Posted on 2-4-2002

Insurance Rates Heated By Global Warming
Source: Edie News

MUNICH, Germany, March 26, 2002 - In their report on natural catastrophes
in 2001, Munich Reinsurance Group noted a substantial rise in insured
natural hazard losses. Climate change has been a major cause of many
natural disasters and scientists at the group fear it is going to have an
continuing effect on company statistics. The group fears the effects of
global warming will be suffered for many years and natural disasters will
continue to increase. This, they say, will have a significant effect on
insurance bills.

In all, 700 natural hazard losses were recorded last year, with economic
losses rising 20% to US$36 billion and insured losses rising by 50% to
US$11.5 billion, compared with the previous year's $7.5 billion. The report
reveals that the dramatic changes have placed an inordinate strain on the
insurance industry. “A gigantic loss event in the realm of natural
catastrophes would have been a severe test on the capacity of the global
insurance industry in addition to the burden it has to cope with from the
devastating attack on the World Trade Centre,” says the company’s report.

As a result, Munich Re’s experts have reassessed the effects of climate
change and have come up with tighter underwriting requirements, this means
insurance bills are almost certain to rise. “Even allowing for a complete
implementation of the Kyoto Protocol, the emission of greenhouse gases will
result in our having to contend with the effects of climate change for
decades to come, mainly in the form of more frequent and more intensive
natural catastrophes,” said Dr Gerhard Berz, head of Munich Re’s Geo Risks
Research department. This report is bad news for insurance payers as Munich
Re now wants to redress the balance for their losses over the year. “The
reinsurers, which bear the lion’s share of the losses from natural
catastrophes, must go on the assumption that the present underwriting
strategy will no longer be commensurate with the changes,” forebodes Dr
Wolf-Otto Bauer, a member of Munich Re's management board.

Given these trends, the insurance industry as a whole is likely to change
the way it underwrites risk, the group explains. Insurers are likely to
abandon their conventional practice of “retrospective underwriting”, which
involves calculating premiums from past trends, as the current increase in
disasters means that premiums are inevitably lagging behind the amounts
being paid out. Instead, an approach that loads premiums dependent on the
level of perceived risk inherent in climate change is likely to be taken.
The natural disasters of 2001 also included non-global warming related
disasters like the giant earthquake in El Salvador, which killed 845
people, and a major earthquake in Gujurat, India, which killed 14,000
people. Around the world there were 80 earthquakes, which produced $9
billion in economic losses and $900 million in insured losses.

But storms and floods last year, as in previous years, dominated the
statistics. They accounted for over two thirds of all events and over 92%
of all insured losses. Tropical storm Allison, which hit southern US in
June, was the most expensive natural disaster of the year, resulting in a
total loss of $6 billion, over half of which was insured. There were also
numerous strong typhoons including one that hit Taiwan in September,
causing an insured loss of $600 million.

Continuing global warming will mean insurance companies’ priority will be
to insure themselves from these natural disasters. “The effects of climate
change make adequate prospective underwriting more essential than ever,”
stated Dr Bauer.