Munich Re Warns Insurers Against Nat Cat ‘Complacency’

December 29, 2006

While recognizing that economic losses from natural catastrophes were considerably lower in 2006 than in 2005, Munich Re warned the industry against becoming too complacent.

In a bulletin on the reinsurer’s web site (, Dr. Torsten Jeworrek, a member of Munich Re’s Board of Management noted: “The fact nevertheless remains that, in the longer term, the number of severe weather-related natural catastrophes is set to increase due, among other things, to global warming. Combined with further increasing concentrations of values in exposed areas, this means continually rising loss potentials. Even apparently contradictory events in Europe, such as the huge snow-pressure losses at the beginning of 2006 and the extremely warm start to this winter, with the potential for severe winter storms, fit into this pattern.”

Economic losses as of the end of December were “only” $45 billion, compared to the $219 billion suffered in 2005. Insured losses totaled around $15 billion, one fifth of 2005’s $99 billion. “This relatively positive outcome can be ascribed to the absence of major hurricanes in the North Atlantic,” Munich Re pointed out. The season produced far fewer storms and thus the “lowest losses since 2000. Ultimately, insured losses due to tropical cyclones amounted to $250 million compared with some $ 87 billion from last year’s unparalleled hurricane series.”

Munich Re said that “dust particles blown from the Sahara to the area where hurricanes develop absorbed solar radiation, warming and dehumidifying the layer of air at medium altitude may have been one of the primary reasons for the dramatic decrease in hurricane activity. The dust “hindered the formation of cyclones, particularly in August.” The reappearance of the “El Niño” condition in the Pacific provided another “curbing effect.”

However the “loss potentials” are still with us. Munich Re noted that there were “billion-dollar losses due to tornadoes in the United States; mini-tornadoes in London, Hamburg and Nuremberg,” in 2006, which “demonstrate the loss potentials in big cities” not only in the US, but also in Europe.

Meanwhile ocean temperatures, which have a significant effect on the world’s weather, continue to rise. “High ocean temperatures, up to one degree above the long-term average, had been expected to increase the number of cyclones,” the report continued. “According to World Meteorological Organization estimates, 2006 was the sixth-warmest year ever recorded in terms of air temperature, and it was even the fourth warmest in the northern hemisphere. This means that both globally and for the northern hemisphere, the ten warmest years on record occurred during the period 1995 — 2006.”

“No one seriously disputes climate change any more. In the long term, it will be a factor which increases the number of severe natural catastrophes,” stated Prof. Peter Höppe, Head of Munich Re’s Geo Risks Research. Munich Re said it believes that “due to the prolonged cyclical warm phase in the North Atlantic, which is reinforced by global warming, in the next one to two decades the number of hurricanes will exceed the mean for the years 1950-2006 (annual average: ten named cyclones, six of hurricane force).”

While the US came through 2006 relatively unscathed, other regions weren’t so lucky. Tropical cyclones, or typhoons, caused “worse destruction than in the previous year,” Munich Re said, “with insured losses of $1.5 billion and economic losses of $15 billion.” Worldwide, some 18,000 people died in 2006 as a result of natural events such as earthquakes, storms or floods.”

The reinsurer also noted that in Europe the “exceptionally snowy winter conditions in 2005” have been followed by a very “warm start to the 2006 winter,” and indicated that this is “in keeping with the phenomenon of climate change. Apart from the trend towards warmer winters, there is also likely to be an increase in weather extremes with a greater range of variation. In Germany, the largest individual loss was caused by a hailstorm which hit the Black Forest region on 28 and 29 June, causing an insured loss in the order of $ 300 million.”

The report singled out the “vulnerability and loss potentials of conurbations [heavily populated areas]” from tornadoes as posing increased risks. While the phenomenon is usually associated with the Midwest and Southern US, Prof. Höppe pointed out that “they occur the world over, spawned by severe thunderstorms, and are well nigh impossible to forecast.” As an example Munich Re cited the recent tornadoes in Florida, which, it said, are “a relatively uncommon event for this time of year.”

Munich Re stressed that it “believes the rising loss potential from natural catastrophes will substantially increase demand for reinsurance in the longer term.” Jeworrek added: “We regard the price increases that followed the hurricane year 2005 as enduring. Constant improvements in modeling the growing catastrophe risks, combined with skilful risk management, will enable us to provide cover at prices, terms and conditions commensurate with the risks.”

The entire report and supplemental information may be obtained on Munich Re’s web site, as noted above.