Munich Re’s Webinar on Thursday – 2008 Natural Catastrophes – presented a detailed analysis of the increasing number of weather related events that concern both primary carriers and reinsurers. It also gave preeminent insurance guru, Dr. Robert P. Hartwig, president of the Insurance Information Institute, a chance to describe the differences – point by point – between the banks and the insurance industry that put the financial crisis in a much needed perspective.
Carl Hedde, head of Risk Accumulation at Munich Re America, reminded his audience that Munich Re has kept close tabs on all loss events for the U.S. and selected countries in Europe from 1980 until today and retrospectively all great disasters since 1950. He reprised 2008 disasters – hurricanes Ike, Dolly and Gustav, as well as the California wildfires – which cost the insurance industry more than $30 billion, half of that from Ike alone. There were “a record number of 10 Significant Natural Catastrophes in the United States in 2008,” he noted.
Ernst Rauch, the head of Munich Re’s Corporate Climate Center then took over. He stressed that 2008 had been the third costliest year on record (2004-5 were the highest) for both economic and insured losses. Interestingly, he pointed out that while “geophysical events” (earthquakes and volcanic eruptions) stayed relatively stable between 1980 and 2008, atmospheric events had increased significantly. The biggest increase has been in “meteorological events” (storms, hurricanes, typhoons).
Even more worrisome for the insurance industry, Rauch noted: “From 1980 – 2008, over 90 percent of the insured losses are from weather related catastrophes.” His conclusion: “Climate change has already started and is very probably contributing to increasingly frequent weather extremes and ensuing natural catastrophes. These, in turn, generate greater and greater losses because the concentration of values in exposed areas, like regions on the coast, is also increasing further throughout the world.”
As an economist, Hartwig is adept at analyzing financial trends, and what he had to say focused on how the insurance industry continues to be able to pay the claims generated by the losses. He opened his remark with the sobering thought that a $100 billion loss cat year was coming one day – possibly in 2009. In addition he pointed out that “nine of the twelve most extensive disasters in U.S. history have occurred since 2004.”
As a result underwriting losses, which were the norm over from 1978 until 2003, have hit the industry again in 2008 – $9.7 billion through the third quarter. However, this time, the main cause isn’t the wind, it’s the fallout from the losses suffered from mortgage and financial guarantee insurers.
In a powerful presentation Hartwig ticked off a number of points as proof that the insurance industry differs greatly from the banks. This means that insurers continue to:– Pay claims (whereas 25 banks have gone under)
— Renew existing policies (banks are reducing and eliminating
lines of credit)
— Write new policies (banks are turning away people who want
or need to borrow)
— Develop new products (banks are scaling back the products
In short, said Hartwig, “the insurance markets, unlike banking, are operating normally. This includes global reinsurance markets. The basic function of insurance – the orderly transfer of risk from client to insurer – continues uninterrupted.”
He then power pointed the following reasons for the industry’s stability amongst the financial chaos:
} Superior Risk Management Model
— Insurers overall approach to risk focuses on underwriting discipline: implies pricing accuracy and management of potential loss exposure
— Banks eventually sought to maximize volume, disregarded risk
} Low Leverage
— Insurers do not rely on borrowed money to underwrite insurance or pay claims
} Conservative Investment Philosophy
— High quality portfolio that is relatively less volatile and more liquid
} Strong Relationship Between Underwriting and Risk Bearing
— Insurers always maintain a stake in the business they underwrite, keeping “skin in the game” at all times
— Banks and investment banks package up and securitize, severing the link between risk underwriting and risk bearing, with (predictably) disastrous consequences
} Tight Regulation
— Insurers are more stringently regulated than banks, investment banks & hedge funds
} Greater Transparency
— Insurer companies are an open book to regulators and the public
Although he didn’t mention it, it’s fairly certain Hartwig would agree that whenever the world’s politicians get around to tackling the problem of preventing the next generation of “Masters of the Universe” from trashing the global economy with their innovative products, they could do worse than follow the trail already blazed by the insurance industry.
Hartwig closed with a warning that the 2009 hurricane season will probably be as bad as 2008 with an above average number of 14 named storms predicted. He also pointed out that both Florida and New York alone have just under $2 trillion of “insured coastal exposure,” making future “mega-losses” almost inevitable.
Nonetheless Hartwig expressed confidence in the insurance industry’s ability to weather the coming storms. After all, the industry follows it’s own version of Murphy’s Law: “Assume that the worst can and will happen at any time.”
Source: Munich Re – www.munichre.com
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