Insurance and natural disasters

This week, Global Alpha is looking at the increased frequency of natural disasters and how climate change is affecting the insurance industry.

The recent wildfires in Hawaii, the deadliest in over 100 years, is the latest in a long line of severe natural disasters. The town of Lahaina was hardest hit as damage assessment maps indicate over 2,200 buildings were destroyed or suffered some harm. Rebuilding Lahaina has been estimated to cost $5.5 billion.

Just this past Friday, a significant earthquake registering 6.8 on the Richter scale shook Morocco, leading to early estimates of over 2,800 casualties and causing severe damage to historic sites in Marrakesh. This comes after an event in February this year when Turkey and Syria were hit by an earthquake measuring 7.8 on the Richter, followed by aftershocks reaching up to 7.5. In that catastrophe, thousands of buildings collapsed, resulting in thousands of injuries and tens of thousands of deaths. It became the deadliest global disaster since 2010 and ranks as the 11th deadliest event in recorded history. Beyond the loss of life, financial assessments from the government of Turkey, the World Bank, the UN and the EU estimate the economic loss at around $91 billion, making it the 11th most costly disaster globally, after adjusting for inflation. Both events have underscored the need for stricter enforcement of modern building codes. In Syria and Turkey, a number of the buildings that fell, including newer multi-story residential structures, should have had sufficient structural integrity to mitigate significant fatalities.

Closer to home, there has been an extended period of wildfire activity across many Canadian provinces. While many of the wildfires occurred in remote regions far from major population centres, total insured losses are expected to reach several hundred million dollars and thick smoke caused hazardous air conditions in the Northeast. In June, New York and Montreal both recorded the worst air quality in the world.

Overall, the first half of 2023 experienced the highest economic impact from catastrophes since 2011, and the fifth highest on record, with the highest ever number of at least $1 billion insured loss events (18 versus the historical average of 7).

The end result is that insurers are choosing to limit exposure in some markets. Reinsurance companies are raising their rates to insurers to help cover losses above certain levels. These higher rates get passed on to consumers and other insurance buyers. Recently, State Farm and Allstate announced they are no longer providing insurance in California, the most populated US state. Reasons for their withdrawal include increased catastrophe exposure, construction costs and the reinsurance market. A similar situation is unfolding in hurricane-prone Florida, where property insurance costs are skyrocketing and Farmers Insurance pulled out of the state altogether, citing increased risk exposure.

Global Alpha holds two insurers: RLI Corp. (RLI.US) and Vienna Insurance Group (VIG.AV).

RLI is a specialty insurance company with more than 50 years of experience serving the property, casualty and surety markets. RLI focuses on niche markets that need deep and unique underwriting expertise. The company operates on both an admitted and non-admitted basis with exposures predominately in the US. RLI had some exposure to the Hawaiian wildfires primarily due to homeowner insurance in the state and recently announced its loss estimates. Although preliminary in nature, RLI estimates pretax net catastrophe losses of $65 million to $75 million related to 200 structures. These losses will be reflected in Q3-2023 results. RLI regularly monitors and attempts to manage exposure to catastrophes by limiting concentrations of locations insured to acceptable levels and by purchasing reinsurance. Catastrophe exposure models can help assess risk, but are inherently uncertain due to the sporadic observations of actual events.

Vienna Insurance Group offers insurance solutions in the property and casualty, life and health business across approximately 30 countries in Central and Eastern Europe. Vienna has a climate change strategy that provides general principles for dealing with climate change and guidelines for investments and insurance operating business. One of the first initiatives was to eliminate investments in the coal sector and significantly limit insurance coverage for new coal mining and coal-fired power plant projects. The company’s scenario analysis highlights the main natural risks as flooding, winter storms and summer (hail) storms. Science is expecting the risk of flooding and hailstorms to increase. The 2021 flooding in Bernd, Germany led to unexpectedly large losses while the same year also saw severe hailstorms in Austria and a tornado in the Czech Republic. As for winter storms, the risk is expected to increase in some countries and decrease in others. Vienna offers insurance coverage in Turkey, albeit in the less affected western part of the country. Nonetheless the company announced an expected gross impact (including active reinsurance) of €170 million.

The world is currently observing a warmer El Nino phase that often leads to shifting rainfall patterns in different parts of the world. For example, more flood-related losses have been reported in Europe, the Middle East and Africa during El Nino phases. Insurance companies have always been concerned with potential losses due to natural risks. Global warming is highlighting the critical nature of this problem. As we confront a world where the frequency and severity of natural events are exacerbated by climate shifts, the question becomes: are insurance models robust enough to adapt, or will we find ourselves financially unprepared for the evolving landscape of risk?