It’s no wonder that general insurers like IAG, Suncorp and QBE are facing higher reinsurance costs for yet another year in 2023 after financial services giant Munich Re produced its annual report on the cost of natural disasters, which confirmed last year’s Australian floods were one of the most expensive global catastrophes in 2022.
Munich Re is one of the world’s biggest reinsurers and has been producing two reports a year for years showing the rising cost to countries and insurers from natural disasters and the growing influence of climate change in this escalating bill.
The full year report each January is acknowledged as the final word on the cost of natural catastrophes such as floods, fires, storms (especially cyclones and tornadoes) and earthquakes.
The annual cost for 2022 was around $US270 billion, down from the $US320 billion in 2021 (which was a boost from the original estimate of $US280 billion). The insured cost (ie covered by insurance companies in various countries) was estimated at around $US120 billion last year, about the same as in 2021.
Hurricane Ian which hit Florida and nearby US states in late September and early October, was the single most expensive disaster last year with an estimated cost of $US100 billion and losses for insurers of around $US60 billion.
The dramatic rise in the cost of natural catastrophes can be seen in the surge in total costs estimated by Munich Re from $US166 billion in 2019 (which included the cost of the Australian Black Summer bushfires) to $US320 billion and $US270 billion this year.
But the report revealed a dramatic surge in costs flowing from 2022’s year of flooding in Australia, especially in NSW, Queensland and Victoria. The floods had a total cost of $US8.1 billion (nearly $A12 billion) and a loss for insurers of $US4.7 billion or $A6.9 billion.
Australia’s floods were in fact the second most costly global natural catastrophe in 2022 for insurers behind Hurricane Ian in the US with its $Us100 billion loss and $US60 billion bill for insurers.
Australia’s losses were of $US8.1 billion with the fourth largest behind the bill for Hurricane Ian, then Pakistan’s floods last year ($US15 billion), but with little insurance) and then the $US8.8 billion (just $2.8 billion insured) cost of an earthquake in Japan last March
The $US5 billion difference in Australia between the near $A12 billion bill and the $A6.9 billion cost to insurers is being worn by policyholders, governments at all levels and non-policyholders – who were numerous in areas of the three states where flood insurance was already too expensive.
The first round of flood in March produced highest costs estimated at $US6.6 billion, or around $A9.7 billion and insured costs of $US3.9 billion (or around $US5.7 billion). The second round of floods later in the year lifted the bill to $US8.1 billion and added around $US800 billion to the cost for insurers.
The data from Munich Re confirms 2022 was the costliest year for the country from natural disasters (easily topping the most single most expensive financial disaster – the $A5.3 billion collapse of HIH Insurance in March 2001).
In its report Munich Re said “For insurers, the second-costliest single natural disaster in 2022 was flooding in the southeast of Australia in February and March.
In the states of Queensland and New South Wales, extreme rainfall led to countless flash floods and severe river flooding. Numerous residents had to be rescued from their homes by boat or helicopter.
The floods also affected the major population centres of Brisbane and Sydney.
“Of the overall losses of approximately US$ 6.6bn, just under US$ 4bn was insured. In October, torrential rainfall again resulted in disastrous flooding in the southeast of the country. However, losses were not as severe as those at the start of the year.
“Overall, floods in Australia caused losses of US$ 8.1bn last year, of which US$ 4.7bn was insured.”
And Munich re was not backward in sheeting home blame to climate change amplifying natural events like the seasonal La Nina/El Nino pattern.
“Natural cycles play an important role in Australian flood risk, as torrential rainfall is much more likely during La Niña years. However, researchers now believe that climate change is additionally influencing the intensity of the rainfall.
“The same is true for bushfires and heatwaves, which tend to occur in El Niño years, the opposite phase to La Niña.”
“At the same time, climate change is tending to increase weather extremes, with the result that the effects sometimes complement each other”, according to Ernst Rauch, Munich Re’s Chief Climate Scientist.
Given that background, it is easier to understand the announcement this week from IAG that it will have to take on more of its insured risk for natural disasters in the coming year.
That’s after the record year for losses in 2022, much of which were absorbed by IAG’s reinsurers.
IAG said in its announcement to the ASX on its 2023 catastrophe reinsurance program that it will retain the first $350 million of losses for first and second events (such as storms, floods, fires). This is significantly higher than the $200 to $250 million cost from last year.
IAG has also renegotiated whole of account quota share deals with re-insurers for five years, is talking to another reinsurer and on Thursday said it had renewed its 20% whole of account quota share deal with Warren Buffett’s Berkshire Hathaway (its National Indemnity Co).
The deal now runs to 2029 and had been due to expire in June, 2024. Berkshire also owns nearly 4% of IAG’s listed shares but the new deal will allow Berkshire to sell those shares which have underperformed in the 8 years of the agreement so far.
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In its report, Munich Re said that 2022’s overall losses were close to the average for the last five years, while insured losses around $US120 billion “were significantly above average (2017–2021: US$ 97bn). “
“The continued high level of insured losses is impacting insurers at a time when they are having to deal with both high inflation rates and a shrinking capital base due to rising interest rates.
“In contrast, the positive effect on investments from higher interest rates will only come in time.
“Two factors should be kept in mind when considering the 2022 natural disaster figures. Firstly, we are experiencing La Niña conditions for the third year in a row. This increases the likelihood of hurricanes in North America, floods in Australia, drought and heatwaves in China, and heavier monsoon rains in parts of South Asia.
The losses, though, do not come near 2011’s figure of more than $US380 billion – which was boosted by the northeast Japanese earthquake and tsunami and the second Christchurch quake (the first was in late 2010)
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Another way of looking at the oversized financial cost of the Australian floods is that at $US8.1 billion, the full year’s bill comprises roughly 10% of the estimated $US70 billion in losses from natural disasters in Asia Pacific.
On the other hand, the Australian insured losses of $US4.7 billion were almost half of the estimated $US10 billion in the region.
Why the difference?
Well, one of the biggest disasters globally was the terrible floods in Pakistan that saw more than 1,700 deaths and losses of $US15 billion, but little insurance cover (because most Pakistanis can’t afford it). Munich Re prosaically described the insured losses in Pakistan as ‘minor’.
“Almost nothing was insured and countless people lost all their belongings,” Munich Re said about the Pakistan floods.
“Researchers estimate that the intensity of an event of this kind has already increased by half because of climate change compared to a world without global warming, and that it will continue to rise in the future.”
And in China, last year’s drought and long heat wave produced big losses, but little cover because of a weak insurance market.
Munich Re reported that the “protracted heatwave and drought, with temperatures of over 44°C in many parts of the country, led to water shortages and crop failures.”
“The water level in the Yangtze, the longest and economically most important river in the country, receded significantly, as did the levels in many other rivers and reservoirs. In some areas, shipping was suspended and the electricity yield from key hydroelectric stations fell drastically.
“Several large industrial corporations had to temporarily suspend production.
“According to rough estimates, the damage, including losses from crop failures, could be in the mid-single-digit billions, virtually none of which will have been insured.”
The costs of the Australian floods (and fires, storms and other events) are only high at times because we are a financial developed advanced economy with high levels of insurance and a trusted legal system (which is essential for the concepts of insurance and reinsurance to work smoothly).
And Hurricane Ian in the US was 2022’s monster, responsible for more than a third of estimated global losses.
“Hurricane Ian was responsible for more than one third of overall losses and for roughly half of insured losses worldwide. This powerful tropical cyclone made landfall on the west coast of Florida in September with wind speeds of almost 250 km/h.”
“Only four other storms on record have been stronger when making landfall on the US mainland, while some others were of a similar strength to Ian. According to provisional estimates, it caused overall losses of around US$ 100bn, of which US$ 60bn was insured (total global losses around $US270 billion and total insured losses almost $US100 billion .
“In terms of insured losses adjusted for inflation, Ian was the second-costliest tropical cyclone on record after Hurricane Katrina in 2005,” Munich Re said.
And 2022’s Australian floods were the worst natural disaster for this country and for insurers their policyholders and shareholders.
