Changing weather risks need bespoke reinsurance solutions: Munich Re

The trend towards greater frequency and severity of weather risk events in Europe, resulting in a higher risk of losses to insurers and reinsurers, requires an adjustment to the perception of risk as well as bespoke reinsurance solutions, Munich Re said this morning.

The world’s largest reinsurance firm believes that weather risk losses are on the rise, with factors affecting them from weather patterns to changes in property construction and features, necessitating a better understanding of the hazards and accumulation risks as well as risk transfer solutions for insurers and corporates, ultimately protecting their customers.

Households and companies in Europe have found themselves increasingly exposed to changing weather risks, with a greater frequency of persistent weather patterns in Europe a key cause. These persistent weather patterns result in long periods of dry weather or precipitation, resulting in droughts or river flooding and large insurance industry losses.

The number of loss events as a result of severe weather is on the rise, said Munich Re in a press release this morning, resulting in direct losses to households and companies, as well as loss of earnings for businesses with weather dependent revenue streams.

Munich Re has recorded a threefold increase in weather-related natural catastrophes worldwide, which have resulted in losses during the period 1980 to 2013. The number of severe convective thunderstorm events in Europe has more than tripled over the same period.

These heavy summer storms accompanied by damaging hail have become more frequent partly because the water content in the earth’s atmosphere is increasing, according to Munich Re. In fact the most costly insured weather loss in 2013 was a hailstorm in Germany with an insured loss amount of €2.8 billion (overall loss: €3.6bn). These weather patterns are increasing both the probability and intensity of hail and flash flooding, as a result changing the potential losses.

There has also been an observed increase in the persistence of weather patterns, with drought and heatwaves under high pressure systems in the summer, and river flooding under low pressure systems. Flood events in Germany, the Czech Republic and Austria in 2013 caused overall losses of €9.7 billion (insured loss: €2.4bn). In the United Kingdom, flooding end of last year and into early 2014 caused financial losses amounting to €1.1 billion and insured losses of €800m.

The losses resulting from these events are becoming increasingly difficult to predict, partly due to the changing frequency and persistence of weather systems, but also due to changes in the built environment. Changes in building features, such as thermal insulation and solar installations, tend to aggravate claims volatility, Munich Re explains.

“For primary insurers, this means rising income uncertainty and more volatile results”, commented Ludger Arnoldussen, member of Munich Re’s Board of Management. “Changing weather risk patterns necessitate an adjusted perception of risk and bespoke reinsurance protection. We need a better understanding of hazards and potential accumulation risks, and we need to analyse the risk locations in this regard.”

The most exceptionally persistent weather conditions can even threaten companies financial success, highlights Munich Re, citing energy companies exposure to weather risks as a prime example. These weather extremes and trends can be particularly damaging to companies with weak capital bases, suggesting that weather hedging solutions are a viable alternative for them.

Munich Re is once again highlighting its depth of expertise and ability to provide solutions across the insurance, reinsurance and also weather risk management value chain to insurers and companies affected by increasingly frequent severe weather events.

Munich Re has been pushing its solutions for large corporates in recent months, as it demonstrates to shareholders and customers that it can provide highly technical solutions which many smaller reinsurers cannot match.

We wrote in August about the highly complementary role that Munich Re’s weather derivatives trading and weather risk management solutions unit, Munich Re Trading LLC, plays within the reinsurer and how it could leverage this within its solutions for large corporates.

Of course these weather risks are also a prime target for the insurance-linked securities (ILS) sector and alternative reinsurance capital market, which would be expected to seek to participate in growing the available capacity for covering weather events and losses in Europe.

At the 2014 Baden Baden reinsurance meetings this week, expect Munich Re to continue to remind the market that its scale and depth of expertise positions it to whether the particularly challenging, soft reinsurance market environment.

Read some of our other recent coverage of Munich Re:

– Munich Re’s resilience to soft reinsurance market is faltering: RBC.

– Competing over the same cake could have disastrous results: Munich Re.

– Weather derivatives trading unit complements Munich Re: S&P.

– Munich Re feels competition, but hints at capital markets opportunities.