Munich Re Urges Insurers To Mitigate Coastal Risks

NU Online News Service, June 4, 3:06 p.m. EDT

Insurers of coastal properties can cut down their risk by inducing homeowners to strengthen dwellings and working to improve building and land use, a reinsurance expert suggested.

Carl G. Hedde, head of risk accumulation for Munich Reinsurance America, Inc. made his observations today during a Web seminar titled, "Basics of CAT Modeling."

Discussing tools for insurers to use in controlling exposure and reducing losses, he mentioned better land use planning and building codes, enforcement of those codes and modern building techniques, plus incentives for mitigation to retrofit homes to better withstand hurricanes.

In slide presentations, he showed how new homes, built to the best of standards to withstand a hurricane, have been able to remain intact while neighboring homes and complexes, that were older or built to lower standards were destroyed by the same storms.

Insurance costs should be actuarially sound, he continued, and the free market "should be allowed to work and do its job."

Without naming any one state, he was critical of locations where, he said, insurance is subsidized and does not reflect "the full cost of living in harms way." He also criticized practices where governments promote growth in hurricane prone locations and do a poor job in land use planning.

Mr. Hedde said the exposure from hurricanes is now nine times greater than it was in the 1980s due to a combination of growth in population along the U.S. coasts, increased building values and the threat of climate change.

He said 42 percent of the U.S. population lives in coastal areas with New York and Florida leading in building values.

"We like to live along the coast, right in the path of hurricanes," he observed.

Reviewing the complexities that go into creating catastrophe models, Mark C. Bove, GEO research specialist for Munich Reinsurance America said the intent of models is not to capture a single real world loss event but to track the exposure and cost impact to an insurer for a broad amount of exposure.

Models are effective once they have included a broad range of information that includes location, property density, valuation and nature of risk, and probability of event occurrence.

With this and other information, catastrophe modelers can then make determinations of probable maximum loss, the probability of the type and size of losses and what the aggregate probable loss amount would be for loss events. These calculations help insurers to determine their appetite for loss and underwrite accordingly, he said.