For the second year in a row, 2022 brought about insured losses of more than USD 100 billion. According to the reinsurerSwiss Re, this indicates a new norm for natural catastrophe losses and reaffirms a long-term growth trend of 5-7 % in annual insured losses.

 

A reinsurer accumulates losses from primary insurance companies. Confronted with climate change impacts, many reinsurers raise prices, limit coverage, and even exit some markets to safeguard their business.

 

Does this mean that your building might end up being uninsurable in the near-medium future?

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Disasters on the rise

Across the globe, 387 natural disasters have each caused damage above USD 1 billion and severely affected people’s lives. Counting 178 events, flooding was the more widespread form of disaster according to a world-wide tally by EM-DAT.

 

In the US alone, a catastrophic hurricane, a massive drought and 16 other major disasters brought the 2022 damage toll up to $165 billion and killed at least 474 people, according to the NOAA: National Oceanic & Atmospheric Administration.

 

However, disasters – and floods in particular – hit unevenly. Just as some geographies are more exposed than others, some buildings within an exposed geography may be more at risk than others. And these dynamics affect the insurance market.

 

Do disasters bring down profits?

The growth in natural disasters causes rising losses for insurers and reinsurers. This can affect the profitability of the sector, and reinsurers have in fact experienced a drop over the last decade.

Drop in insurance sector profitability since 2010. 5-yr evg. RoE. @Moody’s based on data from S&P Capital IQ and company reports.

Moody’s Corporation’s most recent survey of reinsurance buyers found that 4 in 10 respondents foresaw their rates to increase by more than 7.5% for property segments in 2023.

 

In Norway, a country exposed to floods, avalanches, and storms, the cost of disaster reassurance at the sector-wide Norwegian Natural Perils Pool has risen by 34% this year.

 

Analysis by Standard & Poor’s Financial Services LLC suggests that reinsurers, nonetheless, underestimate their exposure to natural disaster risk by 33%-50%. This may be a ticking bomb under the insurance sector, provoking sharp adjustments in business models, cutting away markets or locations, hence potentially leaving building owners uninsured.

 

Effects of disasters on access to insurance

Today, most reinsurers (71%) consider climate change in the pricing of their products according to a survey of 17 of reinsurers. Only a fraction (35%) spells out climate change as a specific price element which – on average – make up 0%-10% of the rate charged. As such, disaster risk does not determine market prices in any fundamental way, but it causes changes in the market as the below cases demonstrate.

 

California
  • Insurers and reinsurers are evaluating disaster risks after a period with 117% average-loss-ratios, indicating that claims are greater than collected premiums, according to Moody’s. The pay-outs were driven by wildfire losses in 2017 and 2018, but the statistics did not cover the impactful floods earlier this year, which only have added to the situation.
  • Regulation puts a limit on how much insurers can raise premiums for Californian house owners. To avoid further losses, insurers may opt away from certain locations, especially rural parts of the state. This pushes house owners in the direction of the insurer of last resort, California’s FAIR plan.
  • Here, property insurance is provided for high-risk properties other insurers refrain from. Still, all licensed property insurance companies are obligated to contribute to the FAIR syndicated insurance pool. Since the wildfires, the number of new FAIR insurance plans have tripled.
Trippled number of new FAIR plan policies in California. @Moody’s based on California Department of Insurance
United Kingdom
  • Parallel to the pooled disaster insurances of Norway and California, the UK has Flood Re, but it does not cover businesses. According to the The National Flood Forum, a charity-based NGO that helps, supports and represents people at risk of floodings, the gap in reassurance for small businesses can have severe consequences:

 

“…not being able to claim for losses if there is a flood can create difficulties in getting loans, managing cashflow, acquiring property, and entering into contracts.”

 

  • Despite this gap, a 2018 survey by the UK government found that a vast majority (97%) of small businesses at a high/medium risk of flooding had arranged commercial insurance without any difficulty at the time.

 

 

Norway
  • Leading insurer Norwegian Fremtind has been voicing the view that reinsurers are pushing the interpretation of ‘normal’. Climate-related risks may no longer qualify as incidental and unpredictable and, hence, outside the scope of the reinsurers’ offering. They will only insure larger events or infrequent disasters.
  • Despite premium increases, Norwegian insurance companies have had to carry larger shares themselves – or deductibles or excess, as known from a property insurance. This increases the risk local insurers face which they will in turn transfer to their client while also pushing for action from all levels of government.
  • This way demand for prevention will likely rise. Fremtind is one of the innovative companies that actively engages with its clients to adapt to a riskier climate, ultimately benefiting all by bringing down risk and costs. And keeping your building insurable.
  • To this end, Fremtind has established eight principles guiding their own work within climate adaptation – and inspire others:

  1. Map physical climate risk

  2. Learn from others

  3. Elevate competence level

  4. Define acceptable damages

  5. Use climate adaptation as a business opportunity

  6. Do no wait for new regulation – act now

  7. Share data and knowledge

  8. Cooperate with and present demand to authorities