Extreme risks insurability

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In a month’s time, starting from August 17 to September 16, 2017, three cyclones, of 4 and 5 magnitude, Harvey, Irma and Maria, caused the United States more than 400 billion USD in economic damage. This toll is to be added to the losses sustained by the Caribbean islands, some of which have been completely razed.

Whether of natural origin or human-made, these extreme climate events are accounted for by intertwined reasons. Most experts agree that the risks are aggravated by the combination of climate change and demographic and socio-economic evolutions.

The number of natural catastrophes rose from an average of 21 events during the 1950-1959 decade to 57 events during the 1996-2005 one. During the periods considered, economic losses triggered by these events skyrocketed from an annual average of 48 billion USD to 572 billion USD. Insured losses associated with climate disasters are doubling every decade.

In view of its position in the economic arena, the insurance business finds itself in the forefront of calamities. It is, therefore, more required to take charge of the hardly insurable risks. Climate phenomena, intense hot or cold waves, droughts, floods, hurricanes which regularly affect the same locations with increasing intensity, are now becoming risks of high certainty, which calls into question the economic model of hazard-based insurance.

One day or another, insurers will be urged to get clearly positioned and ready to face these extreme weather phenomena that are threatening their profitability, and by the same token, their own survival.

Atlas Magazine N°144, October 2017 [1]