Munich Re: ‘Ever Higher’ Nat Cat Costs; Ups Chile Quake Loss to $1 Billion

June 8, 2010

A bulletin from Munich Re, the world’s largest reinsurer, concludes that the “long-term trend towards ever higher natural catastrophe costs” looks set to continue, according to an analysis from its Geo Risks experts.

Their conclusions are based on “the large number of natural catastrophes recently, the latest examples being the earthquake in Chile, hailstorms in Australia and Winter Storm Xynthia in Europe.” Munich Re said it now “estimates its loss burden from the earthquake that struck Chile on February 27, 2010 to be around US$ 1 billion after retrocession and before tax.”

The report contrasted the relatively low number of natural catastrophes in 2009 with the first few months of 2010, which “were marked by a significantly large number of natural catastrophes.

“Exposure to geophysical events remains unchanged despite the earthquakes in Haiti, Chile, Turkey and Costa Rica and volcanic eruptions in Iceland, Ecuador and Guatemala. This exposure is not affected by human activity.”

However, another factor is directly related to human activity. Munich Re points out that “steadily increasing insured values have meant a substantial rise in exposures, and thus risks, over the years.”

In addition the “meteorological risk situation is also changing in the case of storms and heavy precipitation. The number and intensity of weather-related catastrophes is expected to increase in the coming decades, largely on account of climate change.”

Munich Re said that reinsurance claims from Winter Storm Xynthia, which wrought major damage in Europe on February 27 and 28, will cost it around €70 million ($83.5 million). In addition it has set aside provisions of around €160 million ($191 million) for the two hailstorms that occurred in Australia this March. As far as the losses to be expected following the floods on the Rivers Oder and Vistula, Munich Re said the “figures are not yet available.”

The bulletin also examines the earthquake in Chile in greater detail. It notes that the quake “caused exceptionally heavy losses and also triggered a devastating tsunami. Providing a reliable forecast of the overall burden has been difficult up to now due to the low primary insurer retentions, high proportion of individually (facultatively) reinsured production facilities and buildings and ongoing business interruption losses.

“The number of individual losses was also very high, local insurance companies having received more than 190,000 claims notifications by the end of April. Munich Re now believes the market loss will be in the order of US$ 8 billion, and currently estimates its own burden to be some US$ 1 billion after retrocession and before tax. At the end of April, Munich Re had assumed the loss burden would be approximately US$ 700 million.”

Torsten Jeworrek, Munich Re’s Reinsurance CEO, stressed: “Events like Chile’s devastating earthquake reinforce our case for insisting that risks be consistently written at adequate prices, even after years where losses have been relatively low.”

But Munich Re also noted that the “past has shown that current loss experience heightens market players’ awareness of the risks. As regards the renewals on 1 July 2010, (parts of the US market, Australia and Latin America), Munich Re therefore anticipates price increases in the loss-affected regions and business segments.

“The earthquake that struck Chile on 27 February 2010 was the fifth strongest since records began in 1900. Nearly 350 people lost their lives. Insured losses were very heavy due to the high insurance density in Chile’s commercial and industrial sectors. Moreover, infrastructure items such as motorways are often insured in Chile. The country’s insurance density is comparable with that of a number of European countries. Besides the earthquake itself, the subsequent tsunami also damaged industrial and port facilities.”

Jeworrek added: “Whether production-facility or infrastructure losses, our job as reinsurers is to bear catastrophe burdens. Because we possess the necessary know-how, writing natural catastrophe business has always been profitable for us over the years.”

Source: Munich Re

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