Mitigating the Growing Risk of Natural Catastrophes

Rising losses from natural catastrophes threaten both insurers and policyholders. Brokers are caught in the middle, having to explain premium price hikes while helping their clients secure coverage. Since the situation is likely to become worse, it is necessary to take action now to mitigate the growing risk of natural catastrophes.

The Surge in Natural Catastrophe Losses

The World Meteorological Organization says weather-related disasters have increased over the past 50 years. The good news is the number of deaths has decreased; the bad news is the amount of damage has increased. The United Nations says economic losses increased seven-fold – from an average of $49 million per day in the 1970s to an average of $384 million per day in the 2010s.

Although climate change is often identified as the culprit, the Yale School of the Environment points out that other causes may also be responsible for rising losses. Climate change is increasing the number and severity of hazards, but severe losses are extra likely to occur when hazards overlap with vulnerabilities, such as poor forest management and unplanned urbanization.

The Impact on Insurance

Swiss Re says global insured losses from natural catastrophes reached $50 billion in the first half of 2023 and losses have been increasing by around 5% to 7% a year. Compared to the 10-year average, insured losses for natural catastrophes were up by 54%.
Reinsurers, which help insurers transfer risk, have been especially hard hit by the rise in natural catastrophe losses. In response to declining profitability, Moody’s says reinsurers have raised rates for primary insurers. Insurers and reinsurers are also reassessing risk and, in some cases, reducing the amount of coverage they write in high-risk areas.

The Role of Insurance in Building Climate Resilience

As natural catastrophe losses continue to mount, insurers need a proactive and multi-pronged approach to take control of climate risks and reduce losses.
In 2021, the Bank of England published a Climate Change Adaptation Report that looked at the capabilities of banks and insurers in terms of mitigating climate change risks. The report identified uncertainty over whether banks and insurers are sufficiently capitalized for future losses. The report also determined that risk-management controls can reduce the capital needed for resilience in the future.

According to McKinsey & Company , insurers can do more to mitigate risk. For example, they can work with customers to adapt to climate change with more resilient infrastructures, facilities, and supply chains. Insurers can also develop new products and underwriting solutions as new hazards emerge.

Helping Policyholders Navigate Rising Losses

Whereas insurers work on long-term goals, policyholders often have more immediate concerns. They need to secure adequate coverage for their properties and businesses. With rising rates and tighter underwriting, that’s becoming increasingly difficult.

Brokers play a vital role in helping clients navigate this challenging environment. They need to:

• Embrace transparency. Rising prices could catch policyholders off guard. Brokers can minimize the surprise and help policyholders prepare by prioritizing communication and education. Don’t wait until a policyholder complains about a pricey renewal – stay in contact with clients and help them understand what’s happening, both in terms of insurance underwriting practices and their own personal level of risk.
• Explore coverage options. As it becomes more challenging to secure adequate coverage, brokers may need to get creative. This could involve layering coverage or adding a parametric insurance policy to conventional coverage.
• Promote proactive risk management. As risks increase, insurers will continue to tighten their underwriting and require policyholders to play a more active role in risk mitigation. Policyholders can make themselves more attractive to insurers while reducing their chance of a loss by implementing loss control measures. These could be anything from using smart water leak sensors to making building upgrades. For commercial clients, business practices also require attention. For example, diversification of the supply chain could reduce the risk of business disruption after a natural disaster.
• Encourage adequate insurance coverage. Although insured losses are rising, many natural catastrophe risks remain uninsured. According to Swiss Re, global catastrophes led to $129 billion in economic losses in 2022, but only $52 billion of these losses were insured. As insurance rates rise in response to growing risks, more people may opt to go without coverage. However, this could expose them to greater risks and costs.

Are you encountering challenges securing coverage for your clients? Costero Brokers offers creative solutions to help solve your clients’ coverage conundrums. Contact us.