Number 33, April 2002

Research Highlight

Natural Catastrophes and Human-Made Disasters in 2001:
Human-Made Losses Take on a New Dimension

Swiss Re's latest Sigma study reports human-made and natural catastrophes claimed more than 33,000 lives worldwide in 2001. At $34.4 billion, the burden on property insurance due to catastrophe losses was extremely high - with an estimated $19 billion incurred by property and business interruption losses arising from the September 11 event. Furthermore, the insurance industry must cover liability and life insurance losses related to the attack which are estimated between $16.5 and $39 billion.

More than 33,000 people lost their lives in catastrophes in 2001. The estimated death toll for the earthquake in Gujarat, India alone was 15,000, while 3,000 lost their lives in the terrorist attack of September 11 on New York's World Trade Center and Washington.

According to the Sigma study, 2001 would have gone down as an average loss year had it not been for September 11. This event confronted the insurance industry with an entirely new loss dimension. Until 2001 only natural catastrophes such as Hurricane Andrew, with losses of $20.2 billion or the Northridge, CA, earthquake, with losses of $6.7 billion (at 2001 prices) had caused losses of this magnitude. This terrorist attack has brought to light a new dimension of threat to the insurance industry, bringing terrorism covers into question. The traditional insurability criteria - quantifiability, randomness, diversifiability, risk-adequate pricing and conditions - are not satisfied in the current situation. According to the Sigma study, a solution consists of an insurance approach with the following elements: state as insurer of last resort, and mandatory direct insurance. This could take the form of a combination of state and private insurance resources for a transition period, until the insurance industry has accumulated the necessary insurance capacity to cover - limited - terrorism risks.

Over the long term, despite the new dimension of threat, it is mostly natural catastrophes, i.e. storms, floods and earthquakes, which burden the insurance industry. The trend toward higher losses continues in view of the risk factors: higher population densities and higher concentrations of insured values, especially in endangered areas. It therefore remains crucial that insurers and reinsurers identify and diversify natural catastrophe risks.

A downloadable version of the full report is available at the Swiss Re website.