Tropical cyclones caused enormous damage in 2004 and
2005 – US$ 80bn worth in the USA alone.
Were these exceptional events or portents of a new
Dr. Torsten Jeworrek: On the one hand, the record
losses of recent years can be attributed to the fact that insured
losses have increased enormously. However, the hurricane losses
also reflect the general trend that weather events have been
increasing in frequency and intensity for several years now. Today
we are seeing areas affected that we previously considered to be
devoid of exposure. For example, in the past two years tropical
cyclones have caused losses on the Canary Islands and in
Is climate change responsible for these
Jeworrek: We have to distinguish between two
important factors. Firstly, weather extremes are increasing
throughout the world, which as far as we are concerned has been
clearly shown to be a consequence of climate change and partially
man-made. The second aspect concerns the North Atlantic. Surface
temperatures in the North Atlantic are subject to natural
fluctuation over a period of several decades. As we have been in a
warm phase of the Atlantic multidecadal oscillation since the
mid-1990s, we have a coming together of two factors which
contribute to hurricane activity.
What consequences do these weather extremes have for the
Jeworrek: They bring increased loss potentials
and loss frequencies. This results in increased demand for
reinsurance capacity and a need for higher prices in many regions.
Risk management is especially important in this connection. The bar
is being raised continuously –
state-of-the-art is the top priority. Starting with excellent risk
assessment in underwriting through to risk management at Group
level, we have to be extremely disciplined in consistently
implementing our scientific and technical expertise.
What specifically can our clients expect: Higher NatCat
prices? Event limits?
Jeworrek: Regions and hazards that are expected
to produce changes in the risk will have to undergo price
adjustments – based on the resulting higher
technical demands and costs of the risk capital required. However,
this will not mean an across-the-board increase for global
catastrophe business. We will modify our models to ensure they are
appropriate to a region's and a client's prospective exposure.
Event limits to restrict a reinsurer's liability in proportional
business are an essential part of modern risk management.
Do you expect less pronounced fluctuations in future price
Jeworrek: Yes, we do. Firstly, there is now a
much greater awareness of the role of loss estimates and exposure.
Furthermore, rating agencies and regulators are calling for
improvements in processes for modelling, capital requirements and
risk management, both for insurers and reinsurers. This pressure is
bound to produce more disciplined treatment of the risk and flatter
Is a general reassessment of the risk
Jeworrek: There is no doubt that hurricane
exposure has increased significantly. We must therefore continue
the process of factoring this increased exposure into risk
management and risk models. Many models are based on retrospective
analyses. However, recent climate research indicates that exposure
can no longer be presented in terms of a long-term average but must
be calculated on a prospective basis. Even if the necessary
improvements are made, modelling capabilities will still be subject
to uncertainties, and companies will have to make allowance for
these uncertainties by taking a conservative view in their risk
A question on risk management: Was Munich Re overly
optimistic in its risk assessments in the past two
Jeworrek: Our internal risk evaluations,
especially for windstorm covers, have always been conservative.
Hurricanes hit the North Atlantic in 2004 and 2005 with a frequency
and intensity that we had not fully anticipated in our
risk-measurement calculations. We therefore readjusted our loss
models for the renewal at 1 January 2006. Also, our 30
geoscientists and meteorologists continue to work together with the
world of science to develop our models further.
Although simulations had clearly demonstrated the
consequences of a hurricane in New Orleans, nobody expected a
catastrophe on this scale. What are the lessons from
Jeworrek: We underestimated the flood risk in our
model. However, large commercial risks and industrial risks in the
USA nearly all have flood cover. This is what makes the modelling
of flood risks so important. Katrina, and the flooding of large
parts of New Orleans that it produced, involved loss elements that
we had not seen with the major hurricanes of recent years, not even
in the case of Hurricane Andrew in 1992. We may have placed too
much faith in the technological flood control in New Orleans, which
proved to be over-optimistic on our part. An important lesson from
Katrina therefore is to include the so-called inconceivable in risk
Munich Re has placed catastrophe bonds totalling
€110m for windstorms in western Europe. Are
such forms of alternative risk transfer suitable instruments to
diversify risks and reduce peak risks?
Jeworrek: For Munich Re, ART products such as cat
bonds complement traditional retrocession instruments by passing
risks on to the capital markets. Munich Re is very active in the
use of these instruments, for example through the issue of PRIME
capital bonds in 2000 to cover earthquake in California, hurricanes
in the USA and windstorms in Europe, or the AIOLOS cat bonds for
winter storms in Europe placed in the 4th quarter of 2005.
We work hard to retain our opinion leadership, our constant
objective being to ensure that our clients profit from our
Do ARTs have major potential as a new business field and
are they likely to become more widely used as an investment
Jeworrek: The market is developing slowly but
surely. For reinsurers, alternative risk transfers increase price
transparency and reduce capital intensity, and as such can be a
component of risk and capital management. In practice, the limited
number of cat bond investors has tended to handicap some
transactions in the past. However, the situation has since improved
significantly. A few years ago when Munich Re issued its first cat
bond, there were little more than 100 investors willing to invest
in an insurance risk. There are a lot more investors on the market
today. On the other hand, placing the cover has become increasingly
complex, mainly because there are no standardised products.
What are the advantages of placing underwriting risks on
the capital markets?
Jeworrek: It helps us as a large reinsurer to
diversify our risk. It also enables the market to help ease
capacity shortfalls in areas with peak exposures. And thirdly, if
standardised instruments bring about permanent price transparency,
daily trading will help to improve price discipline.
Are pool solutions to cover natural hazards on the
Jeworrek: Pool solutions already exist in some
countries. Switzerland, for example, already has its
Elementarschadenpool (natural perils pool). Norway, France and
Spain have similar pool solutions. Japan has set up an earthquake
pool for residential buildings, which shares liability between the
insurance sector and the state. The USA has established the Federal
Flood Insurance Program, which provides flood insurance in
particularly exposed areas. Generally speaking, however, pool
solutions should only be established as a last resort for the cover
of peak risks – ultimately it is always the
state that bears the liability. We believe that the private
insurance industry should be the first port of call, as its
know-how clearly makes it the superior risk carrier.
Will Munich Re continue to merit its present status as
opinion leader in the field of natural catastrophes?
Jeworrek: Our expertise in geo risks makes us the
global leader in the reinsurance industry. Scientific knowledge and
a global network of scientists are what make us special. We work
hard to retain our opinion leadership, our constant objective being
to ensure that our clients profit from our knowledge. Opinion
leadership is not an end in itself. We translate our findings into
appropriate insurance solutions and excellent risk management.
Munich Re has set up the Munich Climate Insurance
Initiative. What is the purpose of this association?
Jeworrek: The initiative's objective is to find
global insurance solutions to the developments that cause climate
change. It will develop products ranging from microinsurance to
climate property cover. MCII shows that we are looking beyond
traditional reinsurance business to find new and innovative
solutions in an ever-changing risk environment. It is the only one
of its kind in the world and brings together key global players
from the insurance industry, UN organisations, NGOs and science,
all with excellent credentials for the job in hand.
Climate change has certainly raised the profile of
renewable energies. Are there sufficient insurance solutions for
Jeworrek: We give our full and active support to
technologies that use renewable energies. This includes the cover
of wind power plants, which we have provided for quite some time
now, and support for exploration projects in the field of
geothermal power. A prime example of this is the cover of a
geothermal drilling project in Unterhaching near Munich, for which
Munich Re was the sole reinsurer. Technological progress is always
relevant to insurance, whether we are talking about credit
insurance for projects or fire and engineering coverage solutions
for new types of power plant. We are extremely active in this