The financial implications of climate change: the North East and beyond. Focus on Climate Change, Pace Energy and Climate Center, June 27, 2012

Transcription

1 The financial implications of climate change: the North East and beyond Focus on Climate Change, Pace Energy and Climate Center, June 27, 2012

2 Agenda Introduction Financial impacts of weather extremes North East: exposed and vulnerable How insurance can help: products & research Conclusion 2

3 Headquarters, Zurich Armonk, New York The Gherkin, London Swiss Re at a glance Swiss Re is a leading and highly diversified global reinsurer, founded in Zurich (Switzerland) in years of experience in providing wholesale re/insurance and risk management solutions. We deliver both traditional and innovative offerings in Property & Casualty and Life & Health that meet our clients needs. A pioneer in insurance-based capital market solutions, we combine financial strength and unparalleled expertise for the benefit of our clients. Our financial strength is currently rated: Standard & Poor s: AA-/stable; Moody s A1/positive; A.M. Best: A+/stable Key statistics in USD bn FY 2010 FY 2011 Premiums earned: Net income: Shareholders equity: Life & Health 44% Revenues by business (Total 2011: USD 21.3bn) Return on equity: 3.6% 9.6% Return on investments: 3.5% 5.1% P&C combined ratio: 93.9% 101.6% L&H benefit ratio: 88.7% 87.9% 3 Property & Casualty 56%

4 Swiss Re is broadly diversified by geography and product line Premiums earned (USD 22.2 billion) by region (in USD bn) and by product line: P&C nontraditional Specialty 2% 11% Life 28% Life & Health 46% Americas Europe Asia 42% (incl. Middle East /Africa) 39% 19% Property & Casualty Property 24% Casualty 17% Swiss Re benefits from geographic and business 54% mix diversification and has the ability to reallocate capital to achieve profitable growth Combines accumulated expertise of over 149 years and continuing research with a widely recognised strong track record of innovation 1 Includes fee income from policyholders Health 11% Admin Re 7% 4

5 Natural catastrophe losses continue to rise in frequency and severity Insured losses USD bn, at 2010 prices 2005: Hurricanes Katrina, Rita, Wilma : Hurricane Andrew 1994: Northridge EQ 2004: Hurricanes Ivan, Charley, 1999: Frances Winter storm Lothar 2001: Attack on WTC 2008: Hurricanes Ike, Gustav 2010: EQs Chile, New Zealand Earthquake/tsunami Man-made disasters Weather-related Nat Cats 5

6 Massive gap between economic and insured losses Natural catastrophe losses , in USD billion Hurricane Katrina Hurricane Andrew Hurricane season 2004 Hurricane Ike Note: Loss amounts indexed to 2009 Source: Swiss Re, sigma No 2/2010 6

7 The weather loss picture 2011 Global losses Global weather related losses (economic) ~$128 bn Global weather related losses (insured) ~$61bn Between the average insurance losses due to natural catastrophes was US$ 5 billion/year, since then it is closer to US$ 30billion. 32 out the 40 most costly insurance loss events between are weather-related (Swiss Re sigma) US losses Weather loss (economic) ~ US $55 bn Weather loss (insured) loss ~$ 35 bn US Tornado/hail losses (record breaking) ~$25bn Joplin Tornado insured loss ~$6 bn Hurricane Irene insured loss ~ 4.3 bn In the 1980's the average weather related insurance loss in the US was in the region of $3 bn/year. By the end of the first decade of this century this had increased to approximately $20 bn/ year 7

8 Population increases magnify the potential impacts of a hurricane striking NYC, Long Island 8

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10 The 1938 Long Island Express 10-12ft storm surge Devastated Long Island, Connecticut, Rhode Island NYC mostly spared being on western side of the storm. 63'000 made homeless, people killed Economic loss $308 million Repeat today would cause $70 billion economic losses (source: AIR). Image source: AIR Worldwide Corp. 10

11 Resiliency is a major issue: example tropical storm Irene August 28th 2011 New York ~4 million without power 370,000 evacuated 12'500 flights canceled New Jersey Loss (economic) >$10 billion Loss (insured) $4.3 billion ~ 1 million without power Connecticut 50% power outage Ridgefield 90% Rhode Island 50% power outage Vermont 800 homes/300 bridges damaged/ destroyed Source: web-search 11

12 How can the re/insurance industry help? Assess, quantify and price climate risk encourage improved risk management via the pricing mechanism Engage in relevant research Advise decision-markers about managing climate risks Transfer risk to the insurance and capital markets 12

13 The main functions of risk transfer Slide 13

14 Insurance products Traditional re/insurance covers property damage covers Construction/operational risk covers for renewable energy project Solar, wind (on & off shore), geo-thermal, biomass, small scale hydro Revenue/volume risk e.g. wind power (too much/too little wind) parametric insurance Emergency liquidity products National or regional governments Crop insurance agriculture industry, microinsurance clients 14

15 Climate related research helping decision-makers prepare for climate change How can we adapt to climate change in a cost efficient manner? How can we deal with the uncertainties and imperfect knowledge? How should we prioritize the numerous adaptation options? What is better prevention or risk transfer? 15

16 The Economics of climate adaptation 17 regional adaptation strategies Diverse climate and economic development levels Joint execution: Swiss Re's probabilistic NatCat models and McKinsey cost / benefit methodology Public private partnership: EU commission, Rockefeller, Standard Chartered, McKinsey, Climate Works, Swiss Re Key results: Significant economic value at risk: 1-12(19)% of locations studied GDP by 2030 under current (high) climate 40-68% of losses can be averted cost effectively Insurance suited for low-frequency, high-severity events 16

17 Result: Expected losses by scenarios and by hazard Example Florida: Slide 17

18 City of Hull, UK Example city of Hull, UK: 18 Please find the full study at

19 Locally specific adaptation cost / benefit curve Example Florida 19

20 High Climate risk is best tackled with a portfolio of adaptation measures List of potential measures to reduce hurricane damage 1 Sand bags 2 Opening/ masonry 3 Temporary floodwall 4 Levee and floodwall Severity of hazard Targeted hardening (utilities) Home elevation Local levees Road elevation Roof (various) Beach nourishment Vegetation management Financial risk transfer Undergrounding (utilities) Substation backup Low <=Once every 50 years Once every years Once every 10 or fewer years SOURCE: Team analysis Frequency of hazard Example Florida 20

21 Global overview: Expected loss averted by adaptation measures Slide 21

22 Conclusions Climate change is a fact and is happening; Economic development, population growth and migration into risk-prone areas will increase the socio-economic impacts of climate change (if not addressed); Significant amounts of loss can be averted through economically attractive climate adaptation measures but we cannot "climate proof" society or adapt our way out of the situation entirely! Insurance is a natural component of a climate adaptation strategy; The most effective response dictates early action for the mitigation of, and adaptation to, climate change. 22

23 Thank you

24 Legal notice 2012 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivatives of this presentation or to use it for commercial or other public purposes without the prior written permission of Swiss Re. Although all the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage resulting from the use of the information contained in this presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group companies be liable for any financial and/or consequential loss relating to this presentation. 24