From spiking grain futures in Europe to flight cancellations across the country here in the US, synchronized climate shocks are pressuring markets, and behind the noise lies a massive re-pricing event.
Severe convective storms, hail, straight line winds, as well as tornadoes are officially the costliest insured peril of the century, overtaking tropical cyclones with $82 billion in losses last year alone.
Nearly $18 trillion in annual global GDP is exposed today.
And as insurers.
Spike deductibles and retreat, that capital burden is falling straight onto portfolio managers as well as commercial lenders.
So joining us this morning is chief economist of First Street Foundation, Dr.
Jeremy.
Jeremy, great to have you here.
Thank you so much for joining me.
Well, we all know that climate change is something that we're watching not just in the US but across the country.
So every day when we turn on the news or look at our phones, we hear about extreme weather.
So when it comes.
These severe storms as well as the SCS risks.
Tell us why it has become the costliest insured type of disasters.
Yes, I think that's the headline from our report is that the secondary perils, which are severe convective storms which include things like tornadoes, hail, severe thunderstorms, have reached the point to which now we start to think about them like floods, like wildfire, like wind, the things that we used to really call primary perils in the past.
Today what we're seeing is that because of the instability in the atmosphere due to the increasing air temperature and sea surface temperatures, we're seeing more of these severe convective storms.
They actually feed off of these higher temperatures and there's instability in that atmosphere.
Ultimately what that means is that severe convective storms as of last year, as you mentioned, were $82 billion in losses, and ultimately they've overtaken hurricanes and tropical cyclones as the costliest insured disasters globally across the entire globe.
Yes, and when we look at SCS, I was looking at that word earlier, and we all know what severe storms are, but when it comes to that convective part of that equation or that term, we might be familiar with convection ovens.
But given the fact that this is costing homeowners and of course travelers at the airport gates trying to get to a destination, what are the implications here moving forward?
Yes, I mean, you're right, the fact that there's severe convective.
Storms alludes to the fact that they are fueled by the increasing temperatures that we're seeing that you can just take into account the heat domes we've had in the US and in Europe.
These are things that we're seeing every day, but underlying that we're fueling these storms.
As you start to think about homeowners, the increased exposure to hail events, hail events, for instance, when they come into a community, they damage everything in that community.
It's not just the low lying homes that flood.
It is.
The entire community that ends up being impacted by these types of storms that's driving up insurance costs from a homeowner's perspective.
You have principal, you have interest, you have taxes that you can reliably project into the future.
What's happening today is that insurance costs are growing so fast that people can no longer reliably project that.
So if you're a big mortgage holder or you're working at a large bank and you have all of these homeowners that took out mortgages under a different understanding of what the cost of home.
Ownerships are going to be, there's a big risk for probability of default following that.
Yes, and I do want to get your perspective when it comes to supply chains.
So obviously when it comes to the conflict in the Middle East, we are watching the impact on supply chains and what it means moving forward.
And the pandemic also taught us about supply chains.
So what about the risks for the SDS?
Yes, it's really the frontier when you think about physical climate risk.
Pricing it into that systemic risk outside of the internal value chain of companies themselves, so we're getting pretty good at pricing climate risk for specific assets for connections between specific assets.
One thing that we really need to focus on is understanding that those assets exist within a larger ecosystem.
And if you have areas whose GDP is heavily dependent on commodity generation or heavily dependent on exports of some sort for a supply chain.
They're likely to be disrupted into the future.
That has a trickle down effect to many, many companies that depend on those regions and those commodities.
And I know this is an area that you pay attention to closely.
So when it comes to the credit side as well as lending and the insurance business, what are you seeing right now and what are the impacts for Americans?
Yes, severe convective storms.
I think the idea that they're moving from a secondary peril to a primary peril is really important.
Because we're still at the point where there's a lot of hidden financial risk in those types of events.
We're not pulling out of insurance spaces because of severe convective storms, but I think in the very near future you'll see what we've seen in California because of wildfires, what we've seen in the Gulf because of hurricanes.
You're going to start to see insurance companies pull out.
That drives up insurance prices and ultimately it drives down affordability in terms of homes.
Yes, and here at the New York Stock.
Exchange, we pay attention to all sorts of risks for these publicly traded companies, but what would you say to the CIOs out there who are concerned about this and what do you think it means for portfolios?
Yes, it's super important.
I think we have a lot of risk analytics in place.
They've been well defined.
There are frameworks in place that people have been using for decades to understand different types of risk.
I think what we haven't done properly yet is introduce physical climate risk. equation we always say physical climate risk may not be the most important risk to your portfolio or to your assets, but it's material, and you have to measure it the right way.
You have to have the right type of data and you have to understand the connections between both internal value chains and external dependencies to actually understand that risk.
And hindsight is definitely 20/20.
So when we're looking beyond the second half of 2026, not just into next year, but also 5, 10 years, what do you I think this landscape will look like?
I think severe convective storms is going to become quote unquote a household name.
In some cases it is going to become a primary peril that insurers are worried about that people are self-funding against, that people are building reserves to protect themselves against, and it's going to start to disrupt supply chains and other revenue generation pathways for companies.
Well this is an area that all of us will continue to monitor.
So thank you so much for joining us today and thank you so much for sharing your insights.
Thank you.
