In 2023, global natural catastrophe insured losses exceeded $100 billion for the fourth year in a row, underlining the significant financial burden posed by frequent natural disasters. In fact, most 2023 losses stemmed from medium-severity severe convective storms (SCS), predominantly in the U.S.

What are severe convective storms (SCS)?

Willis Towers Watson PLC defines SCS as intense atmospheric disturbances that can cause powerful winds, large hail, heavy rainfall, and occasionally tornadoes. They arise from specific atmospheric conditions, including atmospheric instability, latent heat release, pressure differences, low air pressure, and wind shear.

According to the Swiss Re Institute, from a re/insurance and catastrophe modeling perspective, the term SCS primarily describes damage caused by hail, tornadoes, and derechos, including subsequent water ingress. While these storms can also lead to flooding, such events are typically classified as pluvial flood events rather than SCS. Similarly, insurers generally associate damage from lightning with fire losses rather than SCS.

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Structural Changes Have Protected Reinsurers From SCS Losses

However, unlike previous years marked by heightened natural catastrophes, reinsurers in 2023 faced less exposure to losses. This improvement was driven by structural changes in reinsurance in 2023 and strategic actions taken during the renewals, such as:

• Moving up in the reinsurance towers,
• Scaled-down limits offered to cedents,
• Reducing exposure to frequent natural disasters (lower-return periods),
• Tighter terms and conditions,
• Fewer aggregate covers, and
• Repricing of risk.

With these changes, global reinsurers experienced robust overall performance in 2023 and the first half of 2024. In contrast, primary insurers, especially in the U.S., faced significant challenges, grappling with increased retentions and therefore bearing the brunt of numerous SCS.

Ratings implications

Over the past 18 months, we have not taken any negative rating actions on reinsurers due to natural catastrophe losses. However, we have taken negative rating actions on a few U.S. primary insurers where we believed elevated natural catastrophe losses were dampening underwriting performance.

While the demand for natural catastrophe reinsurance protection remains robust, it will be crucial to observe how long reinsurers can maintain their underwriting discipline. The risk of yielding to competitive pressures, as witnessed in the past, will be a critical factor influencing reinsurers' future underwriting profitability.

SCS Insured Losses Remain Near All-Time Highs

According to the Swiss Re Institute Sigma report, between 1994 and 2023, global insured losses from natural catastrophes have increased faster (5.9% annually) than global economic growth (2.7% annually). Looking ahead, Swiss Re Institute projects insured losses from natural catastrophes will grow by 5% to 7% annually, consistent with the actual loss increases observed over the past three decades.

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Notably, 2023 marked the fourth consecutive year of insured losses exceeding $100 billion and the sixth occurrence in the past seven years, which could be viewed as the new norm. The earthquake in Turkiye, with estimated insured losses of $6.2 billion, was the costliest catastrophe of 2023. That said, it struck a region with low insurance coverage, leaving approximately 90% of the economic losses uninsured. In contrast, the 2011 Tohoku earthquake in Japan and the 2010-2011 Christchurch earthquake in New Zealand resulted in insured losses of $47 billion and $36 billion, respectively.

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However, the primary driver of last year's global insured natural catastrophe losses was the high frequency of medium-severity events. Unlike 2022, when Category 5 Hurricane Ian caused over $60 billion in insured losses, 2023 did not experience any outlier peak-loss events. Instead, the main culprit was the sheer number of events.

For example, the Maui wildfires in 2023 caused approximately $3 billion in insured losses, marking the largest insured loss ever recorded in Hawaii. Losses from secondary perils surged by about 53% in 2023 to $87 billion and accounted for approximately 81% of the global insured natural disaster losses, nearly double the 43% share in 2022.

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Last year was punctuated with 142 natural disasters that resulted in insured losses--the highest number ever recorded in a single year. The combined insured losses from 30 medium-severity events, including 21 SCS, accounted for most of the total losses for all perils. The medium-severity category is the fastest growing, both in terms of event frequency and total insured losses.

Chart 4

In 2023, SCS accounted for $64 billion in insured losses, setting a new record and comprising 60% of the global insured losses from all natural catastrophes--more than double the 10-year average. The majority (about 84%) of SCS insured losses originated in the U.S., but losses have also increased in Europe and other regions.

The primary driver of SCS losses is hail damage, which constitutes 50% to 80% of these losses. In Europe, SCS insured losses exceeded $5 billion annually for the past three years, with Germany being the hardest hit in 2021, France in 2022, and Italy in 2023.

Why are natural catastrophe insured losses so high?

The rise in global insured losses from natural disasters, now often surpassing $100 billion, can be attributed to various factors:

• Economic and population growth,
• Urbanization,
• Inflation,
• The potential impacts of climate change, and
• The increase in property exposures and concentration of high-value areas in regions prone to natural catastrophes, such as coastlines and flood plains.

While the exact attribution remains debated, insurance and reinsurance (re/insurance) brokers have reported that the growth in SCS loss costs is primarily driven by higher inflation. This is followed by economic and population growth, which leads to more valuable and insurable assets. Climate change also contributes to these losses, albeit as a more challenging factor to quantify.

The Swiss Re Institute Sigma report emphasized that increased exposures due to economic and population growth, urbanization, and rising wealth are the primary drivers behind the surge in SCS losses, accounting for approximately one-third of the increase in related insured losses in the U.S. over the past 15 years.

Other analyses, by Aon PLC and Guy Carpenter & Co. LLC, suggest that more than 80% of the escalation in SCS losses can be attributed to changes in exposure. The remaining 10% to 20% may be due to climate change, other exposure factors, or random chance.

Climate change has been shown to influence certain perils, such as hurricanes and tropical cyclones. Additionally, there is growing evidence that SCS activity and insured losses have been increasing over the past several years.

However--given the highly localized nature of SCS--global or regional views of projected changes in SCS are not generally possible. That said, as warming increases, this could lead to conditions that support SCS activity, leading to a greater frequency of such events in some geographies (including the U.S.) and lengthening the SCS season. Evidence in regions outside the U.S. is limited, as reported by the Intergovernmental Panel on Climate Change.

Insurers Grapple With Escalating SCS Losses, While Reinsurers Remain Shielded

Since 2017, the global reinsurance sector's underwriting performance has been hampered by the rising frequency and severity of natural disasters. Recently, there has been a significant shift in loss patterns, with secondary perils--primarily SCS originating in the U.S.--accounting for an increasing share of overall catastrophe losses.

Prior to 2023, reinsurers worldwide endeavored to refine their underwriting risk management, including pricing strategies, to better account for the rise of secondary perils such as SCS. These underwriting actions slightly mitigated the impact of natural catastrophes on reinsurers' 2020 results compared to primary insurers. However, these adjustments largely proved insufficient, as losses consistently outpaced premium rate increases.

Consequently, after enduring significant natural catastrophe losses for nearly six years, the reinsurance market shifted dramatically in 2023. With unprecedented rate increases, rates for short-tail lines (property and property catastrophe) reached multi-decade highs. However, the more significant changes were structural, with reinsurers refocusing on their core competency of providing coverage for tail/severity risks, they:

• Showed minimal interest in lower layers of reinsurance towers,
• Raised their attachment points,
• Managed their limit profiles more cautiously, and
• Exhibited little appetite for aggregate protection covers.

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These actions immediately improved reinsurers' underwriting performance in 2023. Since SCS are typically less intense than primary perils like hurricanes, the natural catastrophe losses incurred in 2023 did not reach the thresholds required to trigger reinsurance policies and were thus mainly borne by primary insurers.

Despite global insured natural catastrophe losses once again exceeding $100 billion, their impact on reinsurers' underwriting earnings diminished, as measured by the percentage point (ppt) impact on the combined ratio. The impact of natural catastrophe losses on the 10 selected reinsurers fell by a sharp 5.5 ppts to 4.1 ppts in 2023, compared with the average of the previous four years (2019-2022). For the five selected reinsurers, the decline was even more pronounced, with an improvement of 6.2 ppts.

Conversely, as primary insurers were compelled to retain more risk, their share of natural catastrophe losses rose to a five-year high. In 2023, the top 10 U.S. homeowners and commercial multiple peril property insurers reported a 2.2-ppt increase in the impact of natural catastrophe losses on their underwriting results to 10.3 ppts, compared with the average of the previous four years. For the top five insurers, the deterioration was 3.7 ppts.

We therefore believe that business opportunities for reinsurers remain sound in view of the diverging impact of natural catastrophe losses on insurers versus reinsurers and a still-large global protection gap.

Re/insurers Must Adapt

We believe the events of 2023 will influence risk management and mitigation, as primary insurers seek solutions to these loss trends beyond mere rate increases, such as refining risk models to better account for secondary perils, enhancing exposure-data quality, improving segmentation and managing exposure to hazard prone areas, increasing deductibles, or requiring better physical durability in assets insured. This is particularly crucial given that SCS were the most expensive peril in 2023 and the first half of 2024.

However, secondary perils like SCS are not as well modeled as primary perils, because of the difficulties in estimating the return periods and the lack of detailed exposure data in certain regions. This limited availability of granular exposure data and less modeling sophistication and accuracy will make it challenging for re/insurers to have a true view of risk.

While the reasons behind the rising loss cost trends can be debated--from exposure increases and inflation to the complex implications of climate change--the imperative to understand and manage natural catastrophe risk, in all its forms, remains unequivocal.