Loss potentials from windstorm catastrophes

At the beginning of this article, we showed that windstorms constitute the most significant natural hazard worldwide in terms of the frequency of loss events, the total area affected, and the losses to be carried by the insurance industry. The dimensions that the loss potentials from windstorm catastrophes have already reached throughout the world today — i.e. not including the risk of change due to global warming — is revealed by the table below.

The size of the losses to be expected makes it clear that the insurance industry will have to react to the possibility of a change (increase) in the windstorm risk if it intends to meet the payment obligations it has undertaken.

The insurance industry's adjustment strategies

In view of the loss potentials from windstorms and other severe weather events, it is necessary to consider the risk of change generated by global warming at an early stage. The uncertainties that still exist relate to the quantification of the changes to be expected and do not justify a sitback-and-wait strategy. The outcome could be an increase in the probability of ruin for the risk carriers. What are the options open to the insurance industry?

Three levels are identifiable on the time axis with regard to this question.

• —
  kShort-term measures: These include analysing the loss accumulation from windstorm and storm catastrophes (e.g. the use of suitable simulation models) and examining the security funds available for the assumption of payment obligations.
• —
  Medium-term measures: Promises of cover may be adjusted in terms of the scope and price of the insurance protection. In windstorm insurance, the introduction of deductibles is one of the most effective ways of reducing the accumulation loss potential. At the same time, any strong premium increases that may be necessary can be kept down to an acceptable level. It is also wise to re-examine the reinsurance and retrocession tools that are used to optimise the balance of risks.
• —
  Longer-term measures: This involves a wide range of activities designed to permanently reduce the (insured) losses from windstorm and severe weather catastrophes (while maintaining expedient promises of cover). The activities include the introduction or modification of building codes to reduce the vulnerability of buildings to windstorm, improvements in the insurance industry's loss management, and in-house examinations of company practices and their impact on the climate.

Whichever of these time horizons is appropriate for the individual risk carrier, insurers should be aware of the change in the climate and windstorm activity as a basic parameter for entrepreneurial decision-making.