State or market? Precautions for natural catastrophes
For many, summer is the most beautiful time of year. However, the warm months bring with them not only the season for holidays, beaches and sunshine, but also severe weather of all kinds. In Europe, the risk of severe thunderstorms with hail and flooding is now at its highest; in the tropical North Atlantic, the hurricane season officially begins on 1 June; and in parts of Asia, the almost year-round cyclone activity peaks from July on.
It is not possible to predict how high the losses of a hurricane season will be. Prior to last year’s record, losses had been low for several years, with the lack of severe landfalls leading to talk of a “major-hurricane drought”. The meteorological parameters for the formation of hurricanes are known, but there are also many imponderables, for example the influence of short-term climatic fluctuations. What is more, it is down to chance whether these storms endanger lives and trigger major losses. For example, approximately 16% of the 429 North Atlantic hurricanes since 1950 have hit the USA with hurricane force. Nonetheless, the lion’s share of hurricane losses occur in the USA.
Regardless of whether the 2018 natural catastrophe season is more benign or not, one thing has still not changed: as a society, we are not fully utilising our potential where loss avoidance and financial provisions are concerned. We have a collective problem with risk perception. The probability of a specific location being hit by a catastrophe event is relatively low – even in exposed regions. This means that although many people may be aware of the risks involved, they do little to manage them.
Preventive measures help reduce the risk to human lives and material assets
Of course, natural catastrophes cannot be forestalled. But good preventive measures help reduce the risk to human lives and material assets. The example of river flooding in Europe makes this particularly apparent. Investment in dams and floodplains since the Elbe flood of 2002 has since prevented higher losses – even when a similarly severe flood occurred in 2013. Where the losses totalled almost €17bn in 2002, they were far lower in 2013 at €9.6bn. Second example, hurricanes again: In 2017, Hurricane Irma caused comparatively low losses in Florida because tighter building standards had made newer structures more resilient to the storm.
© Munich ReAs a society, we are not fully utilising our potential where loss avoidance and financial provisions are concerned. We have a collective problem with risk perception.
Hence first and foremost, every private citizen and every business must take individual responsibility for taking additional precautions. Where possible, we need to reduce risk preventively and insure ourselves instead of calling upon the state after a catastrophe. In Germany, for example, the insurance industry offers natural hazards cover for almost all buildings. Under “extended natural hazards insurance”, this even applies in areas with the very highest flood risk, although there is then often a special requirement to have suitable building work carried out. Deductibles act as incentives for appropriate preventive measures. Calling upon the state as an emergency responder is understandable, but unnecessary here.
In other instances, however, it can be prudent for the regulator to intervene in the market, for example when underinsurance would otherwise become a systemic risk. This applies to earthquake-prone California, where less than 15% of buildings are insured against tremors, even though covers are possible at reasonable prices. Due to rampant underinsurance, a single very strong quake could result in many banks experiencing a wave of mortgage defaults. The economic impact would be felt far beyond the borders of the USA. Were earthquake insurance compulsory at least in connection with mortgage loans – via a private insurer, a state pool or a public-private risk partnership – the loss potential could be distributed across many shoulders.
These examples show that society still has many options at its disposal to mitigate the effects of natural catastrophes. We ourselves are analysing how buildings and structures can be made more durable in order to prevent losses. And we are also supporting research analysing the effects that climate change and natural climate fluctuations have on natural catastrophes in certain regions. All this aims to bolster resilience against natural catastrophes and help us enjoy a more carefree summer.