Catastrophes


A New York Times article over the weekend takes a behind-the-scenes look at the recent deadly blasts at the port city of Tianjin in China.

The series of explosions and fire that began at a hazardous chemicals storage warehouse in the Binhai New Area of Tianjin August 12, leveled a large industrial area, leaving at least 150 dead and more than 700 injured.

As reported by the NYT, the lack of safety and oversight at the third largest port worldwide is shocking.

Here’s an excerpt:

As recently as 2013, Chinese academics had warned of many unacceptable environmental risks in the district, citing the growing chance of accidents from the storage of dangerous materials so close to residential neighborhoods and singling out the area where the Rui Hai facility was located. That warning, and others like it dating to at least 2008, were ignored.”

The Tianjin catastrophe points to the fact that man-made disasters can have a major impact on a global scale. Warehouses, buildings, thousands of containers and new vehicles were destroyed in the blasts, according to reports.

An initial estimate from analysts put the potential insurance loss at up to $1.5 billion. Some claims are likely to hit reinsurers, rating agencies say.

The incident also highlights the growth of accumulation risks, particularly in highly industrialized areas, according to Dieter Berg, head of department business development, marine global partnership at Munich Re.

In a recent online post for Munich Re’s publication Topics Online, Berg noted:

We as reinsurers have observed again and again over the past years how such individual events can have regional, or even global impact.”

He gave examples such as the destruction of a power plant on Cyprus in 2011 that impacted the national economy, as well as floods in Thailand in 2011 that brought conveyor belts to a halt worldwide.

While insurers and reinsurers are focused on the large loss potential arising from natural hazards, such as flooding or hail, losses are often caused by human beings, particularly around industrial facilities, Berg added.

Such losses (from explosion) are difficult to model, but are comparable to modeling terrorism losses. For large port facilities, we thus analyze not only natural hazards such as flooding, earthquake or hail, but also this type of scenario.”

Insurers and reinsurers need to fully understand the value of goods in ports and all potential exposures in order to calculate adequate premiums, he advised.

The Insurance Information Institute (I.I.I.) has facts and statistics on man-made disasters here.

 

The Insurance Information Institute (I.I.I.) is looking back at the costliest hurricane in U.S. history that took 1,800 lives and cost $125 billion in total economic losses, via a comprehensive infographic.

Insurance claims by coverage and state, total National Flood Insurance Program losses from Katrina, and other sources of Katrina recovery funds are all detailed.

Another compelling section to the infographic asks where are we now?

One of the fascinating analogies it draws is that even as awareness of flooding due to coastal storms rises, so too does the population of coastal communities.

As the I.I.I. notes, the 10 year anniversary of Hurricane Katrina gives us a timely opportunity to look at the nation’s preparedness for megadisasters.

I.I.I. disaster preparedness experts will be available via satellite media tour on Thursday August 27 to discuss how individuals and small business owners can better prepare.

View the infographic below to see Hurricane Katrina by the numbers:

katrina10_infographic_web_4

 

 

 

I was in New Orleans last week speaking at a Louisiana Department of Insurance conference marking the 10th anniversary of Hurricanes Katrina and Rita, writes Insurance Information Institute (I.I.I.) chief actuary James Lynch.

State Insurance Commissioner Jim Donelon (pictured below) organized the conference to emphasize how the state’s property insurance market “is more competitive and more viable than it was the day before Hurricane Katrina.” The state sought private market solutions to keep the marketplace vibrant in the wake of more than $25 billion in insured losses.

IMG_0412

Louisiana adopted a statewide building code so structures would be better able to withstand a hurricane. It abolished its politically appointed Insurance Rating Commission, which made it easier for insurers to charge fair premiums. And the state carefully winnowed customers out of its insurer of last resort, Louisiana Citizens Property Insurance Corp. Citizens’ market share soared after the 2005 hurricane season, approaching 10 percent by 2008. By 2014, its market share had fallen to 1.8 percent.

I spoke on a panel about the state’s property insurance markets operate today. I tried to emphasize how Louisiana’s experience shows the importance of adequate insurance. We also talked about alternative capital and how it is shaping the pricing of catastrophe reinsurance, a topic I.I.I. has discussed here.

Over the next few weeks, you will be seeing a lot of media coverage of the 10th anniversary of Hurricane Katrina. Here are some notable links:

  • The New Orleans Times-Picayune won a Pulitzer Prize for its coverage. The paper recaps that work and adds an up-to-date perspective here (h/t to I.I.I.’s Diane Portantiere for the link).
  • NPR is pouring out audio reports this month on Hurricane Katrina: 10 Years of Recovery and Reflection.
  • Forbes contributor Marshall Shepherd talked to meteorologists who noted how forecasting has improved in the past 10 years. Lots of interesting insights, including Colorado State University hurricane expert Phil Klotzbach, who sadly notes that a well-forecast hurricane like Katrina still resulted in more than 1,500 deaths. Klotzbach wondered how many survivors of Category 5 Hurricane Camille in 1969 reasoned that Cat 3 Katrina “would be a piece of cake.” I can confirm that Mississippi Governor Haley Barbour, in his tick-tock memoir about the storm and its aftermath, constantly referred back to his Camille experience – until he saw Katrina’s devastation. Tragically, the breadth and height of Katrina’s storm surge were unprecedented.
  • Barbour’s was one of many books published to coincide with the anniversary. The New York Times Book Review on August 7 featured New Orleans works, including a review of “Katrina: After the Flood,” about the city’s recovery, and a roundup of works examining the tragedy from racial, social and cultural perspectives.
  • Business Insurance discusses how catastrophe models have improved in the past 10 years, particularly in the quality of the input the models receive:
    • For example, casino barges moored on the Mississippi Gulf coast, badly damaged in Katrina’s storm surge, often were wrongly classified as normal buildings, said Jayanta Guin, executive vice president at Boston-based catastrophe modeler AIR Worldwide. Now, modelers have better data on the construction characteristics, occupancy, height and other aspects of individual buildings, he said.
  • Global Insurer Allianz used the anniversary to draw on its own database of major business insurance claims worldwide to examine trends in catastrophe losses, particularly (but not exclusively) marine losses. Its report, released August 18, points to these lessons learned:
    • Storm surge can cause more damage than high winds. Storm surge has been a contributing factor in half of the costliest U.S. storms.
    • Levees in the United States need improvement, even after the rebuilding of New Orleans’ levees after Katrina.
    • Most wind damage occurred “to the building envelope” – roof, walls, windows.
    • Demand surge can not only affect the price of materials and workers, post storm, it can affect the quality of materials, as we famously saw with drywall that created a new set of issues.

 

While total economic losses from natural catastrophes and man-made disaster events remain far below-average in the first half of 2015, the global insurance and reinsurance industry is covering a higher than average percentage of those losses.

That’s the key takeaway from preliminary sigma estimates of global catastrophe losses for the first half of 2015, just released by Swiss Re.

Of the $37 billion in total economic losses from disaster events in the first half of 2015, the global insurance and reinsurance industry covered nearly 45 percent, or $16.5 billion, of these losses.

This is higher than the previous 10-year average of 27 percent covered by the global re/insurance industry.

Of the overall insured losses in the first half of 2015, $12.9 billion came from natural disasters, down from nearly $20 billion in first half 2014, and again below the average first-half year loss of the previous 10 years ($25 billion).

Man-made disasters triggered an additional $3.6 billion in insured losses in the first half of 2015, sigma said.

So why did insurance and reinsurance cover a higher proportion of global catastrophe losses in the first half?

The answer lies in the location of the most costly insured natural catastrophes losses for the insurance industry in the first half of 2015—thunderstorms in the United States and winter storm losses in Europe.

These larger loss events, as well as the severe winter weather in North America, all contributed to the lower percentage of uninsured losses through the first half of the year.

Here’s the Swiss Re chart showing the dollar breakout of insured and uninsured catastrophe-related losses from 2005 through 2015:

CatastropheLossesInsuredandUninsured

Note: insured losses + uninsured losses= total economic losses

But, as Artemis blog reports here, sadly the lower proportion of uninsured losses is not related to any major increase in insurance penetration.

The Nepal earthquakes provide a striking example. While economic losses from the quakes are estimated at $5 billion, only around $160 million were insured.

In the words of Kurt Karl, chief economist at Swiss Re:

The tragic events in Nepal are a reminder of the utility of insurance. Insurance cover does not lessen the emotional trauma that natural catastrophes inflict, but it can help people better manage the financial fallout from disasters so they can start to rebuild their lives.”

Check out Insurance Information Institute (I.I.I.) facts and statistics on global catastrophes.

Despite a rather quiet first half of 2015 for global catastrophes, insurers endured at least five separate billion-dollar insured loss events (all weather-related), according to Aon Benfield’s just-released Global Catastrophe Recap: First Half of 2015.

None of the events crossed the multi-billion dollar loss threshold ($2 billion or greater) and four of the five were recorded in the United States, Aon Benfield said.

The costliest event for the insurance industry was an extended period of snow and frigid temperatures in the U.S. during February ($1.8 billion in insured losses). (See our earlier post on first half winter storm losses here).

Other billion-dollar insured loss events in the U.S. included an early April severe thunderstorm outbreak ($1 billion), a severe thunderstorm and flash flood event at the end of May ($1.2 billion), and projected losses arising from the ongoing drought across the West ($1 billion and counting).

The sole billion-dollar insured loss event to be recorded outside the U.S. during the first half of 2015 was Windstorms Mike and Niklas in Western and Central Europe at the end of March/early April. Niklas became the first billion-dollar insured loss windstorm event in Europe since Xaver in December 2013, Aon Benfield said.

Note: the loss totals, which include those sustained by public and private insurance entities, are preliminary and subject to change.

If you’re wondering about the difference between economic and insured loss totals, the 7.8 magnitude earthquake that hit Nepal on April 25 (and subsequent aftershocks) is a good example.

From an economic loss standpoint, the Nepal earthquake ranks as the costliest global natural disaster during the first half of 2015, Aon Benfield reports.

Total damage and reconstruction costs throughout the impacted areas were estimated as high as $10 billion (subject to change), with reconstruction costs in Nepal alone put at nearly $7 billion.

Despite having a multi-billion-dollar economic cost to Nepal with overall economic effects poised to equal more than one-third of the country’s entire GDP, only a very small fraction of those losses – about 2 percent – was covered by insurance.

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

As my kids head off for their snowy-themed day at camp, the statistic that jumps off the page in the 2015 Half-Year Natural Catastrophe Review jointly presented by Munich Re and the Insurance Information Institute (I.I.I.) is the record $2.9 billion (and counting) in aggregate insured losses caused by the second winter of brutal cold across the Northeastern United States.

As Munich Re illustrates in the following slide, a total of 11 winter storm and cold wave events resulted in 80 fatalities and caused an estimated $3.8 billion in overall economic losses in the period from January 2015 to the end of winter:

USNatCatLosses2015

But the $2.9 billion in insured losses goes higher still when you factor in 2014’s contribution to winter storm losses.

As Munich Re America notes in a press release, if the harsh U.S. winter of 2014/15 is taken as a whole, then the insured losses rise to $3.2 billion and overall economic losses to $4.3 billion.

And this figure does not include indirect losses due to delayed flights, power failures and business interruptions.

As Tony Kuczinski, president and CEO of Munich Re America, says:

The fact that, once again, tens of thousands of people were temporarily left without electricity shows that the U.S. simply must invest in stronger, more weather resilient, infrastructure.”

And when you consider that losses from snow, ice, freezing and related causes typically cost insurers between $1 billion and $2 billion annually, as noted by Dr. Robert Hartwig, I.I.I. president, the impact of the exceptionally cold winter of 2014/15 really starts to bite.

We’re reading a lot about the dangers of heat waves and drought.

Aon Benfield’s latest Global Catastrophe Recap report highlights the exceptional heat wave that impacted India from May 21-31, killing at least 2,500.

This is one of the highest death tolls on record for heat-related casualties, Aon notes.

The states of Andhra Pradesh, Telangana, and Odisha (Orissa) were worst affected by temperatures that reached 48.0˚C (118˚F) in several areas. Temperatures were so hot that roads literally melted in some areas.

150527213832-india-heat-road-restricted-exlarge-169

An opinion piece in the New York Times over the weekend spoke more to the deadly risks of heat and humidity.

Closer to home the ongoing severe drought conditions across much of the Western United States, with a particular emphasis on California, continue to exact an economic toll.

Aon cites a study conducted by the UC Davis Center for Watershed Sciences on behalf of the California state government that concluded that total 2015 statewide economic losses from the drought will top $2.7 billion.

Including damage from neighboring states, the overall total loss will rise to at least $3 billion.

Heat waves and drought can cause losses in many lines of insurance, according to Munich Re. Many losses are unseen, and the result of secondary events, making it difficult to assess the extent of losses involved.

For example, losses to the agriculture industry can run into the billions of dollars in drought years as harvest failures lead to multi-peril crop insurance claims and livestock losses may result from shortage of feed and heat-related stress. Long dry periods also create ideal conditions for promoting the outbreak and spread of wildfires.

In 2011 Texas suffered a severe drought and overall and insured wildfire losses in that state were also the highest ever recorded, Munich Re explains.

Heat waves have also been linked to an increased risk of mortality and heat-related stress with the potential to impact health and life insurance.

I.I.I. provides facts and statistics on droughts and heat waves here and a useful backgrounder on crop insurance here.

We’re reading about the economic and insurance impact of severe thunderstorms in the United States in April 2015, as reported by Aon Benfield’s latest Global Catastrophe Recap report.

Five separate thunderstorm events in central and eastern parts of the U.S. caused expected insured losses of $2 billion, including more than $750 million from one event alone.

What was the $750 million event?

A widespread multi-day severe weather outbreak that hit central and eastern parts of the U.S. from April 7-10, leaving at least 3 dead and dozens injured.

Major damage was noted across the Plains, Midwest and the Mississippi Valley following 25 confirmed tornado touchdowns, grapefruit-sized hail, damaging straight-line winds, and flooding rains, according to Aon.

The April 9 EF4 tornado that devastated the communities of Fairdale and Rochelle, Illinois, is part of this event.

Total economic losses were estimated at $1 billion, while insurers put losses beyond $750 million.

Interestingly, Aon notes that much of the insured losses in this severe weather event were driven by claims resulting from hail.

The Insurance Information Institute (I.I.I.) has some useful facts and statistics on hail here.

It cites ISO figures that indicate events involving wind, hail or flood accounted for $16.1 billion in insured catastrophe losses in 2013 dollars from 1994 to 2013 (not including payouts from the National Flood Insurance Program).

The I.I.I. also notes that there were 5,536 major hail storms in 2014, per statistics culled from NOAA’s Severe Storm database. Nebraska had the largest number of severe hail events in 2014, followed by Texas, Kansas, Iowa and Missouri.

Over the 14 years from 2000 to 2013, U.S. insurers paid almost 9 million claims for hail losses, totaling more than $54 billion, according to a recent report by Verisk Insurance Solutions. That’s a hail of an impact.

As the death toll from Saturday’s devastating 7.8 magnitude earthquake in Nepal continues to rise, we’re reading about the health threat facing survivors.

In addition to the injured, an estimated 2.8 million people have been displaced by the earthquake as many are afraid to return to their homes.

The United Nations (UN) has launched an urgent appeal for $415 million to reach over 8 million people with life-saving assistance and protection over the next three months.

Its report offers insight into the scale of the unfolding humanitarian disaster:

According to initial estimations and based on the latest earthquake intensity mapping, over 8 million people are affected in 39 of Nepal’s 75 districts. Over 2 million people live in the 11 most critically hit districts.”

And:

The government estimates that over 70,000 houses have been destroyed, Over 3,000 schools are located in the 11 most severely affected districts. Up to 90 percent of health facilities in rural areas have been damaged. Hospitals in district capitals, including Kathmandu, are overcrowded and lack medical supplies and capacity.”

Strong tremors have damaged infrastructure, including bridges and roads and telecommunications systems. Transport of fresh water has been interrupted and fuel is running low in many areas.

The UN also reports that an estimated 3.5 million people are in need of food assistance, of which 1.4 million need priority assistance, while 4.2 million are urgently in need of water, sanitation and hygiene support.

While it’s far too early to know if these estimates will hold, clearly the Nepal earthquake is as catastrophe modeling firm RMS says: “shaping up to be the worst natural disaster this calendar year, particularly because Nepal is remote, economically challenged, and not resilient to an earthquake of this magnitude.”

Indeed, the earthquake is expected to inflict at least $5 billion in total economic losses – that’s more than 20 percent of Nepal’s gross domestic product – and could end up exceeding the country’s GDP.

Not surprisingly, insurance penetration in what is one of the world’s poorest nations is extremely low, as the I.I.I. explains here.

Information on the most deadly and the most costly world earthquakes is posted here.

It’s always heartening to read about insurance being made available to a market or sector that for whatever reason has not been able to benefit from risk transfer in the face of natural disaster.

So the news that countries of Central America will now be able to access affordable catastrophe cover by joining the former Caribbean Catastrophe Risk Insurance Facility—now the CCRIF SPC—is a positive.

A memorandum of understanding signed by the Council of Ministers of Finance of Central America, Panama and the Dominican Republic (COSEFIN) and CCRIF SPC will allow Central American countries to join the sovereign catastrophe risk insurance pool.

Nicaragua has signed a participation agreement to become the first Central American country to join the pool. Other member nations of COSEFIN are expected to join later this year and in 2016.

A press release puts some context around the need:

Nine countries in Central America and the Caribbean experienced at least one disaster with an economic impact of more than 50 percent of their annual gross domestic product (GDP) since 1980.

The impact of Haiti’s earthquake was estimated at 120 percent of GDP. That same year, tropical cyclone Agatha, in Guatemala, had devastating consequences and poverty rates increased by 5.5 percent.

Climate change also represents a significant development challenge, with average economic losses due to weather-related disasters amounting to 1 percent or more of GDP in 10 Caribbean countries and four Central American nations, including Nicaragua.”

As Artemis blog reports here, some 16 Caribbean countries are now members of the 2007-established CCRIF SPC, benefiting from parametric insurance products covering tropical storm and hurricane risks, earthquake risks or excess rainfall risks.

The risk pooling facility helps its members to access post-event risk financing, based on the actual event parameters, with a rapid payout and disbursement of as little as two weeks possible. This enables countries to access financing for recovery from natural catastrophes, while benefiting from cheaper premiums due to the risk pooling nature.”

The newly-expanded 23-nation partnership is a win-win for both existing and new CCRIF members, providing low prices due to more efficient use of capital and insurance market instruments. New members will be able to take advantage of CCRIF’s low premium costs and existing members could realize premium reductions due to the increased size of the CCRIF portfolio.

Consider this example: the CCRIF made a $7.75 million payout to the Haitian government some two weeks after the January 2010 earthquake hit close to Port-au-Prince. The value represented approximately 20 times the premium of $385,500 based on Haiti’s catastrophe insurance policy for earthquakes for the 2009/2010 policy year.

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