Insurance payouts point to climate change

Natural disasters in 2011 exerted the costliest toll in history — a whopping $380 billion worth of losses from earthquakes, floods, tornadoes, hurricanes, wildfires, tsunamis and more. Only a third of those costs were covered by insurance. And the tally ignores completely any expenses associated with sickness or injuries triggered by the disasters.

The single priciest events last year were the magnitude 9 earthquake and tsunami in Japan, which wrought some $210 billion worth of devastation, followed in second place by the series of earthquakes in New Zealand that triggered $16 billion worth of destruction, notes Ernst Rauch of Munich Reinsurance corporate headquarters in Munich.

Known as Munich RE, his firm is among a handful of major international corporations that insure insurance companies against failing. So it’s crucial that reinsurers know natural disasters intimately — where they’ve happened, how often, what’s caused them, how much damage they wreak and what recovery from them will cost. Munich RE has compiled one of the largest databases of natural catastrophes going back to 1980 globally, and to 1970 for U.S. and select European events.

After sifting through it, on Jan. 4 Rauch and a few others professional disaster analysts attempted to put 2011 in context. Costly as the Asian quakes were, they don’t point to any huge up-tick in geological activity, Rauch noted.  Earth’s tremors in 2011 were on a par with most years over the past three decades. Last year’s in Asia just proved especially costly because they occurred within wealthy nations at densely populated sites — many of them well-indemnified.

In contrast, he noted, what hasn’t maintained a constant pace over time have been the numbers of storms, droughts and wildfires. These weather and climate-related events have been climbing steadily since 1980, increasing in number, severity (such as average wind intensity) and often in lives lost. That trend, Rauch said, provides strong evidence that climate change is already impacting human suffering and the world’s economies.

Carl Hedde of Munich RE America described 2011 as the Year of the Tornado. U.S. statistics show that the 552 twister-related fatalities made tornados the deadliest since 1925. There were 158 deaths associated with the Joplin, Mo., twister alone. April spawned 748 tornadoes — 226 of them on just one day. Six thunderstorm events associated with twisters chalked up losses exceeding $1 billion each and the late April tornadoes in Alabama and May twister in Joplin together racked up $6 billion in damage catapulting these events into the top 10 costliest natural catastrophes in U.S. history.

The lower Mississippi River experienced the worst flooding since 1927 owing to heavy snowmelt, saturated soils and more than 20 inches of rainfall in just one month. The estimated economic damage: $2 billion, of which only one-quarter was insured.

Texans have suffered through the worst wildfire year on record, fueled by a persistent drought. Throughout the spring of 2011, more than 3 million acres of west Texas ignited, destroying more than 200 homes and businesses (insured collectively for $50 million). In September, fires near San Antonio destroyed more than 1,600 additional homes (insured for $530 million)

Overall, last year, 820 natural catastrophes occurred — 150 fewer than the year before but well above the three-decade-long average of 630. The monetary value of 2011’s losses, however, were more than twice as high as those a year earlier and about three and a third times the previous decade’s average.

There have been some important economic lessons in these data for insurers, observes Robert Hartwig, president of the Insurance Information Institute in New York City. Although insurance companies entered 2011 with hardy cash reserves, they quickly spent them down. In the United States, for instance, insurers paid out about $1.16 for every $1 in premiums they took in from homeowners. Not the way to stay solvent. So, he warned, policyholders should expect premiums to climb, especially in parts of the country that insurers anticipate could be hit hard by storms in this and coming years.

I was chatting with a Munich RE analyst over dinner two years ago at conference in which we were both participating. He had just returned from several trips to Florida scouting its housing stock. Owing to sea level rise and the region’s susceptibility to hurricanes, he said, it was looking decreasingly likely that reinsurers would want to back flood insurance for waterfront property in much of the state. Once reinsurers back out, he warned, homeowners’ insurance would get either prohibitively expensive or nonexistent. Already, he said, there were some sites where he would peg the annual cost of covering flood damage at amounts about equal to the market value of the home.

Insurers take climate change very seriously, he explained. In fact, he added, for much of his industry global change issues have moved to the front and center of its radar screen.