Aerial view of burnt out destroyed forest with road

Catastrophes and Coverage: What 2022 Can Teach Us About Climate Risk

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January 25, 2023

This is the third in a series of The One Brief articles examining the impacts of climate change.


Natural disasters tested the resilience of hard-hit regions around the world in 2022, resulting in economic losses of $313 billion for the year. In the U.S., Hurricane Ian caused between $50 billion and $55 billion in insured damages in parts of Florida and South Carolina, creating the second-largest insured loss on record after Hurricane Katrina. Devastating weather events also proved costly internationally, with sources estimating billions of dollars in damages related to 2022’s summer floods in Pakistan. As climate change continues to create new threats to health, agriculture and economies, disaster preparation has become increasingly urgent.

Aon’s 2023 Weather, Climate and Catastrophe Insight report offers a closer look at the data behind these climate-related economic losses. These insights could also help communities prepare better for future natural disasters. “We are looking at 2022 and trying to find some opportunities and patterns that work,” says Michal Lorinc, head of catastrophe insight at Aon. “We are trying to find issues that we can solve and thus promote the resilience of communities — or the industry as a whole — around the world.”

In Depth

When it comes to climate and natural catastrophes, there is a marked protection gap between the economic cost of the damage and the amount that’s covered by insurance. Last year’s global protection gap was 58 percent, leaving the majority of disaster losses uninsured. While closing that protection gap helps increase insurance coverage for destructive weather events, threats vary by region — as does the understanding of climate risk.

“The challenge is that there are parts of the world where the risk is changing dynamically, and people don’t have a clear picture of the risks their community is facing,” says Liz Henderson, co-head of Catastrophe Analytics at Aon’s Reinsurance Solutions. “As an industry, we can do a lot more in terms of sharing that information, making it available and helping people quantify the benefits of an upfront investment.”

Planning for Disaster Recovery

Not all communities share the same level of climate preparedness or the same regulations and practices for natural disaster response. For insurers, these varying circumstances pose challenges as well as opportunities.

“We see the role of the insurance industry as an integral part of the overall resilience of communities and regions around the world,” Lorinc explains, noting that some communities have excelled at considering the threats of climate change in their approaches to construction. Though Hurricane Ian was deadly and costly, Florida’s rigorous building codes helped to limit the damage from the hurricane.

New development in vulnerable areas may drive losses related to climate catastrophes, according to Henderson. “A lot of communities have grown in areas of California that are at a very high risk for wildfire. Historically, those communities have been developed without really understanding the risks they’re exposed to and without a strict enforcement of building codes and risk-reduction guidelines.” Henderson notes that if these wildfire-prone areas determine how to reduce their risk, they could have a better chance at maintaining their communities.

Changing Approaches to Climate Risk

Building disaster resilience and cultivating an understanding of climate risk also involves strategic decision making and confronting preconceived notions about natural disasters. “When you’re living in a part of the world that’s never experienced an extreme event before, to get your head around the idea that you could start experiencing events like this and make some kind of investment is a really significant challenge,” says Henderson.

Combining individual actions with public-sector reforms can be critical in maintaining a proactive stance on disaster preparedness, but getting buy-in for change may require effort. “Oftentimes, it’s a complex ecosystem of people who have to make decisions in order to actually improve resiliency,” Henderson says. “Part of it is government action to set codes and standards and enforce them. Part of it is individuals willing to make the cash investment in their homes. These investments are not insignificant, and so you have to take that into consideration: people have to believe that it’s going to help them in the long run.”

Lorinc adds that building decisions for flood-prone areas now demand scientific input, as well as a dialogue between governments and the private sector. Recent advances in warning systems have helped some countries conduct large-scale evacuations with short notice, demonstrating the benefits of innovation and fast action. “I think that’s incredible because we hadn’t seen that several years ago,” Lorinc observes.

Infrastructure improvements can also help with climate change resilience, though this practice isn’t applied evenly on a global scale. “In the U.S., federal government action tying investment and infrastructure to climate change resiliency is a really meaningful step forward,” Henderson says. “But for other parts of the world that don’t have that capability or that investment capital, there’s a real need for capital to help with resiliency.”

Finding Solutions and Building Understanding

In addition to encouraging a broader understanding of climate risks and engaging stakeholders in climate-sensitive areas, building natural disaster resilience may require alternative insurance solutions. Three global droughts were among 2022’s 10 most costly global economic loss events — but drought and heat waves are not always modeled as climate perils, nor has insurance always fully covered these threats. “How governments and the private sector deal with this will be a challenge for the future,” Lorinc reflects.

One strategy for managing the growing risks related to extreme weather or climate disasters: parametric insurance, in which payment is triggered by a specified event. “As our models get better at accounting for the impacts of climate change — and as we get better at quantifying, explaining and closing that basis risk to make it as narrow as possible — I think that we’re going to see a lot more take-up of parametric cover,” says Henderson.

To read and download Aon’s 2023 Weather, Climate and Catastrophe Insight report, click here.

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