Part 1

Severe convective storms (SCS), marked by intense thunderstorm winds, hail, and tornadoes, are increasingly destabilizing the insurance market. With climate change accelerating, atmospheric instability is rising, leading to more frequent and severe extreme weather events in certain regions. This trend is causing significant financial losses for both insurers and homeowners. This section delves into the growing threat of SCS and its profound financial impact on the insurance market.

Increasing Losses Due to Severe Convective Storms

In recent decades, economic losses driven by severe convective storms have surged. In 2023, global insured losses from SCS reached $70 billion, marking more than a 90% increase compared to the previous five-year average of $32 billion. (After $70 Billion Hit, Insurers Wake Up to New Risk Pattern; written by Gautam Naik at Bloomberg)

Several factors contribute to this rise:

  1. Climate Change: Altered atmospheric conditions due to climate change are creating more favorable environments for severe weather events.
  2. Economic Growth and Urbanization: Increased property values and urban development in disaster-prone areas have amplified the financial consequences of these natural hazards.
  3. Higher Repair Costs: The rising costs of materials and labor for rebuilding have further exacerbated the financial strain on insurers.

According to Dr. Marshall Shepherd from the University of Georgia, recent trends reveal a shift in tornado activity from the Great Plains to the Southeast and Midwest, where population growth is significant. This “expanding bull’s-eye effect” means more people and infrastructure are at risk, particularly in urban areas historically considered safer from tornadoes.

Dr. Victor Gensini from Northern Illinois University emphasizes that climate change is expected to increase both the frequency and intensity of tornado outbreaks.

“Warmer temperatures and higher atmospheric moisture levels create more unstable conditions conducive to severe weather.”

Gensini explains that “super” tornado outbreaks, though rare, have the most significant damage footprints. Climate change is likely to make these extreme events more common and severe. Increased instability over large areas will allow storms to tap into this energy, making outbreaks more intense and earlier in the season. (How might the next super tornado outbreak play out in tomorrow’s world? Two experts ponder the social and physical factors that may shape the next colossal onslaught of twisters; by Bob Henson and Jeff Masters at Yale Climate Connections)

Financial Implications for the Insurance Market

When discussing the insurance industry’s challenges, it’s common to focus on catastrophic (CAT) events like hurricanes. These primary perils have long dominated attention with their massive, headline-grabbing losses. However, there’s an evolving and critical shift happening beneath the radar: the rising impact of secondary perils.

In recent years, secondary peril losses have grown significantly, affecting the insurance industry’s economic stability. Unlike the occasional catastrophic hurricane, these secondary perils—such as severe convective storms (SCS), wildfires, and floods—cause substantial losses year after year. The scale and frequency of these losses have increased to the point where they now often surpass those from hurricanes.

According to Swiss Re, losses from severe thunderstorms have steadily increased by 7% annually in the last 30 years. (Global Insured Losses From Severe Convective Storms Hit New High of $60B: Swiss Re; Insurance Journal). In 2023, the insurance industry was hit hard by severe convective storms, leading to record losses. Aon reported that these storms reached an all-time high, with 37 thunderstorms each causing at least $1 billion in losses, far exceeding the annual average of 14 such storms. These intense storms accounted for $70 billion in insured losses globally, representing 59% of all natural disaster-related losses. (After $70 Billion Hit, Insurers Wake Up to New Risk Pattern; written by Gautam Naik at Bloomberg). That’s almost three times the 10-year average of $27 billion and more than double the 5-year average of $32 billion. (Global Insured Losses From Severe Convective Storms Hit New High of $60B: Swiss Re; Insurance Journal).

2024 appears to be following recent historical trends. As of April 2024, Severe Convective Storms (SCS) have resulted in $11.6 billion in economic losses in the US, ranking fifth since 1980. The only years with higher losses are 2011 ($25.4 billion), 2023 ($23.5 billion), 2020 ($19.4 billion), and 2017 ($12.2 billion). The US is currently experiencing SCS activity at approximately 2.5 times the normal rate for the first part of the year. (NOAA National Centers for Environmental Information (NCEI) U.S. Billion-Dollar Weather and Climate Disasters (2024)., DOI: 10.25921/stkw-7w73).

The New York Times: As Insurers Around the U.S. Bleed Cash from Climate Shocks, Homeowners Lose

Secondary peril losses are comprised primarily by SCS and are now the largest insured loss problem for the entire insurance industry.

The New York Times recently reported that climate change-induced secondary perils pose a material threat to the survival of the insurance industry.

The New York Times reports the severity of this problem highlighting numerous insurance companies that are in financial distress, downgraded, or going out of business thanks to these losses. We’ll discuss this further in Section 2.

The New York Times: As Insurers Around the U.S. Bleed Cash from Climate Shocks, Homeowners Lose

Read Part 2: Insights from Industry Experts and the Role of Reinsurance