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Warmer climate is driving higher re/insurance costs: Swiss Re report

16th May 2019 - Author: Matt Sheehan

Rising global temperatures due to climate change have heightened the risk of costly events such as wildfire and drought and significantly impacted the level of re/insurance industry losses in recent years, according to the latest sigma report by Swiss Re.

Climate ChangeSwiss Re expects that climate change will cause more frequent occurrences of wildfires and droughts, and may result in more intense tropical cyclones.

It claims that this was evident in 2018, when insured losses from wildfires globally reached a record-breaking $17 billion. Six of the ten largest-ever insured loss totals from fire events across the world occurred in the past three years, the reinsurer added, and five in the last two.

High temperatures in 2018 combined with rainfall deficits also had severe repercussions on water resources and in agriculture around the world, causing devastating conditions for farmers in South Africa, Argentina, and across Europe.

2018 was the fourth warmest year on record, according to data from the World Meteorological Organisation, with 20 of the warmest recorded years having occurred within the last 22.

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Swiss Re added that large losses from secondary perils have tended to be water-related and are thus susceptible to the effects of climate change, with ever 1°C rise in temperature increasing the water-holding capacity of the atmosphere by about 7%.

The reinsurer claimed that secondary perils accounted for more than 60% of the $76 billion insured losses from global natural catastrophe events in 2018.

The sigma report did, however, note that the increase in insured losses from weather and other events could not be attributed wholly to rising global temperatures.

For example, increasing population densities, wealth concentration and coastal exposures have developed into a more constant flow of small and medium-sized events.

As with the wildfire losses of 2018, Swiss Re anticipates that secondary perils (including river and storm surge floods) will more regularly rank among the top loss-making events in any one year.

The report recommended that re/insurers develop enhanced methods of risk measuring, monitoring and modelling to manage a kind of natural perils result volatility with a strong underlying trend increase in both frequency and severity due to environmental and societal changes, particularly urbanisation.

“Failure to afford due recognition to these loss events and their underlying growth trend will over time risk facilitating increasingly more pronounced market dislocation,” the report stated.

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