Monday, October 8, 2007

Climate change: insurers must adapt, too many underinsured

Budapest Times: Insurance companies spoke of the need to adapt and how data on climate change is being integrated into the business of underwriting last Thursday at a conference on climate change and its consequences for the business world. There was also stark evidence of the risks to countries, businesses and people who are not adequately insured against the increasingly unpredictable threat from flooding, drought and storms in Central Europe.

…There are significant variations within Europe in terms of how well insured businesses and people are against natural disaster. When Austria and Switzerland were hit by flooding in 2005, the damage caused was EUR 0.4 billion and EUR 1.7 billion respectively for the two countries. The insurance payouts were EUR 0.1 billion and EUR 1.4 billion respectively. That is, Austria recouped a quarter of the cost, while Switzerland, where insurance against pretty much any eventuality is compulsory, got back over four-fifths. Romania, by contrast suffered EUR 1.5 billion of economic loss as a result of flooding in 2005; it recovered only EUR 15 million (1%) through insurance.

Hungary, as speaker Edina Balogh from Budapest Technical University pointed out, is in a particularly parlous position. A worrying 22.3% of the area of Hungary, home to 10% of the population, is at risk of flooding. Although the issue has been discussed at length, as some members of the audience pointed out at the end of the presentations, successive governments have failed to effectively address the problem.

Director of the Hungarian Environmental Management Studies Centre (MAKK) Gábor Ungvari, continued to move the focus away from insurance to prevention, clearly believing the long-term solution lies in effective water management. In any event, some insurers are already refusing to insure houses built on areas subject to flooding, and poor rural communities often cannot afford to insure in any case.

Of course there are some natural disasters, such as earthquakes and major storms, that are so unlikely that it would be uneconomical to build defences against them. The insurance companies are ready with a new batch of products to deal with such risk. The market in catastrophe bonds (“cat bonds”), offered as a substitute to reinsurance, has been growing steadily since the late 1990s. Purchasers of these bonds collect dividends – channelled from the premium of the insurance policyholder – and are in effect betting against a calamity occurring.

Karim Tamir of Allianz Climate Solutions GmbH said his parent company, the German insurance giant Allianz, issued USD 150 million in “London Flood Bonds” in April this year, so people can bet against the world’s largest financial centre being washed away by a swollen Thames. The bond may sound like a joke, but it reflects serious concern in the insurance industry about increasingly unpredictable climatic conditions. The issue was oversubscribed by hedge funds and even managers of more traditional funds. Tamir said that something similar might even be of interest to the Hungarian government. It is not a panacea, however: at the time of the issue even the Association of British Insurers welcomed the move, which transfers risk to the capital markets but added it was “not a substitute for government investment in flood defences”.

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