Michael Sherris

There is a large cost to insurance companies of Tropical Storm Irene which has hit America’s north west, and the much larger Tropical Storm Nanmadol which is pounding the coast of China right now.

These two vast tropical storms have shown how unpredictable and potentially damaging these weather events can be. Insurance companies – and those that re-insure them – are now counting the cost. Alas, it seems we’ll all have to pay the price, even those a long way from the storm.

Tropical Storm Irene has killed 38 people, and insurance claims could top seven billion dollars, according to the Consumer Federation of America.

It’s not long since we experienced the massive flooding from Cyclone Yasi in Queensland and we saw the massive damage these events can cause. Even though Irene became a severe tropical storm rather than a hurricane, the costs will be substantial because of the populated area that it affected. The insurance industry will pick up a significant amount of the cost, however considerable losses will be incurred by individuals who will not be covered by insurance.

Claims for wind damage are expected to be one sixth of the total sum from Hurricane Katrina in 2005, and claims for flood damage one tenth, the Consumer Federation of America estimated.

As populations increasingly move into areas such as the East Coast, including Florida in the US, the potential exposure to loses from natural catastrophe events increases, even if the risk of these events happening may not be increasing. Nevertheless, theories on climate change do suggest that these events could be increasing in severity and frequency so this only adds to the risk.

Meanwhile overnight torrential rains and fierce winds have hit south-east Taiwan causing extensive disruption, as Tropical Storm Nanmadol swept over the island, and now heads for China.

There are many disasters that can hit dense areas of population. If we just look over the Tasman, even earthquake risk can be seen to be something that can cause massive economic losses. The Christchurch earthquake highlighted this. Insurance companies have taken significant losses and a number of insurers are struggling financially as a result.

The insurance industry is already reeling after 2010 was the second worst year for natural disasters since 1980. There were 950 incidents with insured losses amounting to about 37 billion dollars. Natural catastrophes in Australia and Oceania made up about 16 percent of global losses last year, the costliest being September’s Christchurch earthquake.

I feel it is vital to remember that disasters like this may hit home in Australia. This still remains an issue deserving attention. Australia is not immune from natural catastrophes yet individuals still have significant exposures to these losses that in many cases are not insured.

After the Queensland floods, premiums rose for all Australians, even in non-flood prone areas, because insurers pool risks by averaging losses across all policyholders. As supply falls and demand increases, premiums increase. In this case demand is increasing due to the catastrophic events, and supply is falling due to capital constraints on insurers.

Tropical Storm Irene may seem a long way off – but remember, insurers work in a global market.

Michael Sherris is a Professor of Actuarial Studies at the Australian School of Business.