In 2009, natural catastrophes claimed 9,000 lives worldwide and cost insurers $22 billion, even though the year was considered to be a low-loss year compared with previous years.

Asia was hardest hit: typhoons and earthquakes caused the most fatalities in the region, with losses for the insurance industry totalling around $2.4 billion.

The year’s biggest insured losses were the result of storms. In total, six natural catastrophes generated losses of more than $1 billion each.

• The winter storm “Klaus”, for example, which raged through France and Spain in January 2009, cost insurers more than $3.4 billion.

• The 2009 hailstorm “Wolfgang,” which swept across Central Europe at speeds up to 130 km/h, dealt a $1.2 billion blow in insured losses.

• In the United States, heavy storms with wind speeds of up to 145 km/h inflicted losses of $1.35 billion.

IMMENSE ALLIED PERILS

In addition to primary hazards like storms, natural phenomena, also known as allied perils, can cause extensive property damage. Major global allied perils include floods, earthquakes, hailstorms, tornadoes, snow and ice storms, as well as droughts and brush fires.

More than half the loss burden from natural catastrophes in 2009 was attributable to allied perils. By comparison, over the past 30 years, they constituted only about 30 percent of all natural catastrophes.

In recent years, insured losses from allied perils have often amounted to $10 billion, thus exceeding the 30-year average of $6.5 billion. (See accompanying graph).

CLIMATE CHANGE: THE BRUTAL CONSEQUENCES

Global warming is happening—and it is something risk managers of both the public and private sectors cannot ignore. In fact, the warmest 10 years on record since 1850 (when temperature data was first recorded) have all been after 1996.

The concentration of greenhouse gases in the atmosphere far exceeds the levels observed over the past 100,000 years. Even if we could fully curb global greenhouse gas emissions now, we would still have to cope with climate change.

The longer we wait to cut greenhouse gases, the greater climate change will be, although its effects will differ markedly depending on the location. Populations in many regions are thus faced with the ever greater and costlier challenge of protecting assets against weather-related risks. These include more frequent and devastating storms, floods, droughts and other natural catastrophes. There are also rising sea levels, crop failures and water shortages.

For Europe alone, the loss burden from storm flooding on the North Sea coast is predicted to more than quadruple, soaring from an annual average of 600 million euros to 2.6 billion euros by the end of this century, according to some estimates.

Developing countries are the most vulnerable and the least prepared. In its 2009 study “Shaping climate resilient development,” the Economics of Climate Adaptation working group estimated that by 2030, climate risks in developing countries could generate losses of up to 19 percent of gross domestic product. (The ECA is a partnership between the Global Environment Facility, McKinsey & Company, Swiss Re, the Rockefeller Foundation, ClimateWorks Foundation, the European Commission, and Standard Chartered Bank.)

RISK MANAGEMENT IS CRUCIAL

For the decision-maker, the challenge in developing a risk management approach is striking the right balance between loss prevention and risk transfer measures. In practice, collecting and analyzing data—essential for making an informed choice—requires a high level of teamwork between the relevant public and private-sector entities. For this reason, appointing a central person at a government level to lead and coordinate these efforts is recommended.

As a result of climate change, risks are not only becoming increasingly complex and more interlinked, but coverage against those risks is also becoming increasingly costly and complex. This makes public-private partnerships essential in order to provide appropriate coverage to local populations that are vulnerable to natural catastrophes.

Many of these solutions can be replicated elsewhere and adapted to the specific risk exposure of other regions. But since no approach can be applied in all situations, constant innovation is necessary to protect local populations against the unforeseen effects of climate change. The specialized resources and technical know-how of public and private institutions can make an important contribution to these efforts.

INSURERS LEND A HAND

Innovative insurance solutions integrating partnerships in the public and private sectors can provide affordable options to protect against financial consequences before a catastrophe actually occurs—and give populations more resilience in cases of emergency.

The ECA working group also came to an encouraging conclusion. Case studies in eight different regions around the world, ranging from Maharashtra, India to Florida and Northern England, show that up to 68 percent of expected losses resulting from climate change can be prevented by cost-efficient changes of approach.

These include improved drainage and irrigation systems, flood barriers and tighter construction codes, vegetative buffer zones and campaigns to raise catastrophe awareness.

Most importantly, these provisions can be implemented at a tenable cost and achieve verifiable benefits.

While preventative measures are keys to risk management, no society can afford to prevent losses from every conceivable risk event. This is especially true for risks that are highly unlikely, if they ever occur at all. Risks can only be averted at exorbitant cost.

Annual losses from hurricanes in southern Florida, for example, are expected to reach a staggering $33 billion by 2030, which corresponds to around 10 percent of the region’s entire gross domestic product.

At the same time, a significant portion of the losses—about 40 percent—are virtually impossible to prevent cost effectively.

EXPLOITING SYNERGIES

Synergies can be achieved through a coordinated balance between prevention and insurance. Insurance is an indispensable component of any adaptation strategy.

It is equally important, however, to keep insurance premiums under control by keeping residual risk to a minimum through preventative measures. Only then can exposure to storm risks be reduced, through improved mitigation measures against storm floods.

At the same time, this can ensure that risk transfer options for less common, more severe storm events remain affordable. Reasonable insurance premiums then become a strong incentive to invest in preventative measures that promise economic benefit.

David Bresch is director, sustainability and emerging risk management, with Swiss Re, Zurich. He may be reached at David_Bresch@swissre.com.

Special Reports /

Insuring Against Risk: A Synergistic Approach To Risk Management

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