Climate Change in Mexico implications for the insurance and reinsurance market

Climate Change in Mexico implications for the insurance and reinsurance market Eberhard Faust Geo Risks Research Munich Reinsurance Company 1980 April 2008: Billion & Ten Billion Dollar Losses The costliest natural catastrophes for the insurance industry 7 8 21 23 21 16 bn$-events (96) 1980 1985 1990 1995 2000 2005 2008 January 1994 Northridge Earthquake Fatalities 61 Overall losses**: US$ 44bn Insured losses**: US$ 15.3bn September 2005 Hurricane Rita Fatalities 10 Overall losses**: US$ 16bn Insured losses**: US$ 12bn August 2005 Hurricane Katrina Fatalities 1322 Overall losses**: US$ 125bn Insured losses**: US$ 61.6bn September 1991 Typhoon Mireille Fatalities 62 Overall losses**: US$ 10bn Insured losses**: US$ 7bn Insured losses* US$bn 1-10 Insured losses* US$bn >10 Earthquake, volcanic activity Storm Flood, mass movement (wet) Extreme temperature, drought, fire October 2005 Hurricane Wilma Fatalities 42 Overall losses**: US$ 20bn Insured losses**: US$ 12.4bn August 1992 Hurricane Andrew Fatalities 62 Overall losses**: US$ 26.5bn Insured losses**: US$ 17bn September 2004 Hurricane Ivan Fatalities 125 Overall losses**: US$ 23bn Insured losses**: US$ 13.8bn * Losses in 2007 values ** Losses in original values As at: April 2008 2008 Munich Re

Number Natural disasters in Mexico 1980-2007 North and Central America, Caribbean 300 250 200 150 100 50 0 1980 Earthquake, volcanic activity Storm Flood, mass movement (wet) Extreme temperature, drought, fire 1985 1990 1995 2000 2005 Number Loss US$ bn* 30 25 20 15 10 5 0 1980 1985 1990 1995 2000 2005 5 4 3 2 1 Annual number of events in Mexico Earthquake, volcanic activity Storm Flood, mass movement (wet) Extreme temperature, drought, fire As at: May 2008 8,0 8,7 Overall and insured losses Overall loss Insured loss * Losses in 2007 values As at: May 2008 2008 Munich Re, NatCatSERVICE 2008 Munich Re, NatCatSERVICE 0 1980 1985 1990 1995 2000 2005 Tropical cyclone tracks in the North Atlantic 2007 Tracks of tropical cyclones in the North Atlantic 2007 At the Pacific coast (not shown) 3 tropical cyclone landfalls in 2007: - Trop. Storm Barbara, June 2, Chiapas - Cat 1 Henriette, Sept 4, Baja California Sur - Cat 1 Henriette, Sept 6 Sonora. Hurricane losses 2007 in Mexico: total insured US$ 0.7bn US$ 0.45bn Mexico 2005 most expensive hurricane losses Total insured Hurricane Stan US$ 2.5bn US$ 0.1bn Hurricane Wilma US$ 5bn US$ 1.8bn Source: Munich Re 2008 Data source: NOAA, NHC, Munich Re

Tropical Cyclones striking Central America and the Caribbean Number of Storms Hurricane landfalls Caribbean and Central America 1900 2006 Source: Curry, J. et al. 2007 Blue line: 10-year moving avg warm cool warm Tropical cyclone activity: Correlated to regimes of the Atlantic Multidecadal Oscillation (AMO). Since mid-1990s: warm phase (enhanced activity). Number of Storms 30 25 20 15 10 5 0 Tropical cyclones formed per year in the Atlantic basin 1900-2007 Source: warm Munich Re 2008 Tropical Storms + Hurricanes Hurricanes (Category 1-5) Major Hurricanes (Category 3-5) 10 yr moving avg Cat 3-5 10 yr moving avg Cat 1-5 10 yr moving avg all cool warm 1900 1920 1940 1960 1980 2000 Atlantic hurricanes and Global Warming acc. to a recent multimodel study (Emanuel et al., 2008): - increase in released wind power (~ +10%) - increase in storm intensity (~ +7%) in an atmosphere with a concentration of 720 ppm CO 2 Tropical Cyclones in the eastern North Pacific 1970-2006 Named storms Hurricanes Major hurricanes Source: BAMS June 2007, State of the Climate in 2006, p.551 (Levinson, D.H.) Tropical cyclone activity: lower activity level with onset of the warm-phase regime of the Atlantic Multidecadal Oscillation (AMO) in the mid-1990s (except of strong El-Niño years)? Eastern North Pacific hurricanes and Global Warming acc. to a recent multi-model study (Emanuel et al., 2008): - decrease in released wind power - decrease in storm frequency - unchanged storm intensity and duration in an atmosphere with a concentration of 720 ppm CO 2

Heavy precipitation in Mexico Example: Tabasco and Chiapas Floods Oct./Nov. 2007 Flooded areas in Tabasco at November 12, 2007: - 70-80% of state flooded - hundreds of thousands of people were affected - US$ 2.5bn overall losses, 0.35bn insured losses - 160,000 ha of cacao, plantains, corn, papaya lost - 500,000 acres of grazing land affected Source: UNDAC, MapAction, Mapa de la Zona Afectada as of Nov 12, 2007 Heavy precipitation in Mexico Daily intensity Projected change in simple daily intensity by 2080-99, scenario A1B mm/day Alexander et al. 2006 Trend per decade in mm/day Source: Pérez et al., 2006, Reporte Técnico (Earth Simulator acc. to scenario A1B) Consequences for risk management: - improved flood risk mapping (spatial data on values insured ) - improved flood plain management including effects from land sinking - avoidance of new settlements in flood plains - individual prevention measures, early warning.

Mexican Monsoon System hail, severe weather Percent of annual rainfall falling in July Sept. 60 H 50 40 On average dramatic increase in thunderstorm and hail storm activity in July August over northwestern Mexico Future climate projection: Intensity of rainfall increases, Seasonal amount stays constant Most likely result: more intense individual thunderstorms and hail events Consequences for risk management: - improved agricultural hail risk mapping (spatial data on values insured, hail climatology) - prevention measures against hail damage (hail nets). Mexico s drying under climate change OBSERVED: Difference in annual mean precipitation 1993 2002 minus 1945 1992 Consequences for risk management: Agriculture - climate advisories/seasonal forecasts for agriculture (including training & education of farmers) Source: Seager et al.( 2007) submitted to Atmosfera mm/day PROJECTED: Difference in annual mean precipitation 2021 2040 minus 1945 2000 - adaptation to drier conditions through new crop varieties, optimized irrigation strategies - new allocation of agricultural land Urban water supply - avoiding shortages in urban water supply: water demand management, water metering and pricing, repair of leaking pipes, Source: IPCC AR4 (2007) multimodel ensemble mean according to scenario A1B, Seager et al. (2007) - trigger based products pertaining to supply shortages, droughts,

Approach to climate change taken by Munich Re Basis of credibility: Carbon-neutral strategy Munich Re will be carbon neutral by 2009 in Munich and by 2012 world wide Risk assessment/ underwriting Changed frequencies/ intensities of weather hazards in underwriting/risk management New markets/ new products Pathway to low-carbon, hazard-adaptive economies: new business opportunities Management of assets Integration of sustainability criteria into investment strategies Approach to climate change taken by Munich Re Risk assessment/ underwriting Changed frequencies/ intensities of weather hazards in underwriting/risk management Examples: Tropical cyclones, El Niño/La Niña, Prospective risk management Holistic approach in risk models (budgets) Climate risk analyses of clients portfolios Loss [US$ bn.] 500 450 400 350 300 250 200 150 100 50 For instance, adjustment of risk assessment to enhanced levels of Atlantic hurricane activity since the mid-1990s Hurricane loss adjusted to current warm phase activity all events from historical catalogue 1 10 100 1.000 10.000 Return Period ENSO state of highest hurricane landfall probability: Mexico, Atlantic coast: La-Niña years Mexico, Pacific coast: neutral & El-Niño years

Approach to climate change taken by Munich Re New markets/ new products Pathway to low-carbon, hazard-adaptive economies: business opportunities Examples: Kyoto Multi Risk Cover (delivery of carbon credits as planned) Microinsurance in developing economies Insurance solutions for immediate disaster relief Covers for renewable and low-carbon energies/ energy efficient technology Mexico: 70% of the population is living in regions with a GDP per capita below the national average Approx. 3% of households in middle income countries have insurance coverage against catastrophe risks. After severe catastrophes low income households have to rely on governments and ad hoc assistance of donors; normally it takes several years for them to recover from such hits. Sustainable economic growth is only possible, if microentrepreneurs are protected from the impact of natural disasters. Microinsurance Approach to climate change taken by Munich Re New markets/ new products Pathway to low-carbon, hazard-adaptive economies: business opportunities Examples: Kyoto Multi Risk Cover (delivery of carbon credits as planned) Microinsurance in developing economies Insurance solutions for immediate disaster relief Microinsurance development of life and property microinsurance policies for microentrepreneuers in South America in a joint project with a primary insurer - responsive to essential needs for risk protection of the poor, easy to understand, affordable. Examples: - term life insurance (payment to beneficiaries on death) - - property insurance with named perils flood, wind, earthquake, landslide, fire, theft - monthly premiums US$ 0.3-10 depending on the sum insured Covers for renewable and low-carbon energies/ energy efficient technology

Approach to climate change taken by Munich Re Development of insurance covers for people in developing countries Munich Climate Insurance Initiative (MCII) Main tasks: Developing risk transfer solutions in order to meet the needs for adaptation to climate change Supporting pilot projects for the application of insurancerelated solutions Cooperating with scientific and financial institutions in order to create risk transfer solutions Identifying and promoting loss reduction measures for climate-related events www.climateinsurance.org New markets/ new products MCII was founded in 2005 by Germanwatch, IIASA, Munich Re, Potsdam Institute for Climate Impact Research (PIK), Swiss Federal Institute of Technology (SLF), Tyndall Centre, World Bank and independent experts. Approach to climate change taken by Munich Re New markets/ new products Pathway to low-carbon, hazard-adaptive economies: business opportunities Examples: Kyoto Multi Risk Cover (delivery of carbon credits as planned) Microinsurance in developing economies Insurance solutions for immediate disaster relief Covers for renewable and low-carbon energies/ energy efficient technology Example: Caribbean Catastrophe Risk Insurance Facility (CCRIF): Island states in the Caribbean: - repeatedly storm losses affecting the main sources of income (agriculture, tourism) in recent years & devastating the economy. - relief only through donor countries via World Bank weeks and months after the event often too late. CCRIF - Based on a parametric trigger: Storm intensity (or in case of earthquake ground acceleration) exceeding a predefined threshold triggers immediate payment to governments that constitutes a reasonable approximation of the expected loss. -16 Caribbean states insured since June 1, 2007. Risk cover pertains to hurricanes and earthquake.

New markets: Renewable energies Conclusions Weather hazards are likely to increase in Central America due to climate change, in particular flood, windstorm, hail, drought. The costliest weather hazards are hurricane damages which already have a focal area around Central America/Gulf of Mexico and the Caribbean. Risk management has to be adjusted to these changes. Insurers need improved flood risk risk mapping, higher transparency of locations. They should support individual loss prevention measures, engage in establishment of properly adjusted building regulations and early warning systems. Besides risks also opportunities are involved for the insurance industry. Higher activity levels of weather extremes require more insurance cover, but also risk-adequate pricing. Insurance solutions for lowcarbon or carbon-neutral technologies such as renewable energies are requested, also microinsurance solutions for the poor. Climate change means risks and opportunities at the same time and deserves our attention.