Preparing for a new era of rising NatCat risk exposures

The spotlight on natural disasters has never been greater.

From hurricanes in the US and wildfires in Australia to catastrophic flooding in Pakistan and Afghanistan and the recent earthquakes devastating Turkey and Syria, the frequency and severity of natural catastrophes continues to increase.

Findings published in the recent Swiss Re Sigma report, ‘Natural catastrophes and inflation in 2022: a perfect storm’, evidences what we’ve been experiencing in relation to rising NatCat risks.

Global economic losses from natural disasters have increased 5-7% per year on average since 1992, mounting to USD 275 billion in 2022. Insured losses covered 45% of these damages, totaling USD 125 billion – the fourth highest total for a single year on sigma records.

Interestingly, these increases are not solely being driven by an increase in the force of natural catastrophes. Equally, other factors such as growing populations in exposed areas and economic inflation are also contributing to rising losses.

Insured losses from natural disasters are dominated by urbanization. Simply put, more people are moving to areas exposed to natural disasters. Where a disaster hits in more densely populated areas, the impacts are greater because more people are affected.

We saw this with Hurricane Ian as it hit an area that has seen rapid population growth, expansion of built areas and accumulation of physical assets in recent decades. Since 1970, the population where the category 4 storm made landfall increased by 620%, exceeding both the population increases of both the state of Florida (+217%) and the US (+65%).

In that vein, we’ve also seen a rise in the severity of secondary perils that are now beginning to rival primary perils in terms of magnitude and frequency. In Australia, floods that impacted Sydney and Brisbane (named the country’s fastest growing capital city by population) in 2022 resulted in insured losses of USD 4.3 billion, marking the country’s biggest natural catastrophe claims event ever. Meanwhile, the Sigma report also reveals that global insured losses from severe convective storms reached USD 33 billion in 2022.

Supply chain issues and increasing construction costs are also adding complexity, delaying repairs and resulting in lengthening business interruption to drive up loss costs. According to Sigma, post-Covid-19 construction material costs remain high, up by 40% in the US and 20% in Europe.

The Sigma report is telling. With the frequency and severity of natural catastrophes only expected to heighten further as climate change continues, carriers must adapt and prepare their claims organizations to better meet growing market demands.

No longer can they afford to just react to disasters. Instead, insurers must take a proactive approach, preparing, planning and improving their response protocols by leveraging new technologies to ensure greater claims volumes can be handled efficiently.

Planning for effective catastrophe response in today’s environment may require strategic transformation. Carriers must consider claims reporting, channeling, staffing and handling processes, as well as the logistical challenges associated with responding to large scale disasters. Equally, they must also consider market demands, with consumers now expectant of seamless app- or internet-based claims handling processes.

We’re in an era where speed is vital, both from an emotional and financial standpoint. The quicker you get to and adjust a loss, whether personal or commercial, the less costly it is likely to be. Moreover, a quick response helps to alleviate stress on the policyholder during a difficult time.

In our view, to improve speed of response and service levels, carriers should prepare in three key ways:

1. Boots on the ground
Having the right people and partnerships in the right places to respond effectively when an event happens has and continues to be a key component of effective catastrophe claims handling. When disaster strikes, quick action is imperative, ensuring that appropriate experts can be deployed to inspect losses and settle claims quickly. To this end, carriers should sign contracts with hotels, airlines and rental car vendors to ensure reasonable pricing is available for last-minute travel, for example.

2. Embrace new technologies
New technologies will also need to be embraced to assist in every step of the claims process. Indeed, novel solutions are enhancing the efficiency of field inspections, as well as enabling simpler claims to be handled more cost effectively in house. Claims managers can now take advantage of a range of supportive solutions to review damages and more efficiently triage claims directly from their desks. At Swiss Re, we’ve developed our Rapid Damage Assessment tool, leveraging proprietary NatCat models, imagery, weather and property data, and augmenting it with deep AI algorithms to help determine damage at every insured property level. Indeed, carriers investing in cutting-edge claims technologies will gain a competitive edge underpinned by improved cost efficiency and customer satisfaction.

3. Improve the adjuster experience
Equally, the experience and expertise of those field loss adjusters on the ground can have major bearing on the overall speed and effectiveness of outcomes. Therefore, hiring and retaining key talent is vital. Catastrophe response is a demanding job, with adjusters constantly “on call” and expected to work long hours, weekends, and public holidays to maximize capacity after a catastrophe event. To prevent burnout, claims managers should incorporate staffing compensation in their plans. They should also focus on process improvement to make the lives of adjusters easier. Effective triaging is important to successfully route claims to those adjusters equipped to handle specific losses.

Critically, these factors are all intertwined. The talent a carrier has makes a difference regarding the speed element of their response, but equally their ability to use new technologies, for example.

Insurers should balance their investments in technologies and people to ensure a seamless experience is delivered to the end consumer. We remain in a transition, and while some clients will be more comfortable with technology being involved in adjusting losses, they will still expect a certain protocol to be followed and a level of personal attention to be offered.

Any new technologies must also be rigorously tested to ensure reliability in the real world and avoid unnecessary customer frustration. If a claim isn’t routed appropriately and “bounced” between different inspection channels, it creates a major pain point for the insured.

Transparent interconnection between departments such as claims and underwriting also can't be overstated. With frontline claims teams typically able to identify trends and differences first, it is imperative that information is shared back to underwriting so that they can factor it into pricing decisions.

Having the right people in place is vital to identifying and overcoming issues, yet that is becoming increasingly tricky given the current state of the industry. With many experienced insurance specialists reaching the end of their careers, the industry is now having to increasingly focus on bridging the emerging talent gap.

At Swiss Re, our approach to this multi-pronged. We’re working harder to manage our people better, making sure that the young talent that's here is being upskilled, and that they're working with the senior talent for the knowledge transfer.

This includes focusing on enhancing the employee experience. Employees want to be part of organizations that offer work flexibility, attractive growth opportunities and a culture where people of diverse backgrounds and viewpoints can collaborate and thrive. We must meet those demands in order to attract and retain the very best people. Cathy Desquesses, Chief HR Officer at Swiss Re, and Karima Silvent, Chief HR Officer at AXA speak more on this here.

We also need to be more creative about how we attract people to the industry. How can we introduce young people to the insurance world and work to change their perceptions?

To this end, we’ve been partnering with local universities to bring university students on work placements at Swiss Re Claims in the US. While we fully expect that some of them may not come back to insurance, we want to offer a good experience so that they may begin to view insurance through a new lens.

It’s been an incredibly eye-opening experience. What we've found in conducting these programs is that students are surprised by how many opportunities there are – that insurance isn’t just actuarial, and there's so many different avenues to pursue, whether it's business development, strategy or technology.

As an industry we need to do a better job of shouting about these diverse opportunities. With NatCat events and new technologies driving a new era of insurance expertise, we’ve reached a critical juncture, making it vital to find new and innovative ways to both attract and retain talent.