Natural catastrophes in focus: Tropical cyclones

Across the world, tropical cyclones are known by a variety of names: hurricanes, typhoons or cyclones, depending on where these powerful storms occur. But regardless of what they're called, these rotating storms share common features like strong winds, heavy rain and the potential to do great damage. They typically form over warm tropical waters, drawing their energy from the heat and moisture fluxes from the ocean's surface.

Hurricanes are among the most expensive natural perils in the US, posing a major threat to people, businesses and essential infrastructure in US coastal regions that have often been a focal point for population growth over the past 50 years. The 2022 hurricane season was the second costliest on Swiss Re Institute records. Hurricane Ian made landfall on the west coast of Florida, resulting in an estimated USD 60 – 65 billion in insured losses, according to Swiss Re Institute estimates.

Typhoons in the Asia-Pacific region also have a dramatic impact, producing tremendous loss of life, as well as property damage, like Typhoon Hagibis in 2019.  The most-expensive insured loss typhoons have all occurred in Japan, where there are high property values and strong insurance penetration. Some of the deadliest typhoons have occurred in less developed countries, where there may be less rigorous building codes and where residents may be unable to evacuate ahead of approaching storms.

The effect of climate change on North Atlantic tropical cyclone frequency is at this time uncertain. But increasing sea surface temperatures are believed to have the potential to increase hurricanes' intensity, thereby lifting the average intensity of hurricanes and potentially boosting the number of major hurricanes.

Climate change is expected to increase storm surge-driven coastal flooding due to sea level rise and increasing tropical cyclone intensity, as well as rainfall from tropical cyclones that results from increasing atmospheric water vapor content and increasing tropical cyclone intensity.

Globally, more than 82% of economic losses from flooding are uninsured. When hurricanes make landfall, the resulting flooding often causes a large percentage of the economic losses. Flooding is a growing concern, as well, given likely increases in storm surge and rainfall expected with climate change. Progress in expanding flood insurance protection will support adaptation measures needed to address the effects of climate change.

While traditional risk models relied heavily on long-term historical activity rates, potentially underestimating hurricane risk, today's models are becoming increasingly adept at incorporating climate change trends. This gives reinsurers, insurers, businesses, the public sector and other stakeholders a more accurate view of present and near-future tropical cyclone risk.

At the same time, it is clear that increasing hurricane-related economic losses are the result of increased development in coastal areas impacted by hurricanes, development that has outstripped adaptation measures meant to gird communities against storms. Thoughtful planning of communities can help reduce exposure, as well as ensure the preservation of important landscapes to absorb flooding that comes with tropical storms.

Tropical cyclones are among the most expensive natural catastrophes. In the decade through 2022, hurricanes resulted in USD 609bn of economic losses, of which just USD 277bn was covered by insurance. This comparatively high protection rate is generally because many of these events take place in the US, which has a relatively high insurance penetration. But it still means that more than 50% of the economic losses are uninsured, which can be devastating for those impacted.

Florida’s re/insurance market has been in focus since Hurricane Irma made landfall in 2017 as a category 4 storm, causing significant property damage and financial losses. Loss severity in Florida is compounded by a factor other than damage caused by a hurricane: social inflation, driven by the state’s litigation environment. This has resulted in a distressed property insurance market: homeowner premiums in Florida are roughly three times the national average. Florida has made regulatory changes since Hurricane Ian in 2022 seeking to address these issues and make the state more attractive to re/insurers, while assisting property owners. The long-term results of these regulatory changes remain to be seen.