Climate risk is burning billions and Asia remains vulnerable

ANALYSIS: CLIMATE RISK Climate risk is burning billions and Asia remains vulnerable

In 2021, the costliest recorded natural disaster in the region topped US$2b.

Natural disasters are definitely inevitable, but what continues to worry insurers is that these catastrophes are costing them a heftier price tag than ever. In Aon’s Weather, Climate, and Catastrophe Insight, global economic losses for 2021 alone were estimated to be around $343b with only $130b insured. This marks the seventh costliest year on record, with a protection gap of at least 62%.

Whilst this is not a recordbreaking year, far below the peak losses of $615b in 2011 and $532b in 2017, it was still above the average of $272b and the median of $265b of the 21st century. Comparing the last decade, between 2011 to 2020, economic losses were just 4% higher than the average and 15% higher than the median.

Economic losses were found to be solely resulting from weather- and climate-related events defined as atmospheric-driven phenomena, totalling $329b. This is the thirdhighest loss on record.

Aon pointed out that driving the cost of these economic losses that topped the $20b global threshold in 2021 was just four individual environmental events, namely Hurricane Ida, the July Flooding in Europe, the Summer Season Flooding in China, and the February Polar Vortex in North America.

These four economic losses collectively topped $300b. If this continues, it would be impossible for insurers to properly cover these losses without a hike in premiums.

Asia’s vulnerability

Speaking at the Willis Towers Watson (WTW) Asia Pacific Risk Virtual Conference, Gillian Tan, Assistant Managing Director of the Development & International Group of the Monetary Authority of Singapore, stressed the urgent need for climate action, especially in Asia, as it is geographically prone to natural catastrophes.

“The costliest natural disaster in 2021 was the flood in Henan province in July which resulted in a total economic cost of over $2b as of September last year, and this number is only expected to head north,” Tan said.

In Aon’s report, economic loss from flooding events between 1 June to 30 September 2021 in China stood at $30b. This makes it the number one most significant natural disaster event in 2021 in the Asia Pacific (APAC).

Aon said flooding events make up 55% of the economic losses in 2021, with China flooding events being the most significant natural disaster event for the second year in a row.

What is even more alarming is that, out of the $30b, only $2b were logged as insured losses. Out of the $78b of economic losses, only $9.4b or around 12% were covered by insurance. This highlights the underinsurance gap in the region.

“Amidst this sobering backdrop, what has been taken for granted all along is now clear: our interconnected and interdependent global system is incredibly fragile and vulnerable,” Tan said.

Losses in 2022

In Aon’s Global Catastrophe Recap, global preliminary loss for the first quarter of 2022 is now at $32b, with public and private insurers covering around $14b.

“The first quarter is typically the quietest of the year, though 2022 marked the sixth consecutive year to record more than $10b in insured losses,” Aon said.

What contributed most to the global loss is fluctuations in temperatures and precipitation influenced by the continued effects of La Niña across the central and eastern Pacific Ocean. These influences resulted in notable hazard events, including prolific and record-setting rainfall along Australia’s East Coast.

APAC logged the highest percentage of first quarter economic losses at more than $15b. Aon predicts that economic loss totals will continue to develop in the weeks and months ahead due to many large-scale and impactful climate events in March.

Demand for resiliency

The obvious danger that climate risk brings is that it will result in structural shifts to many firms’ riskreturn profiles.

According to a research released by Swiss Re Institute, it was estimated that if no action on climate change is taken, Asia’s economy would be 26% smaller in 2050 whilst ASEAN’s economy would shrink by 37%.

Our interconnected and interdependent global system is incredibly fragile and vulnerable

Gillian Tan

The costliest natural disaster in 2021 was the flood in China’s Henan province with a total economic cost of over US$2b