Reinsurers should price for climate change

A new study by Munich Re shows that North America has been most affected by weather-related extreme events in recent decades.

The study shows there were nearly five times the number of weather-related loss events in North America for the past three decades, compared with an increase factor of 4 in Asia, 2.5 in Africa, 2 in Europe and 1.5 in South America.

The German reinsurer believes climate change has contributed to this trend. It recommends (re)insurers prepare for, and price for, the increased risk.

“In all likelihood, we have to regard this finding as an initial climate change footprint in our US loss data from the past four decades,” Munich Re’s head of geo risks research professor Peter Höppe said. “Previously, there had not been such a strong chain of evidence.”

Even without changing hazard conditions, increases in population, built-up areas and increasing values, particularly in hazard-prone regions, need to be on Munich Re’s risk radar, according to Höppe. He said all stakeholders should collaborate and close ranks to support improved adaptation.

Munich Re board member Peter Röder said: “Climate change-related increases in hazards – unlike increases in exposure – are not automatically reflected in the premiums.

“In order to realise a sustainable model of insurance, it is crucially important for us as risk managers to learn about this risk of change and find improved solutions for adaptation, but also mitigation.

“We should prepare for the weather risk changes that lie ahead, and nowhere more so than in North America.”

Climate change particularly affects formation of heat waves, droughts, intense precipitation events, and possibly also tropical cyclone intensity.

The view that weather extremes are becoming more frequent and intense in various regions due to global warming is in keeping with theAssessment Report of the Intergovernmental Panel on Climate Change (IPCC), as well as in the special report on weather extremes and disasters (SREX).

Up to now, however, the increasing losses caused by weather-related natural catastrophes have been primarily driven by socio-economic factors, such as population growth, urban sprawl and increasing wealth.

Growing loss burden

Over the past three decades, the overall loss burden from weather-related cats was $1.06 trillion, with insured losses amounting to $510bn. The costliest year on record was 2005, with Hurricane Katrina on its own costing $40bn.

2011 was the second most costly year for (re)insurers, with natural catastrophes around the globe costing the industry in excess of $100bn.

Unlike in many previous years, the bulk of catastrophe losses (nearly two-thirds) came from Asia Pacific and occurred in the first half of the year. Typically, the larger losses for (re)insurers emanated from North America in the second half of the year.

2011 drew attention to the loss potential in emerging markets where economic development and urbanisation means insured values are growing rapidly.

While the USA escaped the worst of the Atlantic hurricane season in recent years, losses from storms and tornadoes have been on the rise.

The study draws special attention to thunderstorms: besides tropical cyclones, thunderstorms are the most important severe weather hazard for the insurance industry in the USA.

Between 1980 and 2011, 43% of insured property windstorm losses ($180bn) were caused by severe thunderstorms.