sigma 01/2024: Natural catastrophes in 2023

In 2023, natural catastrophes resulted in economic losses of USD 280 billion. Of these USD 108 billion (40%) were covered by insurance, above the previous 10-year average of USD 89 billion.

The earthquake in Turkey and Syria was the biggest humanitarian disaster of the year, claiming close to 58 000 lives. With insured losses of USD 6.2 billion, it was also the costliest industry event. Even so, with low insurance penetration in the region impacted, 90% of all property damage was uninsured.

Relative to GDP, we estimate that the insurance loss burden from catastrophes has more than doubled over the last 30 years. And, extrapolating our estimated long-term trend rate of 5-7%, we estimate that today's burden could double over the coming decade. To date economic growth, urbanisation and the associated accumulation of assets that need insuring have been the main driver of rising losses.

So far, the impact of changing climates on losses has been small. However, as climates change, the contribution of more frequent and severe weather events to losses looks set to rise in the future.

The main driver of the accumulation of insured losses in 2023 was event frequency: there were 142 insured-loss inducing catastrophes last year, a new record. The fastest growing category of catastrophes is "medium-severity events", which we define as events causing losses of USD 1-5 billion. Due to event frequency, annual global insured losses (inflation-adjusted) of more than USD 100 billion have become standard. This is even in the absence of a major peak-loss event such as a tropical cyclone that can trigger losses of many multiples more, particularly when a storm strikes an urban area of high population and asset value concentration. Think of Hurricane Ian in 2022, which wreaked losses of more than USD 60 billion when it made landfall in western Florida as a Category 4 storm.¹

Within the category of "medium-severity events" are severe convective storms (SCS). After tropical cyclones, SCS have collectively become the second largest-loss making peril. In 2023, SCS-insured losses were USD 64 billion, a new high. Most of the losses (85%) last year originated in the US, but losses are currently growing fastest in Europe, where they have topped USD 5 billion in each of the last three years, with hail storms the main driver.

Separating out the different contributors to SCS losses in the US over the last 15 years, and after adjusting for inflation, we find that most of the growth in losses has been driven by economic growth-related factors. Cost increases in the construction sector are another factor driving losses, as are climate change effects, although there are many uncertainties around the latter, and impacts will vary by peril and across regions.

Annual increase of insured loss from SCS in the US, 2008–2023 (dark blue), by driver (lighter blue)

Risk assessment and insurance premiums must keep up with the fast-evolving risk landscapes and loss trends. Insurance market functioning requires that premiums be commensurate with the underlying risk, but as losses continue to grow, higher rates alone will not suffice. Further, higher premiums makes insurance less affordable. Hence also needed are adaptation actions, such as enforcing building codes and building flood protection barriers, and mitigation measures to reduce the size of/prevent losses from occurring in the first place. These will help lower the costs of providing insurance, a benefit that can be passed on to consumers through lower premium rates.