Published on 07 March 2019


Natural disasters causing insures to lose profits

Almost all Insurance and reinsurance companies have seen their financial results impacted by the numerous natural disasters that occurred in 2018. The increase in economic losses related to climate events is beginning to worry insurers, but not so much in the short-term.

Hurricane Michael (pictured) and Hurricane Florence were the costliest natural disasters in the United States in 2018.
@Brandon Perdue

Insurance companies have a heft bill to pay. The cost of repeated natural disasters in the third and fourth quarters of 2018 severely cut insurer profits, particularly for Axa. The leading French insurer saw its net profit drop by 66% to €2.1 billion, partly due to compensation for damage related to natural events. These events cost Axa €2 billion in 2018, with its American subsidiary being particularly affected due to California's wildfires and Hurricane Michael, totaling €335 and €261 million respectively.

Other companies in this sector are not fairing any better. Financial results have all evoked the same message: the negative impact of successive natural disasters in 2018. The French reinsurance company Scor announced a hit of €657 million to its accounts, citing typhoons in Asia, hurricanes in the United States and wildfires in California. Its competitor, Swiss Re Group, estimates the cost of these disasters at $2.2 billion. American insurer AIG, which had negative accounts in the fourth quarter of 2018, announced the financial impact of natural disaster at $798 million.

$200 billion in economic losses

The insurance sector will probably have to get used to this kind of situation. The frequency of natural disasters is only increasing, and costs will follow. According to the annual report on global natural catastrophes issued by Aon in January 2019, economic losses amounted to $225 billion worldwide in 2018, including $90 billion in insured damage.

These figures are in sharp decline compared to 2017, which was among the highest in terms of economic losses ($450 billion) and compensated damages ($147 billion) due to three major hurricanes that all exceeded $20 billion in insured costs. This is a fact that Aon directly addressed: "The $225 billion total represents the third consecutive year of disaster losses exceeding the $200 billion threshold and was the tenth time this occurred since 2000,” details the report. Aon also notes that 2018 was the fourth warmest year since 1880, with the hottest five-year streak ever recorded.

Climate risk of concern in the medium-term

Insurance companies are starting to worry about these numbers. An increasing number of them are gradually divesting coal. According to the latest emerging risks barometer from the French Federation of Insurance (FFA) published in February 2019, insurance companies place global warming second on their list of highest risks, but only beyond five years

In the short-term, however, climate risk tends to lose its intensity. While it was in second place on insurers’ list of concerns in 2018, it is now in fifth position for 2019, surpassed by cybercrime and social tensions.

A fragile balance

In their defense, so far things are (still) good for the insurance sector. Reinsurance mechanisms (insurers' insurance) remain sufficiently capitalized, with nearly $600 billion available to absorb the economic costs associated with natural disasters. Insurance companies, despite the negative impact of these events, have also globally managed to keep positive accounts in 2018 by diversifying their risks. Only the smallest companies have truly suffered.

However, equilibrium will only be maintained if large-scale events, exceeding $25 billion in economic losses and $15 billion in insured damage, do not occur too consecutively. A few years of the same levels as 2017 could start to pose a problem for many insurance companies.

Arnaud Dumas @ADumas5

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