Catastrophes Insurance
The term “catastrophe” in the property insurance industry denotes a natural or man-made disaster that is unusually severe. An event is designated a catastrophe by the industry when claims are expected to reach a certain dollar threshold, currently set at $25 million, and more than a certain number of policyholders and insurance companies are affected.
In the United States, over the 20-year period, 1997 to 2016, events involving tornadoes, including other wind, hail and flood losses associated with tornadoes made up 39.9 percent of total catastrophe insured losses, adjusted for inflation. Hurricanes and tropical storms were a close second largest cause of catastrophe losses, accounting for 38.2 percent of losses, followed by other wind/hail/flood (7.1 percent) and winter storms (6.7 percent). Terrorism and fires, including wildland fires, accounted for 5.9 percent and 2.0 percent of catastrophe losses, respectively. Civil disorders, water damage and utility services disruption combined represented about 0.2 percent of losses.
Disaster losses along the coast are likely to escalate in the coming years, in part because of huge increases in development. One catastrophe modeling company predicts that catastrophe losses will double every decade or so due to growing residential and commercial density and more expensive buildings.
Man-made catastrophes such as the attacks on the World Trade Center can also cause huge losses. The attacks led Congress to pass the Terrorism Risk Insurance Act (TRIA) in November 2002. Since its initial enactment, the terrorism risk insurance program has been revised and extended three times. The most recent extension—the Terrorism Risk Insurance Program Reauthorization Act of 2015 (TRIPRA)—ensures its continuation until December 31, 2020. TRIA provided a federal backstop for commercial insurance losses from terrorist acts, making it easier for insurers to calculate their maximum losses for such a catastrophe and thus to underwrite the coverage. TRIPRA renews TRIA. From its inception the program was designed as a terrorism risk sharing mechanism between the public and private sector—with an overwhelming share of the risk being borne by private insurers, a share that has increased steadily over time. Today, all but the very largest (and least likely) terrorist attacks would be financed entirely within the private sector.
The typical homeowners insurance policy covers damage from a fire, windstorms, hail, riots and explosions—as well as other types of loss such as theft and the cost of living elsewhere while the structure is being repaired or rebuilt after being damaged. Commercial property insurance policies generally cover the same causes of loss with some variation, depending on the coverages selected. Flood and earthquake damage are excluded under homeowners policies—separate policies are available—but are covered under the comprehensive portion of the standard auto policy, which more than 75 percent of drivers who buy auto liability insurance purchase. Each year about 7 percent of homeowners file claims.
Recent developments
- Global Losses 2020: Overall losses from world-wide natural catastrophes in 2020 totaled $210 billion dollars, significantly higher than $166 billion in 2019, according to Munich Re. There were 980 events that caused losses in 2020, compared with 860 events in 2019. Insured losses from the 2019 events totaled $82 billion, also significantly higher than $57 billion in 2019. Natural catastrophes in 2020 caused 8,200 deaths, compared with 9,435 in 2019.
- Global Losses 2019: Aon tallied 409 natural disasters worldwide in 2019, including 158 flooding events and 114 severe weather events. There were 33 tropical cyclones and 32 earthquakes, with winter weather, wildfires, European windstorms, droughts and other perils accounting for the remaining events. Insured losses from natural catastrophes in 2019 totaled $71 billion as of January 2020, down from $100 billion in 2018. Typhoons Hagibis and Faxai—both in Japan—were the largest insured losses in 2019, resulting in $9 billion and $6 billion in losses, respectively.
- U.S. Natural Catastrophe Losses 2020: Aon defines a catastrophe as a natural event that causes $25 million or more in insured property losses, or 10 deaths; or 50 people injured; or 2,000 filed claims or homes and structures damaged. Aon’s natural catastrophe estimates include Puerto Rico and the U.S. Virgin Islands and include losses sustained by private insurers and government-sponsored programs such as the National Flood Insurance Program. They are subject to change as loss estimates are further developed. Natural catastrophe losses in the United States rose to an historic high in 2017 of $133 billion in 2020 dollars, the year of Hurricanes Harvey, Maria and Irma and costly California wildfires. Natural catastrophe losses fell in 2018 and 2019, but rose to $74.4 billion in 2020, up 88 percent from $39.6 billion in 2019.
- U.S. Natural Catastrophe Losses 2019: Natural catastrophe losses in the United States fell 36 percent in 2019 to $39.6 billion in 2020 dollars from $62.0 billion in 2018.
- Hurricanes 2021: There were 21 named storms during the season, an extremely high number of storms. It will be remembered as the season of Hurricane Ida, which made landfall in central Louisiana as a Category 4 hurricane, bringing tremendous wind and storm surge damage to the central Gulf Coast as well as significant inland flooding to the mid-Atlantic. The season produced seven hurricanes—Elsa, Grace, Henri, Ida, Larry, Nicholas and Sam. Four hurricanes—Grace, Ida, Larry and Sam—reached major hurricane status (Category 3 and above). Ida and Sam reached Category 4 status. 2021 trails only 2020, with 30 named storms and 2005, with 28 named storms, for most named storms in a single season. Storm averages for 1981 to 2020, which were developed and adopted in April 2021, are 14 named storms, seven hurricanes and three major hurricanes. The scientists cited warmer than normal sea surface temperatures across the tropical Atlantic and La Nin᷈a conditions during peak season as the major settings for the season.
- Hurricanes 2020: The record-breaking 2020 hurricane season produced 30 named storms. The old record was set in 2005 when there were 28 storms. Fourteen—Hanna, Isaias, Laura, Marco, Nana, Paulette, Sally, Teddy, Gamma, Delta, Epsilon, Zeta, Eta and Iota—became hurricanes. Seven—Laura, Teddy, Delta, Epsilon, Zeta, Eta and Iota—became major (Category 3 or stronger) storms. A typical year has 12 named storms, six hurricanes, and three major hurricanes. Since all 21 of the letters of the alphabet that meteorologists use were exhausted, they began using the Greek alphabet to name storms. A record-breaking eleven named storms or hurricanes made landfall in the continental United States. Of those, six hurricanes made landfall in the continental United States. The 2020 Atlantic hurricane season also broke records as Tropical Storm Edouard formed as the earliest 5th named Atlantic storm on record, according to Colorado State University atmospheric scientist and Triple-I non-resident scholar, Dr. Philip Klotzbach, and continued to shatter earliest storm records Zeta as the earliest 27th named storm.
- Hurricanes 2019: The 2019 season yielded 18 named storms, six of which became hurricanes, including three major ones (Category 3 or higher, with maximum sustained winds of at least 111 mph). A typical year has 12 named storms, six hurricanes, and three major hurricanes. Hurricane Dorian became a hurricane on August 28 near St. Thomas, U.S. Virgin Islands. By August 30, Dorian had strengthened to a Category 4 storm and became an historic Category 5 storm on September 1 as it made landfall over the Abaco Islands in the Bahamas and later on Grand Bahama Island. Dorian continued to pound the Bahamas into September 3 with devastating wind, rain and storm surge. Insured losses resulting from Hurricane Dorian in the Caribbean are expected to be near $2 billion. Dorian weakened to Category 3 and moved close to Florida’s east coast by September 4 bringing storm surge resulting in beach erosion and flooding, and later affecting South and North Carolina. On September 6 Dorian weakened to a Category 1 storm and made landfall at Cape Hatteras, North Carolina, bringing wind, storm surge and flooding to North Carolina and Virginia on its way to New England. Dorian made landfall over Nova Scotia on September 7 as a Category 1 hurricane. Catastrophe modelers estimate industry insured losses in the United States from Dorian to total between $500 million and $1.6 billion. This range includes reinsurance and NFIP losses.
- Wildfires 2021: From January 1 to November 26, 2021 there were 52,729 wildfires, compared with 52,113 in the same period in 2020, according to the National Interagency Fire Center. About 6.6 million acres were burned through November 26, compared with 8.9 million during the same period in 2020. On November 26, 2021, three states reported four large fires including Alabama, which had two fires and California and Montana where each had one fire burning. Record rainfall that occurred at the end of October point to the end of the fire season for northern California, but also brought debris flows to the area. However, the situation is different in southern California, which did not have as much rain. Further, that region’s prime fire months often come in November and December.
- Wildfires 2020: In 2020 there were 58,950 wildfires compared with 50,477 in 2019, according to the National Interagency Fire Center. About 10.1 million acres were burned in 2020, compared with 4.7 million acres in 2019. Six of the top 20 largest California wildfires fires occurred in 2020, according to CalFire’s list.
- Wildfires 2019: The 2019 wildfire season was not as active as 2018. However, in late October significant fires broke out throughout California, leading to the evacuation of over 200,000 people and the declaration of a state of emergency. In 2019 there were 50,477 wildfires compared with 58,083 wildfires in 2018, according to the National Interagency Fire Center (NIFC). About 4.7 million acres were burned in 2019 while there were 8.8 million acres burned in 2018.
- Earthquakes 2021: On February 13 a 7.1 magnitude earthquake struck off the coast of Japan’s Fukushima Prefecture near the area of the devastating 2011 quake. According to Aon as many as 4,700 residential structures were damaged or destroyed. Total economic losses were expected to reach into the hundreds of millions of dollars.
- Earthquakes 2020: Croatia experienced the strongest earthquake in 140 years on December 29, a 6.4 magnitude quake 50 km southeast of the capital, Zagreb. The Economic Ministry of Croatia estimated that insured losses would be about $63.5 million, a tiny fraction of the $13.7 billion in total losses. In March, an earthquake with a magnitude of 5.3 struck the region north of Zagreb, causing property losses of $1.8 billion according to Munich Re. In the United States, on January 7, a 6.5-magnitude earthquake struck southwest Puerto Rico, which lies in a tectonically active region. The island had not had a quake of this level since 1918. The 2020 quake caused widespread damage to infrastructure in a region that is still recovering from the effects of 2017’s Hurricane Maria.
- Earthquakes 2019: In 2019, the sparsely populated Ridgecrest City section of California was struck by a pair of significant earthquakes. On July 4 a 6.4-magnitude “foreshock” earthquake hit the area, followed by a stronger 7.1-magnitude quake the following day, along with a number of aftershocks. The 7.1 quake was the largest to hit the state in 20 years. According to Karen Clark and Co., insured losses from the quakes are estimated to total less than $40 million.
- Man-made disasters 2020: Man-made disasters accounted for $7 billion in global insured losses in 2020, down from $9 billion in 2019 according to preliminary data from Swiss Re.
