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AIR is about as influential as RMS and they are fiercely competitive. RMS is not likely to be captive to anyone. They have sufficiently diverse models and knobs to turn on the models to allow reinsurers to pick and choose what suits them to back up what they want to write without conspiracy. All the reinsurers will use both models in any event.

Reinsurance underwriting spreads ARE actuarially high - and yet there remains insufficient capital and capacity to reinsure the peak risks in FLA and GOM - not because of conspiracy or greed but because like any insurer, they want , no, need, a diversified pool of risks. And rightly so, since who would want to reinsured by an undiversified and reasonably highly leveraged reinsurer? Answer: no one.

There is a market failure here, but the failure is that investors have short horizons, don;t understand cat risk, and fear negative fat-tails even if compensated for that tail risk. Go figure. Investor preference for skewed returns, coupled with extreme complexity of modeling and understanding the underlying primary portfolio risk, and a dollop of good old moral hazard keeps risk-capital in short supply. That's my two cents anyway...

by NihonCassandra (rusol1@yahoo.com) on Sun Oct 31st, 2010 at 09:35:16 PM EST
You mean like this?

ABC The Drum - Bookies buying into climate change race

"Munich Re has been dealing with climate change and its consequences and the scientific background since the 1970s, when there was no public debate on climate change," says Munich Re's Ernst Rauch, who heads the insurance giant's Corporate Climate Centre.

"As a risk-taker, we are somewhat like an early-warning system when it comes to changes in the risk field of natural catastrophes."

Mr Rauch's original expertise was in earthquakes, but following devastating losses for the insurance industry from a series of storms in the European winter of 1990, his area of responsibility shifted to the analysis and modelling of meteorological risks.

And the verdict?

"Climate change, we believe, is a fact."

Why?

His pockets are already hurting.

"Based on our own loss experience, climate change we believe is a fact. It triggers natural disasters, atmospheric natural disasters, and the number of these natural disasters worldwide has more than doubled since the 1980s, driven by atmospheric perils, not by earthquakes or volcanic eruptions," Mr Rauch said.

"If we look at the sheer number of losses from natural catastrophes worldwide since the 1980s, more than $US1,600 billion in losses have occured. Most of them were actually weather-related, not earthquakes, not geophysical events."

And he says the economic cost of these disasters, once you take out things like inflation and currency fluctuations, is increasing by 11 per cent a year.

So faced with these increasing losses, what are large insurers and reinsurers doing?

Well, they're putting up premiums of course.

That 11% then seem negated by scientific publications, amongst others one publication by... Munich Re.

ScienceDirect - Environmental Impact Assessment Review : Tropical cyclone losses in the USA and the impact of climate change -- A trend analysis based on data from a new approach to adjusting storm losses

Economic losses caused by tropical cyclones have increased dramatically. Historical changes in losses are a result of meteorological factors (changes in the incidence of severe cyclones, whether due to natural climate variability or as a result of human activity) and socio-economic factors (increased prosperity and a greater tendency for people to settle in exposed areas). This paper aims to isolate the socio-economic effects and ascertain the potential impact of climate change on this trend. Storm losses for the period 1950-2005 have been adjusted to the value of capital stock in 2005 so that any remaining trend cannot be ascribed to socio-economic developments. For this, we introduce a new approach to adjusting losses based on the change in capital stock at risk. Storm losses are mainly determined by the intensity of the storm and the material assets, such as property and infrastructure, located in the region affected. We therefore adjust the losses to exclude increases in the capital stock of the affected region. No trend is found for the period 1950-2005 as a whole. In the period 1971-2005, since the beginning of a trend towards increased intense cyclone activity, losses excluding socio-economic effects show an annual increase of 4% per annum. This increase must therefore be at least due to the impact of natural climate variability but, more likely than not, also due to anthropogenic forcings.
by Nomad on Mon Nov 1st, 2010 at 09:07:42 PM EST
[ Parent ]
You take a special case -- tropical cyclone losses in the USA from 1971 to 2005 -- and project that on the entire world, claiming to know better than Munich Re... Are you an American politician, by any chance?

The basis for the 11% number quoted in the ABC article :

"If we look at the sheer number of losses from natural catastrophes worldwide since the 1980s, more than $US1,600 billion in losses have occured. Most of them were actually weather-related, not earthquakes, not geophysical events."

And he says the economic cost of these disasters, once you take out things like inflation and currency fluctuations, is increasing by 11 per cent a year.

Whereas in the ScienceDirect abstract :

losses excluding socio-economic effects show an annual increase of 4% per annum.

It's hard to see a specific contradiction here :

  • Do you assert that "socio-economic effects" of hurricanes in Louisiana or Florida have been negligeable?
  • Perhaps climatic disasters have been more severe in the world in general than in the US Atlantic coast? (Well golly, you wouldn't think so when you look at the news media.)

And you mentioned "scientific publications"... so you've got more that you'd like to discuss?

And what's the thesis here? Munich Re are exaggerating climate risks in order to justify higher premiums? Or they are honestly but stupidly exaggerating the risk?

Reinsurance is a competitive business. I doubt that they could get away with scamming their clients.

It is rightly acknowledged that people of faith have no monopoly of virtue - Queen Elizabeth II

by eurogreen on Tue Nov 2nd, 2010 at 07:39:03 AM EST
[ Parent ]
One problem with the reinsurance industry is that it works from flag-of-convenience countries like Bermuda. So no it is not competitive, and yes it can get away with scamming its clients.

So it is perfectly possible that they are gouging their customers on the increased risk of adverse weather events. However, the solution to gouging is to regulate the industry, not to idly bemoan the fact that they are gouging.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Nov 2nd, 2010 at 07:54:35 AM EST
[ Parent ]

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