Global Nat Cat Losses Top $100B for Fourth Consecutive Year

As the climate changes, the frequency and impact of natural catastrophic disasters continue to increase, impacting the insurance industry drastically. In 2023 alone, “the estimated total economic costs of direct physical damage and net-loss business interruption from global natural perils were $357 billion,” according to Gallagher Re’s 2023 Natural Catastrophe and Climate Report. As a result, “The private insurance market and public insurance entities covered an estimated $123 billion of that total,” marking the fourth consecutive year nominal insured losses have topped $100 billion and the sixth year out of the last seven, the report notes.

Climate Change Impact on Risk and Insurance

“There were 66 billion-dollar events in 2023, equivalent to one such occurrence every five or six days on average,” according to the report. “Increased costs are driven by factors including changes in where people live; the general costs of products and labor; inflation, litigation, and the evolving behavior of weather/climate events; and broader atmospheric and oceanic patterns.”

Although the rise of insured natural catastrophes is no longer a surprising trend for the industry, the significant jumps in losses across the past several decades is concerning. “This has been driven by consistently more expensive hurricane landfalls but also linear growth in loss costs from ‘non-peak’ perils such as severe convective storm, wildfire, winter weather, and drought.” This, as a result, “has led to two actions, 1) Primary insurance carriers either raising premium rates to accurately reflect the risk or pausing/ceasing to write individual lines of business in high risk-areas; 2) Reinsurers raising their rates to make it more expensive for primary carriers to purchase, reducing some coverage offerings, and reassessing portfolio exposure.”

This activity, in turn, has led to fewer private insurance market options for residents and has “prompted an influx of new policies to state-run ‘insurers of last-resort.’ These policies are typically more expensive to purchase but may often be the lone available insurance safety net for homeowners to gain access to coverage.” As a result, “[w]ith states taking on more insurance policies, the federal government may eventually be required to guarantee financial protection to the states to ensure they would be able to pay insurance claims following a major catastrophe event.”

With the expectation of higher risk and continued increased losses, Gallagher Re recommends decision makers consider the growing threat of climate litigation “due to unforeseen liability concerns and/or the reputational harm that may come from being perceived as ‘not doing enough’; …[for] the (re)insurance sector, one of the top concerns is that climate change may contribute to widespread under-insurance. This could happen if more frequent disasters cause premiums (and reinsurance rates) to rise steeply, meaning less protection is bought; …unforeseen broader macroeconomic events can create additional problems beyond the ever-present hazard risks enhanced by climate change…[and finally,] it is important that non-weather/climate perils are not forgotten. The earthquake peril is often an example of an ‘out of sight, out of mind’ risk…. We must be mindful not to have blind spots when internally or externally assessing natural catastrophe risk, nor exclude non-climate perils in any internal stress testing or broader scenario planning within an enterprise risk management (ERM) framework.

Natural Catastrophes and Industry Losses in the U.S.

The most industry losses were due to high frequency and record breaking severe convective storm (SCS) activity throughout the year, with losses having reached $60 billion, according to the report. “While large hail continued to produce the biggest share of SCS loss, notable tornadic activity, severe wind gusts, and heavy rainfall aided in pushing totals higher.” In fact, U.S. SCS events dominated global insured losses in 2023, “led by the hail sub-peril.” In total, there were 34 billion-dollar insured loss events in the U.S., with 20 of them being from SCS.

Beyond SCS, other notable events in 2023 included the Lahaina wildfire on Maui, “billion-dollar-plus economic flood losses following record-setting 24-hour rainfall in Fort Lauderdale and New York City, Hurricane Idalia’s Category 3 landfall in Florida, and expansive drought conditions which predominantly impacted the Southwest, Southern Plains, and Southeast,” the report explains. Elevated tornado counts are also occurring across vulnerable areas.

2023 Climate and Natural Catastrophe Trends

Primary vs. Secondary Perils

“What was unique about 2023 was reaching the [$100] billion insured loss thresholds without a few dominant events driving annual loss costs,” states the report. “2023 became the first year where global insured losses topped [$100] billion without a singular event causing more than [$10] billion for the industry. It was also the first year since 2017 in which no event topped that total.” Therefore, since 2023 crossed the $100 billion threshold through “the aggregation of a high volume of highly impactful ‘secondary’ peril events, it suggests a narrative shift in how the (re)insurance industry accounts for the ‘new normal’ of high loss years without a major market event—such as a landfalling [U.S.] hurricane.” As a result, there are now “growing calls to shift away from framing perils as either ‘primary’ or ‘secondary’ as the global implications of climate change accelerate commitments to tackle critical carbon reduction targets.” Moving forward, the report suggests, perils may likely be termed as “peak” or “non-peak.”

Global Events Drive Protection Gap

The costliest individual event from 2023 was the sequence of earthquakes that took place in February, including the M7.8 main shock that brought catastrophic damage to southern Turkey and northern Syria, according to the report. Physical damage costs reached $41 billion in Turkey and 5.1 billion in Syria. The September earthquake in Morocco resulted in $7 billion in economic damage, with insured costs estimated near $500 million. Several other costly and damaging natural catastrophes took place across the world last year, shining a spotlight on the protection gaps throughout the world.