Natcat Half Year 2023: Part 1 & 2

Part 1

Mark Maroon:

Welcome to ClimateCheck. This is Mark Maroon, Vice President and Head of Portfolio Management and Reinsurance for American Modern, a Munich Re Company. Today I'm joined by what I think I could call recurring guests, Ernst Rauch, Chief Climate and Geo Scientist at Munich Re, along with Mark Bove, Meteorologist and Senior Vice President of Natural Catastrophe Solutions at Munich Re America. Ernst, Mark, thanks again for joining us today. It's great to have you back.

Ernst Rauch:

Yeah, thanks for having me. Greeting from Munich here.

Mark Maroon:

Appreciated. So in this series we've spoken to many of your colleagues, sharing their experience on the intersection of climate change and risk mitigation, topics that center on what both of you really do here at Munich Re.

So I know that we've just released figures on natural disasters from the first half of 2023, including some major event losses globally, including things like the devastating earthquake in Turkey and a series of thunderstorms in the US. So Ernst, maybe I'll start with you. Can you maybe begin by discussing some of these events and their impact?

Ernst Rauch:

Yeah. Let me first share with you sort of the observations which we made with respect to losses from natural disasters worldwide in the first half of 2023. Actually, we here in Munich, we are recording these numbers since back to the 1970s in our NetCatSERVICE database. And what we have in this database for the first half of 2023 is that worldwide economic losses in the order of $110 billion US dollars occurred, out of which $43 billion were insured. So in a positive sense, you can argue some 39% or almost 40% were insured. If you want to look from a different angle, you can also argue 60% were still not insured. So that's on the first half of 2023.

And if you put this year, or the first half of this year, in a longer context on the timescale, we see that if you look at the last 10 years or so, the number of 2023 was significantly higher. So the 10-year average for the insurance industry was $34 billion only in a first half of the last 10 years. So that gives us an indication that obviously over the last years, losses from natural disasters globally increased.

And what is not shown here with the statistics, if you dive deeper into these numbers or so, you would realize that it is mainly driven by weather-related losses, be it flooding, be it convective storms that we probably get to this point, what happened in the first half of 2023 in the US with respect to convective storms. So that's more on our list of issues and sometimes even concerns that these type of events like convective storms are on the rise.

Mark Maroon:

No, I think that's a good segue. So maybe Mark, I'll want to pick your brain on that a little bit more. When we talk about SCS events in the first half of 2023, do you just see this as sort of, "Hey, you know what? It was kind of random. It was just a bad storm season." Or do you think there's some more underlying factors that are driving this that we need to be aware of moving forward?

Mark Bove:

Yes. SCS losses do seem to be getting worse and worse every year, and there are several factors that are contributing to this. One is simply there is just more and more exposure for these storms to hit across the United States. And of course, those properties as we sprawl out and create suburbs and exurbs, those properties have more value today than they ever have before. Their personal property is more expensive, more electronic, and of course the socioeconomic environment that we're living in is way more expensive with lingering inflation from the Covid epidemic and of course supply chain issues that are still lingering as well.

But as we get more and more time, it is getting tougher to quantify and just say that the SCS losses are purely just an exposure and socioeconomic issue, though that is certainly still a major driver. Studies are showing that warmer atmosphere can be more conducive for severe thunderstorm events, and it appears year after year that we're having more and more severe outbreaks that are causing billion-dollar losses.

I think as time goes on, we're going to continue to see that balance shift, where the influence of socioeconomics, while still important, will play a lesser role than what's happening with the climate impacts. And this is critical, because we don't build our buildings today for the weather we have today, let alone what might happen in the future climate. And research is showing that asphalt shingles commonly fail after 10 years, so we basically are setting things up, unfortunately, to fail quite often.

Climate, well, there is no safe place to run to avoid climate change on this planet. It is a global phenomena, and it'll affect different areas of the globe differently. A lot of people tout New England, especially inland New England as one of the places that's "relatively better" in a warmer world. But look what happened in Vermont just two weeks ago. They got basically a summer's worth of rain within one day, and the state capitol, Montpelier, suffered devastating damage. It is their worst flooding since Irene only 12 years ago.

But again, you are going to find whether it's severe flooding, if it's severe heat waves, or severe thunderstorms, there's really no place that you can escape this. The important thing to do is learn how to adapt and mitigate what tools are going to change with climate change for whatever location you may live.

Mark Maroon:

So then I guess I would ask, I know we do organizationally a lot of work with organizations like IBHS. What are some of the things that they're looking at in terms of adaptation and sort of building a more resilient framework for structures and other things to help protect against some of these more large scale events that we're seeing?

Mark Bove:

Sure, Mark. I can take a stab at that. The assurances they do for business and home safety has been at the forefront for the past 20 years and even more so for the past decade since their lab in South Carolina opened, and understanding how full scale buildings respond to different natural perils. And the findings from the lab have been nothing but groundbreaking and changing the markets in the United States for the better.

The first, as the IBHS says, especially with residential and wind perils, you need to lead with the roof. Having proper hurricane strapping, sealing the roof deck either with felt or bituminous tape, and putting good wind-rated shingles on a roof actually are very critical. And recent major storm events like Ian has shown that fortifying the roof will help prevent major structural damage during a strong wind event. You might still lose segments of that roof, but you're not going to lose the walls, and there's still going to be a building there to come back to from the wind only, which is important.

There unfortunately is a downside though. The most common type of roof covering in the United States is asphalt shingle, whether it's standard three tab or architectural. And the IBHS ages these products to see how they fare over time when they're exposed to the ravages of UV light, to heat, to cold, to all these elements. And what they are discovering is that asphalt shingle resilience really starts degrading around 78 years of time in exposure. And after a decade, if those shingles are exposed to a severe wind or hail event, they are not going to be effective.

Roy Wright, the head of the IBHS, likes likens it to having tires on your car that lost all their tread, that they're bald. On a good day, driving around on bald tires, you're probably going to be okay. You'll get traction. But on a day it's bad and it's very wet out, you don't want to be on the roads. Those tires are not going to work and you're likely going to skid and be in an accident.

Same thing with your roof. After 10 years, the resilience is no longer there, and we need to figure out as a society, can these products be made better? Is it an installation issue? Is it anything else? Because ultimately, we want people not to lose their roofs. We don't want them to have to pay a deductible and have a claim. And it keeps the family safe, most importantly. But also, it keeps the community functioning normally. So we really need to learn, now that we understand how to keep the buildings up, now it's how do we reduce the losses and make sure the products we're using will last for a reasonable amount of time. So that is just what they're doing on wind and hail. They're doing a lot of work in wildfire, and they continue to push the conversation nationally for better building codes and resilience.

Ernst Rauch:

If I may add to this, how important prevention measures are can be explained by this simple equation which we use in our industry, in the insurance industry, to calculate risk premiums. And risk, so the average annual loss, so that's ultimately sort of the premium which we have to pay as homeowners, for instance, is composed of three simple elements. The one is the hazard, so the probability of say a storm or a flood occurring, and climate change is in many places increasing the probability and the intensity of these events. So this one goes up.

Then the second component is the vulnerability, so the reaction of a building to those perils. So what is the damage? Is it high or is it low or medium or so? That depends on the structural elements of the building, but also others like protecting the land and others. So the vulnerability is one component.

And the last one is sort of the value itself. And if you think about inflation, which we had and have, depends on the part of the world today, that's sort of usually upward pointing or so.

Now the only lever which is left or so to bring the risk down, so it was sort of the beginning of the equation, hazard, vulnerability, and exposure, is the level of the vulnerability, and that's prevention. And that makes it very clear that if we don't act on the prevention front, if we don't invest more to reduce the vulnerability of our buildings, then the result has to be, whether we like it or not, that pure risk premiums have to go up. And I think that cannot be in our interest, and that sort of needs to be discussed more to explain how our industry works and how these prices are calculated.

Mark Maroon:

Yeah. I couldn't agree more, because it seems like hazard unfortunately is only going one direction these days, and it's not a favorable direction for anybody really. Okay. Let's go ahead and pause here and we'll see you all on our next episode of ClimateCheck.

And listeners, if you would like to hear about other surprising interactions between climate change solutions and the risk mitigation industry, please subscribe to our podcast. And for more information, as always, head on over to munichre.com/climate. We'll see you next time.

Part 2: 

Mark Maroon:

Welcome to Climate Check. This is Mark Maroon, Vice President and Head of Portfolio Management and Reinsurance for American Modern at Munich Re Company. Today, I'm joined by Ernst Rauch, Chief Climate and Geoscientist at Munich Re, along with Mark Bowe, Meteorologist and Senior Vice President of Natural Catastrophe Solutions at Munich Re America. We are continuing our discussion on Munich Re's release of Natcat data for the first half of 2023.

Ernst, Mark, thanks again for joining us today. Last episode, we spoke about the figure shared for the first half of 2023, and ways to adapt and mitigate major losses. So, Ernst, I guess, I'd just ask you maybe to look into the crystal ball a little bit. What do you think is going to happen for the rest of 2023?

Ernst Rauch:

That's a question I think no one really can seriously answer. However, what can be said is that if you look into the past, is that typically the second half of any year in the past, or almost any year, we have observed in the Northern Hemisphere the activity of tropical cyclones. Now, be it tropical cyclones in the North Atlantics, which may or may not make landfall on the US territory, or if you go over to Asia in the Northwest Pacific, you have Japan, you have other regions there as well. And typically, those large scale meteorological events, tropical cyclones, hurricanes, typhoons also have been in the second half of the years in the past, sort of the main drivers of these losses. Now, building on this or so, we are in an El Nino year. And the El Nino year has meant, in the past, that the probability of such events occurring, so hurricanes occurring in the North Atlantic, was suppressed.

So, the average number of these storms in the North Atlantic was sort of below the long-term average. That could be a positive sign or so. Having said this, unfortunately, there is another driver which is pointing exactly in the opposite direction, and that's the sea surface temperature in the North Atlantic, which is by a number of degrees warmer than in the long-term average. And that's not limited to the North Atlantic, that's other ocean basins in the world as well. And high sea surface temperatures are favorable to cause and trigger more tropical cyclones. So, the bottom line here is we have sort of two sources to powers also fighting against each other. If I may draw this picture, El Nino would help reducing the probability of tropical cyclones whilst high temperature on the sea surface, so is more in favor of more tropical cyclones.

Again, that's of course looking in the glass ball, but that gives you an idea of how we look at our industry at these types of events on probabilities and what can be expected. The bottom line is to be prepared, and that's not just for us as an industry, but also for every private person, for every homeowner, for every community or so. Be prepared for, in the future, for more severe weather related events and more intense events. And talking about this term, the future, the future has started today, or a couple of years ago already. The future is not in 20, 30 years time. So, climate change is not something which will affect our children and grandchildren. It is there, and we do see some indications already in the loss records which we collecting here at Munich Re since many, many years, that climate change is already, in some regions, with some parallels, one of the drivers of upward pointing losses.

Mark Maroon:

Right, yeah. Tropical cyclone in the North Atlantic specifically. I mean, it is kind of that immovable object of El Nino versus the unstoppable force of the sea surface temperatures, right? And I know, I think I saw Noah in Colorado State, their projections were for a slightly above average hurricane season. I suppose time will tell what that ends up looking like come October, November. But one of the things we touched on a little bit earlier in our conversation was a little bit of a disparity between economic loss and insured loss. And I know that's probably a little bit less of an issue for the US as it is for some different parts of the globe.

So, I was just kind curious to get your opinion on what we can do to sort of close that gap between economic and insured loss. Are there ways that we can work with individuals or different institutions or governments, or find ways to really make people whole so that everyday folks aren't stock holding the bag when something happens?

Mark Bowe:

Mark, I'm going to disagree with you slightly. I still think the insurance gap is a major issue within the United States itself. Even for standard hazard insurance, usually the insured percentage of a natural catastrophe for wind or fire is typically still only around 50%. So, that's still is not full penetration, but it's enough that it helps communities get back on their feet and limits the amount of people that are left without any type of financial recourse or a way to be reimbursed and made whole again. But for certain perils in the United States, particularly flood, that gap is still wide open. Most inland counties in the United States, the take up rate of flood insurance by the National Flood Insurance program is still less than 1%. That holds true for Vermont, and look what happened past few weeks. They're not immune. The coast of the United States are a bit better with insurance take up, but even a only a handful of counties along the Atlantic coast have take ups of flood in excess of 50% as well.

So, the more that we can convince people that flood can happen to you, remember flooding, even if you don't live near a river, flash flooding can still affect you. It might be very small, but you should insure yourself because your standard homeowner's policy in the US is not going to cover it. And whatever you get from the government, as far as loans or a handout, is going to be pennies on the dollar for what you actually lost in the event. So, it is critical that people make sure they are insured to protect themselves because insurance is an individual's first line of financial resiliency in the face of Natcat and climate change.

Obviously, the rest of the developing world, penetrations differ. But Ernst, I again, look at the earthquake in Turkey this year, remember ISME in '99 and the destruction then, and it still pains me to see the relatively low take up rates, especially away from the major cities, and the poor construction quality that led to unfortunately so many fatalities there.

Ernst Rauch:

Indeed, Turkey is a good example, but there's also a little bit of a silver lining with respect to Turkey. But let me start with sort of the question of do we have a challenge on the demand side of insurance or on the supply side? Now, globally, the challenge is much more on the demand side. And before I get to Turkey, an example here from Germany. We currently have some 50% of the homes being insured against flooding or so. But years back in time or so, this ratio was much lower, or the insurance penetration was much lower. So it was a slow process to increase demand and factors which helped increasing the demand or the interest in insurance were, for the most, part very severe flooding catastrophes, which we had in Germany and other parts of Europe. I think that's not the best argument people can have to say, "Well, there was a catastrophe. Now I buy insurance."

I think information, let's maybe also call it education about what can happen, where people live in which exposed areas, would help in better understanding these parallels. Mark had a very good example with respect to the situation in Turkey, and that's a case and situation where we do see sort of a silver lining here. And the reason being is that in the year 1999, when there was the last major earthquake catastrophe in Turkey, there was no such thing like a mandatory earthquake cover. So, in the aftermath of this earthquake, the so-called Turkish catastrophe insurance pool was invented and developed over the last couple of years. And today, the positive thing is that some 50 to 60% of the residential homes are insured against earthquakes. There's still a ways to go, and I had the example here for Germany. It took us decades almost to arrive at this 50%.

So, it's a marathon and not a sprint, what is necessary. And it needs explanation, education, information to the people, what the value is of insurance, how this helps bringing more resilience to their livelihoods. Now, having a payout of 5 billion US dollars for this year's earthquake in Turkey and in Syria or so that helps people, $5 billion are not nothing. It's still only some 13% of the overall losses. So, again, it's not 100%, but the direction of travel when it comes to earthquake insurance Turkey. So, I'm positive that we will see more improvements driven by increasing demand. The supply is not the challenge, and us speaking for Munich Re, we have a strong interest in growing our natural catastrophe book globally, always as long as we get the right premium or so.

So, the appetite is there. It is a business, it's part of our core business activities. I think, indeed the challenge is to communicate with our clients, with our stakeholders, and discuss and engage in discussions on sort of the value, the resilience building value from insurance. And I think that's the main thing to increase demand. The example market, perfect on flood, inland flooding in US. Providing good examples what happens in other parts of the world might help understanding the value of insurance.

Mark Bowe:

Ernst, I also think there's a role as a reinsurer to help our clients out cover some of these gaps. Some of my work at Munich Re US has been on creating inland flood endorsement for low risk flood for people with basements that provides a much lower limit of coverage, but covers the vast majority of flood events these types of properties might receive. And we actually now have well over 100,000 policies in force across the country that we've provided to clients as a white label endorsement, and we are making a difference. People that never had flood insurance before now have enough limits to help cover their basements and minor flood events, and that hasn't happened. So, we're creating models that show that this apparel can be insured, and it can be done and also do it affordably.

Ernst Rauch:

I fully agree with you, Mark. We also, as a supplier of this risk transfer solutions, be it reinsurance, be it primary insurance, we have a role to play and we have to become more innovative in developing solutions which really help our clients and help society to become more resilient. So, it is also the supply side, which I think then, in turn or so, will result in an increase in demand if we offer the right products. And so, that's on us to become better here as well. Good point, Mark.

Mark Maroon:

Well, I think this is very encouraging. Certainly there's still a lot of work to be done in this space, but it does sound like we've taken quite a few good first steps, so I'm excited to see the progress over time here as well. Gentlemen, thank you so much for joining us today. I feel like we've covered a lot of ground and gotten a lot of good insights, so I appreciate you taking the time to join us.

Ernst Rauch:

Thank you.

Mark Bowe:

Thank you, Mark.

Mark Maroon:

And listeners, if you would like to hear about other surprising interactions between climate change solutions and the risk mitigation industry, please subscribe to our podcast. And for more information, as always, head on over to munichre.com/climate. We'll see you next time.