Major insurers lost billions on natural disasters in 2017, they say climate change a ‘serious’ risk

Climate change is making these storms more intense, and more expensive.

A damaged home and streets littered with debris are seen after Hurricane Irma passed through Florida on September 13, 2017. Credit: Joe Raedle/Getty Images,
A damaged home and streets littered with debris are seen after Hurricane Irma passed through Florida on September 13, 2017. Credit: Joe Raedle/Getty Images,

The devastating hurricanes and wildfires that caused widespread destruction across several U.S. states and territories last year have already cost insurance companies billions of dollars, a ThinkProgress analysis of recent corporate financial disclosures found.

According to annual reports recently filed by 15 major U.S. insurers, natural disasters in 2017 have so far cost the industry at least $14.5 billion.

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These losses experienced by the insurance industry are an output of the most expensive year on record for natural disasters overall in the United States. And losses incurred by the insurance industry in 2017 were significantly higher than the year before.

As all of the companies state, the losses were mainly due to hurricanes Harvey, Maria, and Irma, along with the historic California wildfires (many were also hit hard by earthquakes in Mexico, but those figures were not included in the ThinkProgress total).

Despite the back-to-back disasters last year, the Federal Emergency Management Agency (FEMA) removed any mention of climate change from its recently released strategic planning document for the next four years. FEMA is the government’s first responder for floods, hurricanes, and other natural disasters increasingly fueled by rising global temperatures. Any mention of sea level rise or extreme weather was also absent from the report.

Climate risks, however, are not being ignored by the insurance industry. Repeatedly, the losses incurred from these catastrophes were described in the annual filings as “significant.” And several companies linked the growing uncertainty and severity of these types of events to climate change.

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We understand that climate change potentially poses a serious financial threat to society as a whole, with implications for the insurance industry in areas such as catastrophe risk perception, pricing and modeling assumptions,” AIG reported to its shareholders.

The reinsurance company Everest — a company that provides insurance to insurance companies — stated in its annual report to shareholders that there was “an unprecedented series of catastrophes in the third quarter of 2017.” As such, “this is the second consecutive year with higher than average catastrophe losses,” the company said.

Everest expects that the total losses for the entire insurance industry due to these events — hurricanes, wildfires, and earthquakes — “could exceed $100 billion.” This estimate is echoed by other companies, like Berkshire Hathaway, as well as in an analysis conducted by J.P. Morgan and shared with ThinkProgress.

According to an analysis released in January by one of the world’s largest reinsurance companies, Munich RE, insurance companies are expected to take a $135 billion hit from natural disasters experienced around the globe in 2017. This will make it the most costly year ever for the industry — and the three successive Atlantic hurricanes will be a main reason why. Half of all losses were in the U.S., with North America as a whole representing 83 percent of all insured losses last year. (Different companies classify Puerto Rico as either U.S., Caribbean, or North America.)

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“Losses from weather-related natural catastrophes set a new record. Insured losses were almost three times higher than the average of US$49bn,” Munich RE’s analysis states.

Financial disclosures

In order to determine losses incurred from the natural disasters experienced in the U.S. and territories, ThinkProgress looked at the annual filings released by major U.S. insurers Argo Group, Progressive, American Financial, W.R. Berkley, and Berkshire Hathaway. The analysis also includes major Texas insurers CNA Financial, Allstate, AIG, Travelers, Chubb, and Assurant, and companies that insure a large number of Florida properties, such as Universal Insurance and Blue Capital Reinsurance.

Two other reinsurance companies also examined were Validus and Everest. When multiple natural disasters hit in a short period of time, this puts increased pressure on reinsurance companies, which are there to help the insurance companies cover the costs.

All together, the loss from natural disasters in 2017 incurred by these 15 insurance companies totaled at least $14.5 billion.

Where possible, ThinkProgress narrowed in on the data to determine loss related specifically to hurricanes and wildfires. There is a growing body of scientific evidence connecting climate change with more destructive, and more expensive, weather-related disasters. This was seen with Hurricane Harvey, Hurricane Maria, and the California wildfires last year. 

The $14.5 billion figure reached is therefore lower than the total amount of loss incurred due to all disasters experienced last year. Losses not considered in the ThinkProgress analysis include damages from the devastating September earthquake in Mexico, as well as any non-weather related events, such as car accidents. Storms occurring elsewhere in the world, such as in Europe or Asia, were also not included in the analysis.

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While several companies disclosed detailed numbers for the cost of each extreme weather event or natural disaster, others simply gave a single figure for the total cost of all catastrophic events. For this reason, ThinkProgress did not include Argo Group and W.R. Berkley in its final total. Despite both companies declaring that catastrophe losses were primarily linked to natural disasters last year, no breakdown was provided; as a result, there was no way of knowing the scale of loss linked specifically to wildfires and hurricanes.

There were also instances in which a company may have experienced some loss from a hurricane or other event, but, due to quirks in the disclosure process, these numbers were not reflected in the report. For instance, some companies only disclose losses for major catastrophes if the dollar amount is above a certain threshold — sometimes above $50 million in losses or above $100 million.

All of this, combined with the fact that at time of publishing some major national insurance companies (such as Liberty Mutual and Nationwide) had not yet released their 2017 annual reports, means the full scale of the financial impact from last year’s natural disasters is still being tabulated. The billions in losses disclosed so far by insurance companies is only the beginning.

Each company was contacted by ThinkProgress to confirm or correct the figures, as well as comment on the impact of last year’s events. Only Berkshire Hathaway and CNA Financial did not explicitly state whether our understanding of the numbers for their company were correct and simply referred ThinkProgress back to the 10-K annual report. Progressive, W.R. Berkley, and Argo failed to respond. No companies would comment beyond their corporate filings or other publicly available documents.

Billion-dollar weather

The cost of recovering from last year’s storms has been monumental. And across the board, insurance companies recognized the impact of these record-breaking events. Over and over again, these catastrophic events were highlighted as a key reason last year’s financial losses were so high.

According to a report by the National Oceanic and Atmospheric Administration (NOAA) released in January, last year’s disasters were the most expensive on record for the country. Natural disasters caused $306 billion in total damages in 2017. The majority of this — $265 billion — came from hurricanes. Wildfires in the West cost $18 billion.

As NOAA economist Adam Smith said at the time, “2017 was a historic year for billion-dollar weather and climate disasters.”

The previous record year was 2005, when Hurricanes Rita and Katrina hit the United States. Katrina alone cost a total of $161 billion. With estimates for the cost to the insurance industry ranging between $41 billion and $82 billion, Katrina “is the costliest disaster in the history of the global insurance industry,” CNN reported.

It’s unclear yet where last year’s storms stand in comparison, but Deloitte has described the impact of the trio of hurricanes as having “reverberated globally, particularly within the reinsurance sector.”

These recent storms also demonstrate the mounting difficulty for car insurance companies to increase profits, Deloitte explained. For example, “Hurricane Harvey is believed to have damaged more vehicles than any storm in history — perhaps as many as one million,” the company said.

Looking ahead, Deloitte has flagged “soaring natural catastrophe claims due in part to climate change” as one of the “possible speedbumps” for the industry in 2018.

‘Protection gap’

The amount natural disasters such as hurricanes cost insurance companies is typically less than the total damage cost from an event. This is because damage estimates include things like loss of wages, power outages, and increased cost of living expenses, which aren’t covered by insurance.

What’s more, many insurance company policies for homeowners don’t cover flood damage claims unless a customer purchased flood insurance prior to a storm hitting. But the damage from Hurricane Harvey, for instance, was so severe precisely because of the historic rainfall and flooding.

The brunt of these damages will instead be felt by the U.S. National Flood Insurance Program (NFIP). However, many Texas residents impacted by Harvey failed to buy NFIP coverage, or let their policies lapse, according a New York Times report. Many people hit by floods, for instance, didn’t buy coverage because they had not been listed as living in a property located in a 100-year flood zone. And, with roughly $25 billion in debt, NFIP is currently facing an uncertain future; the program is in need of major reforms to improve coverage and is significantly underfunded and unable to cover current costs, never mind being prepared to cover future potentially crippling costs brought on by climate change.

“There are two big stories here,” Cynthia McHale, director of insurance at CERES, told ThinkProgress. “2017 was a really bad year for extreme weather [globally], and it was also a really bad year in terms of the protection gap.” The protection gap is the difference between the economic losses (the total cost) and losses covered by insurance.

From the Atlantic hurricanes to heavy monsoon rains in south Asia, the bulk of the total cost of these disasters (59 percent) were not covered by insurance. This means most of the costs are instead being borne directly by the communities impacted by these storms.

And McHale expects this trend to continue. With more intense flooding and sea level rise on the horizon, the damages most likely to become more severe with climate change are those least covered by insurance, she explained. So while climate change will get more costly for insurers, McHale said, “relative to the total damages, their proportion will continue to go down.” 

With climate change, storms are likely to become wetter, more intense, and will hit regions that have previously been less affected by such storms in the past. This will likely further increase both damages and the protection gap.

A draft report by financial analyst Moody’s shows that the number of natural disasters has spiked in recent decades — going from around 60 events per year in the early 1970s to an average of 310 natural disasters per year in the past 10 years. And with this, Moody’s says, the amount of insured losses from weather-related disasters has “trended strongly higher even after controlling for inflation.”

According to research released on March 9 by storm prediction company Global Weather Oscillations, this year’s upcoming Atlantic hurricane season is expected to be “somewhat of a repeat of 2017.”

The increasingly severe coastal storms, however, don’t seem to have deterred construction of new properties along coastlines. So, as more people continue to live in vulnerable areas, the amount of property at risk will go up, too — and this will likely contribute to higher damages in the future.

Rebuilding in wildfire-prone areas will continue contributing to future losses as well. A study released this month shows that between 1990 and 2010, 43 percent of the new homes built across the country were in areas that are increasingly prone to wildfires.

And in January, a California regulator warned that more frequent and intense wildfires was making it harder for homeowners to get, and keep, insurance coverage. Bloomberg also reported that despite last year’s devastating wildfires, local officials are issuing permits for homes to be rebuilt without updating building codes to protect from future risks.

These general trends were recognized by Travelers in its annual report. “Over the last two decades, hurricane activity has impacted areas further inland than previously experienced by us, and demographic changes have resulted in larger populations in coastal areas which historically have been subject to severe storms and related storm surge, thus expanding our potential for losses from hurricanes,” it found. “Demographic changes in areas prone to wildfires have also expanded our potential for losses from wildfires.”

The effects and frequency of climate change-related events are difficult to predict, companies and analysts recognize. And the insurance industry is increasingly exposed to significant financial losses due to climate change, according to Moody’s. The economic impact to property-casualty insurance and reinsurance companies due to climate change, it says, “outweigh the potential opportunities.”

Yet, as McHale emphasized, “We’re kind of on this course where the lines keep widening in terms of the losses versus what’s insured.” As a result, the recovery time will only get longer.

“I just know for communities to build back and build back quickly and get on their feet,” she said,”[if] they don’t have recourse to insurance to get the money so they can make those repairs, it takes a lot longer and it’s a lot harder.”