Transcript Insurance Solutions For Environmental Risks?

Insurance solutions for
environmental risks ?
Philippe TRAINAR
Chief Economist Officer SCOR
35th OAA Conference and General Assembly
24th – 29th May 2008
 Specificities of environmental risks ?
 Whither insurance solutions ?
 Role of government vs insurance ?
35th OAA Conference and General Assembly
24th – 29th May 2008
2
 Specificities of environmental risks ?
1. Environmental risks : six key facts
2. Environmental risks and climate change
35th OAA Conference and General Assembly
24th – 29th May 2008
3
1. Environmental risks : six key facts
1. Human being is fighting against natural catastrophes at the same time
when it is “cooperating” with nature ; human organizations have been built for protecting their
members against these perils which
2. Nature is destroying human productions and human beings : losses
(financial costs as well as deaths etc.) due to natural catastrophes make three fourth of all the losses
due to catastrophes, either natural or technological and human
3. Nature is killing less than in the past : it’s a consequence of rising efforts of
protection and prevention,
4. But, catastrophes are occurring more often and affecting a rising
number of people as a consequence of :


rising world population
Concentration of world population on the most risky areas around the world
5. The share of climatic catastrophes increases rapidly, in term of nulbers
as well as of costs
6. Floods dominate in term of frequency and Storms in term of costs
among climatic catastrophes
35th OAA Conference and General Assembly
24th – 29th May 2008
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Graph :
Importance of environmental catastrophes
US$billions
Source : EM-DAT, University of Louvain
35th OAA Conference and General Assembly
24th – 29th May 2008
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1. Environmental risks : six key facts
 Human being is fighting against natural catastrophes at the same time
when it is “cooperating” with nature ; human organizations have been built for protecting their
members against these perils which
 Nature is destroying human productions and human beings : losses
(financial costs as well as deaths etc.) due to natural catastrophes make three fourth of all the losses
due to catastrophes, either natural or technological and human
 Nature is killing less than in the past : it’s a consequence of rising efforts of
protection and prevention,
 But, catastrophes are occurring more often and affecting a rising
number of people as a consequence of :


rising world population
Concentration of world population on the most risky areas around the world
 The share of climatic catastrophes increases rapidly, in term of nulbers
as well as of costs
 Floods dominate in term of frequency and Storms in term of costs
among climatic catastrophes
35th OAA Conference and General Assembly
24th – 29th May 2008
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Graphique 4 :
La population se concentre dans les zones à haut risque
Source: United Nations Population Fund: State of World Population 2007
35th OAA Conference and General Assembly
www.unfpa.org
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24th – 29th May 2008
1. Environmental risks : six key facts
1. Human being is fighting against natural catastrophes at the same time
when it is “cooperating” with nature ; human organizations have been built for protecting their
members against these perils which
2. Nature is destroying human productions and human beings : losses
(financial costs as well as deaths etc.) due to natural catastrophes make three fourth of all the losses
due to catastrophes, either natural or technological and human
3. Nature is killing less than in the past : it’s a consequence of rising efforts of
protection and prevention,
4. But, catastrophes are occurring more often and affecting a rising
number of people as a consequence of :


rising world population
Concentration of world population on the most risky areas around the world
5. The share of climatic catastrophes increases rapidly, in term of nulbers
as well as of costs
6. Floods dominate in term of frequency and Storms in term of costs
among climatic catastrophes
35th OAA Conference and General Assembly
24th – 29th May 2008
8
Graph :
Number of natural catastrophes around the world
400
350
cats nats non climatiques
cats nats climatiques
(milliers)
300
250
200
150
100
50
19
00
19
07
19
14
19
21
19
28
19
35
19
42
19
49
19
56
19
63
19
70
19
77
19
84
19
91
19
98
20
05
0
Source : EM-DAT, University of Louvain
35th OAA Conference and General Assembly
24th – 29th May 2008
9
1. Environmental risks : six key facts
1. Human being is fighting against natural catastrophes at the same time
when it is “cooperating” with nature ; human organizations have been built for protecting their
members against these perils which
2. Nature is destroying human productions and human beings : losses
(financial costs as well as deaths etc.) due to natural catastrophes make three fourth of all the losses
due to catastrophes, either natural or technological and human
3. Nature is killing less than in the past : it’s a consequence of rising efforts of
protection and prevention,
4. But, catastrophes are occurring more often and affecting a rising
number of people as a consequence of :


rising world population
Concentration of world population on the most risky areas around the world
5. The share of climatic catastrophes increases rapidly, in term of nulbers
as well as of costs
6. Floods dominate in term of frequency and Storms in term of costs
among climatic catastrophes
35th OAA Conference and General Assembly
24th – 29th May 2008
10
Graph :
Number of natural catastrophes around the world
400
350
300
cats nats non climatiques
cats nats climatiques
inondations
tempêtes
milliers
250
200
150
100
50
19
00
19
07
19
14
19
21
19
28
19
35
19
42
19
49
19
56
19
63
19
70
19
77
19
84
19
91
19
98
20
05
0
Source : EM-DAT, University of Louvain
35th OAA Conference and General Assembly
24th – 29th May 2008
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Graph :
Number of natural catastrophes around the world
200
180
160
inondations
tempêtes
US$billions
140
120
100
80
60
40
20
1
6
11
16
21
26
31
36
41
46
51
56
61
66
71
76
81
86
91
96
10
1
10
6
0
Source : EM-DAT, University of Louvain
35th OAA Conference and General Assembly
24th – 29th May 2008
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2. Environmental risks and climate change
Available (re)insurance data don’t give us a good idea of the climate
change that is taking place, for two main reasons :
 Consequences of climate change are ambiguous : for ex., hurricanes will decrease
in number, increase in average intensity, remain stable in maximal intensity
 The most significant consequences of climate change are coming but not yet
observable : temperature has not sufficiently increased for significant consequences
For a good climate strategy, it is as much important, to implement active
prevention policies aimed at reducing the exposure of the world
population to climatic catastrophes than to reduce carbon use :
 Even if the world is reducing quickly carbon use, it will be confronted with increasing
climatic catastrophes in the coming years because trends are difficult to alter
 Moreover, one main source of increasing carbon use, i.e. population and economic
growth, will not come to a standstill in the coming years
 If the trend toward increasing concentration of world population in the most
dangerous areas is not reversed, major catastrophes can be anticipated
 These risks would be all the more serious because they would induce pandemics
and migrations that may degenerate in armed conflicts for water, foods etc.
35th OAA Conference and General Assembly
24th – 29th May 2008
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Number of violent hurricanes
Maximum speed of hurricane (m/s)
Graph :
Hurricanes and climate change
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24th – 29th May 2008
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2. Environmental risks and climate change
Available (re)insurance data don’t give us a good idea of the climate
change that is taking place, for two main reasons :
 Consequences of climate change are ambiguous : for ex., hurricanes will decrease
in number, increase in average intensity, remain stable in maximal intensity
 The most significant consequences of climate change are coming but not yet
observable : temperature has not sufficiently increased for significant consequences
For a good climate strategy, it is as much important, to implement active
prevention policies aimed at reducing the exposure of the world
population to climatic catastrophes than to reduce carbon use :
 Even if the world is reducing quickly carbon use, it will be confronted with increasing
climatic catastrophes in the coming years because trends are difficult to alter
 Moreover, one main source of increasing carbon use, i.e. population and economic
growth, will not come to a standstill in the coming years
 If the trend toward increasing concentration of world population in the most
dangerous areas is not reversed, major catastrophes can be anticipated
 These risks would be all the more serious because they would induce pandemics
and migrations that may degenerate in armed conflicts for water, foods etc.
35th OAA Conference and General Assembly
24th – 29th May 2008
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Graph :
Increase of temperature and climate risks
Source : Rapport Stern
35th OAA Conference and General Assembly
24th – 29th May 2008
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2. Environmental risks and climate change
Available (re)insurance data don’t give us a good idea of the climate
change that is taking place, for two main reasons :
 Consequences of climate change are ambiguous : for ex., hurricanes will decrease
in number, increase in average intensity, remain stable in maximal intensity
 The most significant consequences of climate change are coming but not yet
observable : temperature has not sufficiently increased for significant consequences
For a good climate strategy, it is as much important, to implement active
prevention policies aimed at reducing the exposure of the world
population to climatic catastrophes than to reduce carbon use :
 Even if the world is reducing quickly carbon use, it will be confronted with increasing
climatic catastrophes in the coming years because trends are difficult to alter
 Moreover, one main source of increasing carbon use, i.e. population and economic
growth, will not come to a standstill in the coming years
 If the trend toward increasing concentration of world population in the most
dangerous areas is not reversed, major catastrophes can be anticipated
 These risks would be all the more serious because they would induce pandemics
and migrations that may degenerate in armed conflicts for water, foods etc.
35th OAA Conference and General Assembly
24th – 29th May 2008
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 Whither insurance solutions ?
1. Pb : ambiguous & potentially systemic risks
2. An active & rapidly developing market offer
35th OAA Conference and General Assembly
24th – 29th May 2008
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1. Pb : ambiguous & potentially systemic risks
Economic nature of environmental risks
 Extreme and progressive risks
– Extreme risks : combination of low probability and high severity
– Progressive risks : climate change risks are emerging over the long term
 Risks for which it is difficult to find willing counterparties
– Uncertain definition and frontiers of environmental risks : risk of ambiguity
– In most extreme cases, everyone is affected : uninsurability of systemic risk
 Risk for which capacities are limited
– Underestimation of extreme risks by insured => non willingness to pay
– Limited available capacities for potentially unlimited risks => fluctuating price
Concerned insurance Lines of Business
 Mostly property insurance : material destructions by flooding and wind :
– Houses and cars
– Professional buildings and equipments
 Threatening liability insurance : legal actions against :
– Negligent executives, directors and authorities
– Responsibility of carbon producer (climate change)
 Emerging life insurance : human destruction by flooding and wind
– Mortality risks
– Disability risks
35th OAA Conference and General Assembly
24th – 29th May 2008
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Graph :
Uninsurability of climate change
Source : Stern report
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24th – 29th May 2008
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1. Risks that are potentially ambiguous & systemic
Economic nature of environmental risks
 Extreme and progressive risks
– Extreme risks : combination of low probability and high severity
– Progressive risks : climate change risks are emerging over the long term
 Risks for which it is difficult to find willing counterparties
– Uncertain definition and frontiers of environmental risks : risk of ambiguity
– In most extreme cases, everyone potentially affected : systemic risk
 Risk for which capacities are limited
– Underestimation of extreme risks by insured => non willingness to pay
– Limited available capacities for potentially unlimited risks => fluctuating price
Concerned insurance Lines of Business
 Mostly property insurance : material destructions by flooding and wind :
– Houses and cars
– Professional buildings and equipments
 Threatening liability insurance : legal actions against :
– Negligent executives, directors and authorities
– Responsibility of carbon producer (climate change)
 Emerging life insurance : human destruction by flooding and wind
– Mortality risks
– Disability risks
35th OAA Conference and General Assembly
24th – 29th May 2008
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Graph :
Detrended Cat insurance premiums
170
Katrina
Andrew
150
WTC
110
90
70
20
07
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
89
19
88
19
87
19
86
50
19
85
100 = trend
130
Source : Lane Financial LLC
35th OAA Conference and General Assembly
24th – 29th May 2008
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1. Risks that are potentially ambiguous & systemic
Economic nature of environmental risks
 Extreme and progressive risks
– Extreme risks : combination of low probability and high severity
– Progressive risks : climate change risks are emerging over the long term
 Risks for which it is difficult to find willing counterparties
– Uncertain definition and frontiers of environmental risks : risk of ambiguity
– In most extreme cases, everyone potentially affected : systemic risk
 Risk for which capacities are limited
– Underestimation of extreme risks by insured => non willingness to pay
– Limited available capacities facing potentially unlimited risks => fluctuating price
Concerned insurance Lines of Business
 Mostly property insurance : material destructions by flooding and wind :
– Houses and cars
– Professional buildings and equipments
 Threatening liability insurance : legal actions against :
– Negligent executives, directors and authorities
– Responsibility of carbon producer (climate change)
 Emerging life insurance : human destruction by flooding and wind
– Mortality risks
– Disability risks
35th OAA Conference and General Assembly
24th – 29th May 2008
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Graph :
Number of victims of natural catastrophes
400 000
350 000
300 000
250 000
200 000
150 000
100 000
50 000
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
72
19
70
0
Source : SwissRe, Sigma 2/2007
35th OAA Conference and General Assembly
24th – 29th May 2008
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2. An active and rapidly developing market offer
Components of insurance contracts covering environmental risks
 Three classical available instruments :
– Explicit limits to indemnities : they make all environmental risks insurable
– Explicit excesses : they limit the huge moral hazard of environmental risks
– Explicit modulation of premiums with regard to the risk exposure : it limits antiselection, which is prevalent with environmental risks
 Necessity to combine the three instruments in a sophisticated manner
Insurance to be complemented by reinsurance
 The value added by reinsurance to insurance of environmental risks :
– Complementary capacities from more risk tolerant shareholders
– Enlarged international pooling for risks whose national pooling is limited
– Top expertise on environmental risks (cf. reinsurance models)
 A structuring actor for insurance pricing
(Re)insurance to be complemented by securitization
 The value added by securitization :
– Revelation of pooling dimension not available on the (re)insurance market
– Correction of the (re)insurance coverage biases against extreme risks
 A complement of reinsurance more than insurance
– Optimal pooling of reinsured risks vs insured risks
– Because of structuration costs, direct securitization reserved to big insurers
35th OAA Conference and General Assembly
24th – 29th May 2008
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Graph :
ILS issued and outstanding
25,00
Outstanding from prev. years
New issues
20,00
$US bn
15,00
10,00
5,00
0,00
1998
1999
2000
2001
2002
2003
2004
2005
2006
Source : SwissRe, Sigma 2/2007
35th OAA Conference and General Assembly
24th – 29th May 2008
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 Role of government vs insurance ?
1. Role of governments around the world
2. Bad and good reasons to intervene
35th OAA Conference and General Assembly
24th – 29th May 2008
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1. Role of governments around the world
In most countries, natural catastrophes are insured by market insurance
(storms, floods, volcanoes, earthquakes, droughts)
Nevertheless, in some countries, government are used to intervene :
 In most cases, for organizing the guarantee of a specific national risk :
–
–
–
Floods in USA
Earthquakes in California, Japan, New Zeeland, Taiwan, Turkey
Storms in Florida
 More seldom, for organizing the guarantee of all natural catastrophes :
–
Iceland, Norwegian, Spain, Switzerland, France
Except in France (for households and companies) and in Japan (for
households only), the guarantee is supplied by the (re)insurance market
(often in the framework of a pool)
France is the only industrialized country where the government
intervene directly, by mean of a dedicated public reinsurance company,
despite no specific national risk ; characteristics of this public regime are :




An unlimited government guarantee for households and companies
Conditioned by a 50% quota-share with the public reinsurance company
Inducing a huge moral hazard : most houses are now built in flooding areas
Organizing a huge transfer and subsidy system in favor of small subset of insured
35th OAA Conference and General Assembly
24th – 29th May 2008
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Graph :
Concentrated and recurring compensations in France
Probability of compensation by
Fréquence
par département
(en ‰)
area (in ‰)
administrative
10
Fréquence individuelle 1988-2006
Fréquence moyenne 1988-2006
9
1988 – 2006
8
7
6
5
4
3
2
1
%
%
96
91
%
85
%
80
%
%
75
69
%
64
%
%
59
54
%
48
%
43
%
%
38
33
%
27
%
22
%
%
17
12
6%
1%
0
Lecture : 75 % of the areas have a probability of compensation lower than the average 1,3 ‰
when 4 % of the areas have a probability larger than 4 times this average
Source : FFSA, 2007
35th OAA Conference and General Assembly
24th – 29th May 2008
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2. Bad and good reasons to intervene
Three bad reasons for public intervention
 Uninsurability of cat risks
– Of course, most dangerous environmental risks are cat risks
– Nevertheless, for most cat risk capacities are available and increasing
 Equality between inured, independently from their risk exposure
– Of course, risk exposures are not always chosen
– Nevertheless, not penalizing risky choices increases risk taking (moral hazard)
 Short term concerns of market forces
– Market does not give the right incentive for long term prevention (cf. carbon use)
– In fact, government is more short term oriented than market forces
Why and whither public intervention ?
 Three good reasons for public intervention
–
–
–
–
Blindness of consumers, who underestimate extreme risks, esp. at long term
Limitations and fluctuations of (re)insurance capacities
Systemic dimension included in all the environmental risks
Need for governments to have an incentive to invest in public equipment
 Need for a public / private partnership based on :
– GAREAT and TRIA philosophy : market is in charge of non systemic losses
– Public guarantee given at market price for loans issued for covering excess loss
– Objective assessment of risk exposures and losses
35th OAA Conference and General Assembly
24th – 29th May 2008
30
Graph :
Increasing reinsurance capacities
Capital issues by reinsurers
30
8000
7000
Number of issues
Volume ($MM)
6000
5000
15
4000
3000
10
2000
5
1000
35th OAA Conference and General Assembly
24th – 29th May 2008
07
20
20
06
05
20
20
04
03
20
20
02
01
20
20
00
99
19
19
98
0
7
0
19
9
Number
20
Volume
25
31
2. Good and bad reasons to intervene
Three bad reasons for public intervention
 Uninsurability of cat risks
– Of course, most dangerous environmental risks are cat risks
– Nevertheless, for most cat risk capacities are available and increasing
 Equality between inured independently from their risk exposure
– Of course, risk exposures are not always chosen (cf. inherited house etc.)
– Nevertheless, not penalizing risky choices increases risk taking (moral hazard)
 Short term concerns of market forces
– Market does not give the right incentive for long term prevention (cf. carbon use)
– In fact, government is more short term oriented than market forces
Why and whither public intervention ?
 Three good reasons for public intervention
–
–
–
–
Blindness of consumers, who underestimate extreme risks, esp. at long term
Systemic dimension included in all the environmental risks
Limitations and fluctuations of (re)insurance capacities
Need for governments to have an incentive to invest in public equipment
 Need for a public / private partnership based on :
– GAREAT and TRIA philosophy : market is in charge of non systemic losses
– Public guarantee given at market price for loans issued for covering excess loss
– Objective assessment of risk exposures and losses
35th OAA Conference and General Assembly
24th – 29th May 2008
32
Graph :
A pool mode of senior and junior slices
Losses
Slice financed by issuing a corporate bond
guaranteed by the government
Slice financed by reinsurance
Slice financed by reinsurance and by
big insurers
Slice
financed
by insurers
Losses’
frequency
35th OAA Conference and General Assembly
24th – 29th May 2008
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CONCLUSION
Environmental risks are more and more affecting the daily life of the
world currently and this trend will not reverse in the coming years
Environmental risks have the potential to become catastrophic and
climate change presents a threat for the world from this point of view
Insurance markets is able to cover the environmental risks, even when
extrem, except when they become systemic at national level
Reinsurance and securitization markets are able to offer a
complementary cover for environmental risks, even when extrem, except
when they become systemic at international level
Government intervention should concentrate on systemic risks and avoid
to induce too much moral hazard or anti-selection
This handling of such a situation requires a public / private partnership
based on the complementarities between the different actors :
insurance  reinsurance  securitization  government intervention
35th OAA Conference and General Assembly
24th – 29th May 2008
34
ANNEXE
Cercle “La part de risque”
2 avril 2008