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In 2023, the hottest year on record, 142 nature-related disasters were recorded around the world, leaving a $280 billion hole in finances. In Latin America and the Caribbean, 27 of these incidents occurred, including Hurricane Otis in Acapulco, Mexico, the climatic event that left the most economic damage, estimated at 15 billion dollars, in addition to 47 people dead and 32 missing.
For his work, Kaspar Mueller, president of Latin American reinsurance at the reinsurer Swiss Re, the data that most alerts him is the large number of assets that were lost due to disasters that were not protected by any insurance (72%). . In the last ten years, the gap between the region’s losses with and without protection averages 80%, which is greater than the 62% worldwide and is surpassed only by Asia (85%). Most of them are disasters caused by earthquakes, tropical cyclones and floods, according to the Sigma report, a reference on global risks in the insurance industry published by Swiss Re.
This report reflects that the growth in policy taking out is slower than the growth in catastrophes, something worrying given the potential increase in climate events, says Mueller. “One of the most strategic issues (for the industry) is to mitigate that gap,” says Mueller, in this interview in which he delves into the low culture in insurance and its impact on natural catastrophes.
Ask. What makes 2023 different in terms of disasters?
Answer. 2023 is the year with the most catastrophes among which we have data. It is not only the value with global damages greater than 100 billion dollars, but also the number of events. We did not have a single large event, like in 2022, which with Hurricane Ian alone was 60 billion dollars. But we had many more medium-sized events, (with losses) between one and five billion. This trend is also observed in Latin America.
Q. What is the conclusion?
R. The frequency of mid-level events grows more than the frequency of large events. After tropical cyclones, severe convective storms – those with very intense precipitation, hail, electrical activity and strong turbulence – have established themselves as the second greatest danger that generates losses.
Q. How have losses from natural disasters evolved in Latin America and Mexico?
R. In terms adjusted for global inflation, insured losses from natural catastrophes increased 5.9% annually between 1994 and 2023. This is due to a combination of more people with more things of value in more dangerous places, coupled with the effects of change climate. We know that the temperature is higher, you have more humidity in the air, more rain and more flooding. Floods and hurricanes are more aggressive.
Q. And in that combination, what weighs more on the losses?
R. We say that the influence of climate change is less than the influence of having more valuable things in more dangerous places. But the effect of climate change is also present.
Q. Given this environment, how has insurance contracting behaved?
R. The insured assets grow every year, but not as the risk exposure grows. The growth of insurance is lower than the growth of damages. That’s why the gap between insured and uninsured losses is a little larger each year. Total premiums in Latin America are expected to grow 3.4% in real terms in 2024, compared to an expected 6% in 2023.
Q. In that regard, how is Mexico?
R. The economic loss is much greater than the insurance protection. For Mexico, in the last ten years, disaster losses amount to 22 billion dollars, of which 75% were not insured.
Q. What characterized Mexico in 2023 in terms of catastrophes?
R. Otis is the only catastrophe in Mexico in 2023 (which left) between 1,000 and 5,000 million dollars, but it was a relevant catastrophe not only because of its size, but because it is the first time that a tropical storm becomes a hurricane in such a short time. It is the first time that a hurricane 5 hits a large city. Katrina and Irma, in New Orleans and Miami, were not 5. It was the end of the hurricane period and much further south, which was beyond the probabilities of the models.
Q. What are the projections of catastrophes and vulnerability for the region and for Mexico?
R. We know that climate change will continue. In particular, droughts and floods will be stronger. The global trend is that damages are going to grow more than inflation, something that will also apply to Latin America. Globally, rich countries pay relatively more of GDP for insurance and developed economies.
Q. What characterizes Mexico and Latin America in terms of natural disasters?
R. The thing is, there are certain countries that have the two biggest risks: earthquake damage and hurricanes. The earthquakes, on the west coast; and in the Caribbean, part of Mexico, Central America, hurricanes are the most important risks. In secondary risks, such as forest fires, droughts, and floods, you have a large exposure to the south.
Q. In the face of large-scale catastrophes, could insured losses increase due to people’s greater awareness of the danger?
R. Our memory is short term. In the year following the disaster, people buy more insurance, but not afterward. When you have an earthquake, the numbers go up, but then they don’t go up anymore. After Covid-19, people bought more health insurance, but then it went down. We have a very short-term memory.
Q. Will the frequency and magnitude of climate change catastrophes increase insurance prices?
R. We make a calculation of the probability of damage to calculate the price. We didn’t have a hurricane event to the south, but now we do, and that is going to raise prices. The other issue that influences the price is the inflation of the damages you have to pay in the future. If you have more expenses on damages, that will increase prices. In the long term, they are going to increase because the damages are going to increase.
Q. Could there come a time when the frequency of catastrophes and the cost of damage is such that insurers and reinsurers do not want to absorb it?
A. It is a risk that exists. One part is the ability of the global market to protect risks, and another part is vulnerability: how houses are built, what are the rules for building them. But there needs to be an environment for it to be business for the insurance industry. In some parts of the world, insurance operations are difficult. In Florida, for example, the market for home protection no longer works because the legal situation for insurers is difficult. There, the calculations to know what has to be paid depend on the legal situation and can vary from one to ten times there.
Q. How to bridge that gap between insured and uninsured losses?
R. On an individual level, we don’t want to buy insurance because it’s human: we don’t want to think that bad things are going to happen, and that’s why you have that gap. You have to think that when you have damage, you pay for it as a society. Someone always has to pay the bill. If we can minimize that gap and work with governments and organizations to take a longer-term view, societies will have more protection and can recover faster. Not only in Mexico, throughout the world.
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