Global warming causes insurance group to up premiums

Global warming has been cited as a reason for a German insurance group’s need to increase their premiums, by devising more stringent underwriting requirements for their future insurance quotes.

In their report on natural catastrophes in 2001, Munich Reinsurance Group noted a substantial rise insured natural hazard losses. Climate change has been a major cause of many natural disasters and scientists at the group fear it is going to have an continuing effect on company statistics.

The group fears the effects of global warming will be suffered for many years and natural disasters will continue to increase. This, they say, will have a significant effect on insurance bills.

In all, 700 natural hazard losses were recorded last year, with economic losses rising 20% to US$36 billion and insured losses rising by 50% to US$11.5 billion, compared with the previous year’s $7.5 billion.

The report reveals that the dramatic changes have placed an inordinate strain on the insurance industry.

“A gigantic loss event in the realm of natural catastrophes would have been a severe test on the capacity of the global insurance industry in addition to the burden it has to cope with from the devastating attack on the World Trade Centre,” says the company’s report.

As a result, Munich Re’s experts have reassessed the effects of climate change and have come up with tighter underwriting requirements, this means insurance bills are almost certain to rise.

“Even allowing for a complete implementation of the Kyoto Protocol, the emission of greenhouse gases will result in our having to contend with the effects of climate change for decades to come, mainly in the form of more frequent and more intensive natural catastrophes,” said Dr Gerhard Berz, head of Munich Re’s Geo Risks Research department.

This report is bad news for insurance payers as Munich Re now wants to redress the balance for their losses over the year. “The reinsurers, which bear the lion’s share of the losses from natural catastrophes, must go on the assumption that the present underwriting strategy will no longer be commensurate with the changes,” forebodes Dr Wolf-Otto Bauer, a member of Munich Re’s management board.

Given these trends, the insurance industry as a whole is likely to change the way it underwrites risk, the group explains. Insurers are likely to abandon their conventional practice of “retrospective underwriting”, which involves calculating premiums from past trends, as the current increase in disasters means that premiums are inevitably lagging behind the amounts being paid out.

Instead, an approach that loads premiums dependent on the level of perceived risk inherent in climate change is likely to be taken.

The natural disasters of 2001 also included non-global warming related disasters like the giant earthquake in El Salvador, which killed 845 people, and a major earthquake in Gujurat, India, which killed 14,000 people. Around the world there were 80 earthquakes, which produced $9 billion in economic losses and $900 million in insured losses.

But storms and floods last year, as in previous years, dominated the statistics. They accounted for over two thirds of all events and over 92% of all insured losses. Tropical storm Allison, which hit southern US in June, was the most expensive natural disaster of the year, resulting in a total loss of $6 billion, over half of which was insured.

There were also numerous strong typhoons including one that hit Taiwan in

September, causing an insured loss of $600 million.

Continuing global warming will mean insurance companies’ priority will be to insure themselves from these natural disasters. “The effects of climate change make adequate prospective underwriting more essential than ever,” stated Dr Bauer.

Action inspires action. Stay ahead of the curve with sustainability and energy newsletters from edie