Insured, Uninsured and the Total economic loss: the difference

In contrast to national weather services, insurance companies hold a massive volume of information about not just extreme weather and physical climate risks, but also their financial losses, actual and potential. Insurers register the cost of each hail event and each hurricane.

According to Lloyd's, the five-year TOTAL global economic loss was $5 tn. This assessment, published in 2023, is primarily based on data communicated by developed countries, where at least some level of insurance is available. So far, if the policy includes any weather-related loss, typically it covers only a few types of climate perils, a limited list.

Estimations over the same period by Swiss Re reported the global insured loss due to extreme weather of $0.5 tn. This insured loss is the sum of all payouts reported by insurance companies, and is only a fraction of the estimated total economic loss.

In the same context, it is interesting to highlight another important figure: the known uninsured loss, which concerns only insurance policyholders. The known uninsured loss is the difference between the loss estimated by insurance companies (for their policyholders, after their claim) and the actual payout. The known uninsured loss was $0.7 tn in the same period.

As always, the devil is in the details. The sum of insured and uninsured losses does not equal the total economic loss.

The first reason for this tremendous gap is the fact that the total economic loss is not limited to insurance policyholders. Many property owners don't have any insurance. Most policyholders don't have any drought, storm, hail or heatwave insurance, and so they won't make any insurance claims. If there are no claims, it does not necessarily mean that there is no financial loss or no physical damage.

Numbers are astonishing. As a matter of fact, less than 5% of real assets, properties, and businesses have any form of insurance. And less that 20% of these policies mention weather-related loss and damage, even in the very basic version, with the minimum coverage, with a deductible, and conditional to the state of emergency being declared by the governmental authorities.

Now, let's try to read between the lines! As you can see, when putting these numbers together, the known uninsured loss is higher than the insured loss: $0.7 tn vs $0.5 tn. It means that, on average, over a five-year period, in developed countries, only about 40% of declared losses were paid by insurance ($0.5 tn out of $0.5 + $0.7 tn).

Also, it's worth mentioning that many authors don’t distinguish explicitly between the TOTAL economic loss and the total loss declared to insurance companies. So far, as you can see, one is approximately $5 tn, while the other is only $1.2 tn ($0.5 tn insured loss plus $0.7 tn uninsured loss).

In nearly all publications and articles on this topic, when you read about the TOTAL weather-related losses of $100-200 bn per year, it is actually the known and declared loss by policyholders, and only reflecting the situation in developed countries.

Logically, the concept of TOTAL economic loss should include damage to public and state properties, which are always uninsured. Schools, universities, roads, hospitals, water, and power supply facilities are always left out of the loss calculations. Reconstruction and repair costs for these facilities are "forgotten" in the TOTAL economic loss because they are never communicated or reported to insurers! These properties are out of the scope of any insurance policy. Flood and storm damage to waste management systems is another component of hidden costs, which is not covered by insurance policies and not priced neither.

Companies reporting their transition risks with Scope 3, know that the waste management is responsible for a big chunk of corporate carbon emissions. Construction, water and solid waste management topics appear on the balance sheet. The additional waste and pollution related to company's business and induced by floods and hurricanes, logically, also should be included when evaluating the TOTAL economic loss. This is not yet the case.

Business interruptions, loss of income, and loss of market share are hidden impacts of climate risks and these are rarely reported. So far, these numbers are higher than the direct material damage itself. Useful proxies for these indirect financial losses are bankruptcy rates, real estate prices, volatility of company revenues, stock prices, and unemployment statistics. The most recent example of weather-induced business impacts was the 6% drop in Porsche stock prices in 2024, following the disruption of two aluminum suppliers due to the same flooding in Switzerland. If this type of financial loss was included in Lloyd's assessment, imagine the unreported TOTAL number.

Ecosystem and biodiversity loss, soil and water pollution are the least quantified and the least valued. The fact that contaminated floodwaters destroy fertile soils, rendering entire municipalities toxic, is beyond current estimations and pricings. Farmers are left alone to deal with the consequences of soil and water pollution, which have long-lasting effects. Land depreciation and the withdrawal of polluted areas from the market are, again, always outside the TOTAL economic, insured and uninsured loss calculations.

What else do these numbers tell us?

1. The insured loss corresponds to roughly 10% of the TOTAL economic loss, highlighting a significant protection gap. It’s important to keep this order of magnitude in mind when reading about insured losses in places like Valencia or Dubai: multiply by ten to estimate the actual economic loss.
2. The known uninsured loss is consistently greater than the insured loss.
3. Even large companies in wealthy countries struggle with climate risk management. So what can we expect for smaller companies with limited budgets in countries where corruption, poverty, and social inequality dominate the agenda, leaving little to no capacity for climate risk management or environmental concerns?

Big open questions that stand out:

• What is the actual global total loss, if the figure calculated based on developed country data is $5 trillion?
• From a risk management perspective, is the five-year average of $1 trillion per year representative of longer time horizons? In other words, would a 20-year total loss be 20 times $1 trillion per year, or perhaps double this already substantial figure?
• Finally, what might Novelis, Porsche, BMW, and Jaguar Land Rover report regarding physical climate risk for the financial year 2024? According to the new CSRD/ESRS and IFRS compliance rules, listed companies should disclose the impact of floods and other climate hazards on their revenues and operational losses.

At Weather Trade Net, we help businesses with climate risk assessment. Our goal is to ensure that companies are well-informed about which facilities are at risk of flooding, while considering both direct and indirect impacts.

A lack of awareness equates to a lack of preparedness.