Insurers ill-prepared for rising losses as hurricane season looms

As the North Atlantic hurricane season draws near, a new insurance sector report from Bloomberg Intelligence has raised concerns about the  readiness of insurers to handle the increasing frequency and intensity of losses caused by flooding and climate change. The report emphasises a significant misalignment between pricing strategies and risk appetite among insurers. Notably, Munich Re and Swiss Re have been among the insurers experiencing insured losses surpassing $100 billion consecutively for three years.

Despite a lower number of storms compared to the previous year, the 2022 Atlantic hurricane season still resulted in substantial economic damage, signalling a concerning shift, BI noted. With 14 named storms, which is close to the average, it followed a record-breaking 2021 season, marking the fifth consecutive year of heightened activity.

Furthermore, the 2021 season ranked third in terms of named storms since record-keeping began. The Eastern Pacific hurricane season, which runs from May 30 to the end of November, exceeded NOAA's forecasts for 2022.

Kevin Ryan, senior industry analyst – Insurance, Bloomberg Intelligence, said: “Hurricane Ian destroyed at least 2.3 million homes in Florida. However, most of the damage was from storm surges and heavy rain, with less than 20% of Florida homeowners insured against flooding. The economic loss will likely be much higher than the insured loss, at $95 billion. The scale of Hurricane Ian's losses, particularly in Florida, will likely mean insured losses will drift higher as inflation and litigation add to the toll. Ian is the second most-costly hurricane after 2005's Katrina, which cost insurers $99 billion on an inflation-adjusted basis.”

Ryan added: “Insurance rates don't appear to adequately reflect the threat of flooding as climate change brings more-intense rain events. Aon had 2022 insured natural-catastrophe losses of $132 billion, 57% more than the average since 2000. The biggest losses are getting larger, with many scientists blaming greater precipitation. Simply applying a multiple to historical large losses is likely to result in poor loss forecasts as more real estate is developed. However, it demonstrates potential problems.

“While 2022 only saw average global catastrophe losses, the Australian floods in February and March caused a record $4 billion of insured losses for the local insurers. Insured natural-catastrophe losses rose quickly in 2021 – the fourth most-costly year since 1970, according to Swiss Re; 2020 was the fifth costliest.”

Insured natural-catastrophe losses in 2022 were the fourth highest since records began (2021: third highest) and the third year in a row with over $100 billion insured losses. European floods in July saw a record-high insured loss of $13 billion, according to Aon, notes BI. Severe weather was also responsible for most of the big claims in 2022 – insured losses were above the 21st century normal.

BI also noted that, on average, flood losses were the third most-costly source of insurance claims over the past 20 years, after cyclones and severe weather. Catastrophic flood-loss events were the most-numerous peril globally in 2022. Insured losses from natural disasters reached $132 billion, with the US accounting for 75% of this, according to Aon in 2022, notes BI.

Ryan added: “Though 2022 was one of the 10 lowest years for deaths from natural catastrophes since 1950, beyond North America and Europe, flooding is a major killer among natural catastrophes. It representing 23% of deaths in 2021, 43% of deaths in 2020, 40% in 2019 and 30% in 2018. In 2017 – the most-expensive year on record for weather events – floods accounted for a massive 60%. Fatalities could be even higher should the severity of flooding increase in Europe and North America, as some scientists forecast.”

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