The Strategic Risk Forum The Insurance Institute of South Africa Breakfast Session on HAIL 30 May 2014
Hail exposure and risk management in crop production Global view and focus on South Africa 30.05.2014 Holger Schwarz
Statement The South African farmer is ever more exposed to hail and other natural perils. Therefore he needs a comprehensive insurance cover as a risk management tool. How can this be achieved in South Africa? Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 3
Agenda Part 1 Meteorology Loss Experience Meteorology Climate Change Part 2 Crop Hail Insurance Characteristics and Development from Hail towards MPCI (Multi Peril Crop Insurance) Part 3 Public Private Partnership (PPP) The sustainable risk management system for crop production Part 4 Summary and Conclusions for South Africa Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 4
Part 1 - Meteorology 30.05.2014 Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz
NatCatSERVICE Loss events in Africa 1980 2013 Geographical overview Floods, flash floods 2002 Morocco Overall losses*: US$ 200m Insured losses*: US$ 140m Fatalities: 63 Earthquake 1980 Algeria Overall losses*: US$ 3,000m Fatalities: 2,590 Earthquake (series), tsunami 2003 Algeria Overall losses*: US$ 2,500m Insured losses*: US$ 10m Fatalities: 2,200 Severe storms, floods 2012 South Africa Overall losses*: US$ 250m Insured losses*: US$ 140m Fatalities: 11 Floods Dec 2010 Feb 2011 Southern Africa (esp. South Africa) Overall losses*: US$ 435m Insured losses*: US$ 5m Fatalities: 198 Drought 2000 Morocco Overall losses*: US$ 900m Floods 2012 Nigeria Overall losses*: US$ 500m Fatalities: 363 Limnic eruption Lake Nyos 1986 Cameroon Overall losses*: US$ 25m Fatalities: 1,746 Hailstorms, flash floods 2013 South Africa, Swaziland Overall losses*: US$ 200m Insured losses*: US$ 110m Fatalities: 2 Tornado 1990 South Africa Overall losses*: US$ 380m Insured losses*: US$ 115m Fatalities: 2 Wildfires 2008 South Africa Overall losses*: US$ 430 Fatalities: 34 Earthquake 1992 Egypt Overall losses*: US$ 1,200m Fatalities: 561 Floods 1988 Sudan Overall losses*: US$ 66m Insured losses*: US$ 2m Fatalities: 8,000 Floods 1997 Somalia Fatalities: 2,000 Drought 1990 1993 Southern Africa (esp. South Africa) Overall losses*: US$ 1,400m Floods 2000 Southern Africa (esp. Mozambique) Overall losses*: US$ 520m Insured losses*: US$ 50m Fatalities: 1,000 Floods 1987 South Africa Overall losses*: US$ 520m Insured losses*: US$ 250m Fatalities: 487 Loss events Selection of catastrophes Geophysical events (Earthquake, tsunami, volcanic activity) Meteorological events (Tropical storm, extratropical storm, convective storm, local storm) Hydrological events (Flood, mass movement) Climatological events (Extreme temperature, drought, wildfire) *Losses in original values Source: Munich Re, NatCatSERVICE, 2014, 2014 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE As at March 2014 30.05.2014 6
NatCatSERVICE Weather-related loss events in South Africa 1980 2013 Overall and insured losses million US$ Overall Losses US$ (adjusted to 2013 values based on local CPI) Insured Losses US$ (adjusted to 2013 values based on local CPI) 2014 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE As at March 2014 30.05.2014 7
NatCatSERVICE Weather-related loss events in South Africa 1980 2013 Percentage distribution 445 Loss events 2,500 Fatalities* 56% 30% 14% 30% 61% 8% Overall losses** US$ 9bn Insured losses** US$ 1.4bn 29% 28% 42% 54% 45% 1% Meteorological events (Tropical storm, extratropical storm, convective storm, local storm) Hydrological events (Flood, mass movement) Climatological events (Extreme temperature, drought, forest fire) *Number of fatalities without famine, **Losses in 2013 values, adjusted to inflation based on country CPI 2014 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE As at March 2014 30.05.2014 8
Areas prone to hail in South Africa Average ground stroke density from a lightning detection network, period Dec 2005 March 2006 Source: Pyle, 2007 Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 9
Observed changes in annual number of warm days Brown to red colors indicate increasing linear trend of 1-3 days per decade since 1950. 1950-2010 Warm days are defined as the annual percentage of days when the daily maximum temperature exceeds the 90th percentile within the reference period 1961-1990. Donat et al., 2013 Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 10
Basic physics: How does atmospheric moisture respond to increasing temperature? Physically determined relationship between temperature and humidity: per 1 C warming the moisture content (saturated air) increases by ~7% 1973 2012 Source: Willett et. al. (2013), Clim. Past, 9, 657 677. Black dots: significant trend Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 11
Extreme events (cont.) Severe thunderstorms (hail, gusts, tornadoes) Observation: Some studies show increases in large hail / hail at all in Europe or America (France, Italy, Germany, Canada), others have mixed signals (Argentina, USA) or decreases (China). AR5 assessment: There is low confidence in observed trends in small-scale events (data inhomogeneities, inadequate monitoring systems). Projection: Increased potential convective energy(humidity-driven), decreased shear (N-America) increase in fraction of severe thunderstorms with non-tornadic winds (But: new paper von Diffenbaugh et al., August 2013: shear not decreased, more tornadic storms) AR5 assessment: Overall, for all parts of the world, the results are suggestive of a trend toward environments favouring more severe thunderstorms, but small number of studies precludes any likelihood assessment of this change. IPCC WG1, September 2013 Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 12
Likely analogy: moisture-driven increase in severe thunderstorm activity in the U.S. Source: Sander, J., J. Eichner, E. Faust, and M. Steuer, Weather, Climate, and Society, March 2013, DOI: 10.1175/WCAS-D-12-00023.1 Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 13
Changing severe hailstorm frequency in Europe Number of days with hail damage (SV Stuttgart) Condensation of water vapor releases heat energy. Higher loads of moisture more severe / frequent convection & thunderstorms. Observational studies in Europe: Trentino (Italian Alps): Increase in total kinetic energy of extremely strong hail events (90th percentile) 1975 2009 (Eccel et al., 2012). Potential for strong convection is rising strongest France: increase in hail intensity by 70% between 1989 2009 (Berthet et al., 2011). Southwest Germany: Substantial increase in available energy for severe thunderstorm genesis (Kunz et al., 2009) (data) source: M. Kunz et al. (2009), Int. Journal of Climatology 30.05.2014 14
Projection of hail losses Results from a project by the German Insurance Association Projected changes of mean annual loss ratios ( Sturm/Hagel ) in summer relative to 1984-2008 1984/2008 2011/2040 1984/2008 2041/2070 1984/2008 Mean loss ratio: 0.034 per mille Mean change +15% Mean change +47% Loss ratios are foremost due to hail (residential building insurance). Source: GDV-Studie Auswirkungen des Klimawandels, Abschlussbericht zum Teilbereich Sturm/Hagel, Dezember 2011 30.05.2014 15
Losses in Germany 2013 Event Flood 05-06/2013 Ins. Property Loss in Mio. EUR 1.800 Sum Hail Storms 07-08/2013 Storms Autumn 2013 700 3.000 5,5 bn. EUR Property + 1,5 bn. EUR Motor Compare: Storm Kyrill 2007 2.060 Floods 2002 1.800 Storm Lothar 1999 800 Munich Hail 1984 900 Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 16
Loss Ratio Property in the German Market Industrie/Gewerbe/Landwirtschaft Zeitreihen der Combined-Ratio und deren Bestandteile Kommission Technische Versicherungen Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 17
Part 2 - Characteristics and Development from Hail towards MPCI
Characteristics Hail Cover Crop Hail Property Hail No. of hail days with loss High Low Damaging effect of hail High Low Hail rates in % High Low Deductibles or Franchise Low Low Loss adjustment expensive Less expensive Risk accumulation Occasional* Occasional** *usual SI/Ha= $ 300 High SI/Ha= $ 15.000 Plus accumulation of high value crops like fruit, veggies, tobacco, grapes ** usually light damage on cars and buildings. Extreme accumulations possible at car manufacturers. Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 19
Important aspects for successful crop hail underwriting Build up a loss data base per crop and region Calculate technical adequate rates Manage your portfolio composition by crops and regions Use specialist know how and expertise Organize professional and efficient loss adjustment Develop continuously your products Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 20
Premium (R mio) South Africa Premium Split Hail vs. MPCI 1600 1400 1200 1000 800 600 MPCI Hail 400 200 0 2009/2010 2010/2011 2011/2012 2012/2013 2013/2014 e. Hail: Continuous Growth MPCI: stabilizing at R 300 mio Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 21
International Markets Premium Split Hail vs. MPCI International Markets, Insurance premium in 2012 Mio. 9.357 8.616 3 400 3 200 3 000 2 800 2 600 2 400 2 200 2 000 1 800 1 600 1 400 1 200 1 000 800 600 400 200 0 MPCI Crop Hail *incl. Livestock and Forestry Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 22
EU: Premium Split Hail vs. MPCI 11 EU: Trends in insurance market Share of multi-peril crop insurance in EU [% of total EU crop insurance premium ] Share of subsidized crop insurance in EU [% of total EU crop insurance premium] 100%=1,3 bn 40 100%=1,8bn 60 100%=2,1 bn 75 100%=1,3 bn 80 100%=1,8 bn 85 100%=2,1 bn 90 Source: own data 2007 2013 2018 Source: own data 2007 2013 2018 Trends in insurance market Most European markets have already implemented a PPP Most EU countries provide subsidies for crop insurance Increasing use of EU budgets for the subsidization SystemAgro only in Spain well established, in many other markets important elements are missing In the last years beginning trend from hail- to multi peril-products Increased share of named-peril-products (with often no risk adequate premium rates) compromises profitability Increasing number of insurance companies (mainly mutuals like VH, ÖH, SH and Groupama) doing business outside their home countries with less profitability in foreign markets Source: SFR6, RID Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 23
US Crop Insurance US Crop Insurance Premium 2013 (m$) 959 MPCI Federally Subsidised Program MPCI Crop Hail Uniform Terms and Conditions Catastrophe Reinsurance 11 782 Program Administration MPCI: Crop Hail: No Competition over prize Competition over prize Crop Hail Private Product Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 24
Aggressive Crop Hail Underwriting jeopardizes overall crop insurance profitability Loss Ratio Crop Hail in % Peer 1 250% 200% 150% 100% 50% 0% Peer 1 Peer 2 Peer 3 Stable MPCI business volume, solid Crop Hail Underwriting with profitable results. Peer 2 + 3 Expanded MPCI business by selling cheap crop hail policies led to volatile crop hail results Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 25
Part 3 Public Private Partnership (PPP) The sustainable risk management system for crop production 30.05.2014 Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz
Public Private Partnership (System Agro) The why`s and how`s Exposure Systemic nature risk: entire regions may be affected High frequency of catastrophe losses Climate change Open-air production with limited loss prevention options Economic environment Global markets, financial crisis Price fluctuations Food/feed/fibre/fuel Need to grow and/or specialise Political interest Self-sufficiency Stable rural areas/ economies Clear budgeting Insurers Public Sector Central Agency System Agro Farmers Reinsurers Key components of SystemAgro 1. Integrated in ag law and ag policy 2. Public co-financing of premiums 3. Public co-financing of cat losses 4. Transparent and uniform terms and conditions and uniform settlement of claims 5. Central agency 6. Open to all farmers Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 27
Part 4 - Summary and Conclusions for South Africa
Summary and Conclusions for South Africa The South African farmer is ever more exposed to hail and other natural perils like Storm, Flood and Drought. Therefore he needs a comprehensive insurance cover as a risk management tool, reflected by the development from hail to MPCI cover in many countries. A Public-Private-Partnership between Government and insurance industry is needed in South Africa! Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 29
2014 Münchener Rückversicherungs-Gesellschaft 2014 Munich Reinsurance Company Thank you very much for your attention Holger Schwarz