Tag Archives: Catastrophes

Cat Losses to Rise

Swiss Re has warned insurers to prepare for much higher catastrophe losses in future – more than the record $120 billion set in 2005 – despite a below average year in 2009 due to a calm U.S. hurricane season. Natcat losses in 2010 could be three to five times what they were in 2009, given their volatility, Thomas Hess, chief economist at Swiss Re observed. Already, 2010 has seen significant events with winter storm Xynthia in Europe and earthquakes in Chile and Haiti. The warning came as Swiss Re’s latest sigma study showed that natural catastrophes and man-made disasters worldwide claimed around 15,000 lives and cost insurers just $26 billion in 2009. While the overall cost to society was $62 billion, insured losses were below average due to the calm U.S. hurricane season. Insured losses were highest in North America where they cost insurers over $12.7 billion, Swiss Re noted. The death toll was highest in Asia, where nearly 9,400 of the world’s 15,000 catastrophe victims lived. Insured losses in the region were approximately $2.4 billion. Overall, 133 natural catastrophes and 155 man-made disasters occurred in 2009. Six events each triggered insured losses in excess of $1 billion. The costliest event was the European winter storm Klaus which struck France and Spain in January and led to insured losses of nearly $3.4 billion. Check out I.I.I. facts and stats on global catastrophes.

Human Reason vs. Catastrophes

We often quote the seemingly perplexing statistics that despite the significant risks faced only 17 percent of Americans have a flood insurance policy and only 12 percent of homeowners in California buy earthquake insurance. Persuading people to buy coverage to protect them in the event of disaster remains a key challenge. So it was with great interest that we read a February 19 op-ed in the online edition of Newsweek by professors Erwann Michel-Kerjan and Paul Slovic. The article will be printed in Newsweek’s March 1, 2010 international edition. The op-ed starts out by stating that the earthquake in Haiti is an omen of what is to come as we face a growing trend of more frequent and larger scale natural disasters. Yet even as the world becomes more dangerous – more than half of the planet’s 20 costliest catastrophes since 1970 have occurred since 2001 the authors note – it appears that human reason is failing in the face of disaster. Here’s what they say:

Economic analysis helps determine how people will respond to this more dangerous world. But the traditional economic view suggests that human actions can be predicted as if people were always completely informed, perfectly responsive to economic fluctuations, and rational, in the sense of having stable, orderly preferences that always maximize their individual economic well-being. In fact, disasters seriously challenge this view.”

The authors go on to note that the current situation in Haiti highlights three critical elements where behavioral scientists have found the rational predictions of many economists flawed: first, people don’t think disasters will happen to them; second, we fail to learn from others’ misfortunes; and third, humans can’t grasp the full significance of disaster statistics. Suffice to say and without spoiling the authors’ conclusion, understanding human behavior will play a key role in managing catastrophic risk in the years ahead. Something to think about.

New Media and Post-Disaster Communications

Whether it’s an earthquake, hurricane or terrorist attack, communicating in the wake of a major disaster can be a serious problem as the breakdown of communications and infrastructure often adds to the devastation and loss of life. After the powerful earthquake that hit Haiti late Tuesday, what’s striking is that mobile communications and social networks are playing an immediate and important role in the disaster recovery efforts. An article in the Seattle Times notes that more than a million Haitians rely on the mobile phone service Voilà   for communications which is provided by Bellevue-based Trilogy International Partners. Members of the Trilogy/Voilà   crisis task force were one of the first aircraft to land at the Port-au-Prince airport yesterday morning to assist on-the-ground efforts. A number of organizations are also using Skype as a key tool for phone communications in the earthquake-disrupted area. Meanwhile a number of informational and relief efforts have sprung up on social networking sites. On Facebook an informational page Earthquake Haiti has been created to allow people to share relevant information to help find family members in Haiti and provide guidance on donating to legitimate relief organizations. It already has more than 90,000 members. The American Red Cross is posting Haiti updates to  both Facebook and Twitter  to spread information about donating to relief efforts by texting “Haiti† to 90999. On Twitter “Help Haiti†, or #Haiti, are among the most popular trending topics and are providing an important space where people can tweet calls to support various relief efforts. Twitpic  and Flickr have also become main venues for sharing photographs from Haiti, according to media reports. The business oriented networking site LinkedIn already has at least one group set up for Haiti earthquake disaster relief efforts. And a word-press powered blog Haitifeed is providing first-hand accounts as well as worldwide status reports on the earthquake. There are many more examples, but what is clear is that post-disaster recovery efforts have taken on a new meaning in the new media age.

Heeding Hurricane Forecasts

The long-range forecasts for next year’s Atlantic hurricane season are out and come with a slew of caveats re their forecast accuracy. Colorado State University’s Tropical Meteorology Project team calls for an above-average Atlantic basin tropical cyclone season in 2010 with above-average probability of U.S. and Caribbean major hurricane landfall, but cautions: “Although these early December forecasts have not shown recent-year real-time forecast skill, we believe our new early December forecast scheme will begin to demonstrate forecast skill in the coming years.†   Meanwhile, London-based consortium Tropical Storm Risk (TSR) predicts an active Atlantic hurricane season in 2010, but warns: “Users should note that the precision of TSR’s extended range outlooks for Atlantic hurricane activity between 1980 and 2009 is low.† All this leads to the obvious question of how useful these forecasts can be this far out. Over at bnet.com’s finance blog Ed Leefeldt makes the case that insurers should still pay attention, even though hurricane predictors have been wrong most years since 2005 when making predictions way ahead of the season. For one thing, Leefeldt notes that a Category 4 hurricane could do some serious damage, especially if it were to hit a city like Miami. Secondly, hurricane predicting is getting better. As a result, any storm warning should be heeded. We couldn’t have said it any better. Check out I.I.I. hurricane facts and stats.

2009 Cat Losses Drop

Both the human toll and monetary impact of global natural catastrophes and man-made disasters dropped significantly in 2009 compared to 2008. But the overall figures mask a  tale of two halves. Initial estimates from Swiss Re indicate that some 12,000 people worldwide were killed by catastrophes in 2009, compared to 240,000 in 2008. At $52 billion, the total cost to society of the catastrophes was also about one-fifth of the $267 billion total cost the previous year. Insurers paid out an estimated $24 billion in property losses from these events, compared to total insured losses of over $50 billion in 2008. Natural catastrophes cost insurers roughly $21 billion, while man-made catastrophes triggered additional claims of $3 billion. Swiss Re attributed the below average insured losses to the calm U.S. hurricane season. Contrary to the U.S., Europe suffered above average insured losses in 2009. In a press release Swiss Re cautioned that while cat losses have trended upward in the past 20 years, there is high volatility from year to year. The figures also indicate the volatility of cat losses within any given year. For example, cat losses in the first seven months of 2009 were nearly double the average of the last 20 years. Had that trend continued in the second half it could have been a different story. Thomas Hess, chief economist of Swiss Re, sums it up: “We were lucky, but that may not be the case next year.“ Check out I.I.I. facts and stats on global catastrophes.

Samoa and Sumatra Earthquake Events

At last count, the magnitude 8.0 earthquake that triggered a tsunami that struck the Samoa Islands region on Tuesday has left over 140 dead, destroyed several villages and caused severe damage in Pago Pago, the capital of American Samoa. President Obama has declared American Samoa a disaster area. Meanwhile a magnitude 7.6 earthquake that occurred off the coast of the Indonesian island of Sumatra on Wednesday caused significant property damage in Padang, the city closest to the epicenter. Reports estimate at least 500 people were killed and thousands more have been injured or trapped in damaged buildings. The earthquakes come just days after Typhoon Ketsana hit the Philippines. While it’s too soon to know the extent of the economic loss from these global catastrophes, it’s important to note the cost in human lives. According to data from Swiss Re’s Sigma, in 2008 240,500 people worldwide died or were unaccounted for due to natural catastrophes or man-made disasters. In terms of the number of victims, 2008 was one of the worst years since 1970. The most affected region was Asia. Swiss Re notes that given the rapid development of the Asia Pacific region, natural catastrophes are having more of an impact on the insurance industry. Moreover, many parts of Asia, especially along the coastlines, are highly exposed to natural hazards such as earthquakes, tsunamis, volcanoes, tropical cyclones, floods, hail, snow and thunderstorms. Insurance protection against these risks  has remained at very low levels in Asia, and as a result individuals, corporations and governments typically bear the brunt of the uninsured catastrophe losses. Swiss Re suggests that government protection schemes and public private partnerships, successfully implemented in other regions in recent years, could lead to better catastrophe protection in Asia in future. Check out I.I.I. facts and stats on global catastrophes.

Catastrophe Risk Funding Challenges

Catastrophe insurers and reinsurers will need to develop more secure channels for accessing capital that reflect the potential for future capital market disruptions and implement new risk management measures reflecting the lessons of the current economic crisis and the evolving regulatory response, according to a report by I.I.I. president Dr. Robert Hartwig. The report notes that while financial crises have always posed severe challenges, the capital intensive nature of catastrophe risk funding amplifies those challenges. The global economic crisis that began in the U.S. subprime mortgage sector in mid-2007 spread with remarkable speed and ferocity to challenge the operations of every segment of the global financial services industry, including insurance.   Although the basic function of nonlife insurance—the transfer of risk from client to insurer (and insurer to reinsurer)—continued uninterrupted, the capital intensive nature of catastrophe risk funding has been disrupted more than is generally appreciated. Hartwig notes that primary and reinsurer capacity in the United States and Europe fell by 15 to 17 percent within the first year of the crisis and most measures of capital adequacy continued to deteriorate through early 2009.   Though not presently viewed as solvency threatening, the industry’s ability to quickly attract and retain capital at reasonable cost following a major capital event has clearly been impacted. The report was presented at a conference sponsored by Aon Benfield Australia Limited on the theme of probable maximum loss, frequency vs. severity.

Wildfire Catastrophe Risk

The insurance industry could find itself paying more in claims as wildfires join the growing list of frequent and severe events that have been adding to catastrophe losses in recent years, according to a new report from A.M. Best. It observes that warmer temperatures and drier conditions are making wildfires a year-round affair. While the 2008 wildfire season in the United States wasn’t as severe as in recent years, insurers face the prospect of further property losses from wildfires in 2009 with persistent drought conditions raising the potential for wildfire activity across parts of California, Nevada and the Northwest. A.M. Best reports that when adjusting for inflation into 2009 dollars, wildfire catastrophe losses have averaged nearly $215 million each year from 1964 through 2008. Since 2000, though, annual losses have averaged about $484 million, based on figures from the Property Claim Services (PCS) unit of the Insurance Services Office (ISO). Five of the most severe wildfire events have also occurred this decade, and although the frequency of wildland fires tracked by the National Interagency Fire Center has fallen since the early 1980s, there is an overall rising trend in severity as measured by acres per fire. Check out I.I.I. wildfire statistics.