Climate change and extreme weather events cost the global economy $160 billion in 2012, only $70 billion of which was covered by insurance according to Philip Ryan of Swiss Re.  The combination of Hurricane Sandy, the extensive drought across the mid-West, and other climate and weather-related disasters cost over $110 billion in damages in the U.S., making 2012 the second costliest year for natural disasters since 1980 in the U.S.[1]  Hurricane Sandy alone cost $65 billion in damages while the year-long drought cost approximately $30 billion in damages, mostly from harvest failures.

Costs of natural disasters as a percentage of GDP have more than tripled over the last forty years.  This is reflected in the rising costs of natural disaster insurance.  According to a CATO Institute report, U.S. insurance losses from natural catastrophes went from $16.1 billion in 2003 up to $71.3 billion in 2012.  U.S. spending on natural disaster damage control was the second biggest non-defense spending in 2012, working out to about $1,100 per taxpayer last year — more than the U.S. spent on either education or health.

The costs of natural disaster insurance will continue to rise in the future.  A Princeton report claims that “the increase in cost correlates with the large increase in population and wealth in disaster-prone areas.”  Urbanization has expanded into vulnerable areas, particularly on the coasts.  As the population has grown and urbanization expanded, economic activity has become more concentrated, thus there is more damage when natural disasters strike.  Coastal damage is exacerbated by climate change, making the danger of large economic damage increase.  As over 50% of the world’s population lives in cities and economic hubs, disaster planning and climate adaptation is urgent.

Insurance rate rise will correlate directly with natural disaster cost increasing.  An Allianz report notes that the most catastrophic environmental related losses are concentrated in the U.S. and Europe because of their dense populations and large structures.  The main factor behind the rising insurance costs is economic growth: property values rise as population density expands, often in high risk areas, creating a greater need for insurance in increasingly risky locations. As some of the world’s most populated areas are located on coasts or in areas with higher likelihood of earthquakes, there is a greater need for insurance.  In the past 50 years, over 85% of the U.S. has been declared a federal disaster area due to flooding.  Approximately $10 trillion of insurable assets are along the U.S. coast.  While a vast majority of these were designed to withstand some sort of disaster, they were built to withstand events of the past, not of the future.

Please see below for a video of Philip Ryan of Swiss Re discussing the rising cost of insurance at Climate Week 2013, an event at which ASP CEO BGen Stephen Cheney also spoke.

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