Munich Re

Natural disasters cost insurers US$75bn in 2007

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Source: Munich Re

The insurance industry had to cope with far higher natural catastrophe losses in 2007 than in 2006, with its unusually low loss figures. Despite the general absence of extreme events, overall economic losses had reached US$ 75bn by the end of December – an increase of 50% on 2006 (US$ 50bn). However, the loss figures were well short of 2005’s record US$ 220bn. At just under US$ 30bn, insured losses were almost double those of 2006 (US$ 15bn). The number of natural catastrophes recorded in 2007 was 950 (compared with 850 in 2006), the highest figure since 1974, when Munich Re began keeping systematic records in its NatCatService database.

Board member Dr. Torsten Jeworrek: 'The figures confirm our expectations and endorse our insistence that risks be consistently written at adequate prices, despite years with comparatively low losses as in 2006. The trend in respect of weather extremes shows that climate change is already taking effect and that more such extremes are to be expected in the future. We should not be misled by the absence of megacatastrophes in 2007.'

The worst human catastrophes of 2007 occurred, as so often the case, in developing and emerging countries. Storms, floods and landslides in various parts of Asia caused more than 11,000 deaths, around 3,300 attributable to Cyclone Sidr alone, which struck Bangladesh in November.

The most severe events in terms of insured losses occurred in Europe. The insurance industry’s costliest natural catastrophe was Winter Storm Kyrill, the climax of an above-average winter storm season, which developed on 17 January from a low-pressure system over the mid-Atlantic. With wind speeds far exceeding 100 km/h – and peak gusts of over 200 km/h – it wrought havoc across Europe as far as Poland, the Czech Republic and Austria on 18 and 19 January.

Kyrill caused overall economic losses of some US$ 10bn, with insured losses of around US$ 5.8bn. It was the second most expensive such event in Europe after Winter Storm Lothar (December 1999), which had higher wind speeds but at the same time involved a much more limited geographical area. A noticeable feature of Kyrill was that widespread areas of Europe experienced sustained high wind speeds.

Among the countries worst hit was Germany, with more than half the insured losses. Over 1.5 million individual losses were reported – many relatively small in scale, such as roof damage. The east of Germany suffered particularly heavy losses in the area where hailstorms and tornadoes formed along the cold front associated with the storm.

The insurance industry faced an even greater aggregate loss – albeit from consecutive events – as a result of two floods in England during the summer. From June to August, precipitation levels in England and Wales were the highest since records began in 1914. Central and northeast England experienced twice the normal rainfall. Losses from the events in June were comparable to those sustained three weeks later in July, some counties being affected on both occasions. Overall economic losses were around US$ 4bn for each event, of which US$ 3bn were insured in each case.

Prof. Peter Höppe, Head of Munich Re's Geo Risks Research Department: 'These events cannot, of course, be attributed solely to climate change, but they are in line with the pattern that we can expect in the long term: severe storms, more heavy rainfall and a greater tendency towards flooding, including in Germany.' In view of the steadily rising losses, Munich Re has, for some considerable time, been calling for firm action to address the causes of climate change and adapt to changes that cannot be avoided. Prof. Höppe noted that 'the Bali Roadmap, which launched negotiations to find a successor to the Kyoto Protocol by 2009 and also indirectly established the corresponding parameter data, is a welcome and positive step'.

The year 2007 also numbers among the warmest years since routine measurements began. According to data published by the Hadley Centre in the UK for the period up to December, 2007 was the seventh warmest year on record worldwide and the second warmest in the northern hemisphere. This means that the 11 warmest years worldwide have been recorded during the last 13 years.

Losses due to the North Atlantic hurricane season were relatively low, although the general situation had initially indicated the likelihood of a more severe course of events. Despite 15 named storms in all, in keeping with the average for the current warm phase that goes back to 1995, the number of hurricane-force storms (five) was below the average (eight). This is due to lower-than-expected water surface temperatures in the tropical Atlantic and the counteracting effects of air-current conditions in the upper layers of the atmosphere.

The relatively low losses can be explained by the tracks of the hurricanes, no major hurricanes reaching the US mainland, as in 2006. The most severe, Hurricane Dean, made landfall as a Category 5 hurricane (the highest category) on Mexico’s Yucatan peninsula. With wind speeds of up to 270 km/h, it was comparable to Hurricanes Rita and Wilma in 2005. Dean caused severe damage in Yucatan and on the islands of the Caribbean, although the main tourist areas were not as seriously affected.

Torsten Jeworrek: 'All the facts indicate that losses caused by weather-related natural catastrophes will continue to rise. As a leading reinsurer, we are ready to deal with this. Ultimately, however, it is society as a whole which bears the cost – in the form of higher insurance premiums or infrastructure repairs financed by taxes. That is why speedy international action is needed. In addition, climate protection can bring huge economic opportunities, thanks to new technologies and increased energy efficiency. This will primarily benefit companies that are swift to act. As we have proved by years of research and new insurance products for renewable energy plants, for instance, we are determined to be among them.'

In terms of overall economic losses, the most expensive event was the earthquake that struck the Niigata prefecture in Japan on 16 July. Insured losses from the medium-strength (magnitude 6.6) quake were not significant, but economic losses were in the order of US$ 12.5bn. The heavy losses show the economy’s susceptibility when natural catastrophes strike. The world’s largest nuclear power plant, close to the city of Kashiwazaki, was damaged, small quantities of radioactive material escaping into the environment. The earthquake also affected a major automotive component supplier, resulting in a production shortfall of 120,000 vehicles for car manufacturers.

Munich Re assigns natural catastrophes to one of six categories for assessment purposes. The annual list includes all events with more than ten fatalities and/or losses running into millions.

The Munich Re Group operates worldwide, turning risk into value. In the financial year 2006, it achieved a profit of €3,519m, the highest since the company was founded in 1880, on premium income of approximately €37bn. The Group operates in all lines of business, with around 37,000 employees at over 50 locations throughout the world and is characterised by particularly pronounced diversification, client focus and earnings stability. With premium income of around €22bn from reinsurance alone, it is one of the world's leading reinsurers. Its primary insurance operations are mainly concentrated in the ERGO Insurance Group. With premium income of almost €17bn, ERGO is one of the largest insurance groups in Europe and Germany. It is the market leader in Europe in health and legal expenses insurance, and 33 million clients in 25 countries place their trust in the services and security it provides. The global investments of the Munich Re Group amounting to €177bn are managed by MEAG, which also makes its competence available to private and institutional investors outside the Group.

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