role of the reinsurance industry in the management of catastrophe related risks dr. anselm smolka...
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Role of the Reinsurance Industry in the Management of Catastrophe Related Risks
Dr. Anselm SmolkaGeo Risks ResearchMunich Reinsurance Company
Global Conference on Insurance and Reinsurance for Natural Catastrophe Risk, Dec 8-9, 2005, Istanbul, Turkey
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2005
160 bn US$
0
20
40
60
80
100
120
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
US
$ b
n.
>178 bn US$
Economic losses (2004 values)
Insured losses (2004 values)
Trend of economic lossesTrend of insured losses
© 2005 MRNatCatSERVICE, Geo Risks Research, Munich Re
Great Natural Disasters 1950 – 2005Economic and insured losses
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- Risk identification
- Risk evaluation
- Risk control
- Risk financing
The trend to growing catastrophe losses requires a holistic risk management encompassing:
Growing losses
The reinsurance sector has built up a unique experience in catastrophe related losses and risk management, and therefore has to play a role in each of these fields
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Risk identificationThe MR NatCatSERVICE©
output - examples
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Risk identificationThe MR World Map
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Vulnerability function
Munich Re's
loss experience
Set ofscenarios
Statistics
Expected loss or lossoccurrenceprobability
Risk curveIndividual
exposure
Scientific
inputHazardinformation
Value distribution
Risk evaluationThe risk model MRHazard
Risk = Hazard × Vulnerability × Values
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Reinsurance – at the cutting edge of recent knowledge
Risk evaluation
Climate change – introducing activity cycles into pricing
0
5
10
15
20
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1850 1875 1900 1925 1950 1975 2000
Hurricane and Tropical StormHurricaneHurricane (SS3,4,5)
2,6/year*1,5/year*
3,8/year*
Warmphase
Coldphase
Warmphase
Warmphase
Coldphase
1,2/year*1,5/year*
Low probability extreme events – a concern for insurance?
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Westward migration of earthquakes along the NAFin the 20th century
Turk/US Study on earthquake probability Istanbul sponsored by Swissre
Risk evaluation
Risk evaluation
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0
20
40
60
80
100
120
140
160
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
>178bn US$
Risk controlThe role of reinsurance
Adequate pricing Substantial deductibles, based on the respective exposure Accumulation control
Improved claims settlement Tax reductions on reserves
Liability limits Exclusion of certain hazards or highly exposed areas
Loss prevention
Reinsurance is in itself a means of risk of control, and reinsurersgive guidance in respect of the following risk control measures:
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0
20
40
60
80
100
120
140
160
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
>178bn US$A holistic risk management requires sharing the risk between
Insured Insurer
State Reinsurer
Capital market
Risk control and risk financing The principle of risk partnership
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- Capacity for rare, large-scale catastrophic lossesthrough global balance of risks. Single objects (industrial plants). Accumulation losses (natural disasters)
- Education and knowledge transfer
- Technical support and innovation in insurance solutions for catastrophe risks, drawing on the unique experience regarding catastrophe losses
- Maximizing the role of the private sector in catastrophe insurance
Risk Partnership
The role of reinsurance
The role is different in different parts of the world –
it is inversely proportional to a market‘s development
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Capital markets vs. reinsurance
pro con
Cat bonds - no default risk - complexity (# partners)- immediate payout - transaction cost (stable prices) - restricted regional scope
- continuity to be tested
Reinsurance - universal scope - default risk- only 2 parties - market cycles => simple contracts => low price- continuity
Risk Partnership
Capital market – additional rather than alternative capacity
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Risk Partnership
- Land use regulations and building codes
- Ensure that regulations are observed
- Measures to protect the infrastructure (e.g. dams/dykes, water-retaining basins)
- Favourable tax treatment of natural perils reserves
The state’s tasks
Role of the Reinsurance Industry in the Management of Catastrophe Related Risks
Dr. Anselm Smolka, Munich Re
Thank you for your attention!