Aon highlights exposure growth for SCS losses

At this year’s Monte Carlo Rendez-Vous de Septembre, Aon has revealed research on the drivers of severe convective storm (SCS) insured losses, which it suggested will be a a significant influence on forthcoming 1 Jan 2024 reinsurance renewals.

Aon’s data show that to date in 2023, 70%of global insured losses were driven by SCS. In the US, SCS caused $35 billion of insured loss in the first half of 2023, following three consecutive years with at least $20 billion of insured loss in the first half.

From 1990 to 2022, SCS exposures increased at a combined rate of 8.6% per year, while SCS insured losses increased at an annual rate of 8.9%. This variance highlights that more than 80% of SCS loss growth can be explained by exposure changes, an emerging form of volatility. 

Aon suggests that the remaining 20% could be due to small changes in climate that are not discernible in the weather ingredients that drive severe convective storms, other exposure factors or random chance. This dynamic should encourage re/insurers to place more emphasis on exposure management when mitigating the impact of SCS on their portfolios.

John Jacobi, managing director within Aon’s Reinsurance Solutions’ US actuarial team, said: “While climate is a driving force behind other perils, there is little evidence that the climatic factors that drive SCS are changing. (Re)insurers instead must manage growing exposures in high hazard areas, which can be mitigated by traditional risk management techniques such as accumulation management, enhanced claims handling, and appropriate deductible, limit and premium levels. “

“Going forward, the industry’s emphasis for the SCS peril should be less on climate factors, and more on traditional risk management to help shape better decisions.”

According to Aon research, there are four main drivers of SCS exposure change:

1.    Real Gross Domestic Product, which accounts for assets in the economy, grew at an annual rate of 2.3%.

2.    Fixed reproducible tangible wealth, which accounts for how much the assets are worth, grew at an annual rate of 2.1%.

3.    Property cost inflation, measured by the producer price index for all construction and providing an estimate of how construction costs change over time, grew the fastest at a 2.8% rate.

4.    Population distribution, measured by a housing distribution index based on changes in housing units in high hazard states like Texas and other Sun Belt states in the US, had a 1.1% growth rate.

Aon’s research about the drivers of severe convective storm (SCS) insured losses is available here.