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Medium-Sized Disasters: Frequency and Impact on the Industry

Situation and challenges faced by the sector due to the noticeable increase in this type of events.

Within the framework of the MAPFRE Global Risks International Seminar held in early June this year, a roundtable discussion was held on this interesting topic with prominent reinsurance professionals.

MAPFRE RE Chief Underwriting Officer Javier San Basilio hosted this talk with the testimonies of Munich Re (Spain) Executive Chairman Tim Jehnichen and Swiss Re Managing Director Beat Kramer, who analyzed the impact of medium-sized disasters on the insurance industry.

In recent years, climate change and certain socioeconomic aspects are causing secondary, frequent and serious catastrophic phenomena, which manifest in different ways, with regional impact: floods, intense rains, fires or droughts are some examples. The increase in the frequency of this type of events has impacted the insurance and reinsurance sector. This increase, according to Munich Re Executive Chairman in Spain Tim Jehnichen during his presentation, has been seen mainly in Spain and Portugal, but also in Latin America. Jehnichen says that climate change is the main reason for this increase, highlighting that it is not a random or occasional phenomenon, rather that we are facing a far-reaching predicted phase.

More precisely, Jehnichen mentioned the case of Spain as one of the countries where the increase has been more specifically seen in recent years, and where the Consortium—that is, the state regulator—had to take a step forward, citing as an example the snowfall of January 2021 (Filomena), a phenomenon that had not occurred in the last hundred years in this country.

Swiss Re Managing Director Beat Kramer, meanwhile, also pointed out that many of these “secondary hazards” also respond to socioeconomic indicators, such as the uncontrolled growth of cities, which often leads to the construction of buildings in vulnerable areas, or “social inflation.”

The Financial Sector’s Reaction

Given this scenario, the next question analyzed by the experts was whether the re/insurance industry is indeed prepared to measure and prevent these secondary hazards. In this regard, Jehnichen agreed that the industry is lagging behind somewhat. And while he pointed out that much remains to be done, he acknowledged that there is a positive aspect in the current phase, such as the fact that people are becoming more and more aware of the importance of sustainability, an issue that has been consistently reflected in the financial sector, and insurers, for example, have set more stringent conditions regarding carbon-related activities.

Kramer, meanwhile, also agreed that the market has been especially focused on traditional hazards. In addition, he pointed out, it is easier to model large-scale events, those that have existed for hundreds of years, while secondary events have a shorter historical trajectory. In addition, the expert pointed out, even the way the effects are studied is not yet systematic—as is the case with the primary ones—, which means that the data obtained are limited.

Consequently, Kramer warned of the existing need to find a way to model these secondary events, considering that they are much more regional in nature, and he urged working together, as a sector, in developing models that make it possible to understand their size and scope.

The experts then shared their views on the most appropriate way of working to avoid deterioration in the results of insurance companies in light of these events. In this context, Jehnichen pointed out that the most convenient thing would be to have some type of cumulative coverage that could be used for forecasting the following year. He added that his experience with horizontal coverage has not turned out to be quite positive, and it is also much easier to forecast a major event than a series of minor catastrophes, which are much more frequent.

Kramer, meanwhile, agreed with this statement, noting that it would be a good idea to work with a cumulative model, from all areas of the industry, with complete transparency, for the common benefit of both industry professionals and clients. 

A Budding Product

Another important aspect brought up by moderator Javier San Basilio is that the gap between the damage and what is insured—and then reinsured—ends up being greater in the case of these secondary risks, given that, as he said, there is less awareness of them than of events such as hurricanes or earthquakes.

In this context, Jehnichen stressed that if this situation becomes more serious, both the sector and society will be affected, and he emphasized that although the sector is applying certain decisive measures in the prevention of climate change, such as setting more stringent policies with negative environmental impact companies, it will take time to see their effects. That is why, he said, it is key for society to understand what would happen if no action is taken, what the consequences would be, accompanying that with statistics.

Kramer reminded the audience that despite all efforts, the global temperature will continue to rise, and these medium-sized catastrophes would continue to occur, so a solution must necessarily be found in the medium and long term.

Future Challenges

Finally, the experts shared their views on the issues that most concern their companies in the immediate future.

According to Beat Kramer, it is global issues at the global level that pose the greatest threat today, such as those that stem from anything that can accumulate on the planet: viruses—physical and digital—and systemic issues, such as climate change. 

In addition to these issues, Tim Jehnichen added political instabilities, which often appear even as a side effect of natural disasters, such as the current pandemic.

Finally, the experts also agreed on the need to work together to address the situation, always considering that the ultimate objective of the analysis of these risks is to provide a better service to clients, and even to prevent claims.

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