Economic consequences of natural catastrophes and the role ...€¦ · 1. Economic consequences of...

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


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



Negative indirect effects, e.g.:

Loss of production due to destroyed installations

Destroyed infrastructure

Inflation

Indirect effects can be negative …


Image: Michael Kooren / Corbis

Average impact of natural catastrophes by region


… and may have an impact on sovereign risk ratings

2.7

1.2

4.3

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2.3

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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



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 …


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



Emerging economies are particularly at risk

2


Emerging economies are particularly at risk, in part due to rising urbanisation (1/3)

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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


16


0-25%

25–50%

50-75%

75-100%

Urbanisation

percentage

Urban population

1-5 million

5-10 million

> 10 million



17


0-25%

25–50%

50-75%

75-100%

Urbanisation

percentage

Urban population

1-5 million

5-10 million

> 10 million


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


Protection gap still very large after NatCat events


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


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


After a series of benign years, the hurricane season 2017 has been quite active


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

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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


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.



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).


Overall, hurricane losses will have a substantial impact on reinsurance capital that is available to the market


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320

1948 60 68 75 80 65

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100

150

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250

300

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2012 2013 2014 2015 2016 2017E 2017new

(US

D b

illi

on

s; C

AG

R %

)

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


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


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


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


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


Risk identification: Relevant loss events 2016 from natural hazards


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


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


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


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