AIR Worldwide: expect annual average cat losses in excess of $100 billion… and prepare for over $200 billion

Extreme event modelling firm AIR Worldwide (AIR) has released its 2021 Global Modelled Catastrophe Losses report, which estimates that on an annual average basis, catastrophes around the world are expected to cause about $106 billion in insured losses.

It suggested that the market can expect a long-run annual average loss of $106 billion, but added that there’s greater than a 40% chance the insurance industry will experience losses of greater than $200 billion in the next decade before accounting for growth in property exposure or climate change.

AIR estimates that the five percent aggregate exceedance probability (EP) insured loss (or the 20-year return period loss) is approximately $203 billion, and the one percent aggregate exceedance probability insured loss (or the 100-year return period loss) is about $320 billion.

“While there has been justifiable concern about extreme event losses over the last few years, outside of 2017, actual global insured losses have been below the modelled long-term average,” said Bill Churney, president of AIR Worldwide.

“Our report shows that the global insurance industry should currently expect a long-run annual average loss of $106 billion. This notably exceeds the actual average loss of the past decade of approximately $75 billion and is a stark reminder that we have been fortunate to not have had a major tropical cyclone or earthquake event in a highly populated region.”

“However, such events can and will occur under the climatic conditions of today and society must continue to focus on ensuring resilience to the risks of today while also looking forward to how risk may change in the decades ahead.”

In this report, AIR stressed that it continues to be important to discuss loss metrics in the tail of the distribution.

However, given the concerns about the scale of recent catastrophe losses and the ability of the current suite of near-present climate models to reflect extreme loss potential, AIR is also reporting an additional point on the EP curve representing the five percent EP (or 20-year return period) because losses in excess of $200 billion are a very real possibility; there’s greater than a 40% chance the insurance industry will experience losses of greater than $200 billion in the next decade before accounting for growth in property exposure or climate change.

The 2021 report also provides estimates of global economic losses from catastrophes, which highlight the persistent insurance protection gap that will limit a country’s ability to recover from a major extreme event.

Global economic losses include insured and insurable losses, as well as losses from non-insurable sources, which may include infrastructure and lost economic productivity. Based on its research, AIR has determined that global economic losses are about three times higher than global insured losses on average, when trended to 2020 dollars. Compared to AIR’s modelled global insured average annual loss (AAL) of $106 billion, this would correspond to an economic AAL of more than $320 billion.

On a regional basis, the percentage of economic loss from natural disasters that is insured varies considerably. In North America, about 50% of the economic loss from natural disasters is insured, while in Asia and Latin America, insured losses account for only about 12% and 24% of economic losses, respectively, reflecting the very low insurance penetration in these regions. The portion of economic losses that is insured also varies significantly by peril, with coverage for flood and earthquake losses typically much lower than for risk from wind and fire.

For the first time, this year’s edition of AIR’s Global Modelled Catastrophe Losses paper also includes a section on the Intergovernmental Panel on Climate Change (IPCC) reports, which suggests how the protection gap might evolve in a warmer climate. AIR’s report highlights the large and growing protection gap for many of the perils highlighted by the IPCC report (AR6), including coastal and inland flooding.

“Our report shows that the global insurance industry should currently expect a long-run annual average loss of $106 billion. This notably exceeds the actual average loss of the past decade of approximately $75 billion and is a stark reminder that we have been fortunate to not have had a major tropical cyclone or earthquake event in a highly populated region.”

Bill Churney, AIR Worldwide

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