Insured cat losses in excess of $200bn a ‘very real possibility’: AIR Worldwide

The global modeled insured average annual loss from catastrophes is expected to exceed $100 billion, with a “very real possibility” that the insurance industry will experience losses of greater than $200 billion in the next decade, a new report by Verisk’s catastrophe modelling firm AIR Worldwide has revealed.

AIR has released key financial loss metrics based on its assessment of global losses from extreme events considering the near-term climate risk.

The risk modeler's 2021 Global Modeled Catastrophe Losses report found that five percent aggregate exceedance probability insured loss (or the 20-year return period loss) is approximately $203 billion, and the one percent aggregate exceedance probability insured loss (or the 100-year return period loss) is about $320 billion.

On an annual average basis, catastrophes around the world are expected to cause about $106 billion in insured losses, it said.

Furthermore, AIR's report highlights that losses in excess of $200 billion are a “very real possibility”, noting that there’s greater than a 40 percent chance the insurance industry will experience losses of greater than $200 billion in the next decade before accounting for growth in property exposure or climate change.

The report also provides estimates of global economic losses from catastrophes, which it says highlight the persistent insurance protection gap that will limit a country’s ability to recover from a major extreme event.

According to the report, global economic losses are about three times higher than global insured losses on average, when trended to 2020 dollars. These include insured and insurable losses as well as losses from non-insurable sources. Compared to the modeled global insured average annual loss (AAL) of $106 billion, these would correspond to an economic AAL of more than $320 billion. AIR stated that these losses highlight a large protection gap.

On a regional basis, the report found that the percentage of economic loss from natural disasters that is insured varies considerably. In North America, about 50 percent of the economic loss from natural disasters is insured, while in Asia and Latin America, insured losses account for only about 12 percent and 24 percent of economic losses, respectively, reflecting the very low insurance penetration in these regions.

The portion of economic losses that is insured also varies significantly by peril, AIR noted, with coverage for flood and earthquake losses typically much lower than for risk from wind and fire.

“While there has been justifiable concern about extreme event losses over the last few years, outside of 2017, actual global insured losses have been below the modeled long-term average,” said Bill Churney (pictured), president of AIR Worldwide. “Our report shows that the global insurance industry should currently expect a long-run annual average loss of $106 billion.

“This notably exceeds the actual average loss of the past decade of approximately $75 billion and is a stark reminder that we have been fortunate to not have had a major tropical cyclone or earthquake event in a highly populated region. However, such events can and will occur under the climatic conditions of today and society must continue to focus on ensuring resilience to the risks of today while also looking forward to how risk may change in the decades ahead.”

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