Brace for a new normal: Higher cost of catastrophe cover

CLIMATE change has been on scientists’ radar for more than five decades, but it was only in the 1990s that the world woke up to the need for collective action. In 1994, the first international treaty to limit greenhouse gas emissions and prevent climate change went into force, ratified by roughly 200 countries. Fast-forward to 2023 and the stark impacts of global warming have intensified. Land and sea temperatures this year hit record highs, making it increasingly likely that the long-term target of keeping the global temperature rise within 1.5 deg C is out of reach.

Insurers are bracing for worse outcomes. In many quarters, serious thought is being given to the industry’s capacity to cover not just natural catastrophes, but also even ubiquitous property and casualty risks where protection is indispensable for companies. Insurance provider Swiss Re described 2022 as a “perfect storm” – with good reason. Global economic losses from natural disasters hit an estimated US$275 billion. Of this, the share of catastrophic insured loss was 45 per cent or US$125 billion, the fourth-highest total for a single year since 2005. The 10-year average insured loss between 2012 and 2021 was US$81 billion.

This year is expected to be worse. “We expect hard market conditions to persist in 2023, based on rising demand for coverage and inflation-driven higher values of insured assets,” said Swiss Re. The current higher-rate environment is also a challenge. Higher interest rates deal a double whammy. They raise insurers’ cost of capital and, at the same time, reduce the value of financial assets on insurers’ balance sheets.