Guy Carpenter: Driving innovation through nature-based solutions

The 2024 catastrophe year to date is following very closely to the traits of the 2022 and 2023 catastrophe years, as $59bn in property insured losses is comparable to 2023 and not far behind the record high $69bn observed in 2022.

Global severe convective storm (SCS) losses are again the driver of catastrophe losses in 2024. Record high frequency of insured SCS events in the United States transpired in the first half of the year. 2024 flood events in Germany, the Middle East, Brazil and Italy are the second largest contributor of insured loss and close to the quantum of total 2023 flood losses.

Noteworthy wildfire events in Texas, California and Canada have also occurred before the late summer and autumn peak season. While the heart of the Atlantic hurricane and West Pacific season can still change the overall magnitude of annual losses, it appears that 2024 is on track to be the fifth consecutive year of $100bn or higher losses.

Weather and climate drivers

Record warm air and ocean temperatures were observed in 2023 and surpassed in 2024. Of concern for impact to catastrophe frequency and severity is the higher moisture content feeding off the oceans into individual weather systems; each degree Celsius of atmospheric warming affords 7% higher capacity of atmospheric moisture storage. Heavier precipitation events are closely correlated to this phenomenon, as seen in Italy, the Middle East and Brazil this year. April rainfall in Dubai, UAE, resulted in a year’s worth of rain in 12 hours, with unprecedented flooding in the region.

At the same time, other arid regions have seen widespread drought; increasing temperatures in arid regions increase evapotranspiration of moisture from the soil into the atmosphere, accelerating the extent and severity of drought.

A multi-year drought in north central Mexico is a factor driving elevated severe thunderstorm and wildfire activity across portions of North America. Other drought-stricken regions have the propensity for extreme wildfire activity when windy, dry and elevated temperatures are present, including British Columbia, Texas, California and portions of Russia in 2024.

Elongated seasons

One distinct trend of recent loss years is longer periods of opportunity for factors to promote conditions for catastrophe events. The record oceanic warmth affords more calendar days in the year for tropical cyclone activity; 2023 was the most active Atlantic hurricane season on record with wind shear inducing El Nino conditions usually limiting activity. Fortunately, landfalls were in less populated areas.

Ocean temperatures in 2024 were nearly three months ahead of average, supporting the ability for storm formation in April and May. The exceptional early season warmth manifested in Category 5 Hurricane Beryl being the earliest in Atlantic records, with landfalls seen in Beryl, Debby and Ernesto through mid-August 2024. As with 2023, no major population centers have taken a direct hit from these storms.

Severe convective storm activity is starting earlier in the calendar year and ending later due to increasing temperatures affording severe weather outbreak opportunities in the traditionally quiet autumn and winter seasons.

The same can be said for wildfires; the western US season is now more prone to events nearly year-round. The February Smokehouse Texas wildfire this year was the largest in state history, while the July/August Park Fire in California ranks as the state’s fourth largest.

While overall fire frequency is declining over time in the US, severity as measured by cumulative acres burned is increasing due to the propensity for uncontrollable fire activities due to a combination of weather and ground conditions.

Human factors driving $100bn loss years

The specific drivers of loss for a region and peril can vary from negligible to meaningful contributions of a warming planet. Heatwave, drought and flood risk have a stronger imprint from a changing climate. Smaller footprint perils, such as hailstorms and tornadoes, it can be more challenging to detect a clear link between those perils and a changing climate.

Insured losses have increased notably over the last 10 years, even when adjusted for inflation, wealth creation and population growth. However, trended losses relative to global gross domestic product illustrate more year-to-year variability and a less discernable upward trend.

Examining the largest driving peril of severe convective storm over the last several years, Guy Carpenter research indicates a range of human factors are the main drivers of increasing loss frequency and cumulative losses. Consider the range of factors pressuring reconstruction and repair costs:

• Aging workforce: Workers age 55+ has doubled from 11.5% in 2003 to 22.7% in 2020 (US Bureau of Labor Statistics).
• Inflation on construction materials: 36% since 2020 (US BLS).
• Population migration to more risky geographies: The 10-year growth rate of population in very high-risk severe convective storm counties has been 9% and is expected to continue at an annual rate of 3% for the next five years, the highest growth of any category of SCS risk classes.
• Altering the natural landscape via population sprawl: An increase in flood potential due to greater areas of impervious surfaces along with increased temperatures from heat islands.
• Change in natural vegetation: The Lahaina Maui wildfire spread quickly due to invasive grasses, planted after the closure of pineapple plantations; the non-native grasses desiccate more quickly in the dry season, adding additional fuel sources for fire spread and intensity.
• Aging infrastructure: Average electricity distribution lines are 40 years old in the United States, with a quarter of the grid 50 or more years of age; 40% of Europe’s grid is over 40 years old.

Driving innovation in the second half of the decade

The insurance industry can incentivise nature-based solutions to drive mitigation and adaptation of catastrophe losses. Multiple studies highlight a range of efforts to enhance and reinforce natural systems to slow the propensity of increasing losses.

1. Risk assessment and underwriting: Insurance companies can consider natural features and ecosystems, such as wetlands and forests, that provide protection against catastrophes. By valuing these assets, insurers can better assess risk and adjust premiums accordingly.
2. Data and analytics: Insurers can use advanced tools to analyse historical data and model future scenarios, quantifying the risk reduction potential of nature-based interventions. This information informs underwriting decisions and pricing strategies.
3. Public-private partnerships: Collaboration between insurers, governments and stakeholders is crucial. Governments can provide incentives and regulatory frameworks, while partnerships facilitate data-sharing and resources for large-scale nature-based projects.
4. Education and awareness: Insurers can drive education about the value of natural ecosystems in reducing catastrophe risks, incentivising adoption and behavior change.

These strategies enable the insurance industry to integrate nature-based solutions, reduce catastrophe losses and promote environmental sustainability.

By Josh Darr (pictured), managing director, global head of peril advisory, Guy Carpenter