Floods, Windstorms, Droughts, Heat Waves and Wildfires
There was a time in the not-so-distant past when events such as these would have been considered somewhat unusual in Europe. But these days, extreme weather events are becoming a much more common occurrence.
In this year alone, extreme weather included a winter windstorm in Western Europe, a series of massive floods in Central Europe, and a heat wave in Russia that resulted in drought and wildfires.
Although a single weather event is not proof that the earth’s climate is changing, there is no doubt that evolving weather patterns in Europe and other parts of the world are bringing more volatile, extreme and unpredictable weather conditions to places that have little previous experience with them.
Businesses seeking to expand outside the United States must carefully consider the impact that unanticipated changes in weather patterns will have on their activities. To reduce their risk of a loss, multinationals should identify locations that are not as prone to catastrophic weather risk and make sure they have adequate insurance to protect them in case of an event.
Extreme Weather Risks Increasing
For multinationals, the challenge of managing catastrophe risk is greater than it is for companies with U.S.-only operations. In the United States, most businesses are familiar with the potentially catastrophic weather risks inherent in the U.S. climate. Coastal areas along the Atlantic and Gulf of Mexico, for instance, are vulnerable to hurricanes, while the Midwest and South are prone to tornadoes and hail.
But the weather-related risks outside the United States are not as familiar to U.S.-based companies. In addition, the nature and location of these risks have become much more unpredictable in recent years. Places that had not had a significant weather-related event in years are suddenly experiencing several weather-related catastrophes in a decade.
Based on analyses performed by reinsurer Munich Re’s natural catastrophe database, the most comprehensive in the world, the number of extreme weather events like windstorm and floods has tripled since 1980 and the trend is expected to persist. Munich Re attributes this trend to climate change.
In 2010, there have been a number of significant weather-related events around the world, even though it has been a quiet year for most of the United States. Events this year included winter Windstorm Xynthia, which hit Western Europe, causing an estimated 1.3 billion euro in insured damage.
This year also brought a series of floods in Central Europe in May, June and August – just eight years after a catastrophic flood devastated the same region. The Elbe flood of 2002 stands out as a significant European natural catastrophe, according to risk modeler EQECAT. In Germany alone, the Elbe flood resulted in economic damage of around 9 billion euro and insured losses of about 1.8 billion euro, according to figures from the Austrian Insurance Association and AXCO. In Austria, economic damage from flooding of several rivers in 2002, including the Danube basin, came to about 3 billion euro and insured losses at 400 million euro.
Europe can expect more of these problems in the future. Winter storms will become more frequent and intense and extreme precipitation resulting in floods is becoming increasingly common in Germany, reinsurers say. Storm surges are also expected to worsen. Swiss Re forecasts a significant increase in coastal damage in the long term as a result of storm surge.
Heat also has been a problem this year.
The first half of 2010 was the warmest period since meteorological records began, according to Munich Re. In Russia, 50 people died in July as a result of fires caused by heat and drought. In late July, Moscow registered its highest temperature since records began 130 years ago.
Extreme weather events such as these have contributed to a dramatic increase in insured losses. Insured losses from natural catastrophes totaled $22 billion in the first half of 2010, driven in part by a massive earthquake in Chile as well as the European windstorm Xynthia. Insured losses from natural catastrophes have jumped from an average of $5.1 billion per year in the 1970-1989 period to $27 billion annually over the last two decades, according to Swiss Re.
Multinationals that expand into Europe can manage their risk by investigating weather-related risks and doing what they can to select locations that are less exposed to catastrophe perils.
Getting up-to-date information about catastrophe perils, however, can be a challenge outside the United States. In the United States, risk managers have access to the latest information and tools to help manage these risks. Outside the United States, the information may be less reliable. Without detailed hazard maps and good catastrophe models, businesses are at more risk.
Even so, with weather patterns changing and extreme events becoming more frequent, even good historical information may not be of much help. Businesses can no longer assume that just because a location has no history of weather-related catastrophes that it is without risk.
Catastrophe insurance not only makes sense as a way of managing loss in this time of volatile weather events, some countries also require it. Natural catastrophe insurance is mandatory in France, Spain and Switzerland. In Italy and Germany, insurance for natural catastrophes is optional and only available from private insurers for additional premiums. In the United Kingdom, insurance for a range of natural perils, including flood, is generally included in standard property insurance policies.
Although Italy, German and the United Kingdom do not have national catastrophe programs, each country has discussed developing such programs in recent years. These discussions have focused on enhancing flood insurance, according to a report from the U.S. General Accountability Office.
Property insurance is the cornerstone of a good catastrophe insurance program, but multinationals should have other types of insurance as well. In addition to property insurance, they should have business interruption, extra expense and contingent business interruption insurance to protect their revenue stream.
With an integrated global insurance program, multinationals can obtain locally admitted insurance policies with a master policy that contains DIC/DIL insurance. This will provide access to catastrophe insurance available through government pools and help avoid gaps in their insurance portfolio in the event of a catastrophe.
When it comes to selecting an insurer, companies should look for an insurer that has a global network of offices as well as good loss control and claims handling capabilities.
Always unpredictable, weather events in Europe have become more extreme, resulting in a significant increase in insured losses and greater risk for multinationals seeking to locate in the region.
While it is important to take precautions when selecting a location, no place is completely free of risk anymore. Multinationals will need insurance both to protect against the risk of a loss as well as, in some cases, to meet local regulatory requirements.
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