susceptible to natural perils.

The report also noted there are longer-term trends emerging globally, such as a doubling of the share of natural catastrophe insured losses from wildfires in the past 30 years, while weather variability and anomalous atmospheric circulation conditions are causing severe drought and heatwaves across the world – with the UK acting as a stark example with the driest February this year in 30 years.

UK impact

At a UK level, the report finds total economic losses from natural catastrophes stood at $0.9bn (£0.7bn) in 2022 and $0.8bn of these losses were covered by insurance, up from $0.7bn in 2021.

This equates to a protection gap of 17%, down from 24% in 2021.

Richards said although the UK’s protection gap from natural catastrophes might be low when compared with other regions, the 2022 losses serve as a reminder of the ever-present risk of winter storms and flooding, but also the growing risk of droughts.

Richards added: “Known for its wet and windy weather, windstorms and floods are both significant contributors to the loss figures we see in the UK today.

“At the same time, higher average temperatures resulting from climate change are increasing the intensity and frequency of heatwaves during the summer and the volatility of existing weather patterns in the winter. Last summer saw the UK recording its highest temperature ever at 40.3°C.

“The UK has just experienced the driest February for 30 years, a trend only expected to become more pronounced over the coming years. This is a problem as ground and soil hardened by drought will be less absorbent during subsequent instances of heavy rainfall, triggering flash floods as seen in parts of the UK following July’s heatwave.

“While the re/insurance sector has a key role to play in boosting resilience against such events, its ability to curb resulting losses has its limits. Insurance is no substitute for a robust climate mitigation plan and other adaptation measures to lessen risks.”