The latest sigma report from Swiss Re has estimated that global insured catastrophe losses totalled $89 billion in 2020 from 274 events, marking the fifth most costly year since its records began.
Insured losses from natural catastrophes were $81 billion, the reinsurer said, with man-made disasters were the cause of the remaining $8 billion. Costs were 25% higher than the $63 billion recorded in 2019, and accounted for 4.9% of global property direct premiums written.
Notably, secondary peril events accounted for $57.4 billion, or more than 70%, of the natural catastrophe insured losses, mostly from severe convective storms (SCS) and wildfires. This compares with secondary peril losses of $31.9 billion in the previous year.
Swiss Re suggested that the industry has failed to fully model independent secondary events or capture the secondary effects of primary perils, and stressed that “secondary perils need to be better understood for the purpose of more complete risk assessment and sustainable underwriting of natural catastrophe risks overall.”
However, 2020 also underlined the peak-loss potential from primary perils, as a record-breaking 30 named storms formed during hurricane season with 12 making landfall in the US.
But at $21 billion, insured losses from these storms were moderate relative to the 2005 and 2017 seasons, owing to the landfall location of some of the larger events.
Swiss Re estimates that in a year of both peak-loss inducing hurricane season and multiple secondary peril events, combined annual insured losses could be as high as $250-300 billion.
Looking at the overall economic cost from catastrophes in 2020, Swiss Re puts the figure at $202 billion, with $190 billion caused by natural catastrophes and $12 billion caused by man-made catastrophes.
The worst man-made event was the Beirut explosion, which caused economic losses of $3.8-4.6 billion and insured losses of around $1.5 billion, although overall man-made losses were comparatively low due to global lockdown restrictions.
In GDP-normalised terms, losses rose 1.6% between 1970-2020 on a 10-year moving average basis, which is indicative of the larger scale of losses that could result if an event of the past were to occur today, given the accumulation of socio-economic value and other dynamics such as changing weather conditions in the intervening years.
“2020 will be remembered for the global health and economic crisis triggered by the COVID-19 pandemic,” said Swiss Re Group Chief Economist Jérôme Haegeli.” “But while COVID-19 was a stress test for society and the economy, it has an expiry date – climate change does not. In fact, climate change is already becoming visible in more frequent occurrences of secondary perils, such as flash floods, droughts and forest fires.”
“We have seen an increase in losses from secondary perils in recent years, such as severe convective storms, floods and wildfires,” added Martin Bertogg, Swiss Re’s Head of Cat Perils.
“The same upward loss trend for primary perils and 2020 serves as another reminder of their peak loss potential. The two peril types are affected by the same loss-driving risk trends, including population growth, increasing property values in exposed regions and the effects of climate change. This suggests that with climate change, future peak loss scenarios could also increase significantly.”
Bertogg continued: “Given the dynamic nature of risks, re/insurers’ risk models need to increasingly consider forward-looking risk trends, such as climate change, urbanisation and socio-economic inflation – rather than relying on historical data observations – when assessing the potential magnitude of losses.”
In 2020, Swiss Re estimated the global protection gap to be around $113 billion, which was up from $87 billion in 2019 but down from the previous 10-year average of $143 billion.
“Natural disaster risks are increasing and climate change will significantly exacerbate them,” Haegeli went on. “This underlines the urgency to better protect our communities against catastrophic losses while dramatically reducing carbon emissions. Unless mitigating measures are taken, such as greening the global economic recovery, the cost to society will increase in the future.
“In many regions of the world, the need to close protection gaps persists for both primary and secondary peril exposures,” he concluded. “Re/insurers can do more to help people, businesses and societies become more resilient.”