Global Catastrophe Economic Losses Largely Unaddressed by Insurance

There were 416 natural catastrophe events globally in 2020 that resulted in economic losses of $268 billion – 8% more than the average annual losses for this century, according to insurance broker Aon’s latest catastrophe loss report. Of this total, private sector and government-sponsored insurance programs covered $97 billion, leaving a protection gap of 64%, which is the portion of economic losses not covered by insurance.

Aon’s report, Weather, Climate & Catastrophe Insight: 2020 Annual Report, notes that costs from catastrophes continue to rise due to a changing climate, more people moving into hazard-prone areas and an increase in global wealth. During the year, more than 8,000 people lost their lives due to natural catastrophes. Tropical cyclone was the costliest peril, causing more than $78 billion in direct economic damage. It was closely followed by flooding ($76 billion) and severe convective storm ($63 billion).

From a climate perspective, the National Oceanic and Atmospheric Administration (NOAA) cited 2020 as the world’s second-warmest since 1880 for land and ocean temperatures at +0.98°C (+1.76°F) above the 20th-century average.

Aon CEO Greg Case said future organizations will need to deal with more than one catastrophe at a time.

“The global response to the socioeconomic volatility caused by the COVID-19 pandemic has increased focus on other systemic risks – particularly climate change – and is causing a fundamental reordering of business priorities. This report highlights the increasing likelihood of ‘connected extremes’ and reinforces that leading organizations of the future will be defined by their ability to manage the global implications of concurrent catastrophic events,” Case said.

He added that the experiences of 2020 have also emphasized the need for more collaboration between the public and private sectors, calling this essential to closing the rising protection gap and building resilience against natural catastrophes.

According to the report, catastrophic events will increase in frequency and intensity “and in ways that are impossible to predict using conventional risk assessment methods.”

The authors contend that while catastrophe modeling has been conducted primarily in the private sector, academia and government scientists have taken the lead on the science of climate change.

The report also advises the insurance industry to develop more of a bespoke view of risk, which will in turn allow them to reduce their “dependence on model vendors to measure their catastrophic risk and gain greater confidence in their risk tolerance thresholds.”

Steve Bowen, director and meteorologist for Aon’s Impact Forecasting team, agreed that the world will be faced with new challenges around natural perils.

“While many private and public sector entities primarily focus on physical and human hazard risks, an increasing number of global regulative bodies are further pivoting towards how to handle emerging transitional and subsequent reputational risks,” Bowen said. “This is especially true as the financial and humanitarian risks surrounding climate-enhanced events become more evident on a daily basis. Focus at the corporate and federal levels will be critical around investments in risk mitigation, resilience, and sustainability as the landscape around climate change solutions continues to accelerate with renewed urgency.”

Significant regional events during 2020 included:

• Costliest year on record for global severe convective storms led by historic U.S. derecho
• U.S. mainland endured a record-breaking 12 named storm landfalls, including six hurricanes
• Super Typhoon Goni struck the Philippines as the strongest landfalling storm ever recorded globally at 195 mph
• Ciara became Europe’s costliest wind storm since Xynthia in 2010
• Drought conditions reduced agricultural crop yields in Brazil and Argentina, burning 30% of the Pantanal Region
• The most widespread Yangtze River Basin floods since 1998 caused USD35 billion of economic damage in China’s monsoon season

The full report is available on Aon’s interactive microsite at https://aon.io/3nsM7cu.

To access current and historical natural catastrophe data, as well as event analysis, visit catastropheinsight.aon.com.