Swiss Re ‘sigma’ Study: Insured 2009 Disaster Losses Cost $26 Billion

Swiss Re’s annual sigma study has calculated that “natural catastrophes cost insurers $22 billion in 2009, while man-made disasters cost an additional $4 billion. Insured losses were highest in North America, where they cost insurers over $12.7 billion.

“The death toll was the highest in Asia, where nearly 9,400 of the world’s 15 000 catastrophe victims lived. Insured losses in the region were approximately $2.4 billion.”

Although those figures are substantial, Swiss Re indicated that 2009 was a “low loss year.” According to the study “Natural catastrophes and man-made disasters in 2009,” there were 133 natural catastrophes and 155 man-made disasters.

Six events each triggered insured losses in excess of $1 billion. The costliest event was the European winter storm Klaus, which struck France and Spain in January, and led to insured losses of €2.35 billion (nearly $3.4 billion).

Swiss Re noted that “historically, catastrophe losses have been highly volatile, with a strong upward trend. In US dollars, the historic upward trend for global insured losses is around 10 percent, and is driven by higher income, increasing wealth, a higher value concentration of wealth in loss prone regions and a trend towards more insurance coverage. Global warming and the related higher risk of extreme weather conditions also contribute to the trend.”

Swiss Re’s chief economist Thomas Hess commented: “The probability that we see nat cat losses as low as those in 2009 is less than 35 percent. We have already seen significant events in 2010 with winter storm Xynthia in Europe or the earthquakes in Chile and Haiti. The industry is therefore well advised to prepare for much higher losses.

“Given their high volatility, losses could easily be three to five times what they were in 2009. In 2005, insured losses set a record when they soared to $120 billion. I would not be surprised if this record is broken in the not too distant future.”

The study also pointed out that while “most of the attention in recent years has been mainly focused on the primary perils – i.e. earthquakes, hurricanes and winter storms,” there are a number of other “natural phenomena, referred to as secondary or other perils, which can also cause widespread damage to property.

“The most prominent secondary perils are flooding, landslides, hail storms, tornadoes, winter storms outside Europe, snow and ice storms, droughts and bush fires. In 2009, more than half of the natural catastrophe loss burden was caused by secondary perils.”

According to Dr. Jens Mehlhorn, co-author of the sigma study, “premiums from primary perils are often used to cross-subsidize losses from secondary perils. The risk is that if premiums deteriorate, they can become insufficient to pay for the sum of losses caused by primary and secondary perils. More advanced probabilistic risk assessment models would help to better gauge and price the risk of secondary perils.”

A special section of the report is devoted to a discussion of earthquakes, prompted by the two recent devastating events in Haiti and Chile. They are “grim reminders of the destructive force of earthquakes,” said Swiss Re. “Since 1970, 360 damaging earthquakes have claimed over 1 million lives.”

According to Dr. Brian Rogers, co-author of the sigma study: “The deadliest earthquakes tend to occur in less economically developed countries and in regions that are usually densely populated and prone to earthquakes. These countries typically have low per-capita income and fewer resources for prevention- and post-disaster management.”

While the death toll is “usually higher in developing countries, insured losses are highest in the developed countries due to their wealth,” said the bulletin. However, in contrast to poorer countries, wealthier ones “often have advanced prevention measures in place and better infrastructure to limit the consequences of disasters. Economically advanced nations also tend to purchase more insurance cover, which helps to finance the costs of reconstruction.”

Nonetheless, Swiss Re indicated that less developed economies “can also benefit from insurance cover, especially if the public and private sectors – i.e. (re)insurers, brokers, governments and international agencies – work together.”

Hess added: “By contributing to catastrophe insurance solutions, private insurers and reinsurers can help create more stability in emerging markets, but this is only the beginning.” Governments and reinsurers have successfully teamed up in the past to implement reinsurance and capital market solutions. These solutions have provided significant financial relief when disastrous earthquakes and windstorms occurred as they allocate immediate liquidity to participating governments.”

Copies of the full sigma study No 1/2010 may be obtained from Swiss Re. The English, German, French and Spanish versions are available on Swiss Re’s web site at: www.swissre.com/sigma . The versions in Chinese and Japanese will appear in the near future.

Source: Swiss Re