As catastrophe losses mount, Dr Gerhard Berz considers possible countermeasures.

The loss trend since 1960 clearly shows a dramatic increase in catastrophe losses in the last few decades - a development that could well see average annual loss burdens from major natural disasters rise to $100bn (at today's values) by the end of the decade. The increase compared to the 1960s, which in the 1980s amounted to a factor of three for economic losses and five for insured losses, has since escalated to factors of eight and 14 respectively. These data are based on 'great' natural disasters; the remaining natural loss events, some 600 to 800 of which are recorded annually, at least double the overall loss volume.

Increased susceptibility
Without doubt, this rise in losses is due primarily to increasing economic values and insured liabilities, particularly in heavily exposed areas. In addition, natural disasters have shown time and again that the loss susceptibility of buildings, infrastructures and whole societies has increased rather than decreased, in spite of tighter building codes and other technological developments.

At the same time, however, indications are showing that emerging climate changes are having an ever greater influence on the frequency and intensity of natural disasters. This has been demonstrated by the major windstorm and flood disasters of recent years, as well as the countless extreme atmospheric events, such as the extraordinary heat-wave experienced in many parts of Europe this June, that seem to be occurring more and more frequently.

In Central Europe, significantly wetter winters and drier summers have been recorded in recent decades. A greater proportion of winter precipitation falls as rain rather than snow, with the consequence that most of it runs off before it can be absorbed. Evidence of increasing levels of run-off is provided by measurements taken from the Rhine basin and the increased frequency of flooding catastrophes. Global warming also enhances the capacity of the air to absorb water vapour and thus the precipitation potential as well. In conjunction with intensified convection processes, this will lead to ever more frequent and heavier downpours, which are already responsible for a large proportion of flood damage.

The milder winters that have become typical of Central Europe have reduced the extent of the snow-covered regions, above which stable, high-pressure zones of cold air form a barrier against low-pressure storm fronts approaching from the Atlantic. As a result, the barrier is often weak or has shifted far to the east, and one can no longer expect such devastating gales as occurred in 1990 and 1999 to be rare and exceptional phenomena.

There is also a suggestion of a North Atlantic trend towards more frequent and extreme cyclones, that is to say towards increased windstorm activity itself. The findings obtained thus far on the connection between global warming and tropical cyclone activity are both controversial and inherently contradictory. However, this issue could well become a question of survival for densely populated coastal regions, particularly in view of the expected rise in sea level.

With a confidence born out of its extraordinary ability to adapt to changing risk conditions, the insurance industry might well take the view that climatic change is of relatively little importance. However, the industry should be wary of adopting such an attitude. There is reason to believe that climatic change in nearly all regions of the planet will affect numerous parameters of relevance to the insurance sector and will give rise to new, more extreme maxima or minima. This will lead to natural catastrophes of hitherto unknown force and frequency, and will trigger even greater capacity problems on both national and international insurance markets than those experienced in recent years. Incorrect assessment of these developments could jeopardise the future of the entire industry in some regions. In this case, moreover, premium adjustments would continually lag behind loss trends.

Having said that, the insurance industry possesses the ability to effectively protect itself against the consequences of climate change, while helping substantially to promote and gain acceptance for measures to protect the climate. No other economic sector has such effective instruments for encouraging risk reduction, but only if it can bring both its customers and the public authorities on-board.

It is in the interests of the insurance industry to assume a major role in implementing measures to protect the climate in order to ensure that it can provide cover for natural hazards over the long term. By configuring insurance products appropriately, the insurance industry can motivate not only policyholders, but also government agencies to adopt loss prevention and minimisation measures and thus reduce its own loss potentials.

By Gerhard A Berz

Dr Gerhard A Berz is Head of the Geo Risks Research Department at Munich Re.