Extreme weather is just one factor insurers need to consider - Il Broker.it

Extreme weather is just one factor insurers need to consider

Financial Times 30 settembre 2013
It ranks among the worst catastrophes to hit postwar Germany. Thousands were forced to flee their homes in June after two of the country’s biggest rivers burst their banks, saturating low-lying areas.
Just weeks later, a similar disaster struck almost 5,000 miles away. The Canadian city of Calgary declared a state of emergency as the worst flood in decades ravaged swaths of Alberta.
Certainly the number of global weather-related catastrophes varies significantly from year to year. Even so, the latest disasters contribute to a trend the insurance industry has observed for decades: the frequency of events that require them to make payouts is on the rise.
Data from reinsurance group Munich Re that compensate for year-to-year fluctuations show a near ninefold rise since 1980 in losses to the insurance industry arising from weather-related catastrophes, after adjusting for inflation.
Global economic losses from weather-related events came to about $150bn in 2012, according to Munich Re, of which $55bn were insured losses. This raises the question of whether the trend can be reversed – and if not, who should foot the bill.
Some leading insurance executives have warned that the rising costs threaten the continued provision of important types of coverage at affordable levels, particularly for flood-related damage in vulnerable regions.
In a report this year, the Geneva Association, trade body for the global insurance industry, warned that “a shift” was taking place towards a “new normal” for a number of insurance-relevant hazards.
It claimed that parts of the developed world, including the US state of Florida, were facing “a risk environment that is uninsurable”.
However, the role of climate change in contributing to the rise in insurance losses remains contentious.
Economic growth has played a much more important role, say several scientists and insurance executives. Rising insurance losses driven by development are not necessarily problematic as they should be accompanied by a corresponding increase in premium income.
“The main drivers of the [rising] losses are mainly increases in population and in wealth,” says Ernst Rauch, head of the corporate climate centre at the reinsurer Munich Re.
He says in some regions – the US and parts of Europe – “it is likely there is a connection between the changing weather patterns and the losses”, but adds that the effect is impossible to quantify.
Robert Muir-Wood, chief research officer at the catastrophe modelling agency RMS, says climate change is likely to play only a very small role, if any, in contributing to the rise in losses for insurers that provide flood cover.
“Clearly global temperatures have risen… [but] scientifically, we can’t actually demonstrate that climate change has altered flood risk.”
The impact climate change might be having on insurance policy terms or premium levels is even more debatable.
The insurance industry is awash with capital – not least as pension funds increasingly invest in the sector through securities such as catastrophe bonds. These competitive forces are keeping a lid on the premiums that large sections of the industry can charge.
Paul Miller, international head of catastrophe management at Aon Benfield, the reinsurance broker, says: “People are aware of climate change. But it’s one of many factors for insurers and I don’t so far see it as leading to a withdrawal of products.”
This is not least because the terms of annual policies are renewed each year, minimising the extent to which insurers need to incorporate any projected impact of long-term climate change risks into annual policies.
Even so, insurers are concerned about a phenomenon that has accompanied economic growth: increased building in risky locations, as commercial and industrial developments take place on low-cost greenfield sites.
John Fitzpatrick, head of the Geneva Association, has called on governments to tighten building restrictions, as well as to invest more in flood defences, to mitigate the fallout from extreme weather hazards.
The question of who will bear the costs of future flood-related damage – insurers, governments or individual policyholders – has become a highly politicised subject in several countries in recent years.
The matter came to a head in the UK this summer after insurers warned their commitment to provide universal flood cover to all households had become unsustainable – partly because of inadequate government investment in flood defences.
Just weeks before the existing agreement between insurers and the government was due to expire, potentially leaving hundreds of thousands of households without affordable cover, the two sides agreed to set up a new scheme known as Flood Re.
The pooling scheme would be funded by a £10.50 levy on every policyholder to subsidise insurance for high-risk households.
However, taxpayers would be in line to cover the costs of extreme flooding, namely a disaster of the magnitude that would be expected to occur once every 200 years. Moreover, homes built since 2009 would not be covered by the scheme.
In the US, policyholders in vulnerable locations are facing sharp increases in premium levels because of a recent overhaul to the government-funded flood insurance programme.
The changes align premium levels more closely with the real – in the jargon, “actuarial” – risks presented by each policyholder.
This has led some homeowners to complain they are facing tenfold rises in insurance premiums, running into tens of thousands of dollars a year, over the next decade.
Yet Mr Muir-Wood, a leading author on reports by the Intergovernmental Panel on Climate Change, says for now climate change is not driving industry concerns about the provision of flood insurance.
Instead, he says, developments in catastrophe modelling technology are giving insurers more detail about the risks presented by each household – prompting them to want to price risks accordingly.
“It may be convenient for people to label this as a consequence of climate change but it’s really not,” he says.
“People have been used to the idea that insurance is a flat-rated commodity like mortgage rates, or the price of petrol,” he adds “But once you start getting in to the reality of risk, you see extremely strong localised variations.
“That is a basic reality of flood risk that society has to confront. Once you start modelling it at very high resolution, you see how variable it is.”


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