CATASTROPHIC RISK AND INSURANCE Hurricane and Hydro meteorological Risks INTRODUCTORY REMARKS OECD IAIS ASSAL VII Conference on Insurance Regulation and Supervision in Latin America Lisboa, 24-28 April 2006 Alberto Monti Principal Administrator Financial Affairs Division OECD 1
CATASTROPHIC RISK AND INSURANCE: RECENT OECD ACTIVITIES Several key publications between 2003 and 2005: natural catastrophes man-made disasters (special focus on terrorism) International Conference (Paris, 22-23 November 2004): Insurability of catastrophic risks Financial markets solutions to manage cat risks (ART) Role of governments (Public Private Partnerships) International Network on Financial Management of Large Scale Catastrophes (new project under the aegis of the Insurance and Private Pension Committee and the Committee for Financial Markets) 2
HYDRO METEOROLOGICAL RISKS Risks caused by WATER and WEATHER In particular: STORMS (Hurricanes, cyclones and windstorms) FLOODS (due to meteorological conditions) 3
THE CHANGING RISK SCENARIO During the past 35 years (1970-2005): trend towards higher catastrophe losses Hydro meteorological risks: CLIMATE CHANGE (global warming) rising sea level (effects on tsunami events and storm surge) WARM PHASE of the Atlantic Multidecadal Oscillation, AMO (surface water temperature) hurricanes Increasing hurricane activity increasing frequency of extreme flood events 2005 has been a record year for weather related natural catastrophes losses. 4
THE CHANGING RISK SCENARIO 2005 Record hurricane season (N. Atlantic) Total losses estimated at USD 170 bn Insured losses estimated at approx USD 70bn 15 hurricanes (previous record year: 1969 with 12) Highest number (3) of category-5 hurricanes (Katrina, Wilma and Rita) 2005 Winter storms and floods in Europe Winter storm Erwin (January) Floods in the Alpine region (August) (Sources: Swiss Re and Munich Re, 2006) 5
TREND TOWARDS HIGHER LOSSES EXPOSURE Rising population densities and value concentrations Growing urbanization of exposed areas (floodplains, coastal areas, etc) VULNERABILITY Lack of risk awareness Lack of sufficient preventive and mitigation measures Lack of effective disaster response and crisis management strategies 6
LESSONS LEARNED HURRICANE KATRINA (US 2005) NEW LOSS DIMENSION Most expensive insured event in the US Estimated total insured losses: USD 40 to 55 bn Personal lines: USD 15.2 to 19.3 bn Commercial lines: USD 19.7 to 25.3 bn Marine and Energy: USD 4 to 6 bn Liability: USD 1 to 3 bn Other: Up to USD 1 bn (Source: Towers Perrin, October 2005) 7
LESSONS LEARNED HURRICANE KATRINA (US 2005) Crisis management issues: efficient disaster response strategies may reduce the total costs of catastrophes Social issues: vulnerable layers of the population were affected (uninsured losses / ex post public aid) Insurance coverage issues: need to distinguish between wind and flood damage (claims adjustment) Wind: homeowners insurance policy Flood: National Flood Insurance Program (NFIP) 8
INSURANCE PERSPECTIVE Generalized uncertainty (weather risks are changing) Financial capacity (new loss dimension) Risk of accumulation (geographical and inter-temporal spreading problems) Reinsurance (financial capacity / risk spreading at international level) Adverse selection (bundling / risk classification) Pricing mechanism (risk based pricing / incentives) Institutional cooperation (with public sector) 9
RISK AWARENESS KNOWLEDGE OF CHANGING RISK SCENARIO (assessment and management) Public Authorities (domestic and regional initiatives) Insurance/Reinsurance Companies PUBLIC RISK AWARENESS Education of the public Improve responses to warnings Incentives to manage the risk efficiently (insurance) STRUCTURAL vs. NON STRUCTURAL SOLUTIONS 10
KEY ISSUES AT STAKE Changing hydro meteorological risk scenario New loss dimension (high financial burden) Financial impact on insurance / reinsurance sector Public risk awareness (incentives to manage the risk) Enforcement of vulnerability reduction measures Disaster response and crisis management strategies Need for an integrated disaster risk management strategy (public-private partnership) Need for international cooperation at a global level OECD NETWORK PROJECT 11
CONTACT INFORMATION OECD Website : www.oecd.org/daf Alberto Monti Principal Administrator Financial Affairs Division OECD Tel: + 33 1 45 24 78 48 E-mail: alberto.monti@oecd.org 12