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Natural catastrophes: an Australian perspective

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Swiss Re Property Treaty Underwriting Manager ANZ David Sinai draws some local insights from the reinsurer’s latest Sigma report

Swiss Re’s 50th-anniversary Sigma report, Natural Catastrophes and Man-Made Disasters, highlights just how damaging last year was.

Total global economic losses from natural disasters were about $US330 billion ($425 billion), almost double the 10-year average.

New annual records were set for the highest insured losses – $US144 billion ($185 billion) – the highest insured wildfire losses – $US14 billion ($18 billion) – and the highest ratio of insured losses (43%). 

Insured natural catastrophe losses of $US138 billion ($178 billion) were well above the previous 10-year average of $US50 billion ($64 billion), which highlights the inherent variability of natural catastrophe losses.

While the record ratio of insured to economic losses is considered a “good” achievement, the natural catastrophe protection gap remains significant at almost 60% of economic losses.

It is important we continue to seek new ways to close this gap through new insurance products, distribution channels and physical resilience measures.

The Sigma also includes two focus reports on the US hurricane season and the US wildfires. I find these very interesting, not only in the story they tell, but also because they allow us to draw parallels to the risks we face here in Australia and New Zealand.

Hurricanes and tropical cyclones

The focus report on the US hurricane season confirms the losses of last year are far from unprecedented, both in terms of single-event losses and aggregated annual losses.

Hurricane Katrina’s losses – $US82 billion ($106 billion) – were much larger than Maria’s – $US32 billion ($41 billion) – and our research has shown that a storm similar to Andrew in 1992 could generate losses of $US180 billion ($232 billion) today.

From an aggregate perspective, our analysis suggests we have seen seasons capable of generating aggregate losses similar to last year’s at least three other times in the past 90 years.

Return periods of about 25-30 years are hardly extreme outcomes in the world of catastrophe (re)insurance. Swiss Re’s hurricane model contains various storm clustering scenarios, where annual insured hurricane losses exceed $US250 billion ($322 billion).

Australia did not establish any new records with our cyclone season. However, Cyclone Debbie did manage to secure second place on the list of Australia’s largest insured cyclone losses – after Cyclone Tracy – estimated at $US1.3 billion ($1.67 billion).

As happens to be the case with most catastrophe events, Debbie also offered insurers and reinsurers new insights.

The slow-moving nature of Debbie meant homes were exposed to cyclone-strength winds and heavy rainfall for well in excess of 12 hours.

This resulted in significant water ingress, the extent of which was not immediately obvious.

Access restrictions to offshore resort islands have also resulted in increased claims costs.

As a result of these two issues, the claims estimates have continued to grow in the 12 months since Debbie made landfall, meaningfully exceeding initial estimates.

It is important to take learnings from these events and integrate the findings into the damage functions in our loss models.

Just as in the US, we have not seen the worst that Australian cyclones can serve up. We have been relatively lucky when it comes to the major cyclones we have experienced in the past several years.

Larry, Yasi, Marcia and Debbie have all managed to miss the largest population centres in the regions they affected. A direct hit on Cairns, Townsville or Mackay would have resulted in much larger insured and economic losses.

Our model shows a severe cyclone hitting the populated southeast of Queensland, though rare, has the potential to generate losses that are multiples of the losses we have seen since Yasi.

Similar to the US, New Zealand has also experienced a frequency of events over the past two cyclone seasons, with Cyclones Fehi and Gita this year, as well as remnants from Cyclone Cook and Cyclone Debbie last year. Which makes me think, is this a new trend or just random variability? 

Wildfires and bushfires

The focus report on the California wildfires also makes interesting reading for Australian insurers and their reinsurers.  

The loss quantum from the California wildfires surprised many, but we should use this to remind us of the loss potential we face in our own backyard.

The largest of the California fires, the Tubbs fire, destroyed more than 5600 structures, causing $US7.7 billion ($9.9 billion) of losses.

Locally, Risk Frontiers has estimated there are more than 100,000 homes in Sydney exposed to high bushfire risk, being within 100 metres of the bushland interface.

It is entirely plausible that 5-6% of these high-risk homes could be destroyed in a large bushfire event, roughly equalling the impact of the Tubbs fire. There are almost 20,000 homes in the high-risk zone in the Hornsby local government area, on the northern fringe of the metro area, and another 23,000 at-risk homes in the Blue Mountains.

Swiss Re’s bushfire pricing tool generates losses of up to $7 billion. However, in light of the Californian experience, I am starting to think this number could be insufficient for worst-case scenarios, especially given that Australian reinsurance contracts allow the aggregation of losses over a large area (indeed, multiple states) into a single reinsurance loss.

The Sigma report also reveals some increasing wildfire risk trends in the US. Looking into the future, we are likely to see similar risk trends for Australian bushfire, with climate change driving hotter, drier weather and longer fire seasons. The early start to the NSW 2017 fire season – brought forward by a warm, dry winter – may have provided us a window through which we can view the future of Australian bushfire risk.

The full Sigma report is available here.