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Insurance gap widens as extreme weather bites

© Shutterstock / Corona Borealis StudioPost Thumbnail

The first half of 2023 is a continuation of the recent run of years with high losses. The critical issue is that less than 40% of overall losses in the first half of the year were insured – evidence of the large insurance gap that persists in many countries for multiple natural hazards.

  • Global H1 losses higher than ten-year average of $110 billion – but only $43 billion was covered by insurance.
  • Extreme weather in the US accounted for roughly one third of overall global losses.
  • The increasing gap between insurance coverage and natural disaster impacts – only 12% of losses covered in Europe – makes economic recovery more difficult.

Insurers bore around 35% of worldwide losses in terms of the average half-year losses in the period 2013–2022, highlighting the challenge of maintaining cover in a changing world.

Natural disasters drove losses

The earthquake in Turkey and Syria was by far the most devastating natural disaster in the first six months of the year.  A very large number of buildings, roads and bridges were destroyed. Around 58,000 people lost their lives. As a result, the global number of victims of natural disasters in the first half of the year (some 62,000) was higher than it had been since 2010. Overall losses from the earthquake in both countries are estimated at around $40 billion, with Syria accounting for roughly $5 billion.

In the USA in the first half of the year, multiple rounds of severe thunderstorms, accompanied by destructive tornadoes and hail, caused losses to spike. Losses of this magnitude from severe thunderstorms in the USA now seem to be normal occurrences, rather than outliers. After adjustment for inflation, higher first-half thunderstorm losses have only occurred once before in the  USA (in 2011, with $46 billion in overall losses and $29 billion in insured losses).

Most researchers assume that climate change is facilitating the formation of severe thunderstorms with tornadoes and hail, since the continuing warming is resulting in greater evaporation and, particularly at ground level, in increased humidity. This increases the potential for thunderstorms to form. Loss statistics for thunderstorms in North America and Europe are also trending upwards, even after adjustment for the increase in values from economic development.

Insurance gap is a growing problem – in Europe less than 12% losses covered

There is a rapidly growing increase in the insurance gap, where countries facing multiple hazards don’t have the right complex insurance required. In the US losses from storms alone came to more than $35 billion, of which more than $25 billion was insured – a reflection of the region’s high insurance penetration for thunderstorm losses, motor own damage in particular.

In Turkey however, struck by a massive earthquake earlier this year, the picture was different. Despite the establishment of the Turkish Catastrophe Insurance Pool (TCIP), which provides compulsory insurance for residential buildings in Turkey and now has insurance penetration of more than 50%, the insured portion of overall losses totalling around $5 billion remained small.

The sum insured under the TCIP is limited to TL 640,000 per residential unit (equivalent to approximately $34,000 at the time of the earthquake). Commercial enterprises are not included in the pool and infrastructure is generally not insured – this is a problem especially in a country as exposed to earthquakes as Turkey. Munich Re said: “It would be both desirable and practicable to have a wider spread of insurance cover, to ensure that those affected – governments included – can recover more rapidly from the financial losses.”

In the EU overall, driven by the Turkey earthquake, the proportion of losses in the first half of 2023 was exceptionally high. Of roughly $59 billion (€48 billion) in overall losses, only some $7 billion (€6.7 billion) was insured.

With climate change and El Nino will 2023 be the warmest year yet?

“The effects of climate change are having a stronger and stronger impact on our lives. The first half of 2023 was characterised by record temperatures in many regions of the world, very high water temperatures in various ocean basins, droughts in parts of Europe, and severe wildfires in northeastern Canada,” said Ernst Rauch, Chief Climate and Geo Scientist at Munich Re. The global average temperature for June was the warmest ever recorded, up by more than 1.2°C compared to pre-industrial times.

“As in 2016, the natural climate phenomenon El Niño is playing a role in 2023. It is characterised by a temperature swing in the Pacific that influences extreme weather in many regions of the world and causes temperatures to temporarily rise further. All the same, research on global temperature trends is unequivocal: rising water and air temperatures worldwide are mainly driven by climate change, in turn causing more weather-related natural disasters and financial losses,” Rauch added.

Hurricane activity in the North Atlantic generally decreases during an El Niño phase. However, the exceptionally high water temperature in the main areas of hurricane formation, with values that are 1–2°C above the average, make it more likely that a greater number of storms will form in the season’s main phase starting in August. This makes it difficult to predict what the current hurricane season will be like.

SGV Take

There is growing concern about insurance. The insurance sector in the US, for example, is being hit by increasing claims from drought, wildfires, flooding and storms, which is straining financial resources and even solvency.  Market volatility resulting from climate-related disasters makes it difficult for insurers to predict future revenues and manage risks effectively, which is increasingly leading insurers to restrict cover or pull out of some markets altogether.

In the first half of the year, only 12% of losses in Europe were covered. In the Asia-Pacific region, natural disasters resulted in overall losses of around $7 billion, of which less than half was covered. Of some developing countries, Munich Re said that due to the very low insurance penetration in low-income countries, ‘ only a negligible portion of the losses was insured’. How are countries, and companies, expected to recover from disasters, or wider extreme weather impacts, without insurance?

Lack of access to the right insurance can prevent a project happening or a home being covered in case of flooding – the economic impact could be immense and someone is going to have to pay for it. The question is who.

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