The k2p blog

Munich Re – like all insurance companies – is in the business of alarmism. The insurance business relies on the total risk perceived by all the buyers of insurance products being significantly higher than the actual risk that materialises. The bigger this difference the greater the insurance company’s profits.

In a new press release Munich Re presents its overall picture of natural catastrophes in 2010.

Several major catastrophes in 2010 resulted in substantial losses and an exceptionally high number of fatalities. The overall picture last year was dominated by an accumulation of severe earthquakes to an extent seldom experienced in recent decades.

The facts are not in doubt but Munich Re’s opinionated conclusion and the introduction of global warming into the same breath as earthquakes and extreme weather is intellectually bankrupt and blatantly self-serving:

The high number of weather-related natural catastrophes and record temperatures both globally and in different regions of the world provide further indications of advancing climate change.

Munich Re’s business is best served if the perception of risk is very high, the actual risk is much lower than than that perceived and more and more people take to insuring these exaggerated risks. Munich Re – as other insurance companies – have become expert at taking real data, blending it with unjustified opinions and then applying a totally bogus “pondus” to exaggerating the perceived risk.

Altogether, a total of 950 natural catastrophes were recorded last year, nine-tenths of which were weather-related events like storms and floods. This total makes 2010 the year with the second-highest number of natural catastrophes since 1980, markedly exceeding the annual average for the last ten years (785 events per year). The overall losses amounted to around US$ 130bn, of which approximately US$ 37bn was insured. This puts 2010 among the six most loss-intensive years for the insurance industry since 1980. The level of overall losses was slightly above the high average of the past ten years.

“2010 showed the major risks we have to cope with. There were a number of severe earthquakes. The hurricane season was also eventful – it was just fortunate that the tracks of most of the storms remained over the open sea.

But it is the statement of Munich Re’s Reinsurance CEO which is most telling. I am afraid I do not have his faith in the insurance industry. It must be remembered that the insurance industry is not in business to reduce the losses actually suffered by natural catastrophes but to sell risk mitigation products such that the perceived risk and the amount of cover taken is maximised while their payout for risks incurred is minimised. Alarmism is the fundamental creed of any insurance company.

“But things could have turned out very differently”, said Torsten Jeworrek, Munich Re’s Reinsurance CEO. “The severe earthquakes and the hurricane season with so many storms demonstrate once again that there must be no slackening of our efforts to analyse these risks in detail and provide the necessary insurance covers at adequate prices. These prices calculated by the insurance industry make it possible to assess the economic consequences of these otherwise difficult-to-evaluate risks.“

Yes Indeed!!! And let’s not forget your profits.

In another press release from November 2010:

Munich Re is reckoning with a higher consolidated result for 2010 than previously expected: following a profit of €1,955m for the first nine months of 2010 (same period last year: €1,784m), Munich Re is now anticipating a consolidated profit of around €2.4bn for the year as a whole, compared with the guidance to date of over €2bn. In the third quarter, the Group posted a profit of €761m (650m), based on a good underwriting result of €785m (852m) and – as in the first half-year – a high investment result. The reasons for the raised profit guidance are the high income from investments achieved so far and the favourable claims experience in the third quarter.

The major catastrophes which caused the most loss of life in Haiti and Pakistan had little impact on Munich Re’s business (hardly any insurance coverage and no pay-outs either). The number of hurricanes was well down – in fact benign – but even this fact is distorted to try and increase the perception of risk. Returning to their report on natural catastrophes:

In all, there were five catastrophes last year assignable to the top category of “great natural catastrophes” based on the definition criteria of the United Nations: the earthquakes in Haiti (12 January), Chile (27 February) and central China (13 April), the heatwave in Russia (July to September), and the floods in Pakistan (also July to September). These accounted for the major share of fatalities in 2010 (around 295,000) and just under half the overall losses caused by natural catastrophes.

One of the most devastating earthquakes in the history of the past 100 years, the quake in Haiti on 12 January killed more than 220,000 people. Only the 1976 Tangshan earthquake in China claimed more lives (242,000). Whilst the earthquake in Haiti resulted in human tragedy on a staggering scale, it gave rise to only negligible losses for the insurance industry, as is so often the case in developing countries.

Five-hundred times more energy than in the Haiti quake was released by the earthquake that hit Chile just over a month later. With overall losses of US$ 30bn and insured losses of US$ 8bn, this quake was last year’s most expensive natural catastrophe. Chile is a highly developed country with very strict building codes to take account of the high earthquake exposure. As a result, there were comparatively few human casualties, despite the severity of the quake – the fifth-strongest ever measured – although people were killed in Chile, too.

In the summer, floods following extreme monsoon rainfall had devastating consequences in Pakistan. For weeks, up to one-quarter of the country was flooded. Countless people lost all their worldly possessions. The overall loss totalled US$ 9.5bn – an extremely high amount for Pakistan’s emerging economy.

A widescale catastrophe also resulted from the heatwave in Russia and neighbouring countries between July and September. Many places, including Moscow, experienced record temperatures. In some regions of central Russia, they exceeded 30°C for two months on end. Forests burned, with the fires threatening nuclear facilities and areas where the ground had been contaminated by radioactive fallout from Chernobyl. At least 56,000 people died as a result of heat and air pollution, making it the most deadly natural disaster in Russia’s history.

The hurricane season in the North Atlantic was benign – but only at first glance. Favourable weather patterns meant that the US coast was not hit by a single hurricane. In Mexico, however, a few storms caused substantial damage. Otherwise, the tropical cyclones turned away in a northeasterly direction over the sea, only grazing some islands in the Caribbean.

All this leads Munich Re’s tame “professor” to conclude that

Prof. Peter Höppe, Head of Munich Re’s Geo Risks Research:

“That is in line with the trend of the past 30 years, in which all ocean basins show an increase in water temperatures. This long-term trend can no longer be explained by natural climate oscillations alone. No, the probability is that climate change is contributing to some of the warming of the world’s oceans. This influence will increase further and, together with the continuing natural warm phase in the North Atlantic, is likely to mean a further high level of hurricane activity in the coming years.”

I am afraid that though anything put out by Munich Re will probably not err when reporting facts any conclusions or opinions they put forward must first be discounted for their efforts to maximise risk perceptions while minimising actual payouts for risks incurred.

Hold on tight to your wallets when an insurance company indulges in alarmist reports!

Tags: Alarmism, climate change, earthquakes, global warming, hurricanes, Insurance, maximisation of risk perception, Munich Re

This entry was posted on January 4, 2011 at 12:56 pm and is filed under Alarmism, Business, Climate, Natural Disasters. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.