Is Climate Change to Blame for Increasing Losses?

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What is Indicative of a New Normal?

The global insurance marketplace is experiencing a multiyear period of elevated insured losses. The shifting loss profile is seeing an elevated baseline influenced by a changing climate. However, evidence indicates that climate is only one factor in play. Catastrophe model usage, secondary perils, population demographics, evolution of built infrastructure, changes in the construction industry and inflation are also growing concerns. What can we do to ensure we take a holistic view of the risk environment? In this episode of Fo[RE]sight, Guy Carpenter experts Josh Darr and Jessica Turner share their insights on this multifaceted issue. 



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Pia Welch: I'm Pia Welch with Guy Carpenter. Welcome to this episode of Fo[RE]sight, a Guy Carpenter podcast series, bringing you unmatched insights on trending challenges and our solutions delivered by Guy Carpenter experts on the vanguard of thought leadership within the reinsurance industry. In today's episode, Is Climate Change to Blame for Increasing Losses?, Guy Carpenter’s Josh Darr, Managing Director, Head of North America Peril Advisory and Jessica Turner, Managing Director of Catastrophe Advisory, will discuss themes regarding climate change as well as the complex set of factors at play beyond climate that can complicate loss potential. Over to you, Josh.

Josh Darr: Thank you very much, Pia. The global insurance marketplace is in the midst of a multiyear period of elevated insured losses. Last year in 2021 featured $108 billion of insured loss, ranking is the third highest of the last 10 years, behind 2020 and 2017. Swiss Re's Annual Sigma report highlights that the 10-year moving average of insured losses reached an all-time high of $86 billion of loss in 2020.

A key question confronting the insurance industry is if recent years are now indicative of a new normal. Jessica, what are your thoughts on this question?

Jessica Turner: Hi Josh, really nice to speak to you today and in podcast format and on the topic we spend so much time discussing lately. So, losses have been higher. Absolutely. But what's driving it? I think there's a few considerations. First of all, let's strip out the hopefully one-time impact of COVID in 2020, when the losses included a projected $40 to $50 billion associated with the COVID-19 pandemic.

So, that's almost for COVID claims alone. So, not including the associated inflation, which I know we'll get on to later. Then there's the question of are the elevated losses coming from increased frequency or increased severity. Now every year since 2017 has featured higher insured losses than the prior five years dating back to 2012, and we know some of that is coming from the increased importance of so-called secondary perils like wildfire, convective storm and flooding.

There have been large loss years in the past, of course. 2011 was a comparable year, which included a significant contribution from the Japan and New Zealand earthquakes. Another big loss year was 2005, with Hurricanes Katrina, Rita and Wilma. So, these levels of losses aren't unheard of. It's just that they keep happening year on year, and that's causing the concern.

Josh Darr: So, it sounds like the shifting loss profile is a bit of a tug of war, maybe to put a word around it, between loss frequency, loss severity of individual events, all the while seeing a potential elevated baseline that's influenced by a changing climate.

Jessica Turner: Yeah, there truly is a mix of, of all of that, Josh. Well, 2017 featured elevated severity, the other 4 of the last 5 years rank in the top 6 of all time, largely due to the contribution from secondary perils. So, this would suggest that the recent loss years, anyway, are driven by a more elevated frequency of events vs. severity alone.

Josh Darr: I would wager a guess that many would think climate change is a leading driver of the loss shifts you highlight. You think that's accurate, Jessica?

Jessica Turner: Yeah, agreed. I think social awareness of climate change and its potential impact on our planet has never been greater. And it's not wrong to say that climate change has an impact. It does. And for those interested in how natural disasters are being altered by climate change, I highly recommend episode one of the Guy Carpenter Fo[RE]sight podcast, where our colleagues Kieran Bhatia and Sam Phibbs did a really excellent job of distilling the latest findings from the UN Climate Change Assessment.

However, while climate has a role in certain regions and perils on loss outcomes, I think there's evidence to say that climate change is only one of many factors at play.

Josh Darr: I think this is where the topic of climate change relative to other factors currently influencing loss outcomes becomes a bit tricky to really clearly define. In recent industry conversations I've been involved with, there are several factors that seem to be impacting loss assessments. Number 1, catastrophe model usage and the secondary peril topic you brought up, Jessica. Population demographics, how our infrastructure in the built environment is evolving, as well as the changing nature of the economy and the workforce.

Jessica Turner: Mm hmm. Yeah, those are all important factors. I concur. I'd like to dig deeper into the usage of catastrophe models as our first topic, if I could. There's sometimes a perception that the frequency or severity of certain events is not well captured by the catastrophe models. And, somehow this implies climate change is acting on those perils such that the cat models that are calibrated to historical data are just not sufficient anymore.

Now, that might be the case in some instances; I'm not ruling that out. But there's many other and maybe more likely reasons, such as old, outdated models or even more importantly, non-modeled factors. So a great example of this I could give is last summer's extreme floods in Germany in the mountainous region of Berndt, losses were much higher than expected by modeling companies.

And this appears to be due, really, to high inflation from COVID-impacted supply chains. But also the high-velocity, debris-filled flood waters that are not completely captured by the vendor models. And some other special features, like oil heaters that are common in the region, that failed and caused contamination.

Josh Darr: Interesting. Those are valuable points, particularly as the nature of catastrophe risk and catastrophes themselves become more complex. I think a second topic that also shows complexity for loss outcomes is the evolution of population over time. At Guy Carpenter, we're fortunate to have a great partnership with Dr. Steven Strader. He's a geographer and meteorologist at Villanova University.

His research surrounds a phenomenon that's increasingly being called the bull’s-eye effect. Essentially, after decades of urban and suburban development, population is sprawling across more of the landscape. His research points strongly to population sprawl being one of the leading drivers of increased losses over time. I'm not going to bore you with all the wonderful statistics that are associated with this, but there is one number that might takeaway with you that relates to population demographics, particularly here in the United States, and that's the number 40.

40% of the U.S. population lives in coastal counties, yet only encompassing less than 10% of the total land area. Another artifact of the number 40, the growth of the population in the wildland urban interface, which we call the WUI. That's where the forest meets the cities in very simple terms; that's increased by 40% as well in past decades. The WUI’s enhanced zone, where that wildfire activity can occur, with population being the major driver of fire ignition. And the number 40 pops up again—by 2050, the population is anticipated grow by yet another 40% in this risk-prone area for wildfires.

Jessica Turner: Hmm. Yeah, I think that those statistics really highlight that there's an increasingly mobile population and it's increasingly moving towards maybe more desirable but more risky areas. And that's really escalating the loss outcomes.

Josh Darr: Yeah, I think that's right, Jess. And I think there's another layer to this, which is we're still trying to uncover what the lasting effects of the COVID pandemic are on the shifting population. Even prior to COVID-19, it's been well documented that Sunbelt cities in the US have seen acceleration in their population. Think about cities like Dallas, Houston, Austin, Texas; Phoenix, even Nashville, Tennessee, has seen a large increase in population.

This has come at the expense of many northern based cities, where nearly half of the most populous cities have seen outright declines in population post-COVID.

Jessica Turner: Well, and another thing to consider is that coming with these major shifts in population centers, that really significantly alters the built environment, which is another major potential influence on losses. So one often sees time series of annual losses, and we talked a lot about annual losses at the beginning of our conversation. But these time series are often shown in a way that they've only been inflated for currency inflation, meaning consumer prices or rebuild costs.

They're usually not corrected for growth in the built environment, and that can give a misleading picture. So, a significant portion of that loss increase is due to just more properties being built, just more stuff in the path of a peril. So on the theme of the built environment, we should consider not just that it's growing in size, urbanization and population growth, but the nature of it is also changing.

So, for some perils, new types of construction can be more vulnerable. This is the case with hail. A great example of this is all the solar panels on homes that have become popular in areas which are really vulnerable to hail, like southern Germany.

Josh Darr: I guess the scale here, as you talk about the built environment, is not only the location level, but certainly infrastructure around a metropolitan region is an issue. And the aging of that infrastructure in older cities, I think about urban drainage. And if that isn't updated to contemplate heavier rainfall rates, you have an increased flood risk. Recent articles that I've observed over the past couple of months in The New York Times, Wall Street Journal, they've been highlighting this deteriorating infrastructure.

One focused on the electricity grid, which we've seen some outsized losses as a result of grid failure, as well as the increasing age of the dam infrastructure in the US, causing the potential for catastrophic flooding. With those population centers that are losing population, supporting these types of major infrastructure projects on the back of a diminishing tax base that might even be a bigger challenge yet.

Jessica Turner: Well, it's a challenge, but maybe I can inject a little bit of optimism. So, I think that the climate change discussion has has really made us think hard about infrastructure. And I think as we gain further clarity and confidence on those outcomes, hopefully it's going to inform really meaningful spending decisions for critical infrastructure, guided by the confidence that those investments will pay dividends for decades to come. So in other words, I expect adaptation measures to be taken as they must.

Josh Darr: Yeah Jessica, I like your optimistic tone there and sincerely believe you're correct. Science and the assessment capabilities are improving to where those types of large decisions can increasingly be made with confidence, spending those dollars as efficiently as possible. Now, I wouldn't portray myself as a negative person, but I would like to highlight one more challenge if I could. And that's the changing shape of the construction industry.

When those funds that we are talking about are ready to deploy for infrastructure, we may have to deal with the lower number of qualified workers in the construction industry. Last year, and there could be some COVID influences here, granted, but over 4% of construction jobs here in the United States went unfilled. That's the highest percentage in 2 decades and notably higher than the average, which runs just north of 2%.

Why is this? Well, the aging of the construction workforce is accelerating. While the number of qualified workers at younger ages, generally that 25 to early 50s, that's fallen by 8% over the last 10 years.

Jessica Turner: It sounds like what you're saying, Josh, is that we're facing a situation where the supply of skilled labor is not keeping up with demand. I think this is also true with the supply chain disruptions we've observed during the COVID pandemic. Significant price increases in lumber, copper and the ingredients for products such as drywall are also driving prices higher.

It feels like we're experiencing a compounding effect: less labor and the price of materials are increasing. Now, that whole topic of inflation is such an important one in our industry, and in fact, we're planning a whole podcast on that topic with specialist experts on inflation, rather than meteorologists like you and I.

Josh Darr: Jessica, I can't argue with you there. I'd like to stay in the weather and away from the inflation topic, if possible. Wow, we've covered a lot of ground in our discussion, and hopefully our listeners have a better appreciation of the multitude of factors that are driving the increase in insured losses. Now, we've covered a lot of ground—effective cat model usage and the secondary perils, how population demographics may be at play, the built environment, aging of the workforce, are all critical elements and have some interactions together. And that's all, let alone the climate influences, which we also feel are afoot.

Jessica Turner: I agree. Hopefully, our listeners will understand that whilst climate change is happening, the development of insurance losses we're experiencing has more nuance, given how complicated the subject is.

Well, I'm biased, but it's important to have organizations such as Guy Carpenter, with a breadth of advisory expertize to size the factors up and help inform decisions. So, whilst we'll continue our journey of quantifying the climate change risk, the market will certainly stay attuned to many of these factors currently impacting the marketplace dynamics. So, thank you for your time today, Josh. It's been a pleasure.

Josh Darr: Thank you, Jessica. It's been a pleasure to discuss these important topics.

Pia Welch: I'm Pia Welch, and thank you to Guy Carpenter’s Josh Darr and Jessica Turner for sharing your insights on many factors beyond climate change affecting the nature and severity of potential losses.

Anyone wanting to learn more or who would like to engage with a Guy Carpenter expert directly should visit guycarp.com and click on Explore Solutions. Please look for the next episodes in our series as we address additional themes connected with climate, cyber and other key issues affecting the reinsurance environment.

And thank you to our audience for sharing this time with us and listening to Fo[RE]sight, a Guy Carpenter podcast series.