Introduction: Catastrophic weather events led to extraordinary losses and market conservatism
US Supreme Court Decision Could Have Broad Implications
In April, the US Supreme Court declined to consider five cases filed by fossil fuel companies arguing that climate change-related tort claims should be heard in federal, rather than state, courts – a decision that could lead to a sharp increase in state court litigation. (State courts are widely considered more plaintiff-friendly in such cases.)
The number of climate change-related cases against fossil fuel companies and organizations in the plastics, food and agriculture, finance and transport sectors had already risen notably. Over 1,200 cases were filed in the last eight years, as compared to 800 cases filed between 1986 and 2014*. Outside the US, Non-Governmental Organizations and individuals represent almost 90% of the claimants, whereas within the US, governments, companies, and trade associations make up a higher proportion of claimants.
It is clear that the potential consequences of climate-related litigation could reach far beyond the fossil fuel industry, and the cost of climate change losses to the insurance industry may reach well beyond the Property market.
The first half of 2023 proved monumental for natural catastrophe risk – especially, climate-related events – as economic losses stemming from natural disasters globally reached $194 billion – well above the first half average of $128 billion for the 21st century. Key events contributing to the record-breaking total include:
- $91 Billion: The earthquakes in Turkey and Syria, making economic losses in the EMEA region an unprecedented $111 billion.
- $35 Billion: Severe convective storm (SCS) activity in the United States, which was responsible for at least 13 individual billion-dollar events, setting a new 1H record.
- $7.2 Billion: Two back-to-back, billion-dollar disasters, which impacted the North Island of New Zealand within a three-week period in the first quarter, remnants of Cyclone Gabriele and severe flooding in Auckland.
These and other climate-related catastrophes have had myriad impacts around the world, across many parts of society and business, including on insurers who have paid $53 billion in losses from natural disaster events in 1H 2023, some 46 percent above the 21st-century average of $36 billion. And this extraordinary loss amount is limited to Property insurance. If climate-related litigation gains traction, Liability losses could also have a material impact on (re)insurers’ profitability and the industry as a whole. Just as the Property market has shifted to become more conservative to address these climate developments – with price increases, capacity contraction, and coverage clarifications – the Liability market could likewise experience a shift as organizations turn to their insurance – especially, General Liability, Public and Products Liability, and Directors & Officers Liability – to cover their climate-related liabilities.
In this quarter’s Global Market Insights report, we see clearly the impact of Natural Catastrophe losses on market behaviors. Key findings this quarter include:
A conservative market environment continued in Q2 as uncertainty related to economic and social inflation, rising loss costs, global tensions, and a slow supply chain recovery continued. Insurers remained committed to adapting their appetite, capacity deployment, coverage language, attachment points and pricing to manage their portfolio performance while focusing on targeted growth for lower-hazard, quality risks, and products such as Directors & Officers and Cyber where portfolio performance targets have been achieved and coverage terms and conditions have been clarified.
Despite more orderly mid-year reinsurance renewals which led to a modest reprieve in reinsurance pricing and terms and conditions relative to the January renewals, Natural Catastrophe-exposed Property risks continued to experience a volatile and challenging market environment. Climate change concerns weighed heavily into Natural Catastrophe risk underwriting amidst a backdrop of Canadian wildfires burning across 20 million acres, several geographies experiencing record-breaking heat waves, rain and flooding, record high sea surface temperatures, and an updated Colorado State University prediction of a higher-than-average number of Atlantic tropical storms and hurricanes during the upcoming 2023 season. Reported property and business interruption values and valuation methodologies remained under scrutiny. Sophisticated modeling and risk quantification tools were increasingly leveraged by risk managers and underwriters to better understand and quantify risk.
Demand continued to grow for innovation around risk transfer, and alternative solutions gained prevalence amidst an increasingly complex, interconnected and data-enabled risk environment. Alternative Risk Transfer, Structured Insurance, Cross-Industry Facilities, and Captives served as ever-important levers in achieving companies’ financial and risk management goals. Further, parametric products gained momentum, especially for heavily Natural Catastrophe-exposed risks. To accelerate the delivery of index-based solutions, Aon established a global center of excellence for parametric initiatives and products and named a global leader, Cole Mayer, to reinforce our commitment to supporting clients in making better decisions.
As climate risk and frequency of catastrophic events continues to increase, Aon is leveraging resources from across the firm to support clients. Our climate risk advisory is focused on building a holistic, end-to-end approach to risk modeling and management, from scoping the exposure to communicating and executing strategies. We are using forward-looking diagnostics for a range of climate scenarios, applying climate hazard data to individual asset locations to understand key geographies at risk today and in the future. Our advanced data and analytics, our academic collaborations, and our 30+ years of experience applying a toolkit of catastrophe and climate models enables us to inform decision-making and to deliver myriad alternative and traditional risk transfer options such as insurance-linked securities, parametric solutions, facultative reinsurance via corporate captives, and enhanced policy language.
Our advice goes beyond analyzing the results of any single approach. We help organizations as they develop holistic risk programs to navigate the inherent uncertainty of climate change.
I am pleased to introduce you to this quarter’s Commercial Risk market insights where you can learn more about the important issues shaping today’s insurance market.
Andy Marcell
Chief Executive Officer, Risk Capital and Chief Executive Officer for Reinsurance Solutions
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