Natural catastrophe risk experts at Swiss Re used the reinsurer’s internal risk model for North Atlantic tropical cyclones to conduct an analysis and concluded that improvements in building and construction standards in Florida since the 1970s have reduced the amount of expected annual losses as a result of hurricanes. Approximately 90-100%.
But while Florida’s improved building codes are reducing the risk of losses on the one hand, the rapid growth of exposure in the state is greatly outweighing their impact on the other.
Swiss Re experts stated that the building law’s gains were “dwarfed by the higher typical loss projections that arise from the state’s population growth, which has tripled to more than 22 million since the 1970s,” as well as the increased value of assets at risk.
The reinsurers’ analysis looks specifically at Hurricane Ian last year and found that Fort Myers, where that storm made landfall, is an area where exposure growth was more than twice the pace of reductions caused by better building habits.
“Based on Swiss Re’s models, forecast annual losses in Fort Myers due to population growth rose 340-350% from 1970s levels, exceeding the building standards-driven gains in Swiss Re’s models of 150%,” the reinsurer explained.
If we look more broadly, across the United States, rapidly expanding values greatly outweigh the effects associated with building standards flexibility.
Swiss Re said population growth is gaining ground in fast-growing urban areas in the southeastern United States and Gulf states, such as Houston and Texas, where the expected loss from population growth has risen by a factor between 200 and 210 percent.
Large cities in the northeastern United States, such as New York, have grown more slowly over the period since the 1970s, but “are not immune to the increased risk of loss due to less storm-resistant construction given generally weaker and less frequent hurricanes, as well as lower risk.” “Awareness,” warns Swiss Re.
Exposure growth and increased values at risk in disaster and weather-prone areas have been an important driver of insurance and reinsurance losses, as well as renewal rates, as the industry seeks to catch up.
Swiss Re’s analysis reveals issues related to increasing exposures due to population increases, as well as the accumulation of high value assets in the region.
This is a trend that continues today, as Florida continues to see significant migration from other states, and while hurricane-hardened building standards are increasingly the norm, with exposure levels rising rapidly, it still means increased industry losses when major hurricanes hit. .
Swiss Re highlights the flood risks that are also accumulating, as people move to exposed coastlines, such as in Florida.
The reinsurer highlights an OECD-sponsored study that estimates the cost of flood improvements in more than 130 coastal cities around the world at $50 billion annually.
Noting that this is only a small portion of the study’s estimate of $1 trillion annual loss, nothing should be done to increase the resilience of these cities to floods.
“Swiss Re believes that by partnering with the public and private sectors, reinsurers can mitigate and adapt to increasing natural risks,” the company explained.
More broadly for the industry, the inflationary effects of population, growth in exposure to extreme weather and disaster-prone areas of the world, along with economic inflation, supply chain impacts, social inflation and other factors, all mean that insurance and reinsurance rates should remain higher. To cover the ever-increasing loss potential in these areas.
Although Florida continues to represent the largest regional exposure to the insurance-linked securities (ILS) and catastrophe bond markets, these exposure trends must be taken into account in analyzing and pricing ILS market risks.