Posted on Apr 05, 2012 by Sergio Ulloa
2011 was a year of heavy storms, devastating floods, and record-shattering earthquakes, but how much did these catastrophic events actually cost the global economy? A new report from Swiss Re, the world's second largest reinsurance group, aims to find out.
In their latest sigma study
, released last week, the Zurich-based reinsurer put the combined economic losses (both insured and uninsured) experienced last year due to natural catastrophes and man-made disasters at an all-time record of US$370 billion, versus US$226 billion recorded in 2010. Swiss Re noted that, of this historic total, US$116 was borne out by the international insurance industry, who largely managed to uphold their obligations with regards to risk management and post-disaster financing to clients in the face of these challenging circumstances. The insured loss total represented a 142 percent increase over 2010's expenses.
According to Swiss Re's study, 325 catastrophic events occurred in 2011, of which 175 were classified as natural catastrophes and 150 were declared man-made disasters. Broken down more succinctly, Swiss Re estimated insured losses for natural catastrophes finished the year at around US$110 billion, while losses resulting from man-made disasters accounted for the remaining US$6 billion. Altogether, 2011 represented the second-most costly year ever for the international insurance and reinsurance industry. With US$123 billion in insured losses, 2005 still ranks as the costliest year for the international insurance industry when 3 Atlantic hurricanes, Katrina, Wilma and Rita, battered the United States.
Swiss Re observed that the majority of these economic losses resulted from just a few cataclysmic events: the devastating earthquakes that hit Japan and New Zealand, the Thailand floods, and a record-setting tornado season in the United States. The study singled out the 2011 Japan earthquake, the largest known in terms of magnitude to have ever hit the country, as a particularly costly event that in fact accounted for some 57 percent of 2011's total catastrophe loss. Due to the extreme magnitude of the event (a 9 on the Richter scale) and the subsequent tsunami and nuclear fallout risk that followed, the 2011 Japan earthquake ended up costing the domestic and global insurance industry around US$35 billion, making it the most expensive earthquake in history. Interestingly, because earthquake insurance penetration in Japan
is very low, particularly for commercial properties, insurers are only expected to cover 17 percent of the total losses, with the national government, corporations and individuals bearing the remaining cost. Swiss Re contrasts this situation with what occurred in New Zealand last year, where individual earthquake coverage rate was high. The 6.3 earthquake that struck Christchurch in February triggered insurance claims worth US$12 billion, which meant the industry covered around 80 percent of the country's rebuilding costs. Had Japan been more thoroughly insured like New Zealand, 2011 would certainly have been ranked the most expensive year ever in terms of insured losses as well, according to Swiss Re.
In addition to earthquakes, unprecedented flood losses also impacted the Asia Pacific region and global insurers. First there were the floods in Australia, which triggered claims worth over US$2 billion and became the country's most expensive disaster on record. This event was soon eclipsed however by what occurred in Thailand. According to the Swiss Re study, the Thailand floods cost insurance
and reinsurance companies about US$12 billion last year. That is the highest ever insured loss recorded for flooding from river water. "Flood losses can be just as tremendous as earthquake and storm losses. The flooding in Thailand is a painful reminder that, given the high risk of flooding in many countries, other parts of the globe could be prone to similar or even bigger losses," wrote Jens Mehlhorn, Head of Flood Perils at Swiss Re and co-author of the study. Altogether, as a consequence of the historical earthquake in Japan and the unprecedented flood in Thailand, both insured and economic losses finished the year highest in Asia, where they respectively reached an estimated US$49 billion and US$ 260 billion, according to Swiss Re,
The United States, often the most costly insurance market, chipped in with insured catastrophe losses worth US$25 billion following an unprecedented tornado season that caused record property damage across the middle of the country. There was good news to be found in hurricane claims however. Outside of Hurricane Irene, storm damage remained moderate in the US, which meant that domestic insurance losses overall remained far lower than 2005's record totals. While flooding also hit the US during 2011, Swiss re noted that sophisticated risk management systems managed to contain flood-related insured property losses much better than in other regions.
Overall, the international insurance industry weathered the extreme events of 2011 quite well. Despite facing historic disaster losses and uncertain financial markets, insurers proved themselves effective at performing their key role in dispensing much needed funds to affected policyholders when called upon, be they individuals, businesses or governments throughout 2011. The conclusion Swiss Re wants you to draw from their report is that more should now be done to ensure that risk-models are updated and that insurance coverage is expanded across the world.
In a press statement, Kurt Karl, Swiss Re's Chief Economist explained that "last year saw extraordinary and devastating catastrophic events. The earthquakes in Japan, New Zealand, and Turkey, as well as the floods in Australia and Thailand, were unprecedented and brought not only massive destruction but also the loss of thousands of people's lives," Karl said, adding "Yet two-thirds of the staggering USD 370 billion in economic damage will be shouldered by corporations, governments, relief organizations, and ultimately individuals, pointing to the still widespread lack of insurance protection worldwide." Indeed this US$254 billion gap between insured and non-insured economic losses points to a widespread lack of coverage that needs to be addressed going forward.
Swiss Reinsurance Company Ltd was established in 1863 and is present in more than 20 countries. Swiss Re provides reinsurance products and financial service solutions. It offers various reinsurance products covering property, casualty, life, health and special lines - such as agricultural, aviation, space, engineering, HMO reinsurance, marine, nuclear energy, and special risks.