Increased risk of natural disasters

Part 1

Mark Maroon:

Hey everybody. Welcome to Climate Check. This is Mark Maroon, VP for Portfolio Management at American Modern, a specialty insurance provider and part of the Munich Re Group. And today I'm joined by Ernst Rauch, Chief Climate and Geo Scientist at Munich Re, as well as Mark Bove, Munich Reinsurance, America's Senior Vice President of Natural Catastrophe Solutions. Ernst, Mark, thank you so much for joining me today.

Ernst Rauch:

You're welcome, and thanks for having me in the call today.

Mark Bove:

Yes, it's a pleasure to be here. Thanks, Mark.

Mark Maroon:

We really appreciate it. So Ernst, let's start with you. Munich Re's been offering reinsurance and risk solutions to primary insurance companies as well as other industries around the world for over 140 years now. So how has that put Munich Re in a position to chart climate trends over time?

Ernst Rauch:

Well, as a global risk area, we as Munich Re, have started in the 1970s already having a closer look at climate change and the impact of climate change on our business model. And back then in the 1970s, we already realized that obviously, some of the loss patterns which we have seen from weather-related events have started to change.

Perhaps this was more of a gut feeling 50 years ago or so. But over time, we have built up experience and learn almost every day more about climate change and what does it mean to our business. And this is one good reason that we are now able to support our clients with solutions which are based on this experience and ultimately, actually, on what is now, I think, fair to argue, a DNA of Munich Re.

Mark Maroon:

Thank you. I appreciate that. And maybe just to follow up a little bit further, you had spoken a little bit about how anecdotal experience has trended more into data tracking over time. Can you talk a little bit about what some of that data looks like and how we're using it?

Ernst Rauch:

So we actually started in the 1970s, setting up a database where we collect loss information from worldwide natural disasters that's on flooding, on windstorm, on wildfires and others. And that's loss information coming from our clients, which we convert into global data sets. Now, this was in the 1970s and '80s and right into the 1990s. And then later in time, we combined loss information, so insurance data with meteorological information.

And by combining insurance data with wind speed data, with flood data and others, we were able to draw a link between the losses and loss trends in some parts of the world from these severe weather events and climate change. Because you need to have a holistic view on data, on natural disasters, again, both from the insurance world and from the science world in order to better understand what the drivers of such loss trends are.

And as of today, we can say based on our analysis, and our analysis which we have done together with scientific organizations, that at least part of the driver of these trends are changing meteorological patterns. Other drivers in many regions, still the most relevant drivers, are socioeconomic factors like changes in wealth and other factors in these regions.

Mark Maroon:

Thanks. I think that's an important point to make sure that we continue to look at this from a multidisciplinary approach because if we just take a look at things through a singular lens, there is an opportunity for us to maybe miss a thing or two along the way.

So Mark, we're seeing a lot more Nat Cat risk in North America today. So can you talk a little bit about how Munich Re is helping to use its expertise to guide governments or institutions or communities affected by them?

Mark Bove:

Yes. The United States is one of the most developed and unique markets across the globe. And as Ernst mentioned, yes, we are one of those countries where socioeconomic impacts are also playing a major role in the loss trends we're seeing aside from climate change. And that creates a lot of unique challenges in this market.

We have a wealth of data, but a lot of our clients struggle to understand how the environment is changing around them, how the weather and climate is changing with time, and how that affects their portfolio both on the short-term, maybe on an annual basis, but also how will climate affect their portfolio going forward in the years and decades ahead.

And a lot of companies just don't have either the scientific background or technical expertise to be able to address these questions thoroughly. And that's why, as Munich Re and our decades of experience and research into these areas, we can help plug in with our clients and show them some of their data, help them with their analyses and show them why some loss trends in their data are occurring the way they are, what's driving it, whether climate or socioeconomic.

And then what potential solutions we could offer as far as data or guidance or direction on how to grow that may be able to help them strategically and profitably grow into the future. It is quite an investment that Munich Re has made over the past 50 years in geoscience research, and we are very proud that we're able to share this expertise with our clients globally.

Mark Maroon:

So one thing I would ask that I've always struggled with a little bit, is that we know climate change is going to occur over a longer time horizon. But a lot of insurance contracts, reinsurance contracts, things along those lines of derivatives et cetera, are on a year-over-year basis. So what would you recommend to some of your clients to start to implement some of these when we know that the effects of this are going to be drawn out over a longer time horizon?

Mark Bove:

Thanks, Mark. It's an excellent question and one that the insurance industry, as a whole, globally, is still trying to answer. With regard to the United States, which is my focus, my argument really is that when it comes to some of the current loss trends, particularly with the vulnerability of the building stock in the United States, is we are not prepared for the disasters we already have today, let alone the disasters we might have in the future climate.

So as much as we're concerned about that, some of these short-term socioeconomic pieces are still going to dominate for the near term. We have a patchwork of building codes across the United States, one code per state, if it exists at all. And that creates wide differences in how buildings withstand windstorms, ground shaking, and other natural perils. For example, in Florida after Hurricane Andrew in 1992, the state implemented the strongest building codes in the country, and the results can be seen today with the newer building stock being much more resilient to natural disasters.

Other states, unfortunately, have not followed suit. And if we cannot withstand the natural catastrophe events of today, how are we going to expect to withstand the future events that might be more frequent and more intense going forward? So I try not to personally focus on that year to year. I try to focus on the pragmatic issues that are facing them on that annual basis, which is largely being driven by socioeconomics and the building stock.

But of course, we can't leave climate out. There are areas where climate is already fast-moving and rapidly changing the hazards themselves. Wildfire in the American West, extreme precipitation events, particularly across the eastern two thirds of the United States. These particularly fast-moving, changing perils within our climate reality do need more direct addressing today and helping clients understand how to best control accumulations and manage what their loss potentials could be in areas where these perils are getting much more frequent and severe.

Ernst Rauch:

Building on what Mark just said with a focus on the US situation, what I can say is that this applies almost equally to many, many other regions in the world that we, as homeowners or owners of businesses, are not necessarily prepared already today for severe weather-related events. And climate change will just not change the situation to the better. So risks are increasing.

So the key to this challenge is to adapt the way we build our homes, we build our businesses. And adaptation has a lot to do, just as Mark said, with respect to hardening constructions, with respect to building in a way that our homes can sustain high wind speed, can sustain floodings by, for instance, putting draining systems in communities and others. So adaptation is key, but this is where our industry, the insurance industry, can also help societies and really bring value to societies.

Because this is our experience, these are our data, our knowledge, which we have learned over decades, over 100 years or so to understand the vulnerability of property with respect to natural disasters. And our industries has quite a good understanding of how these vulnerabilities change by changing construction materials, building practices, building codes. And there are a lot of positive examples. Mark has mentioned some of them. Building codes, which now take into account high wind speeds, for instance, have helped reducing the vulnerability of these buildings substantially.

And the result, over time, is actually that with the decreasing risk, so decreasing average annual losses, decreasing vulnerability over time, also the technical insurance premium can be adjusted downwards. We need to be aware of this link between construction building materials, vulnerability of buildings, and ultimately risk and insurance premium. So we can do a lot, and our industry can contribute to this discussion and really can bring value to societies and help improving resilience with respect to natural catastrophes.

Mark Maroon:

We really can. And I'd like to continue this discussion on natural disasters and what reinsurers like Munich Re can do to support communities. So folks, please join us for part two of our discussion with Ernst Rauch and Mark Bove up next and head over to munichre.com/climate for more information.

Part 2

Mark Maroon:

Hey everyone, this is Mark Maroon, vice president at American Modern, a Munich Re company, continuing my interview with Ernst Rauch, chief climate and geoscientist at Munich Re, and Mark Bove, Munich Re America's senior vice president of Natural Catastrophe Solutions. In part one of our discussion, we talked about the need to improve the resilience of communities all over the world when it comes to more frequent and severe natural disasters and weather events. So Mark, in terms of climate justice, how can the insurance and the reinsurance industries help support those communities with large proportions of underserved populations to prepare better?

Mark Bove:

It's an excellent question, Mark, and it is a challenging one that we at Munich Re are trying to address globally. A lot of people might not be aware that underserved/underrepresented communities tend to be the biggest victims of any type of climate change, whether it's sea level rise, severe storms, or even just pollution-related environmental justice. A lot of poor communities end up being near industrial facilities where there could be contamination in the air, water, or ground as well.

We need to work with these communities to figure out ways to provide alternative risk transfer mechanisms because almost by definition, these communities really do not have the means or finances to really initiate big projects on the macro community level or even on the individual homeowner, apartment renter, or even landlord level that they can afford insurance or infrastructure upgrades that might help their community. So part of our obligation of being a partner in risk to try to help find solutions for these communities, and it appears that the traditional risk transfer mechanisms for these communities, just aren't able to work properly largely because of the lack of resources.

So we are trying to work on new novel ways that we can help these communities gain some financial resilience and natural perils by providing some level of insurance. There are a couple of avenues that we're looking at. One is parametric based insurance, and that could be at the individual or a community level where that if a flooding, for example, hits a certain level, there is an automatic payout for the community whether any damage was incurred or not. Though usually a trigger will be set where there is some level. And those funds that are made available can be used for repair, upgrading the community.

Another potential avenue is doing community-based insurance or organization-based insurance where maybe a larger organization like the community goes out and purchases insurance, and then individual community members can participate and they can have more novel slices. Maybe they only need a need or afford a certain amount of coverage, they can buy those small pieces. And by offering that to their residents, and maybe it's levied in through tax opt-in or opt-out, and that could provide an extra level of service at a lower price point and help the affordability.

Obviously, these are just two examples of what could be done, and we have a lot of people thinking about this because we really think the only way that we are going to achieve true resilience, not just in the United States, but globally, is if all of our communities are resilient to natural disasters and are changing climate. Because if any community within a town or city is impacted, the rest of the city will suffer as well. And the wealthier communities tend to have the ways it meets recover, but still, if our neighbors are suffering, our society and neighborhood as a whole will suffer as well, and we need to work to end that.

Ernst Rauch:

Well. I can only fully agree with what Mark just said, but to give you a global picture on that issue, in the US you are already in quite a positive situation as you do have public-private partnerships with many communities already. And that's a relevant starting point obviously to enter into exchanges and discussions to arrive at solutions to this challenge.

In many regions in the world, such public-private partnerships where the private sector, the private insurance industry is supporting public development, these negotiation or these talks are simply not there. It depends a little bit on the region in the world, but indeed, our take on this is that if there would be more exchanges, more exchange of information, data, expertise between the public and the private sector, it would probably be a relevant step towards finding new and innovative solutions Mark was referring to.

And yes, indeed, sometimes it is not always about straightforward risk transfer solutions. Sometimes it's about supporting with expertise to build levy systems to help identifying certain risks. And understanding risks is always sort of the first element in a chain towards then measuring risk and managing risks. And if we start cooperating between our industry and the private sector and the public sector with more of these topics, I think that will help society, of course, to improve the resilience and have better access to data, to expertise in our industry and find a more balanced way to manage these risks so that as a consequence, also currently underserved communities will benefit from this.

Mark Bove:

And Ernst, I also want to add the wonderful work that the Munich Re Foundation is doing, particularly in the developing world. We might be worried about insurance coverage in developed countries for our underserved communities, but there are other communities, particularly indigenous and subsistence communities across the globe, where climate change is an existential threat and threatens their livelihood with droughts or excessive flooding. And the work that the foundation is doing, helping provide microinsurance to farmers across the world or moisture nets to help collect water in arid regions or homes that can float in Bangladesh due to the sea level rise and storm surges they can experience in the country are all other ways that Munich RE is trying to help the globe adapt to climate. And it is great to see such activities in these communities as well.

Ernst Rauch:

Well, yes, we do this on a not-for-profit basis through the Munich Re Foundation, but also in a public-private network called the Insurance Development Forum where we engage with UN organizations, with NGOs, but also with the private sector to improve insurance penetration especially in low income countries. And the fact is, if you look at the developed countries like the US or other OECD countries, that's the acronym for the Organization for Economic Cooperation and Development, approximately, currently 50% of losses from natural disasters are insured by the private sector. So that's across the OECD countries. And this has improved significantly. 40 years ago, this were only 25% of these losses were insured.

Now, when we look at the low income countries, the situation is, I mean, let me in say my words, frustrating because over the last decades, and we are tracking this data since the 1980s, the situation has not improved. As it was in the 1980s, it is today more than 95% of losses from natural disasters are not insured. So all these losses are on the shoulders of the people and the communities. And that needs to be changed because whenever there is a step forward with low income countries, with developing countries, there is two steps backwards when there is a new natural disasters setting back all the development activities they had in the last years, and that's not a situation we can accept.

Mark Bove:

Agreed.

Mark Maroon:

So those are pretty shocking numbers considering a 50% insurance gap overall, 95% insurance gap among developing countries. So Ernst, maybe we can wrap with this. How do you think we can start to close that gap on an overall basis?

Ernst Rauch:

I think we should differentiate between the developed world or OECD world and the low income countries. With the low income countries, part of the solution is what I said earlier, is to enter into public-private partnerships. The governments and the public sector will be needed to support their people and do it in cooperation with the private sector. I mean, one has to be fair. If someone lives on $2 a day, we simply cannot expect that these individuals will be able to finance insurance or risk transfer policies. So here in low income countries, public-private corporations are key probably with support of multilateral development banks and other mechanisms for premium support or so.

The situation is very different in the OECD world. Here we have the reality that our industry would be ready to provide more supply of risk transfer of insurance. We don't simply have the demand. I can speak for Germany for instance. Currently, less than 50% of the homes are insured against flooding. The insurance industry, the primary insurance industry, and the reinsurers argue almost 100% of buildings would be insurable as of today. So the gap is more the demand set. And I think we as an industry, we need to explain better the value which we can bring to improve also the livelihood and stabilize economic growth in high income countries, in developed countries. So that would be the two different approaches, ultimately helping global society to grow in terms of wealth and livelihood situations.

Mark Bove:

Ernst, 50% flood takeup penetration in Germany, that sounds like a incredibly amazing outcome if we could achieve that in the United States. In the United States, most inland counties, the takeup rate of flood insurance is less than 1% of households. It is much higher along the coast where there's a chance of surge flooding, but there is a massive gap in the United States with regard to flood insurance. This is not necessarily affordability issue, though albeit in some lower income disadvantaged communities, that definitely can be the case, but a lot of people just forego it because they don't perceive that they have a flood risk. And that is not accurate because truly when it comes to especially flesh flooding and rainfall related flooding, everyone is at risk for severe flooding. You might not need full limits of coverage, but you need to have some coverage, because otherwise you're going to have no means to recover except maybe a low interest loan from the federal government. And even those tend to be much lower than what the insurance payout would be.

I would say we're now experiencing an analogous issue in California with wildfire where the climate landscape around wildfires change so rapidly and insurers are following the data on the climate and the loss history and the cost of insuring in these areas is rising rapidly. This rise is just reflecting the frequency severity we've seen of wildfire activity for the past decade. And it's becoming a challenge for many local residents to be able to afford this insurance. And we need to figure out ways both as insurers in conjunction with local, state, and federal government, ways that we can help individuals and communities adjust to this rapid era of transition of climate change over the next few years.

We need to find public-private ways to help people afford risk adequate premiums, particularly for perils that are changing rapidly so that they can adjust to this world. We realize it's a shock to many how quickly the climate and the behavior of certain perils can change. And it is imperative that we try to help these people with the affordability during this transition. But this responsibility does not fall on the insurance industry alone. We need partners in the public sector as well to help communities be able to successfully achieve this and get ready and get adjusted to the new climate reality.

Mark Maroon:

Those are important points across the board. I would really like to thank both of you gentlemen for taking the time to join us today on this important and unfortunately, somewhat timely topic. Folks, thank you again for checking into Climate Check, Munich Re's continuing series on the impact of climate change, and we welcome you to join us again.