The insurance industry suffers $133 billion in average annual losses from natural disasters
The global average annual loss from natural disasters is $133 billion, a new record in the latest analysis using Verisk’s extreme event decision models.
Verisk announced the launch of its latest update to the ISO Businessowners Program (BOP) and added nearly 160 new classifications to help insurers keep pace with changing risks.
Not only should the insurance industry prepare for total insured losses from natural catastrophes to exceed $100 billion each year, Beinsure said, citing AON research, but annual losses in excess of $200 billion are also likely.
According to Verisk’s Global Catastrophe Loss Report 2023, these values have increased significantly over the decade. “Increasing exposure values, driven primarily by continued construction in high-hazard areas, and rising insurance claims—primarily due to inflation—are the most significant factors influencing the increase in disaster losses,” said Bill Cherny, president of Verisk Extreme Event Solutions.
“Another important factor is the impact of climate change, which is often cited as the main cause of increased losses for insurers. But while that plays a role, the year-over-year increase in exposure and higher building materials prices have a much bigger short-term impact.”
According to insurers, thunderstorms cause 70% of insured losses. Losses from perils beyond the traditional peak perils of hurricanes and earthquakes, including floods, severe thunderstorms and wildfires, now account for a much larger share of insurers’ total annual losses due to a combination of more frequent events and more “valuable insured properties” at risk.
Severe thunderstorms have caused an increase in losses over the past five years and can no longer be considered a “secondary hazard.” In 2023, severe thunderstorms accounted for more than 70% of insured losses, with eight multi-billion dollar events, and according to this year’s report, the contribution to the global average annual loss (AAL) insured from severe thunderstorms worldwide is nearly 40%. Severe thunderstorms in the US account for the majority of these losses and alone account for 21% of the total global AAL.
Economic losses could exceed $400 billion, highlighting a global protection gap
Verisk has determined that global insured losses account for only about a quarter of global economic losses. The company estimates that annual economic losses could exceed $400 billion, a staggering number that highlights the lack of insurance protection that exists around the world.
The significant difference between insured and economic losses—the coverage gap—represents the cost of disasters to society. At the regional level, the percentage of economic losses from natural disasters that are insured varies significantly. In North America, for example, approximately 51% of economic losses from natural disasters are insured, while in Asia, insured losses represent only about 12% of economic losses, respectively, reflecting very low insurance penetration in these regions.
Verisk AAL is generally the amount of losses that can be expected on average each year. The global exceedance probability curve generated by Verisk’s set of models provides probabilities for many different loss levels, with significantly higher losses expected at relatively high frequencies.
According to a report for the year, Verisk estimates a global insurance 1% or 100-year loss of $370 billion. With this information, companies can prepare for big loss years and take on risks with real confidence so they can help get through those tough years without risking their solvency.
Catastrophe modeling remains the best approach to understanding risk, and reinsurers can use these models, with current risk information, to put recent losses into perspective, while considering the impact of continued risk growth, climate change, and the increasing role of hazards beyond tropical cyclones and earthquakes.