MUNICH RE SEMINARS NON-LIFEREINSURANCE l CASUALTY l PROPERTY l MARINE l ADDITIONAL TOPICS

Global Warming a Risk of change New challenges for the insurance industry

A paper by Prof. Dr. Peter Höppe, Munich Re Head of Geo Risks Research presented by

Alexander Milberg, Munich Re Malaysia at the

National Seminar on Socio-Economic Impacts of Extreme Weather and Climate Changes

Kuala Lumpur 22 June 2007

Risk of change – Peter Höppe

Content

Climate change

- Extreme events of last years

- Facts and scientific basics

- Effects

- Challenges

Risk of change – Peter Höppe

Trends of Natural Disasters

The last years have brought records in natural disasters in respect to:

Intensities

Frequencies

Damages and losses

Risk of change – Peter Höppe

UTC13:00

Heat stress

Cold stress

light

extreme

high

moderate

light

comfortable

moderate

high

extreme

Heat wave of 2003, the largest humanitarian natural catastrophe in Europe for centuries

15,000 †

15,000 †

7,000†

7,000†

4,000 †

4,000 †

2,000 †

2,000 †

2,000 †

2,000 †

4,000 †

4,000 †

Perceived Temperature on 8 August 2003 and excess mortality

Source: German Weather Service, 2004

Risk of change – Peter HöppeSource: Image courtesy of Earth Sciences and Image Analysis Laboratory, NASA Johnson Space Center, Bild-Nummer ISS008-E-19646. http://eol.jsc.nasa.gov

2004: 1st Hurricane in South Atlantic

Hurricane Catarina off the Coast of Brasil, March 2004

Risk of change – Peter Höppe

July/August 2005 – Flooding in India944 mm rain within 24 hours, highest ever in India

24.7- 5.8 Flooding in India (1.150 fatalities)

Insured losses (US$ m):

Economic losses (US$ m): 5.000

770

August 2005 – Hurricane Katrina6th strongest hurricane, largest losses of a single event

25.-30.8 Hurricane Katrina, USA (1.322 fatalities)

Insured losses (US$ m): Economic losses (US$ m): 125.000

40.000

Risk of change – Peter Höppe

2005, a Year of Weather Extremes

Never before since the beginning of records (1850) have so many named tropical storms occurred in the North Atlantic basin in one season: 28, of which 15 with hurricane strength (old absolute record 21 in 1933, resp. 12 in 1969)

Risk of change – Peter Höppe

Hurricane Vince (9 October 2005)

Vince, a hurricane in a region without hurricane risk (easterly North Atlantic, Madeira)

Risk of change – Peter Höppe

Deaths per week and average maximum temperature

Heat wave in the Netherlands – July 2006The warmest July since records began

=> 1 000 more fatalities than usual in July

Risk of change – Peter Höppe

Winterstorm Kyrill, 18-19 January 2007

Simulation: GeoRisikoForschung, Münchener Rück

Insured losses (€ m):

Economic losses (€ m): 10.000

5.000 -7.000

Fatalities: 48

Risk of change – Peter Höppe

Less problematic

• Rise in population

• Better standard of living

• Increasing insurance density

Problematic

• Concentration of people and values in large conurbations

• Settlement in and industrialization of extremely exposed regions

• Change in environmental conditions - Climate Change

Reasons for globally increasing losses due to natural disasters

Risk of change – Peter Höppe

Global mean temperature, 1856 - 2006

Departures in temperature from the 1961-1990 average

2006: +0.42°Cabove the 1961-1990 annual average (14°C).

The five warmest years in decreasing order are:

1998, 2005, 2003, 2002 and 2004.

Temperature anomaly (°C)

Source: Climate Research Unit, UK (2007) in conjunction with Hadley Centre of the UK Met Office

-0,6

-0,4

-0,2

0

0,2

0,4

0,6

1855

1865

1875

1885

1895

1905

1915

1925

1935

1945

1955

1965

1975

1985

1995

2005

Risk of change – Peter Höppe

Global and Regional Temperature trends in the 20th century: modeled and observed

Source: climateprediction.net, Oxford University

+ 0.8 °C + 0.7 °C

Risk of change – Peter Höppe

CO2 concentration in the atmosphere of the past 650,000 years from the Vostok ice core, Antarctica

160

180

200

220

240

260

280

300

320

340

360

380

400

-650 -600 -550 -500 -450 -400 -350 -300 -250 -200 -150 -100 -50 0

Thousand years before present

CO

2 (p

pm

v)

2006:

383 ppmv CO2

Sources: Siegenthaler et al. (2005), Spahni et al. (2005), Röthlisberger et al. (2004)

Risk of change – Peter Höppe

Scientific Evidence of a Link between Global Warming and Extreme Events

It is very likely (CL >90%) that human influence has already at least doubled the risk of a heat wave exceeding the magnitude of the European heat wave 2003 (Stott et al., Nature 2004).

Major tropical storms both in the Atlantic and the Pacific region have already increased since the 1970s in duration and intensity by about 50 percent (Emanuel, Nature 2005; Webster, Science 2005).

Due to climate change the sea surface temperatures have increased already by 0.5°C (Barnett, Pierce, 2005, Science; Santer et al., PNAS, 2006).

Of all the factors only the steady increase in sea surface temperatures over the last 35 years can account for the rising strength of storms in six ocean basins around the world (Webster et al., Science 2006).

Insured losses from winter storms will more than double in some European countries (Denmark, Germany) until 2085 due to global warming (study sponsored by SR, Schwierz, submitted 2007).

Risk of change – Peter Höppe

Webster et al., Science, Vol 309, September, 2005

The global frequency of most destructive tropical storms has increased since the 1970s

Risk of change – Peter Höppe

Climate Change in Europe – Example Winter Storm

Result:

Climate change increases insurance losses significantly...

Insurance Risk Model

combined

Climate Model

Results of the study

„Modelling European Winter Wind Storm Losses in Current and Future Climate“

(Conny Schwierz (ETHZ), submitted 2006)

Risk of change – Peter Höppe

Climate Change in Europe - Example Winter Storm Expected average increase of losses in Europe

Europe Denmark Germany Sweden Belgium France Great

Britain

44 % 116% 114% 95% 80% 47% 35%

Source: Conny Schwierz (ETHZ), submitted 2006

for the period of 1975 - 2085

Because of the changing tracks the impact is

different in the European countries

Risk of change – Peter Höppe

Changes in sea level rise and projection for different scenarios

A1FI

B1

*Basis: Range of ΔT = 1.5º-5.8ºC (IPCC TAR)Source: Stefan Rahmstorf (2007), Science Vol. 315, p.368

Temperature-dependent approach*

140 cm

50 cm

Risk of change – Peter Höppe

Changing risk

Increase in temperature air + sea

Increase in humidity

Increase in sea level

more extreme

weather events

e.g. windstorms,

hail storms, rain storms

and drought

Increase in greenhouse gases

important for insurer:

- stronger events

- frequent events

Risk of change – Peter Höppe

Climate Change affects Insurance Industry

• Increase in weather variability

• New levels of weather extremes

• New kinds of weather risks

• Higher loss potentials

• Lacking experience in new kinds of damages

• Increased capacity demand due to larger accumulation risks

• Prospective premium calculation becomes necessary

• Due to increased coverage of climate change by the media and own perception of changes in weather patterns higher demand for nat cat covers

• New insurance products can be developed (e.g. Kyoto Multi Risk Policy of MR)

Risk of change – Peter Höppe

How can the Insurance Industry prepare for the Increasing Catastrophe Risk?

• Development of new risk models considering climate change(more data on shorter term effects of global warming needed)

• Adequate pricing

• Substantial deductibles, based on the respective exposure

• Accumulation control

• Loss prevention

• Improved claims settlement

• Liability limits

• Exclusion of certain hazards

• Exclusion of particularly exposed areas

• Reinsurance, retrocession

• Private-public partnership

Risk of change – Peter Höppe

Insured Insurer Reinsurer

un

lim

ited

up to nowup to now

Insurer

§

GovernmentInsured Reinsurer

limited

future solution?future solution?

Insurance of Natural HazardsCarrier of the burden/liabilities

Risk of change – Peter Höppe

Insurance Industry has high Potential to Promote Climate Protection

- Member of The Climate Group

- Member of the Global Roundtable on Climate Change (Jeff Sachs)

- Board member of the European Climate Forum

- Hosting side events at the annual global climate summits of the UNFCCC (COP)

- UNEP-Financial Initiative

- Carbon Disclosure Project

Munich Re: many activities to promote climate protection

Risk of change – Peter Höppe

CRO briefing published on 20 June 2006

Munich Re: Co-Initiator of CRO Briefing Position Paper on Hurricane Risk and Climate Change

To raise awareness of global warming

as a relevant factor of insurance industry

Risk of change – Peter Höppe

Munich Re: Initiator of International Workshops

UNDERSTANDING AND ATTRIBUTING TRENDS AND PROJ ECTIONS 25 - 26 May 2006 Hohenkammer, Germany

To discuss the attribution of increasing losses to climate

change with a high level group of participants from science

and insurance industry.

Risk of change – Peter Höppe

Consensus (unanimous) statements of the workshop participants

Syllabi:

Climate change is real, and has a significant human component related to

greenhouse gases.

Direct economic losses of global disasters have increased in recent

decades with particularly large increases since the 1980s.

The increases in disaster losses primarily result from weather related events,

in particular storms and floods.

Climate change and variability are factors which influence trends in

disasters.

There is evidence that changing patterns of extreme events are drivers for

recent increases in global losses.

The Munich Climate Insurance Initiative (MCII)

The MCII was founded by representatives of Germanwatch, IIASA, Munich Re, the Potsdam Institute for Climate Impact Research (PIK), the Swiss Federal Institute of Technology (SLF), the Tyndall Centre, the World Bank, and independent experts.

MCII

Risk of change – Peter Höppe

• Wealthy countries will be able to cope with financial losses from increasingdisasters by means of insurance solutions and state funding, the poorest countries will suffer most

Objectives

• The increasing natural catastrophe damages in poor countries will consume increasing ratios of  the donor money of development funding, delaying their further development

• New insurance related systems are necessary to get these countries, where currently almost no insurance is available, out of the global warming trap 

• MCII is working on solutions to provide expertise on insurance related mechanisms to cover losses due to climate change, especially in developing countries        

Risk of change – Peter Höppe

Increase of corporate responsibility activities in the field of climate change

Publications and strategic board game

Risk of change – Peter Höppe

Phases of Climate Strategies

Temporal course

of development

progressive

defensive

80s 90s today

Defense StrategyIgnoring/denying climate risks

Defense StrategyIgnoring/denying climate risks

Compliance StrategyObeying the legal preconditions

Compliance StrategyObeying the legal preconditions

Mitigation StrategyMinimising and excluding climate

related business risks

Mitigation StrategyMinimising and excluding climate

related business risks

Source: Schaltegger after WWF 2006

Innovation Strategy(also Adaption Strategy)

Integral climate and business strategy

Creating new chances of business

Innovation Strategy(also Adaption Strategy)

Integral climate and business strategy

Creating new chances of business

Risk of change – Peter Höppe

Conclusions

Natural catastrophes, especially weather related events, are increasing dramatically in number and magnitude. Loss potentials have reached new dimensions

The insurance industry has to consider climate change in its risk models

There is more and more scientific evidence for causal links between global warming and increasing frequencies and intensities of natural catastrophes

Climate change is happening already, it cannot be stopped anymore, just attenuated

We have to mitigate global warming and adapt to the changing risks in respect to the regionally specific risk patterns

Thank you very much for your attention

Alexander Milberg