Aon flags US flood protection gap as extreme weather increases

Extreme and unpredictable weather has become a lot more frequent in the US. During the period of June 2018 to May 2019, the nation experienced the wettest 12-month period since 1895, causing extensive flood damage. The flooding of the Mississippi river basin alone caused $10 billion of economic losses and $4 billion of insured losses, according to Aon.

Steven Bowen, director and meteorologist at Aon’s Impact Forecasting team, told Intelligent Insurer that the flooding has led to substantial insurance pay-outs. “The US federal crop insurance programme has paid out more than $6 billion for flood damage alone,” he said. Bowen highlighted the US as a unique case in the insurance market in that while it has a mature market with high penetration rates, less than 10 percent of people have flood cover.

“Hurricane Harvey caused $125 billion of damage but only $30 billion of this was covered because most of the damage was flood related. People just don’t realise they need flood cover,” he said.

Bowen added that private insurers could take on a larger role in the US when it comes to insuring flood risk. “As climate change alters the frequency and severity of extreme weather, insurers in the US are beginning to re-evaluate how they assess the risk associated with natural disasters. Despite this we are also seeing improved building structure, so I don’t expect a drastic change in the industry” said Bowen.

In its report, Aon noted $232 billion in economic losses in 2019. This made the global protection gap of 69 percent for catastrophe the fifth-lowest since 2000, yet there were still $160 billion in uninsured losses.

One contributing factor to such high levels of global uninsured losses, according to Bowen, is the immature nature of the insurance market in developing nations. “The insurance markets in Latin America and Africa have a low insurance take-up and just aren’t as mature as markets like in the US,” he said.

Cyclone Idai, for example, swept across the Southern Africa nations of Zimbabwe, Mozambique and Malawi in March 2019 causing nearly $2 billion of economic losses with very few insured losses, highlighting the substantial climate risk protection gap that exists in the region.

The implementation of parametric catastrophe bonds could be a pivotal move in a bid to scale-up the insurance industry in these more vulnerable developing nations, according to Bowen. “People in these countries can’t afford insurance and so when these humanitarian disasters occur, this puts a strain on governments who essentially act as an insurer. Catastrophe bonds could therefore be the key for unlocking insurance in these immature markets,” he said.

In line with this, the World Bank completed an issuance of $1.36 billion of parametric earthquake catastrophe bonds in February 2018 to Chile, Colombia, Mexico and Peru. And following a magnitude 8 earthquake in Peru in May, the parametric trigger was confirmed and a partial pay-out of $60 million was issued to the nation.

Overall, the insurance market is in a healthy position to handle the losses associated with natural peril risk. “Global losses in 2019 were elevated but not as severe as the previous two years which saw more than $100 billion of insurance losses. What’s more, the reinsurance market is sitting on $625 billion worth of capital, the most available capital in its history. Therefore, if we do continue to see high losses in the years to come, the market should be able to handle it,” concluded Bowen.