December 29th, 2011

2011 Catastrophe Update: Historical Global Losses, Cluster of Costly International Losses

Posted at 1:00 AM ET

2011 has been an unusually eventful year for the (re)insurance sector. In addition to the challenging economic environment and major catastrophe model updates, (re)insurers were hit by an exceptional accumulation of global natural catastrophes. Two of the most damaging earthquakes in recent times struck Japan and New Zealand early in the year, causing huge losses. Several other significant events, including devastating floods in Thailand and Australia, a record breaking tornado season in the United States and Hurricane Irene making landfall along the U.S. east coast, combined to cause insured losses of around USD108 billion in 2011 (1) .

Losses were more than double those recorded in 2010 and second only to 2005 when (re)insurers paid out more than USD120 billion (2) (see Figure 1). Natural hazards continued to be the largest source of losses in 2011 at USD103 billion, while man-made disasters cost (re)insurers USD5 billion (1). Economic losses (both insured and uninsured) are estimated to have reached a record of USD350 billion, with the earthquake in Japan accounting for USD210 billion. More than 30,000 people lost their lives to worldwide disasters in 2011, including at least 16,000 people in the Tohoku earthquake.

Figure 1

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Significant Insured Losses in 2011

At least twelve natural catastrophes resulted in insured losses of more than USD1 billion during 2011. Interestingly, the vast majority of the loss activity occurred outside of the United States, with the Asia Pacific region accounting for more than two-thirds of total insured losses (see Figure 2). This broke the historical trend of U.S.-based events dictating pricing movements across the property catastrophe reinsurance market.

Figure 2

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Figure 3 shows how significant loss activity during YTD 2011 compared with the significant losses of 2005 (3) . Although both reinsured losses and overall insured losses in 2011 rivaled those of 2005, the sector responded to the situation and was sufficiently capitalized to pay claims.

Figure 3

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(2)

Cluster of Costly International Losses

Australia sustained two major losses early in the year when floods submerged parts of Queensland in January and Cyclone Yasi made landfall in northern regions of the state the following month. These events were strongly influenced by a La Niña event in the tropical Pacific (4) . The floods in Queensland started at the end of 2010, but the worst of the damage occurred in January 2011 when parts of Brisbane City were inundated. Although floodwaters in Brisbane peaked one meter below the level reached during the devastating floods of 1974, thousands of buildings were flooded and insured losses totaled around USD3 billion, according to the Insurance Council of Australia (ICA).

Queensland’s misery was compounded when Cyclone Yasi made landfall on February 3 with sustained winds of around 150 mph, making it one of the strongest cyclones to ever hit Queensland. Although the cities of Cairns and Townsville were spared the worst of the stormy weather, smaller communities suffered severe wind damage while the agricultural sector also reported heavy losses. ICA estimates suggest Yasi’s insured loss cost is likely to exceed USD1.2 billion.

More damage occurred in Asia during the second half of the year after Thailand was hit by its worst flooding in recent memory. It is thought that La Niña again contributed to the severity of the event. Hundreds of thousands of homes were destroyed or damaged and the floodwaters severely disrupted manufacturing operations in central regions of the country. Damage and disruption to the manufacturing sector was particularly severe after flood defenses at seven industrial estates were breached in September and October, inundating thousands of factories owned by multinational companies. The floods also submerged large parts of Bangkok. Although considerable uncertainty remains over the cost to the industry, current estimates indicate insured losses could be between USD10-20 billion.

Denmark’s capital city of Copenhagen was also hit by severe flooding due to a cloudburst in July, causing widespread property damage and triggering insured losses of around USD1 billion.

Earthquake Devastation

Two of the most damaging earthquakes in recent times struck Japan and New Zealand in the first quarter of 2011, triggering the highest number of earthquake-insured claims ever recorded. At least 16,000 people lost their lives in Japan after a 9.0Mw earthquake struck off the country’s northeastern coast in March. The event caused severe shaking along much of Japan’s eastern coastline and triggered a massive tsunami that devastated coastal communities. Tens of thousands of buildings were destroyed or damaged by the Tohoku earthquake, which was the most powerful to hit Japan since modern instrumental recordings began 130 years ago. Industry losses related to the earthquake and tsunami are currently estimated at more than USD30 billion.

In New Zealand, meanwhile, thousands of buildings were destroyed in the country’s second largest city of Christchurch after a shallow 6.3Mw earthquake hit the area in February. The event was classified as an aftershock of the 7.0Mw Canterbury earthquake that shook the region in September 2010. Despite being of a lower magnitude than that of the Canterbury earthquake, the Christchurch event hit closer to the city’s central business district, where many buildings had already been weakened by the earlier quake. Recent estimates suggest insured losses from the event will exceed USD14 billion.

Although there is still some uncertainty over the total insured loss figure for both the Tohoku and Christchurch events (earthquake losses historically take longer to develop than typical wind losses), current estimates suggest the events look set to become the first and third most costly earthquakes on record, respectively. Furthermore, the Tohoku earthquake is the biggest loss ever to occur outside the United States.

Several other noteworthy earthquakes occurred in 2011, including a 7.2Mw event in Turkey and some unusual activity in the U.S. states of Oklahoma and Virginia.

Notes:

[1] Swiss Re News Release, 15 December 2011. This preliminary figure includes all events that are estimated to have caused insured losses of >USD17.9 million for shipping, >USD35.9 million for aviation and >USD44.6 million for other property-related events.

[2] This figure has been revised from initial 2005 estimates and is inflation-adjusted.

[3] This chart compares losses in excess of USD1 billion for 2005 and YTD 2011 (December 2011).

[4] The El Niña Southern Oscillation (ENSO) is the most prominent year-to-year climate fluctuation on the planet. It originates in the tropical Pacific with usually warm (El Niño) and unusually cold (La Niña) events often recurring every 3 to 7 years (although they sometimes occur in consecutive years).

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