DESPITE RECORD LOSSES IN 2017, GLOBAL CATASTROPHE LOSSES ARE TRENDING DOWN
Despite record weather-related catastrophe losses last year, since 1990 total global catastrophe losses are down by about one third
Last July, I observed here that the world had recently experienced an era of unusually low disasters and that streak of good luck was going to end sometime. Little could I know that less than one month later the United States would be hit by Hurricane Harvey, which was soon followed by Hurricanes Irma and Maria. Not only did these three major hurricanes emphatically break the more than decade-long drought in major hurricane landfalls in the US but, according to Aon Benfield (PDF), together they resulted in > $220 billion in total losses and >$80 billion in insured losses.
In this column I take a look back at 2017 and put its catastrophes into longer-term historical perspective. Media reports have sent mixed messages about the catastrophes of 2017. On the one hand, there have been headlines about the record insured catastrophe losses of 2017. On the other hand, the impact of record losses on pricing in insurance and reinsurance has been less than many had expected or hoped for. How might we reconcile these two perspectives?
The short answer is that 2017 did indeed result in record weather-related catastrophe losses, but understanding the significance of losses requires understanding the inexorable growth in global wealth in addition to patterns in weather extremes. Total global losses in 2017 were $344 billion worldwide according to Aon Benfield. In terms of total catastrophe losses, 2017 trails only 2011 which had $486 billion in losses. Insured losses followed a similar pattern, with $134 billion in total losses (almost all of which were weather-related), just below that of 2011 and just above 2005.
The figure below places total weather-related catastrophe losses into the context of increasing global GDP. The graph presents data on losses from Munich Re (1990-2017) and Aon Benfield (2000-2017) in relation to global GDP (World Bank) all expressed in constant 2017 dollars (US Office of Management and Budget) (OMB). The data show clearly that 2017 was indeed an extreme year, with losses exceeding 0.4% of global GDP.
Yet, at the same time, since 1990 total global catastrophe losses are down by about one third, based on a simple linear trend. Over the past decade, reinsurance capacity, according to Aon Benfield, has increased by almost 80% (to $605 billion in 2017), whereas global GDP increased by about 24%. Simple math here helps to explain why reinsurance market pricing did not respond as much as some thought despite the 2017 record losses: (1) global GDP has increased, (2) reinsurance capacity has increased much faster than global GDP and (3) catastrophe losses have decreased as a proportion of global GDP. The consequence of these dynamics explain why it is that, even with losses in 2017 at a record levels, the market is nonplussed.
The majority of 2017 catastrophe losses and vast majority of insured losses resulted from the three major Atlantic hurricanes. How should we understand the 2017 Atlantic hurricane season?
According to Phil Klotzbach of Colorado State University, 2017 saw the most active North Atlantic hurricane season since 2005. (This assessment uses a metric called ACE, accumulated cyclone energy.) Three of the previous four years were well below average. These data reinforce what I wrote last July: “A simple regression to the mean would imply disasters of a scale not seen worldwide in more than a decade.” The active 2017 hurricane season reminds us that catastrophe luck cuts both ways.
Interestingly, in addition to the three major hurricanes that made landfall in the North Atlantic, there was only one other intense landfall worldwide (tropical cyclone Enawo struck Mozambique, killing 81 and causing >$20 million in damage). The figure below (based on updated data provided by Ryan Maue http://(tropical cyclone Enawo struck Mozambique, killing 81 and causing >$20 million in damage- @ryanmaue –http://(tropical cyclone Enawo struck Mozambique, killing 81 and causing >$20 million in damage based on our 2012 study) shows global tropical cyclone landfalls since 1970.
In 2017 there were 18 total landfalls at hurricane strength, above the long-term average of 15.3 (median = 15, record = 30 in 1971), but the four major landfalls were below the long-term average of 4.8 (median = 4; record = 9 (five times)). Overall, 2009 to 2016 were all below average for global landfalls, which helps to explain the good fortune experienced with respect to global weather catastrophe losses.
Despite the record catastrophe losses in 2017, according to Aon Benfield, the year continued a streak of well-below average (and below median) loss of life, according to longer-term data provided by Max Roser and Hannah Ritchie at Oxford University. However, large loss of life in 2004, 2008 and 2010 (>200,000 in each year) reminds us that the challenge of protecting lives in the face of disasters remains a crucial priority.
2017 saw a range of other catastrophes, including notable severe weather and wildfire events, together totaling more than $50 billion in losses, whereas flood losses were well below a longer-term average. However, despite these various catastrophes and associated losses, 2017 was notable primarily due to the three major hurricanes in the North Atlantic.