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Transcript of Insurance solutions for environmental risks ? Philippe TRAINAR Chief Economist Officer SCOR 35 th...
Insurance solutions for environmental risks ?
Philippe TRAINARChief Economist Officer SCOR
35th OAA Conference and General Assembly24th – 29th May 2008
235th OAA Conference and General Assembly24th – 29th May 2008
Specificities of environmental risks ?
Whither insurance solutions ?
Role of government vs insurance ?
335th OAA Conference and General Assembly24th – 29th May 2008
Specificities of environmental risks ?
1. Environmental risks : six key facts
2. Environmental risks and climate change
435th OAA Conference and General Assembly24th – 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
535th OAA Conference and General Assembly24th – 29th May 2008
Graph :Importance of environmental catastrophes
Source : EM-DAT, University of Louvain
US$billions
635th OAA Conference and General Assembly24th – 29th May 2008
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
735th OAA Conference and General Assembly24th – 29th May 2008
Graphique 4 :La population se concentre dans les zones à haut risque
Source: United Nations Population Fund: State of World Population 2007 www.unfpa.org
835th OAA Conference and General Assembly24th – 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
935th OAA Conference and General Assembly24th – 29th May 2008
Graph :Number of natural catastrophes around the world
Source : EM-DAT, University of Louvain
(milliers)
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cats nats non climatiquescats nats climatiques
1035th OAA Conference and General Assembly24th – 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
1135th OAA Conference and General Assembly24th – 29th May 2008
Graph :Number of natural catastrophes around the world
Source : EM-DAT, University of Louvain
milliers
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cats nats non climatiquescats nats climatiquesinondationstempêtes
1235th OAA Conference and General Assembly24th – 29th May 2008
Graph :Number of natural catastrophes around the world
Source : EM-DAT, University of Louvain
US$billions
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inondationstempêtes
1335th OAA Conference and General Assembly24th – 29th May 2008
2. Environmental risks and climate changeAvailable (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.
1435th OAA Conference and General Assembly24th – 29th May 2008
Graph :Hurricanes and climate change
Max
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m s
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f h
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/s)
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anes
1535th OAA Conference and General Assembly24th – 29th May 2008
2. Environmental risks and climate changeAvailable (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.
1635th OAA Conference and General Assembly24th – 29th May 2008
Graph :Increase of temperature and climate risks
Source : Rapport Stern
1735th OAA Conference and General Assembly24th – 29th May 2008
2. Environmental risks and climate changeAvailable (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.
1835th OAA Conference and General Assembly24th – 29th May 2008
Whither insurance solutions ?
1. Pb : ambiguous & potentially systemic risks
2. An active & rapidly developing market offer
1935th OAA Conference and General Assembly24th – 29th May 2008
1. Pb : ambiguous & potentially systemic risksEconomic 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
2035th OAA Conference and General Assembly24th – 29th May 2008
Graph :Uninsurability of climate change
Source : Stern report
2135th OAA Conference and General Assembly24th – 29th May 2008
1. Risks that are potentially ambiguous & systemicEconomic 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
2235th OAA Conference and General Assembly24th – 29th May 2008
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= t
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dGraph :
Detrended Cat insurance premiums
Source : Lane Financial LLC
AndrewKatrina
WTC
2335th OAA Conference and General Assembly24th – 29th May 2008
1. Risks that are potentially ambiguous & systemicEconomic 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
2435th OAA Conference and General Assembly24th – 29th May 2008
Graph :Number of victims of natural catastrophes
Source : SwissRe, Sigma 2/2007
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2535th OAA Conference and General Assembly24th – 29th May 2008
2. An active and rapidly developing market offerComponents 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 anti-
selection, 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
2635th OAA Conference and General Assembly24th – 29th May 2008
Graph :ILS issued and outstanding
Source : SwissRe, Sigma 2/2007
0,00
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10,00
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1998 1999 2000 2001 2002 2003 2004 2005 2006
$US
bn
Outstanding from prev. years
New issues
2735th OAA Conference and General Assembly24th – 29th May 2008
Role of government vs insurance ?
1. Role of governments around the world
2. Bad and good reasons to intervene
2835th OAA Conference and General Assembly24th – 29th May 2008
1. Role of governments around the worldIn 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
2935th OAA Conference and General Assembly24th – 29th May 2008
Graph :Concentrated and recurring compensations in France
Source : FFSA, 2007
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
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3035th OAA Conference and General Assembly24th – 29th May 2008
2. Bad and good reasons to interveneThree 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
3135th OAA Conference and General Assembly24th – 29th May 2008
Graph :Increasing reinsurance capacities
Capital issues by reinsurers
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3235th OAA Conference and General Assembly24th – 29th May 2008
2. Good and bad reasons to interveneThree 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
3335th OAA Conference and General Assembly24th – 29th May 2008
Graph :A pool mode of senior and junior slices
Losses’frequency
Losses
Slicefinanced
by insurers
Slice financed by re-insurance and by
big insurers
Slice financed by issuing a corporate bond guaranteed by the government
Slice financed by reinsurance
3435th OAA Conference and General Assembly24th – 29th May 2008
34
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 insurance reinsurance reinsurance securitization securitization government intervention government intervention
ANNEXE
Cercle “La part de risque”2 avril 2008