Economic consequences of natural catastrophes and the role of (re)insurance Observatorio de Catástrofes Naturales 20 Noviembre 2017 Andrés Ruiz & Joachim Mathe Image: Shutterstock.com
Economic consequences of natural catastrophes and the role of (re)insurance
Observatorio de Catástrofes Naturales20 Noviembre 2017Andrés Ruiz & Joachim Mathe
Image: Shutterstock.com
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20/11/2017
Agenda
1. Economic consequences of natural catastrophes
2. Emerging economies are particularly at risk
3. Hurricanes 2017: Harvey, Irma, Maria
4. Role of the (re)insurance industry
20/11/2017Natural catastrophes 3
Economic consequences of natural catastrophes
1
Image: Shutterstock.com
Insurers help to limit the losses, both before and after the catastrophe
20/11/2017 5
Insurers provide support for risk-mitigation
measures
• Prevention, e.g. through policy terms and conditions or because insurance premiums give a price to the respective risk and therefore create incentives
• Knowledge and expertise, e.g. risk information
Insurers make funds available and thereby limit
indirect losses
• Prompt reconstruction enables the rapid resumption of production
• Public and private debt is limited so that no additional obstacles to growth arise
Ex-ante Ex-post
Catastrophe occurs
Insu
rers
’ rol
eN
atC
atef
fect
s
time
Direct lossesHuman losses and destroyed property
Short-term effectEffect on GDP level and business cycle
Indirect losses
Long-term effectInfluence on long-term growth
Direct losses
Damage to physical capitaland resources
Death and diseases
Not directly evidentfrom GDP development
Natural catastrophes affect the economy through direct losses
20/11/2017 6Natural catastrophes
Image: NEIL SANDS/AFP / Getty Images
Indirect losses
Any effect not caused directly by the natural catastrophe, but byits direct losses
Indirect effects are changes of GDP compared with the hypothetical development in the absence of a natural disaster
Indirect effects on the economy are also relevant
20/11/2017 7Natural catastrophes
Image: Shutterstock.com
Negative indirect effects, e.g.:
Loss of production due to destroyed installations
Destroyed infrastructure
Inflation
Indirect effects can be negative …
20/11/2017 8Natural catastrophes
Image: Michael Kooren / Corbis
Average impact of natural catastrophes by region
20/11/2017 9Natural catastrophes
… and may have an impact on sovereign risk ratings
2.7
1.2
4.3
1.6
0.5
2.3
0.60.2
0.40.6
0.20.6
0.30.1
0.5
0
1
2
3
4
5
Damage (% of value) Net rating impact (notches downgrade) % fall in USD GDP per capita
LATAM and Caribbean APAC Europe North America Middle East and Africa
Source: Swiss Re, Standard & Poor’s calculations
Positive indirect effects
Reconstruction
Wealth creation incentives
Investments in modern technologies
“Creative destruction”
However, natural catastrophes can also havepositive indirect effects on economic activity
20/11/2017 10Natural catastrophes
Image: Shutterstock.com
Natural disasters lead to production losses butcan also trigger “positive” effects
20/11/2017 11Natural catastrophes Source: Graphic: based on Hallegatte S. et al. (2010): “The Economics of Natural Disasters”; Munich Re Economic Research
GDP level
TimeOccurrence of disaster End of reconstruction
Additional production due to stimulus from reconstruction (= indirect positive effects)
Production losses due to the destruction of material assets(= indirect negative effects)
actual production
hypothetical productionwithout disaster
Empirical studies show that indirect positive effects on overall prosperity do not compensate for the indirect losses
“Major, devastating and great” natural catastrophes lead to a statistically significant reduction in GDP of nearly 4% after five years, compared to the level of GDP without the catastrophe
Wealth gains through recovery cannot compensate for losses …
12Natural catastrophes
Image: used under license from shutterstock.com
Source: Munich Re Economic Research, v.Peter/v.Dahlen/Saxena (2012) 20/11/2017
In case of a natural catastrophe, a state usually has little alternative but to provide generous support to the affected regions
A future increase in the loss potential from natural hazard events could place a strain on the national budget and jeopardize the competitive advantage of countries with low public debt
… and natural catastrophes affect public finances
20/11/2017 13Natural catastrophes
Image: Shutterstock.com
Emerging economies are particularly at risk
2
Image: Shutterstock.com
Emerging economies are particularly at risk, in part due to rising urbanisation (1/3)
15
Global conurbations in 1980
0-25%
25–50%
50-75%
75-100%
Urbanisation
percentage
Urban population
1-5 million
5-10 million
> 10 million
Source: United Nations Department of Economic and Social Affairs (UN DESA), Population Division; Munich Re Economic Research
Emerging economies are particularly at risk, in part due to rising urbanisation (2/3)
16
Global conurbations in 2011
0-25%
25–50%
50-75%
75-100%
Urbanisation
percentage
Urban population
1-5 million
5-10 million
> 10 million
Source: United Nations Department of Economic and Social Affairs (UN DESA), Population Division; Munich Re Economic Research
Emerging economies are particularly at risk, in part due to rising urbanisation (3/3)
17
Global conurbations in 2025
0-25%
25–50%
50-75%
75-100%
Urbanisation
percentage
Urban population
1-5 million
5-10 million
> 10 million
Source: United Nations Department of Economic and Social Affairs (UN DESA), Population Division; Munich Re Economic Research
0-25%
25–50%
50-75%
75-100%
Urbanisation
percentage
Urban population
1-5 million
5-10 million
> 10 million
Examples of areas exposed to tropicalcyclones
Many conurbations develop in regions that are exposed, for example to tropical cyclones
18
Settlement and industrialisation of heavily exposed regions in 2025
Source: United Nations Department of Economic and Social Affairs (UN DESA), Population Division; Munich Re Economic Research
Protection gap still very large after NatCat events
20/11/2017 19Natural catastrophes
ContinentOverall losses
US$ bnInsured losses
US$ bn
North America 1,660 730
South America 120 14
Europe 590 170
Africa 48 2
Asia 1,660 135
Australia/Oceania 140 58
29% 8%
4%
41%
11%
(Losses in values at 2016)
Inflation-adjusted via country-specific consumer price index and consideration of exchange-rate fluctuations between local currency and US$
Uninsured loss share
Insured loss share
Losses per continent as percentage of overall losses
7Source: Munich Re, NatCatSERVICE, 2017
44%56%
89%
96%
92%
59%
71%
Loss events worldwide 1980–2016
The factors driving the trends of the past will also influence those of the future
20/11/2017 20Natural catastrophes
Population growth1
Rising standard of living2
Concentration of population and assets in conurbations (“urbanisation”)3
Settlement and industrialisation of heavily exposed regions4
Climate changeRegional increase in loss-relevant and extreme events5
Increasing insurance penetration (of particular relevance for the trend in insured losses)6
Hurricanes 2017Harvey, Irma, Maria
3
Image: Shutterstock.com
After a series of benign years, the hurricane season 2017 has been quite active
20/11/2017 22Natural catastrophes
2017 was the fourth year since 1950 with at least 3 major hurricanes making landfall in the US
The hurricane season 2017 by now has been quite active, especially in respect to strong storms, above average
The series of very strong major hurricanes is unusual, but not totally out of scope compared to other years
On the long run, climate change will intensify hurricanes due to more evaporation; climate research does not see an increase in frequencies though
0
1
2
3
4
5
6
7
8
9
19
50
19
53
19
56
19
59
19
62
19
65
19
68
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
20
07
20
10
20
13
20
16
Landfall (cat 3-5) Landfall (cat 1+2)
Number
*
Source: Unisys *data for 2017 preliminary (as at 12/10/2017)
Reasons why 2017 has reshaped the (re)insurance market
The global market will suffer an aggregate insured loss of between $100bn and $125bn over recent hurricane events.
This compares to an unindexed insured loss of $41bn for Katrina in 2005.
Image: shutterstock.com
Reasons why 2017 has reshaped the (re)insurance market
Non-traditional capital has been severely impacted
This capital will only “reload” if modelled returns increase significantly, this will involve very material increase in rate.
A huge divergence amongst the modelling companies will lead to capital requiring additional margin.
Image: shutterstock.com
Reasons why 2017 has reshaped the (re)insurance market
Impacted lines see significant adjustment in rates, the effect will lead to all lines of business to secure their capital requirements to continue trading.
In short order, this will certainly have tremendous implications on prices and conditions, also in many other parts of the world (though not to the same extent).
Image: shutterstock.com
Overall, hurricane losses will have a substantial impact on reinsurance capital that is available to the market
20/11/2017 26Natural catastrophes
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100
150
200
250
300
350
400
2012 2013 2014 2015 2016 2017E 2017new
(US
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illi
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Traditional Capacity Convergence Capacity
Current hurricane losses have destroyed the reinsurance industry’s profits of more than 1.5 years.
Analysts (e.g. JP Morgan) estimate that ~50% of insured losses will be covered by the reinsurance industry
Depending on the exact loss figures, this would be approx. USD 50-60bn
It is assumed that this would beshared among ILS (USD ~15bn) and reinsurers (USD ~35bn)
Last year‘s RI profits have beenUSD ~20bn consequently, a reduction of 35bn means that >1.5
years of industry profits have
been destroyed
Source: Total reinsurance capital by AM Best / Guy Carp & owncalculation for 2017 (new)
Own calculation:
USD -15bn = -19% of
alternative capacity
USD -35bn = -10% of
traditional capacity
Role of the(re)insurance industry
4
Image: Shutterstock.com
Incentives for risk-minimising behaviour (e.g. through terms and conditions)
Incentives for entrepreneurial action and thus for growth (by covering threats to continued existence)
Before the occurrence of a disaster: Insurers provide the right incentives
28Natural catastrophes
Image: Shutterstock.com Image: Shutterstock.com
20/11/2017
Fast reconstruction allows production to be resumed quickly
State and private indebtedness are limited, so no additional obstacles to growth arise
After the occurrence of a disaster: Insurers make funds available and thereby limit indirect losses
29Natural catastrophes
Image: used under license from shutterstock.com Image: used under license from shutterstock.com
20/11/2017Source: Munich Re Economic Research
Role/business model of the insurance industry
20/11/2017 30Natural catastrophes
Risk identification Risk measurement“price tag” Risk transfer
Know-How / data transfer
Risk consulting
Capital substituent Investment
support
(Re-)Insurance
Clients / Industry / Politics / NGOs
Continuity of business
Quick assessment of the magnitude of the event
Effective communication with the press and other stakeholders
Optimisation and immediate activation of available resources
Fast, precise recording and processing of claims
Implementation of loss minimisation measures
Devising of acceptable solutions for insureds
Providing adequate advanced payments
Indemnification according to the original intention of the policy
Risk consulting: Contingency Planning to guarantee after a catastrophe event
Image: Shutterstock.com
Risk identification: Relevant loss events 2016 from natural hazards
20/11/2017 32Natural catastrophes
Source: Munich Re, NatCatSERVICE, 2017
Meteorological events
(Tropical storm, extratropical storm, convective storm, local storm)
Hydrological events
(Flood, mass movement)
Climatological events
(Extreme temperature, drought, wildfire)
Geophysical events
(Earthquake, tsunami, volcanic activity)
Selection of catastrophes
Loss events
Wildfire (Fort McMurray Fire)
1 May–4 Jul CanadaOverall losses: US$ 4bnInsured losses: US$ 2.9bn
Floods, flash floods
11-15 AugUSAOverall losses: US$ 10bnInsured losses: US$ 2.5bnFatalities: 13
Earthquake
24 AugItalyOverall losses: US$ 5bnInsured losses: US$ 0.08bn Fatalities: 298
Earthquake
16 AprEcuadorOverall losses: US$ 2bnInsured losses: US$ 0.5bn Fatalities: 673
Hurricane Matthew
28 Sep–9 OctCarribean, USAOverall losses: US$ 10.2bnInsured losses: US$ 3.8bnFatalities: 601
Hailstorm,
severe storm
10-15 AprUSAOverall losses: US$ 3.9bnInsured losses: US$ 3.0bn
Flash floods, severe storm
27 May–8 JunWestern EuropeOverall losses: US$ 6bnInsured losses: US$ 3.2bnFatalities: 22
Earthquake
14/16 AprJapanOverall losses: US$ 31bnInsured losses: US$ 6bn Fatalities: 69
Floods
18 Jun–13 JulChinaOverall losses: US$ 20bnInsured losses: US$ 0.33bnFatalities: 237
Risk identification: All 16 years since 2001 rank among the 17 warmest since measurements began
20/11/2017 33Natural catastrophes Source: Munich Re, based on data from the National Centers for Environmental Information / NOAA
Risk identification: Relevant loss eventsworldwide 1980-2015
34
Number of loss events Overall and insured losses (US$ bn)
Accounted events have caused at least one fatality and/or produced normalized losses ≥ US$ 100k, 300k, 1m, or 3m (depending on the assigned World Bank income group of the affected country).
Meteorological events (Storm: tropical, extratropical, convective, local)Hydrological events (Flood, mass movement)Climatological events (Extreme temperature, drought, forest fire)
Geophysical events (Earthquake, tsunami, volcanic activity) Overall losses
(in 2015 values)
Insured losses
(in 2015 values)
Inflation adjusted via country-specific consumer price index and consideration of exchange rate fluctuations between local currency and US$.
Risk identification: From global/regional hazard zoning schemes to high resolution hazard information
20/11/2017 35Natural catastrophes
Natural hazard exposure analysis tool
Combining client risk data with Munich Re natural hazard zoning system
Creating risk transparency / information
New York, USA
Munich Re NATHAN Risk Suite
Risk measurement: Risk modelling of natural catastrophes
20/11/2017 36Natural catastrophes
Risk curve
Return period
Munich Re vulnerabilityfunction / damage sensitivity
Wind speed
Historical and / or simulated events
Exposure data
Loss
es
+ +
Risk transfer: Examples of sovereign and public-private NatCat risk transfer schemes
20/11/2017 37Natural catastrophes 7
African nationsAfrican Risk Capacity (ARC)
AlgeriaCatastrophe Insurance Pool
Caribbean
Catastrophe Risk InsuranceFacility (CCRIF)
New ZealandEarthquake Commission (EQC)
NorwayNorsk Naturskadepool (NNPP)
TurkeyCatastrophe Insurance Pool (TCIP)
United Kingdom
Flood Re
St. Lucia, Grenada, JamaicaLivelihood Protection Policy (LPP)
IcelandIcelandic Catastrophe
Insurance (ICI)
Pacific IslandsPacific Catastrophe Risk
Insurance (PCRAFI)
PhilippinesSovereign Parametric Insurance (PSPI)
All developing countriesPandemic Emergency Financing Facility (PEF)
United States
National Flood Insurance Program (NFIP)
MexicoFondo Nacional de Desastres
Naturales (FONDEN)
SwitzerlandSwiss Natural Perils Pool (ES-Pool)Intercantonal Union of Reinsurance (IRV)
RomaniaProgramul Roman de Asigurare la Catastrofe (PAID)
TaiwanResidential Earthquake Insurance Pool (TREIF)
IndonesianCatastrophe Reinsurance Pool (Maipark)
StormEQFlood Drought
¡Muchísimas gracias!
Munich Re MadridAndrés Ruiz & Joachim Mathe
Image: Shutterstock.com