Dwelling with local weather change: Local weather change led to the third-most costly losses of all time in 2021 – lower than half of that wealth was insured
Led by deadly and costly Hurricane Ida and massive flooding in Europe, the world inflicted $329 billion in severe weather-related economic losses last year, and only 38% of that bill was covered by insurance.
These results prompted the consultants Aon
to warn in a report on Tuesday that the rising costs of climate change-related disasters are only in the early stages unless more complete insurance assessment and risk pricing catches up. That could cost companies and their customers more, make home ownership more difficult, and change how investors view stocks
in the companies that are most vulnerable.
Total economic losses totaled $343 billion, Aon said, of which $329 billion was due to weather and climate-related events such as hurricanes, floods, wildfires, tsunamis and drought. This made 2021 the third most expensive year on record after inflation.
Related: The 10 costliest climate disasters of 2021 cost $170 billion – and this US storm was #1
Natural disasters happen every year, but the collective scientific community has warned that warming global temperatures are leading to more extreme weather, sometimes pushing hurricanes further inland or prolonging what is normally considered a storm season for a given region.
Wildfires in California and elsewhere grew in importance as conditions became more conducive to the fire's rapid spread. The term "fire season" is officially obsolete because the risk of dangerous wildfires prevails throughout the calendar year, Aon officials said.
Read: This mandate helped reduce the risk of wildfires destroying buildings in California by 40% – so why aren't more states implementing it?
"There's no question that the fingerprints of climate change are already here today…more intense weather putting more things at risk," Steve Bowen, weather forecaster and head of disaster insight at Aon, told MarketWatch. "When that happens, the insurance industry will have to step back and recalibrate and determine where pricing adjustments are needed."
Modern life means both being more efficient at warning people of severe weather, protecting property and getting to safety, and increasing development along vulnerable coasts and in population clusters is putting more life and structures on the path to destruction .
Than burning oil
and natural gas
sending most of the CO2 and other emissions into the atmosphere, last year was the sixth warmest year in the world on record. Land and sea temperatures were, by some standards, 0.84 °C (1.51 °F) above the 20th-century average. The hottest temperature ever reliably recorded on Earth was unofficially recorded on July 9, 2021 in Death Valley, California at 54.4 °C (130 °F). And the decade that just ended was the hottest in 10 years.
Read: Scorched western states and a hurricane in New York: In 2021, the earth experienced one of its hottest years on record
$50 billion disasters
While economic damage increased in 2021 compared to 2020, the number of notable catastrophe events decreased slightly, meaning fewer events overall proved equally costly; 401 notable catastrophic events were recorded in 2021, compared to 416 in 2020.
There were 50 instances of billion-dollar economic loss events, the fourth-highest year on record. And only 20 of them had sufficient insurance on the property in question to cover the billion-dollar threshold.
Costs were even higher outside of the US, with Germany, Belgium, Austria, Luxembourg and China recording the insurance industry's most expensive events, Aon said. Flooding was a big problem.
Global losses from natural catastrophes amounted to US$280 billion, according to calculations by German reinsurer MunichRe, compared to US$210 billion in 2020 and US$166 billion in 2019.
""Climate change isn't necessarily causing all of these (storms), but it is amplifying these events and in areas where the impacts were previously much smaller."”
Many insurance and reinsurance plans – coverage for the consumer-facing insurers themselves – are renewed at short notice, often annually. It can be difficult to explain the damage that unchecked global warming could do over the coming decades, affecting everything from loans for major construction projects to preventative measures like levees.
"Climate change isn't necessarily causing all of these things, but it's amplifying these events and doing so in areas where the impacts were previously much smaller," Bowen said. “But we're not pricing (coverage) for 100 years, we're trying to price the next 365 days so the dice can roll. Still, the repetitive nature of losses over 20 years makes it easier to get a sense of where price changes are needed.” According to Aon, artificial intelligence and predictive models need to evolve faster.
“Multi-hazard” events are also increasing. For example, Hurricane Ida, which caused more than $75 billion in economic damage, hit several US states in late summer 2021. Ida was not limited to its impact on shorelines along the Gulf of Mexico. Mighty storm remnants hit the populous Northeast, bringing costly inland flooding and tornadoes to Pennsylvania and elsewhere.
High water, high stakes
The system for insuring against flood damage is being scrutinized more and more closely as climate change worsens.
Currently, the federal government, through the National Flood Insurance Program (NFIP), is the primary insurer when it comes to floods and handles both the determination of what constitutes a floodplain and the insurance claims. For example, flood plains can affect what level of insurance a lender might need when borrowing for a property.
Do not miss: "If It's Raining Where You Live, Consider Flood Insurance": How Ida Could Uncover Insurance Loopholes Costing Homeowners
But starting last fall, the NFIP began a complete overhaul to allow insurance prices to more accurately reflect each property's unique flood risk, it said. Finally, climate change is taken into account.
"There is no question that this is the most significant change to the program since 1968," said David Maurstad, assistant assistant administrator for federal insurance and loss reduction and chief executive of the flood insurance program, at the time.
Read: The National Flood Insurance Program omits black communities with lower-income Americans, finds report
Whether the changes and fresh eyes will come about quickly enough is yet to be seen, Aon's Bowen said.
“Floods are a big challenge. We are seeing land use changes and terrain changes on a daily basis…Texas, Florida, the Southeast (USA)…the government is really going to need to update these (flood zone) maps more frequently. We see a critically higher risk today than we did five years ago," Bowen said.
""There is no question that this is the most significant change to the (national flood insurance) program from 1968."”
Asked if there will be a market for private insurance to pick up where government insurance stops, particularly in flood protection, Bowen added: "When private insurance sees premiums are fair for the highest risk properties , we could see the growing appetite for privates to take a bigger role in the market.”
"That would require a fundamental change in flood insurance, but I think some (in the business community) would welcome that."
Read: Blame the rain: Climate change has caused billions of dollars in flood damage
Shrinking world, growing risks
Rising physical damage losses are causing ongoing global supply chain disruptions, Aon said, especially as goods and services shuttle around the globe and across US roads faster than ever due to demand consumption and one-day delivery.
Even without the added risk of climate change, tight supply chains and the domino effect of higher inflation are already showing what can happen in the face of a global pandemic that restricts the flow of trade.
"If your physical locations (e.g. a manufacturing facility or a logistics center) are damaged by major weather events, the business suffers from this connectivity and that can result in longer wait times or higher costs for the end user," Bowen said.
He explained that demand for existing "business interruption" policies — such as the kind of claims that arose when the Texas ice storm's power outage shut down busy parts of that state — is likely to skyrocket if climate change continues.