How Climate Change Affects Property Insurance

In property insurance, we have been observing a change in the claims statistics for quite some time: While the number of losses caused by fire is decreasing due to the constant development of preventive measures, such as stricter building regulations, the picture is quite the opposite for losses caused by natural hazards. In the past few decades there was a significant increase in natural disasters, the effects of which have often been devastating. Last year, particularly extreme storms, floods and forest fires in various regions caused economic damage amounting to a total of 210 billion US dollars. Of this, around 82 billion US dollars were covered by insurance.

NatCat damage increases continuously

In a recent study by the Swiss Re Institute, an average annual growth rate of 1.3% in losses caused by natural hazards has been determined since 1970. In a year with a severe hurricane season and several secondary loss events – called Secondary Perils – the insurance industry could face payments of 250 to 300 billion US dollars in the future. “It is only a matter of time before such a severe scenario becomes real,” said Swiss Re. According to the reinsurer, this development is driven by population growth, increasing asset values in exposed regions and the effects of climate change.

Reinsurers have been researching the origins and effects of natural hazards for decades and have got relevant experience and data; after all, together with their primary insurers, they must be able to assess their exposure as best as possible and manage their risk accordingly in endangered areas. For this purpose, the maximum indemnification for losses caused by natural hazards is usually limited in the insurance policies, which reduces the cumulative risk for the risk carriers.

Risk management and parametric insurance on the rise

In the current hard market phase, which is characterized not only by premium increases but also by a significantly lower availability of capacities, the insurance of natural catastrophes is very challenging. In international insurance programs with many insured locations around the world, different limits and deductibles are often agreed depending on the exposure in the various regions. For the appropriate design of such insurance solutions, the potential exposure of natural hazards at the insured locations must be precisely analyzed in advance and the need for insurance coverage must be determined accordingly. For sites that have already been affected by natural disasters in the past, loss prevention and mitigating measures, such as flood protection systems in flood-prone areas and the existence of emergency plans, are also essential.

As an alternative or in addition to conventional natural hazard coverage in property insurance there are so-called Parametric insurance policies available. In these concepts, defined, measurable parameters, such as a flood level in the vicinity of the insured location, are determined. These parameters are monitored (mostly digital and online) so that the agreed indemnification is paid out when a specified limit is reached. Such insurance solutions can be tailored to the individual needs of the policyholder for natural hazards and weather events and also have the advantage that there is no need to identify and assess any damage that has occurred and payment of the specified indemnification can be made easily and within a few days.

We would be happy to analyze your natural hazards exposure and advise you on the optimal design of your insurance cover.

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Rudolf Schiel

Practice Leader Property & Engineering

T +43 664 822 27 58