As we enter the back half of August, we are currently seeing European countries fighting a number of wildfires.
A new report from Swiss Institute noting that the first half of the year was relatively benign when it comes to insured natural catastrophe losses.
They totaled $42 billion globally, which is 16% below the 10-year average, and record heat waves and early wildfires are weighing on Europe and a strengthening El Nino is altering the outlook for hurricane season and the second half of this year.
Also keep in mind most insurance losses come in the second half of the year and the upward trajectory for catastrophe losses remains intact due to expanding urban development, higher asset concentrations and exposed areas and changing hazard patterns.
Well joining us to break all of this down for us is Jeff Gitterman, managing director for Gitterman asset management.
Jeff, good morning.
Thank you so much for joining us.
Thanks for having me.
Well, it does seem as though every day when we open up our smartphones or watch the news, there is a new.
Extreme weather that is taking place, but break down what we're seeing so far in the first half and what you expect as we head into the second half.
Yes, so in the first half of the year we're seeing actually lower than expected losses, but still on trajectory if you look at the really 10 to 15 year pattern of an upward trend, but definitely lower losses for the first half of the year.
The climate deniers will jump on that and say, see, climate change isn't happening.
It isn't real.
But what you have to look at.
As an investor is what is happening within the insurance company payables itself, and while you had gross losses actually reduced, you have the highest share of insured losses that we've seen in a while, up 65% in Europe, up in significant other places.
We have the worst catastrophe from the heat wave that we've seen in a long time, 20,000 deaths in June across Europe due to heat waves.
So what you Want to look at as an investor, as a homeowner, as somebody that cares about their insurance costs, is what is the long term trend and what are my future expenses going to be based on insured losses being covered.
Yes, and I'm glad you also touched upon the wildfires as well as extreme heat we've been seeing in Europe.
So when we're talking about these non-traditional climate risks, how are underwriters actually pricing these risks?
In Europe it's interesting.
A lot of fires are excluded from coverage across Europe.
Unlike in America, there are a lot of parts of Southern Europe where the forests aren't as intermittent with urban areas, but that across Europe is really starting to change, especially in Northern Europe, especially in London and France, where you're starting to see much more urban spread and that conflagration of urban spread into treed areas.
And then what we saw in Europe is we saw a very wet winter.
Followed by an extremely dry summer.
This is the same whiplash that occurred in California when we saw those fires.
What happens is you have a very wet winter and all the vegetation grows really quickly, so that's really young, immature, fertile fire kindle basically, and then it gets whipsawed by an incredibly dry heat drought across Europe into the summer.
All of that new vegetation is like kindled.
It's not like old trees that have a lot of water that they're retaining inside, so it sets up really bad situations.
These whipsaws are basically the worst thing that we can see happen for fire risk, especially and for droughts that affect vegetation, crop growth.
We're seeing real big declines in crop growth across Europe.
We're seeing desertification across a lot of what used to be fertile land even in the Middle East, so we're seeing problems across the board and it's definitely something as an investor we pay really close attention to.
Which leads me to my next question regarding insurability here.
So Swiss Reed does project natural catastrophe losses will grow to about 5 to 7% every year.
But do you think some of these high risk coastal as well as wildfire zones are becoming fundamentally uninsurable?
They definitely are.
We've already seen declines on coastal industrial properties.
That's where you see it the most.
We've seen a pushback.
In places like Miami where they won't cover 30 year mortgages within a mile and a half of the coastline, so you're definitely seeing that kind of pressure.
But still, what I think a lot of people miss is the insurance companies are still using backward models to project the future, and the future seems to be changing much more quickly than our backward models can accept.
There's a new scientific study out last week that said the combination.
Of rising sea levels across the east coast, especially in the US, along with declining or dropping land masses, that combination hasn't been accounted for.
So we've really only been looking at rising sea levels.
We haven't been looking at the fact that New York is starting to sink into the ocean, that parts of Florida are starting to sink.
So it's, it's a combined effect, but even 5 to 7% increase in covered.
Losses that means ultimately your insurance costs are going up 5 to 7% a year.
Most people have not accounted for that in their long term retirement planning or in their budgeting.
A lot to consider for sure, Jeff, and I do want to get your perspective when it comes to El Nino.
So here we are counting down to back to school season as well as the summer, the end of the summer.
So tell us about your expectations and her. tail risk as we head into your end.
I mean right now they're expecting we could have the worst El Nino in 250 years.
A lot of the numbers are starting to come in and showing that the biggest effect of that typically happens going into 27 in the early months of 27.
It's good news for Atlantic coast hurricanes, at least in the number of hurricanes.
It sets up wind conditions that just don't benefit forming of hurricanes on the east coast side, but it doesn't.
Mean because we have significantly warming oceans that if we do get a hurricane that it can't be a Category 5.
So don't get too comfortable with the fact that we'll have a lower hurricane season.
But then what it sets up on the Pacific Coast is we see much more hurricane and typhoon conditions on the west coast.
We see much more droughts on the east coast, so it is not a good scenario.
Historically going back, it adds to food inflation, about 3 to 5%.
A year we're already dealing with this mix of, you know, do we have inflation growth is kind of getting stymied, so does the Fed have to raise rates?
But if you don't raise rates and then we go into the season with big drops in agricultural production and big increases in prices, the Fed could wind up getting behind on inflation risk.
Yes, and Jeff, finally, before I let you go, I do want to ask you about the protection gap, especially when we're talking about emerging markets and.
Earthquakes.
So this is another sign we're getting from Mother Nature, it seems, when it comes to these high magnitude earthquakes.
So how does the industry actually close this massive protection gap when we're talking about emerging markets?
Yes, I mean, not a huge percentage of the hurricane that we saw in Venezuela was covered by insurance, maybe about 20% of insured losses.
So in emerging markets, the unfortunate thing is there's not as Good coverage so it doesn't hit insurance companies as hard.
I mean we had 5000 deaths.
We had an enormous amount of damage.
Those things are going to hit the GDP.
They're going to hit people.
You know it's very difficult when you're making these discussions about is insurance impacted.
Well, so many people are impacted it ultimately transitions into global risk and insurance risk, but earthquakes are an interesting subject.
Most expensive.
The incident of 2026 was the earthquake, but the amount of covered losses is still not enough to really hurt insurance companies in the first half of the year so far.
But as you can see, it seems like every week we're seeing another earthquake or another fire.
Well Jeff, a lot of food for thought as we kick off the new trading week.
So I appreciate your insights as well as your perspective.
Thank you so much.
Thanks for having me.
Thank you.
