Munich Re Issues 2002 Natural Catastrophe Study; L.A., S.F. are High Risk

Munich Re has issued a new survey report – “topics Natural Catastrophes 2002.” The study found that “storms and floods have an even greater impact on insurers’ claims burdens than in the year before,” and examines “how can the effects of flood catastrophes in Central Europe be reduced?”

It also concluded that “The long-term comparison reveals a dramatic increase in losses despite the chance below-average burden in the last three years / Geographical underwriting makes catastrophe risks more transparent,” and it includes a section on ” Megacities: Index describes the risk in large agglomerations,” that concludes that Tokyo, Los Angeles and San Francisco are all located in high risk areas.

Highlights include the following:
— last year’s unusual accumulation of severe storms and extreme floods, focusing in detail on the example of the flood catastrophe in Central Europe (economic loss: Euro13.5bn [$14.9 billion]; insured loss: Euro 3.1bn [$3.87 billion]).

— One of the main reasons for the steep increase in natural catastrophe losses observed worldwide in recent decades is the mounting concentration of people and property values in exposed cities and agglomerations. Munich Re publishes for the first time statistics on the hazard and vulnerability of the world’s main agglomerations (see “Megacities”).

— Geographical underwriting is a tool that leads to more precise statements on local loss potentials and accumulation risks – an important step for the insurance industry towards further enhancing risk management.

— As in previous years, the study presents a detailed account of the natural catastrophes that occurred in the year past and also examines the long-term trends. Provisional figures for natural catastrophe losses in 2002 were published by Munich Re on 30 December 2002.

Munich Re said that its “natural catastrophe statistics show that, comparing the last ten years (1993-2002) with the 1960s, the number of major events has increased by a factor of 2.6 (from 27 to 70), with economic losses – adjusted for inflation – increasing by a factor of 7.3 (from US$ 75.5bn to US$ 550.9bn) and insured losses by a factor of no less than 13.9 (from US$ 6.1bn to US$ 84.5bn). The increase is dramatic – in spite of the chance below-average burdens in the last three years.”

“The extreme rainfall and discharge amounts observed last year confirm what Munich Re has been forecasting for a long time: that the insurance industry must be prepared to face new loss dimensions – due also to global changes in the climate,” it continued.

In discussing last summer’s disastrous floods in Central Europe, which hit Germany particularly hard, Dr. Gerhard Berz, Head of Munich Re’s Geo Risks Research Dept., stated, “If the risks are to be prevented from getting even worse, the most essential requirement is, besides improved flood control and the further development of early-warning systems, restrictive land use planning at communal level.”

“Especially since 11 September 2001, the insurance industry has intensified its quest for new ways to further improve the identification and analysis of its risk exposures,” said the announcement. “In order to assess complex risks in an optimum way, it is necessary to have accurate knowledge of their position and the indemnity limit. This is where geographical underwriting can help. In addition to the information available hitherto on an insured risk (like the value of the building and the sum insured), the exact geographical position of the insured risk and its surroundings can now be recorded and analysed (up until now, data has mostly been processed at postcode level only). All exposures in a specific region – affecting both insurers and reinsurers – are thus made transparent. The loss potentials at any location on earth can also be evaluated more precisely than before, which greatly promotes the insurability of accumulation risks in particular – e.g. for floods or terrorist attacks in large cities.”

The report concluded with a discussion of “Megacities” which describes the exposure of large agglomerations to natural hazards. “According to the United Nations, the urbanisation of the earth is progressing at a rapid pace. In 1950 just under 30% of the world’s population lived in urban areas, today it is over 50%.”

“Megacities have enormous dimensions nowadays (Tokyo-Yokohama has about 35 million inhabitants, New York about 22 million, São Paulo about 20 million, Shanghai about 14 million). Cities are continually spreading into highly exposed areas, such as zones threatened by floods or forest fires.” As a result Munich Re has “developed an index for the world’s 50 largest metropolitan areas which quantifies their risk potentials for all natural hazards, including the vulnerabilities and concentrations of values.”

It noted that “As might be expected, metropolitan areas like Tokyo-Yokohama, San Francisco, and Los Angeles are particularly high up the scale, whilst others, like Rio de Janeiro, Delhi, or Lagos are much lower down the scale because the exposed values and the hazards there are smaller. The index makes it possible for the first time to make a realistic comparison of the risk of various megacities. Given that the insurance density is known in each case, statements can then be made on the insured loss potential.”

The full report is available in PDF format on the company’s web site: http://www.munichre.com.