Global Warming a Risk of change New challenges for the insurance industry

1. MUNICH RE SEMINARS NON-LIFE REINSURANCE l CASUALTY l PROPERTY l MARINE l ADDITIONAL TOPICS Global Warming a Risk of change New challenges for the insurance industry A paper by Prof. Dr. Peter Höppe, Munich Re Head of Geo Risks Research presented by Alexander Milberg, Munich Re Malaysia at the National Seminar on Socio-Economic Impacts of Extreme Weather and Climate Changes Kuala Lumpur 22 June 2007

2. Content • Climate change • - Extreme events of last years • Facts and scientific basics • Effects • Challenges Risk of change – Peter Höppe

3. Trends of Natural Disasters • The last years have brought records in natural disasters in respect to: • Intensities • Frequencies • Damages and losses Risk of change – Peter Höppe

4. extreme high moderate light comfortable moderate high extreme Heat wave of 2003, the largest humanitarian natural catastrophe in Europe for centuries Perceived Temperature on 8 August 2003 and excess mortality Source: German Weather Service, 2004 Heat stress 2,000 † 2,000 † 7,000† 15,000 † light 4,000 † Cold stress 4,000 † UTC 13:00 Risk of change – Peter Höppe

5. 2004: 1st Hurricane in South Atlantic • Hurricane Catarina off the Coast of Brasil, March 2004 Source: Image courtesy of Earth Sciences and Image Analysis Laboratory, NASA Johnson Space Center, Bild-Nummer ISS008-E-19646. http://eol.jsc.nasa.gov Risk of change – Peter Höppe

6. 24.7- 5.8 Flooding in India (1.150 fatalities) 25.-30.8 Hurricane Katrina, USA (1.322 fatalities) Economic losses (US$ m): 5.000 Economic losses (US$ m): 125.000 Insured losses (US$ m): 770 Insured losses (US$ m): July/August 2005 – Flooding in India944 mm rain within 24 hours, highest ever in India August 2005 – Hurricane Katrina6th strongest hurricane, largest losses of a single event 40.000 Risk of change – Peter Höppe

7. 2005, a Year of Weather Extremes Never before since the beginning of records (1850) have so many named tropical storms occurred in the North Atlantic basin in one season: 28, of which 15 with hurricane strength (old absolute record 21 in 1933, resp. 12 in 1969) Risk of change – Peter Höppe

8. Hurricane Vince (9 October 2005) Vince, a hurricane in a region without hurricane risk (easterly North Atlantic, Madeira) Risk of change – Peter Höppe

9. Heat wave in the Netherlands – July 2006The warmest July since records began Deaths per week and average maximum temperature => 1 000 more fatalities than usual in July Risk of change – Peter Höppe

10. Simulation: GeoRisikoForschung, Münchener Rück Winterstorm Kyrill, 18-19 January 2007 Fatalities: 48 Economic losses (€ m): 10.000 Insured losses (€ m): 5.000 -7.000 Risk of change – Peter Höppe

11. Reasons for globally increasing losses due to natural disasters Less problematic • Rise in population • Better standard of living • Increasing insurance density Problematic • Concentration of people and values in large conurbations • Settlement in and industrialization of extremely exposed regions • Change in environmental conditions - Climate Change Risk of change – Peter Höppe

12. Global mean temperature, 1856 - 2006 • Departures in temperature from the 1961-1990 average Temperature anomaly (°C) 2006: +0.42°Cabove the 1961-1990 annual average (14°C). The five warmest years in decreasing order are: 1998, 2005, 2003, 2002 and 2004. Source: Climate Research Unit, UK (2007) in conjunction with Hadley Centre of the UK Met Office Risk of change – Peter Höppe

13. Global and Regional Temperature trends in the 20th century: modeled and observed + 0.8 °C + 0.7 °C Source: climateprediction.net, Oxford University Risk of change – Peter Höppe

14. CO2 concentration in the atmosphere of the past 650,000 years from the Vostok ice core, Antarctica 2006: 383 ppmv CO2 Sources: Siegenthaler et al. (2005), Spahni et al. (2005), Röthlisberger et al. (2004) Risk of change – Peter Höppe

15. Scientific Evidence of a Link between Global Warming and Extreme Events • It is very likely (CL >90%) that human influence has already at least doubled the risk of a heat wave exceeding the magnitude of the European heat wave 2003 (Stott et al., Nature 2004). • Major tropical storms both in the Atlantic and the Pacific region have already increased since the 1970s in duration and intensity by about 50 percent (Emanuel, Nature 2005; Webster, Science 2005). • Due to climate change the sea surface temperatures have increased already by 0.5°C (Barnett, Pierce, 2005, Science; Santer et al., PNAS, 2006). • Of all the factors only the steady increase in sea surface temperatures over the last 35 years can account for the rising strength of storms in six ocean basins around the world (Webster et al., Science 2006). • Insured losses from winter storms will more than double in some European countries (Denmark, Germany) until 2085 due to global warming (study sponsored by SR, Schwierz, submitted 2007). Risk of change – Peter Höppe

16. The global frequency of most destructive tropical storms has increased since the 1970s Webster et al., Science, Vol 309, September, 2005 Risk of change – Peter Höppe

17. Climate Change in Europe – Example Winter Storm Results of the study „Modelling European Winter Wind Storm Losses in Current and Future Climate“ (Conny Schwierz (ETHZ), submitted 2006) Climate Model Insurance Risk Model combined Result: • Climate change increases insurance losses significantly... Risk of change – Peter Höppe

18. Climate Change in Europe - Example Winter Storm Expected average increase of losses in Europe for the period of 1975 - 2085 Source: Conny Schwierz (ETHZ), submitted 2006 Because of the changing tracks the impact is different in the European countries Risk of change – Peter Höppe

19. Changes in sea level rise and projection for different scenarios Temperature-dependent approach* 140 cm A1FI B1 50 cm *Basis: Range of ΔT = 1.5º-5.8ºC (IPCC TAR) Source: Stefan Rahmstorf (2007), Science Vol. 315, p.368 Risk of change – Peter Höppe

20. Changing risk more extreme weather events Increase in greenhouse gases e.g. windstorms, hail storms, rain storms and drought Increase in temperature air + sea Increase in humidity important for insurer: - stronger events - frequent events Increase in sea level Risk of change – Peter Höppe

21. Climate Change affects Insurance Industry • Increase in weather variability • New levels of weather extremes • New kinds of weather risks • Higher loss potentials • Lacking experience in new kinds of damages • Increased capacity demand due to larger accumulation risks • Prospective premium calculation becomes necessary • Due to increased coverage of climate change by the media and own perception of changes in weather patterns higher demand for nat cat covers • New insurance products can be developed (e.g. Kyoto Multi Risk Policy of MR) Risk of change – Peter Höppe

22. How can the Insurance Industry prepare for the Increasing Catastrophe Risk? • Development of new risk models considering climate change(more data on shorter term effects of global warming needed) • Adequate pricing • Substantial deductibles, based on the respective exposure • Accumulation control • Loss prevention • Improved claims settlement • Liability limits • Exclusion of certain hazards • Exclusion of particularly exposed areas • Reinsurance, retrocession • Private-public partnership Risk of change – Peter Höppe

23. up to now unlimited future solution? limited § Insured Reinsurer Insurer Reinsurer Insured Government Insurer Insurance of Natural HazardsCarrier of the burden/liabilities Risk of change – Peter Höppe

24. - Member of The Climate Group • Member of the Global Roundtable on Climate Change (Jeff Sachs) • Board member of the European Climate Forum • Hosting side events at the annual global climate summits of the UNFCCC (COP) • UNEP-Financial Initiative • Carbon Disclosure Project Insurance Industry has high Potential to Promote Climate Protection Munich Re: many activities to promote climate protection Risk of change – Peter Höppe

25. Munich Re: Co-Initiator of CRO Briefing Position Paper on Hurricane Risk and Climate Change To raise awareness of global warming as a relevant factor of insurance industry CRO briefing published on 20 June 2006 Risk of change – Peter Höppe

26. Munich Re: Initiator of International Workshops To discuss the attribution of increasing losses to climate change with a high level group of participants from science and insurance industry. Risk of change – Peter Höppe

27. Consensus (unanimous) statements of the workshop participants Syllabi: Climate change is real, and has a significant human component related to greenhouse gases. Direct economic losses of global disasters have increased in recent decades with particularly large increases since the 1980s. The increases in disaster losses primarily result from weather related events, in particular storms and floods. Climate change and variability are factors which influence trends in disasters. There is evidence that changing patterns of extreme events are drivers for recent increases in global losses. Risk of change – Peter Höppe

28. The Munich Climate Insurance Initiative (MCII) The MCII was founded by representatives of Germanwatch, IIASA, Munich Re, the Potsdam Institute for Climate Impact Research (PIK), the Swiss Federal Institute of Technology (SLF), the Tyndall Centre, the World Bank, and independent experts. MCII

29. Objectives • Wealthy countries will be able to cope with financial losses from increasingdisasters by means of insurance solutions and state funding, the poorest countries will suffer most • The increasing natural catastrophe damages in poor countries will consume increasing ratios of  the donor money of development funding, delaying their further development • New insurance related systems are necessary to get these countries, where currently almost no insurance is available, out of the global warming trap  • MCII is working on solutions to provide expertise on insurance related mechanisms to cover losses due to climate change, especially in developing countries         Risk of change – Peter Höppe

30. Increase of corporate responsibility activities in the field of climate change Publications and strategic board game Risk of change – Peter Höppe

31. Phases of Climate Strategies Innovation Strategy(also Adaption Strategy) Integral climate and business strategy Creating new chances of business progressive Mitigation Strategy Minimising and excluding climate related business risks Compliance Strategy Obeying the legal preconditions Defense Strategy Ignoring/denying climate risks Temporal course of development defensive 80s 90s today Source: Schaltegger after WWF 2006 Risk of change – Peter Höppe

32. Conclusions • Natural catastrophes, especially weather related events, are increasing dramatically in number and magnitude. Loss potentials have reached new dimensions • Climate change is happening already, it cannot be stopped anymore, just attenuated • There is more and more scientific evidence for causal links between global warming and increasing frequencies and intensities of natural catastrophes • The insurance industry has to consider climate change in its risk models • We have to mitigate global warming and adapt to the changing risks in respect to the regionally specific risk patterns Risk of change – Peter Höppe

33. Thank you very much for your attention Alexander Milberg