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
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 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 3
Statement South African farmers are ever more exposed to hail and other natural perils. They need 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 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 1950-2010 Brown to red colours indicate increasing linear trend of 1-3 days per decade since 1950. 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 likely 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 Ins. Property Loss in Mio. Sum Flood 05-06/2013 1.800 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
Experience of SV Sparkassen-Versicherung AG Stuttgart, Germany Hail storm 28 July 2013 15min hail Hailstones up to 10cm diameter 5mio tonnes of hail 40mio loss per minute 67,214 buildings damaged 4,751 cars damaged Average loss per building: 8,576 Average loss per car: 3,587 Overall loss: 600mio Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 17
SV Sparkassen-Versicherung AG (contd.) Hail Loss adjustment and findings and consequences of the hail storm 28 July 2013 Inspect the damage as soon as possible Non-stop work of 300 adjusters, also over weekends 33,000 out of the 70,000 cases assessed after 1 week Setting a trigger for assessment of 3,000 Payment rule: inspection +1 day Emergency program: agreement with the German Association of Roofers Providing hands-on support through specialist companies Savings in loss amount by 33% Damage on solar installations (units are only protected against hailstones up to 8cm) Appeal to policy-makers: regulations for new buildings New and better roofing tiles (experience from Switzerland) Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 18
Loss Ratios for Property in the German Market Industry/Commerce/Agriculture Time series of Combined Loss ratios and their constituents Kommission Technische Versicherungen Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 19
Part 2 - Characteristics and Development from Hail towards MPCI for Agriculture
Comparison of Crop and Property Hail Characteristic Crop Hail Property Hail No. of hail days with loss High Low Damaging effect of hail High Low Hail rates 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 21
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 Continuously develop your products Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 22
South Africa Premium Split Hail vs. MPCI 1600 1400 Premium (R mio) 1200 1000 800 600 400 200 MPCI Hail 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 23
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 24
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 Rein- surers Insurers Public Sector Central Agency System Agro Farmers 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 25
EU: Premium Split Hail vs. MPCI 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: Munich Re 2007 2013 2018 Source: Munich Re 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 Source: SFR6, RID Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 26
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 price Competition over price Crop Hail Private Product Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 27
Aggressive Crop Hail Underwriting in the US 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 28
Part 3 Summary and Conclusions for South Africa 30.05.2014 Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz
In South Africa, Crop Hail is becoming unprofitable Total market loss ratios 140% 120% 100% 80% 60% 40% Average 20% 0% 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14e Hail exposure and risk management in crop production Global view and focus on South Africa / Holger Schwarz 30.05.2014 30
Summary and Conclusions for South Africa South African farmers are ever more exposed to hail and other natural perils like Storm, Flood and Drought. Therefore they need a comprehensive insurance cover as a risk management tool, reflected by the movement from Hail to MPCI cover in many countries. A Public-Private-Partnership between Government and the 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 31
2014 Münchener Rückversicherungs-Gesellschaft 2014 Munich Reinsurance Company Thank you very much for your attention Holger Schwarz