Natural Disasters More Severe and More Costly

According to a recently released report from Munich Re, fatalities caused by natural catastrophes were up 450 percent in 2003, while insured losses reached $15 billion. More ominous was the reinsurer’s conclusion that economic and insured losses would continue to increase at the same high level.

Preliminary portions of the study had been presented at a meeting of the United Nations Environment Program (UNEP) in Milan in early December. The U.N. also sponsors the Intergovernmental Panel on Climate Change (IPCC). The final report includes data from the recent earthquakes in California and Iran, but not the mudslides that took 13 lives in the San Bernardino Mountains in late December. A slightly earlier sigma report from Swiss Re, released before those events occurred, estimated 2003 fatalities at 20,000 and insured losses at around $17 billion. Weather events were responsible for around $8 billion of that. It estimated that “man-made” catastrophes (mainly major industrial fires, explosions and aviation and spacecraft losses) were approximately $2 billion.

Munich Re analyzed all reports on natural hazard events that caused material or human losses anywhere in the world. It concluded that, “right up until the last days of the year, 2003 was marked by a series of severe natural hazard events, with the number of fatalities far exceeding the long-term average.” The world’s biggest reinsurer warned that, “in view of the deteriorating risk situation, the insurance industry must continue to act rigorously—for example, by agreeing on limits of liability and risk-adequate premiums.”

Munich Re noted that more than 50,000 people were killed in natural catastrophes worldwide last year, almost five times as many as in the previous year (11,000). That total has been recorded four times since 1980. The most devastating events were the heat wave in Europe and the earthquake in Iran. Each claimed more than 20,000 lives. The death toll in Iran is now estimated at more than 40,000.

Other conclusions from the study included the following:
• The number of natural catastrophes recorded in 2003 was around 700 and thus at the same level as in the previous year.
• Economic losses rose to more than $60 billion (2002: $55 billion). These were mainly the result of tornadoes, heat waves, and forest fires—but also severe floods in Asia and Europe.
• Insured losses increased to about $15 billion (previous year, $11.5 billion). The series of tornadoes in the Midwest of the United States in May alone cost insurers more than $3 billion.
• The year 2003 was marked not only by natural catastrophes but also by other remarkable events: the power outages in the United States, the United Kingdom, Denmark, and Italy, for example; total losses involving two satellites; again numerous terrorist attacks; a major leak of poison gas in China shortly before the end of the year. However, the extent of the losses caused by these events was much smaller than that caused by the natural catastrophes and they claimed fewer lives.

Seventy earthquakes were reported in 2003, and many caused extensive damage. The report indicates, however, that “the resulting economic losses of approximately $6 billion were far higher than the insured losses of approximately $100 million.” It noted that the earthquake that shook parts of California on Dec. 22 did not cause any dramatic damage even though its magnitude was registered at 6.5, “because it fortunately occurred in a thinly populated region about half-way between Los Angeles and San Francisco. However, its proximity to those two megacities points to their extremely high exposure in the event of a future strong quake.”

The earthquake, which struck the Iranian city of Bam early in the morning on Dec. 26, had a magnitude of 6.6, only slightly higher than the California quake. Munich Re noted, however, that the “majority of the clay-brick houses in this city—situated on the legendary Silk Road and with a population of approximately 100,000—collapsed, burying tens of thousands of the city’s inhabitants beneath them.”

Even though earthquakes caused heavy damages and loss of life, Munich Re observed that while windstorms and severe weather in 2003 accounted for only about one third of the approximately 700 events recorded, they were responsible for “75 percent of all the insured losses caused by natural catastrophes.” It singled out the series of tornadoes and hailstorms that hit the U.S. Midwest in April and May as particularly costly. They caused insured losses of some $5 billion. The losses in May alone exceeded $3 billion,” making it one of the ten most costly storms in insurance history,” said the report. “In the second half of September, Hurricane Isabel swept over the U.S. East Coast and devastated more than 360,000 homes (economic loss: around $5 billion, of which $1.7 billion was insured).” Compared to prior years, however, Europe suffered comparatively little damage from windstorms with economic losses of around $1 billion and insured losses of $300 million.

However, the continent’s summer heat wave was devastating. Munich Re said: “In Germany alone, the record temperatures from June to August corresponded to a 450-year event in climatological terms; if the atmosphere continues to warm up unchecked, such a heat wave could already become a mere 20-year event by 2020.” It noted that the “heat affected a very large area (western and central Europe and large parts of the western Mediterranean region). Economic losses of approximately $13 billion constituted an extremely large amount. Nevertheless, the burden imposed on insurers by, for example, drought-related losses is relatively small because reduced yields in the agricultural sector as a result of dry weather are mostly not yet covered in the European Union.”

Wildfires caused heavy damages in 2003, notably in Australia, southwest Europe, Canada, and the U.S. In October and November alone, thousands of homes fell victim to flames in California, resulting in a bill of about $2 billion for the insurance industry, representing almost 60 percent of the economic losses.

Floods also struck in many parts of the world. In China, the swollen waters of the Huai and Yangtze flooded 650,000 homes and caused an economic loss of almost $8 billion. Many places in southern France were under water at the beginning of December, when numerous rivers, including the Rhône, flooded their banks after extreme rainfall (causing insured losses of $1 billion and economic losses of around $1.5 billion).

Swiss Re’s report also said the 2003 figures “confirm this trend towards high losses.” A combination of “increasingly densely populated areas, higher concentrations of insured values and the development of endangered zones” are at least partially to blame. This leads to the conclusion that, while it remains impossible to control the elements, it may be possible to control, or at least limit, the damages.

Munich Re is convinced that the increasingly severe weather related events are linked to changes in climate. The report shows that “new types of weather risks and greater loss potentials must be reckoned with in the future.” Stefan Heyd, a member of Munich Re’s board of management responsible for corporate underwriting stated, “The insurance industry must prepare itself for increasing risks and losses. This requires above all transparency and a limitation of the risks. Prospective action also means adjustments in the premiums.”

That conclusion really isn’t news. The debate over global warming and its consequences, particularly its impact on the insurance industry, first surfaced in the 1980s. Looking back, while there’s been a lot of discussion, it hasn’t really produced any concrete solutions.

Predictably, the climate change aspect of the study caused the most controversy, even if most people now recognize it as a reality. “There’s no doubt the earth’s climate is changing,” stated Dr. Robert Watson, head of the International Panel on Climate Change (IPCC) Scientific Advisory Panel, back in 2000.

The controversy is not over whether the climate is changing. It always has and it will continue to do so. Normally, however, it evolves over centuries, but weather patterns now seem to be altering much more rapidly. This phenomenon has sparked a “heated” debate. A recent BBC report stated, “Most mainstream scientists believe that human activity—notably emissions of greenhouse gases—has contributed to a significant increase in the average surface temperature of the planet.” They blame the increased burning of fossil fuels (oil and coal) for intensifying the trend. The conclusion is that humanity is to blame.

When Munich Re presented its preliminary findings to the UNEP, it provoked angry reactions from across the Atlantic. According to another BBC report, Sen. James Inhöfe, chairman of the Senate Committee on Environment and Public Works, said he was increasingly convinced that “global warming is the greatest hoax ever perpetrated on the American people and the world.” As his views are more or less shared by the current Administration, the findings have probably increased the rancor in the debate over climate change between the U.S. and the rest of the world.

Taking direct issue with Senator Inhöfe and the U.S. position, UNEP Executive Director Klaus Toepfer, stated: “Climate change is not a prognosis, it is a reality that is, and will increasingly, bring human suffering and economic hardship. Developed countries have a responsibility to reduce their emissions, but also have a responsibility to help developing countries adapt to the impacts of global warming.”

Dr. Gerhard Berz, head of Munich Re’s Geo Risks Research Department commented: “We will have to get used to the fact that hot summers like the one we had in Europe this year must be expected more frequently in the future. It is possible that they will have become more or less the norm by the middle of the century. The summer of 2003 was a ‘summer of the future,’ so to speak. For many years, we have been warning about the elevated danger of heat waves and the associated problems and risks. Warmer summers mean a rise in the intensity and frequency of severe weather events. A heated-up Mediterranean and a warm North Atlantic increase the risk that particularly strong low-pressure systems will form in autumn and winter with torrential rain and extreme wind speeds. This was confirmed by devastating floods in southern France at the beginning of December and the intense low-pressure system called Jan over west and central Europe shortly before Christmas.”

Can anything be done? The answer is probably not. Even if the world stopped using fossil fuels tomorrow, it’s unlikely that this would have any immediate effect on the climate—maybe in a 100 years or more, but not now. This puts the insurance industry between the proverbial rock and the hard place. P/C insurers cover both man-made risks—fires, thefts, torts, products liability, etc.—and “natural disasters,” which includes practically everything else. What if that’s become an open ended source of losses?

Dr. Andrew Dlugolecki, director of General Insurance Development at then CGNU (now Aviva), predicted in a BBC interview that unless serious steps were taken to reduce greenhouse gas emissions, the costs of natural disasters caused by climate change would exceed the world’s GDP by 2065.

Long before that point is reached, the insurance industry will have run out of money. If remedial solutions are to be found, they will require active programs by governments and industries to reduce the risks from natural catastrophes. Eventually paying for the losses will no longer be a viable option, as more than a few people have begun to realize.