Category Archives: Climate Change

WEF: Collaboration Imperative On Global Risks

The World Economic Forum (WEF) is calling for a redoubling of efforts to protect and strengthen systems of global collaboration in the face of increasingly disruptive risk trends.

In its just-released Global Risks Report 2017, the WEF warns that risk drivers such as income inequality, polarization of societies, and climate change need to be addressed collaboratively if solutions are to be found to the world’s most complex problems.

Nowhere is cooperation more urgent than in addressing climate and environmental risks, the WEF said. While important strides have been made in the past year, the pace of change is not fast enough and more needs to be done.

The WEF cited the Paris Agreement on climate change now ratified by 110 countries, and the landmark agreement to curb CO2 emissions from international aviation as important examples of global cooperation in 2016.

But political change in the United States and Europe is putting this progress at risk.

“This is a febrile time for the world. We face important risks, but also opportunities to take stock and to work together to find new solutions to our shared problems. More than ever, this is a time for all stakeholders to recognize the role they can play be exercising responsible and responsive leadership on global risks.”

The environment dominates the global risks landscape outlined in the WEF report, with extreme weather events emerging as the single most prominent global risk and climate change the number two underlying trend this year.

Society is also not keeping pace with technological change, the WEF noted. While new and emerging technologies can provide solutions they also exacerbate risks.

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Artificial intelligence and robotics were identified as having both the highest potential for negative consequences and also the greatest need for better governance in this year’s risk survey.

The private and public sectors need to work together and collaborate to address the challenges of the Fourth Industrial Revolution, the WEF said.

“It is critical that policy-makers and other stakeholders – across government, civil society, academia and the media – collaborate to create more agile and adaptive forms of local, national and global governance and risk management.”

Faster Decisions, Fewer Challenges Among Cyber Buyers

Good news for cyber insurers. A majority of companies continue to have network security and data privacy insurance, and are making their purchase decisions faster and experiencing fewer purchasing challenges than in 2015.

The findings come in the newly-released 2016 Network Security and Data Privacy Study by Wells Fargo Insurance.

While in 2015 the study showed that 22 percent of companies buying insurance took more than 12 months to make the purchase decision, in 2016 just 8 percent of companies are currently taking that long, while 59 percent are taking six months or less.

Cost of coverage and finding a policy that meets a company’s needs remain the top two insurance purchasing challenges of 2016. However, the study found that 19 percent of companies did not experience any purchasing challenges, a significant improvement over 2015 when only 6 percent did not experience challenges.

The easier purchasing process may be related to less internal resistance, Wells Fargo said. Likewise, in 2016, fewer companies (24 percent) believed the risk was not big enough to warrant the purchase of network security and data privacy insurance.

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Of the companies in the study that had purchased insurance, one-fifth reported filing a network security and data privacy insurance claim in the last 12 months, and most were satisfied with their coverage.

Another key takeaway for cyber insurers? Protecting the business against financial loss was the primary reason for purchasing coverage (81 percent) in 2016, as in 2015. However, protecting the company’s reputation is an increasing concern, with 70 percent citing it in 2016, compared to just 58 percent in 2015.

Purchasing insurance is an important step, but it should be used in tandem with developing and testing a comprehensive incident response plan and performing a thorough cyber risk assessment, Wells Fargo noted.

The second annual study analyzed trends of network security and data privacy issues among 100 decision makers at companies with $100 million or more in annual revenue.

Check out Insurance Information Institute’s (I.I.I.’s) latest white paper on cyber risk threats and challenges here.

Billion-Dollar Insured Disaster Events Add Up

The first half of 2016 saw at least six individual billion-dollar insured disaster events globally, three of which occurred in the United States, according to Aon Benfield’s Global Catastrophe Recap: First Half of 2016.

Four of these events crossed the multi-billion dollar threshold ($2 billion and greater).

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As seen in the chart above the most costly event was a series of earthquakes that struck Japan’s Kumamoto prefecture in April with total insured losses—including losses due to physical damage and business interruption—expected to total in excess of $5 billion.

Other major loss events in the first half included:

—the late May and early June flooding and severe weather (Storm Elvira) in Europe ($3.4 billion insured losses);

—the Fort McMurray wildfire ($3.2 billion insured losses);

—the April 10-15 severe convective storm outbreak in the central United States ($3.2 billion insured losses).

Aon Benfield notes that all of the estimates from both public and private insurers are subject to revision as losses are further developed.

A deeper dive into the data reveals that there were at least 14 events that minimally cost insurers $500 million in the first half of 2016, eight of which were recorded in the U.S. and were all severe convective storm or flood-related.

Globally, public and private insurers endured an elevated level of disaster losses—$30 billion—during the first half of 2016, some 60 percent higher than the $19 billion sustained in 2015. The U.S. sustained the highest level of insurable losses at $14 billion.

The aggregated $30 billion was only the third time on record that first and second quarter losses reached that threshold—even after adjusting for inflation to today’s dollars, Aon Benfield said.

Check out Insurance Information Institute facts and statistics on global catastrophes here.

Industry Partnership Looks to Green, Risk-Informed Future

As we mark Earth Day and as nearly 170 countries gather in New York to sign the Paris climate treaty, a timely new partnership between the insurance industry, the United Nations and the World Bank is set to put vulnerable economies and societies on a path to a green, risk-informed and sustainable future.

The Insurance Development Forum (IDF) aims to incorporate insurance industry risk measurement know-how into existing governmental disaster risk reduction and resilience frameworks and to build out a more sustainable and resilient global insurance market in a world facing growing natural disaster and climate risk.

With more than 90 percent of the economic costs of natural disasters in the developing world uninsured (the so-called protection gap), the IDF mission is to better understand and utilize risk measurement tools to enable governments to use their resources to target resilience and better protect people and their property.

A press release notes:

“The IDF acts as a forum to enable the optimal coordination of insurance related activities; the development of shared priorities; the mobilization of collective resources; the development of strategic and operational relationships within and between governments, industry and international institutions; and, the avoidance of unhelpful and unnecessary fragmentation of efforts and resources. These collective actions can help close the protection gap.”

The IDF will be led by a high level steering group of senior leaders from the insurance industry as well as government institutions supported by an executive secretariat housed at the International Insurance Society (IIS).

IDF chair Stephen Catlin, who is also executive deputy chairman, XL Catlin and deputy chair of the IIS, commented:

“Insurers’ risk management skills help us assess natural disaster risk and can be exported to allow governments at all levels to reduce future losses by designing in resilience into infrastructure projects; and in increasing the use of insurance as a pre-disaster economic resource to allow people to protect their families, property and assets.”

And:

“These skills can increase the utilization of insurance which will reduce the reliance on post-disaster aid and better target resources to the most important and needed humanitarian crises. Research has shown that a 1% increase in insurance penetration can reduce the disaster recovery burden on taxpayers by 22%.”

A keynote address by the UN Secretary General Ban Ki-Moon last week emphasized the critical role the insurance industry can play in building natural disaster resilience.

According to Swiss Re research, the global natural catastrophe property protection gap has risen steadily over the last 10 years, and 70% of the economic losses, or USD 1.3 trillion, were uninsured. In the emerging markets, 80 percent to 100 percent of the losses are uninsured.

Check out this Insurance Information Institute backgrounder on climate change and insurance issues here.

Warren Buffett On Climate Change Risk

Climate change made a few headlines over the weekend, both in best actor Leo DiCaprio’s Oscars acceptance speech and in Warren Buffett’s annual letter to Berkshire Hathaway shareholders.

Buffett, facing calls from a proxy voter to file a report on the risks that climate change might present to Berkshire Hathaway’s insurance business, said it seems highly likely that climate change poses a major problem for the planet, but made clear that climate change is not a concern for its insurance operation:

As a citizen, you may understandably find climate change keeping you up nights. As a homeowner in a low-lying area, you may wish to consider moving. But when you are thinking only as a shareholder of a major insurer, climate change should not be on your list of worries.”

Buffett said it was understandable that the sponsor of the proxy proposal believes Berkshire is especially threatened by climate change because “we are a huge insurer, covering all sorts of risks”.

Such worries might be valid, he said, if Berkshire wrote 10 or 20-year policies at fixed prices.

But because insurance policies are customarily written for one year and repriced annually to reflect changing exposures, Buffett maintains that climate change is an opportunity for growth. In his words:

Increased possibilities of loss translate promptly into increased premiums.”

According to Buffett, up to now, climate change has not produced more frequent or more costly hurricanes or other weather-related events. As a result, U.S. super-cat rates have fallen steadily in recent years, which is why Berkshire has backed away from that business.

If super-cats become costlier and more frequent, the likely — though far from certain — effect on Berkshire’s insurance business would be to make it larger and more profitable.”

For a broader perspective on how insurers are dealing with climate change risk, check out the Insurance Information Institute’s issues update paper: Climate Change and Insurance Issues.

Fight for Market Share Continues: MarketScout

Online insurance exchange MarketScout just reported that the composite rate for U.S. commercial property/casualty insurance declined by 4 percent in December 2015.

No line of business tracked by MarketScout saw a rate increase compared to the same month the previous year.

Its analysis was accompanied by some interesting commentary on the market by Richard Kerr, MarketScout CEO.

It may seem like the insurance industry has already been in a prolonged soft market cycle, but we are actually only four months in, Kerr noted.

The market certainly feels like it has been soft for much longer, because rates bumped along at flat or plus 1 to 1.5 percent from July 2014 to September 2015. The technical trigger of a soft market occurs when the composite rate drops below par for three consecutive months.”

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MarketScout has been tracking the U.S. p/c market since July 2001 and Kerr also made the point that the length and veracity of the market cycles seems to have become less volatile in the last five or six years.

As a result, the impact of hard or soft market in today’s environment may be 5 or 6 percent up or down, he said.

Can you imagine how we would act today in a market such as that of July 2002 when the composite rate was up 32 percent? Or in December 2007 when the composite rate was down 16 percent?”

Kerr observed that underwriters today have better tools to price their products and forecast losses. Further, the chances of a rogue underwriter or company are greatly reduced by the industries’ checks and balances, Kerr said.

In his words:

There may be less excitement but there are probably far fewer CEO heart attacks.”

MarketScout’s historical barometer shows a mean average rate increase of 30 percent in calendar year 2002 and a mean average decrease of 13 percent in calendar year 2007.

The current environment is relatively benign in relation to these volatile years, MarketScout observed.

I.I.I. provides commentary on the p/c insurance industry financial results here.

 

More on Historic South Carolina Floods

The expected $2 billion minimum economic cost of the South Carolina and eastern U.S. floods in early October will place the event as one of the top 10 costliest non-tropical cyclone flood events in the country since 1980.

Aon Benfield’s latest Global Catastrophe Recap report, which evaluates the impact of natural disaster events occurring worldwide during October 2015, reveals that already public and private insurers have reported more than $400 million in payouts from the event.

Days of relentless record-setting rainfall caused by a complex atmospheric set-up brought tremendous flooding across much of South Carolina, leaving at least 19 dead, Aon reported.

The event caused considerable flood inundation damage to residential and commercial properties, vehicles, and infrastructure after more than two feet (610 millimeters) of rain fell from October 1 to 5.

Aon noted that the minimum $2 billion in total economic losses from the event includes infrastructure and $300 million in crop damage.

Preliminary reports from insurers suggest roughly $350 million in claims.

However, additional insured losses of at least $100 million are expected via the federal National Flood Insurance Program (NFIP) and the USDA RMA crop insurance program.

A recent  article  by Insurance Journal noted that the potential exposure home insurers in South Carolina face from the early October event is estimated at $18 billion. That’s according to figures by catastrophe modeling firm CoreLogic.

According to the Insurance Information Institute (I.I.I.), none of the 10 largest floods as ranked by NFIP payouts occurred in South Carolina (see below).

However, the state was affected by three of the most costly U.S. hurricanes: Hurricanes Charley and Frances in 2004 and Hurricane Hugo in 1989.

The list  includes events from 1978 to June 30, 2015, as of August 21, 2015.

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Early Warning On Heat Health Risk

As many parts of the United States enter another day of high heat and humidity, we’re reading about the first ever heatwave warning guidelines issued by the United Nations earlier this month.

The guidelines are intended to alert the general public, health services and government agencies via the development of so-called heatwave early warning systems that should ultimately lead to actions that reduce the effects of hot weather extremes on health.

As the foreword to the publication states:

Heatwaves are a dangerous natural hazard, and one that requires increased attention. They lack the spectacular and sudden violence of other hazards, such as tropical cyclones or flash floods, but the consequences can be severe.”

In their joint guidance, the World Health Organization (WHO) and the World Meteorological Organization (WMO) note that heatwaves are becoming more frequent and more intense as a result of climate change.

According to the Intergovernmental Panel on Climate Change, the length, frequency and intensity of heatwaves will likely increase over most land areas during this century.

Recent world heatwave events come to mind:

Both India and Pakistan were hit by deadly heatwaves in the first half of 2015, leading to 3,600 fatalities, according to Munich Re. Temperatures were exceptional, climbing as high as 47 °C and accompanied by high humidity which compounded the effect.

European heatwaves in the summer of 2003 led to the deaths of tens of thousands of people, as did the Russian heatwaves, forest fires and associated air pollution in 2010. In fact, the Russian heatwave of 2010 still ranks among the top 10 deadliest world catastrophes 1970-2014.

The UN guidance makes the case that one way to manage the risk of heat-related health effects is through the development of a Heat Health Warning System (HHWS) as part of a broader Heat Health Action Plan (HHAP).

Of primary concern in an HHWS, it notes, is how to assess the level of heat stress associated with the meteorological or climate forecast, translate this into an estimate of a likely health outcome and identify a critical heat-stress threshold for a graded plan of action.

Typically, HHWSs are composed of a number of elements, including:

  • Weather forecasts of high temperatures that may also include humidity;
  • A method for assessing how future weather patterns may evolve in terms of a range of health outcomes;
  • The determination of heat-stress thresholds for action;
  • A system of graded alerts/actions for communication to the general population or specific target groups about an impending period of heat and its intensity and to government agencies about the possible severity of health impacts.

A number of cities and countries around the world have developed these early warning systems, including Canada, England, France, Germany, Italy, the United States and Australia.

The first HHWS was actually implemented in the city of Philadelphia in the United States in 1995. In this system, local city staff work with the National Weather Service (NWS) to determine when a heatwave is imminent.

After an alert is issued, the Philadelphia Health Department contacts news organizations with tips on how vulnerable individuals can protect themselves. People without air conditioning are advised to seek relief from the heat in shopping malls, senior centers and other cool spaces.

Friends, relatives, neighbors and other volunteers are also encouraged to make daily visits to elderly people during the hot weather, ensuring the most susceptible individuals have sufficient fluids, proper ventilation and other amenities to cope with the weather.

After the success of Philadelphia, similar tailor-made systems are being implemented for the 50-60 cities in the U.S. with a population of more than 500,000 and a local meteorological office, the guidance notes.

The NWS reports that heat is typically the leading cause of weather-related fatalities each year.

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Check out Insurance Information Institute (I.I.I.) facts and statistics on drought and heatwaves here.

Actuarial Tool Adjusts for Climate Change

Insurance Information Institute (I.I.I.) chief actuary James Lynch  on an innovative actuarial approach.

It was a record-breaking rainy day in Colorado Springs when I attended a panel last month describing a new climate index the actuarial community is introducing.

The 1.58 inches of rain that fell May 19 almost doubled the previous record for that day. The Actuaries Climate Index (ACI)—a joint effort between the  Casualty Actuarial Society (CAS), the American Academy of Actuaries, the Canadian Institute of Actuaries, and the Society of Actuaries—is intended to monitor how often extreme events — blistering heat, shivering cold, record winds and rain — strike 12 regions in North America.

It addresses an interesting conundrum about insurance and climate change. Given that the climate is changing — though quite a few in the industry dispute that – how can insurance incorporate the change into pricing?

The ACI, which will be introduced later this year, tries to address that. It will measure how many severe events occur every quarter. Since catastrophes are an important component of claim costs, changes in the long-term trend can affect insurance prices.

As I wrote for the CAS:

The index is an educational tool that could help pricing actuaries incorporate long-term trends into their mathematical models; it could also help actuaries and others working in enterprise risk management by quantifying the risk in a subtle, long-term trend.”

Insurance prices are famously based on historical data, trended forward. The index would help show whether extreme events are becoming more or less common, and actuaries could trend this information forward to set rates.

Actuaries have been working on the index for a couple of years. Historical data has shown that over the past few years, the frequency of extremely hot days has increased, while the frequency of extremely cold days has decreased. The overall ACI climbed from the 1990s on, though it appears to have leveled off in recent years.

In its Facts and Statistics section, the I.I.I. gives comprehensive snapshots about catastrophes, both in the United States and worldwide.

Irrational Exuberance

Tomorrow is Pi Day, and a very special one writes I.I.I. chief actuary Jim Lynch.

For one second the date and time will represent pi’s first 10 digits (3/14/15 9:26:53), a moment both trivial and mnemonic.

Pi is an important number in insurance, as any actuary who has reflected on the matter will tell you.

Actuaries grapple with the mathematical discipline known as statistics, the heart of which is the normal distribution. The normal distribution is famous for its bell-curve shape, but relevant on March 14 is that the number pi appears in the formula for the normal distribution:

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If I may be a bit hyperbolic, the mathematical foundation of insurance balances upon the number pi.

Pi is famously irrational, its digital expression neither ending nor repeating, but it is not the only irrational number in the normal equation. There’s the square root of 2 (1.414213562 . . .). There’s also the number e (2.71828 . . .), which you might remember if you studied logarithms in precalculus, but probably not.

So irrational numbers play an important role in insurance as elsewhere. Some, like pi, help us understand the world better. Others, like the irrationally small percentage of homeowners who purchase flood insurance, are less honorable, and the I.I.I. notes them in this infographic.