Statistical Assessment of Extreme Weather Phenomena Under Climate Change NCAR Summer Colloquium June 7, 2011 Frank Nutter, President Reinsurance Association of America

Flooding on Iowa’s Cedar River June 2008

Homes surrounded by the Mississippi river's floodwaters near Natchez, MS, Tuesday, May 17, 2011.

2011 Texas wildfires have scorched over a million acres of land, destroyed hundreds of homes, cost millions of dollars to fight, and claimed two lives.

Joplin, Missouri neighborhood before the tornado.

Joplin, Missouri neighborhood after the tornado passed through on May 22, 2011.

Joplin Tornado Loss estimates between $1- $3 billion (EQECAT) Destroyed more than 2,000 buildings Additional 5,000 to 10,000 buildings damaged

Climate Change and Extreme Weather Events (IPCC, 2007) very likely > 90% likely >66% more likely than not > 50%

Global Risks Landscape 2011: Perception Data from the World Economic Forum’s Global Risks Survey

Natural Catastrophes Worldwide, (Number of events with trend) Number Meteorological events (Storm) Hydrological events (Flood, mass movement) Climatological events (Extreme temperature, drought, forest fire) Geophysical events (Earthquake, tsunami, volcanic eruption) Source: Geo Risks Research, NatCatSERVICE. © 2011 Munich Re Increased claims paying capacity will be required on a global scale if current trends continue (as is expected)

Geophysical events (earthquake, tsunami, volcanic activity) Meteorological events (storm) Hydrological events (flood, mass movement) Climatological events (extreme temperature, drought, wildfire) Selection of significant loss events (see table) Natural catastrophes Volcanic eruption Island, March/April Heat wave/ Wildfires Russia, July-Sept. Severe storms, floods United States, March Earthquake Haiti, 12 Jan. Hurricane Karl, floods Mexico, Sept. Earthquake, tsunami Chile, 27 Feb. Winter Storm Xynthia, storm surge Western Europe, Feb. Flash floods France, 15 June Floods, flash floods Pakistan, July-Sept. Earthquake China, 13 April Floods Eastern Europe, 2-12 June Floods, flash floods, landslides China, June Landslides, flash floods China, 7 Aug. Hailstorms, severe storms Australia, 22 March/6-7 March Earthquake New Zealand, 4 Sept. Severe storms, hail United States, May Severe storms, tornadoes, floods United States, 30 April – 3 May Typhoon Megi China, Philippines, Taiwan, Oct. Floods Australia, Dec. Natural Catastrophes, loss events Source: Geo Risks Research, NatCatSERVIC.E12 Insurance is a global business and claims paying ability is interconnected via reinsurance markets

Number Geophysical (earthquake, tsunami, volcanic activity) Climatological (temperature extremes, drought, wildfire) Meteorological (storm) Hydrological (flood, mass movement) Natural Disasters in the United States, Number of Events (Annual Totals 1980 – 2010) Source: MR NatCatSERVICE 13 There were a record 247 natural disaster events in the US in 2010

Source: NOAA 14

Number of Tornadoes and Related Deaths, Note: 2011 is preliminary data. Source: U.S. Department of Commerce, Storm Prediction Center, National Weather Service.

Source: Property Claims Service, MR NatCatSERVICE U.S. Winter Storm Loss Trends, 1980 – 2010 (Annual Totals) 17 Insured winter storm losses in 2010 are one of the top five in US history, totaling $2.6 billion in 2010

Great Weather Catastrophes, Overall and insured losses with trend US$ bn © 2009 Münchener Rückversicherungs-Gesellschaft, Geo Risk Research, NatCatSERVICEAs at January 2009 Overall losses (in 2008 values)Insured losses (in 2008 values) Trend insured lossesTrend overall losses 90 % of insured losses caused by windstorms

U.S. Thunderstorm Loss Trends, (Annual Totals) Source: Property Claims Service, MR NatCatSERVICE Thunderstorm losses in 2010 totaled $9.5 billion, the 3 rd highest ever Average thunderstorm losses have now quintupled since the early 1980s Hurricanes get all the headlines, but thunderstorms are consistent producers of large scale loss

Federal Crop Insurance Program

Total Value of Insured Coastal Exposure (2007, $ Billions) 24 Source: AIR Worldwide In 2007, Florida still ranked as the #1 most exposed state to hurricane loss, with $2.459 trillion exposure, an increase of $522B or 27% from $1.937 trillion in The insured value of all coastal property was $8.9 trillion in 2007, up 24% from $7.2 trillion in $522B increase since 2004, up 27%

“Cat” Models RMS AIR EQECAT Where Climate Science Intersects with Insurance

Rise in population Better standard of living Increasing insurance density Settlement in extremely exposed regions Increased vulnerability of modern societies and technologies to natural hazards Change in environmental conditions - Climate Change Reasons for globally increasing losses caused by natural disasters In general no problem for insurance as premiums rise proportionally with risk ! Problem for insurance, if risk models are not adapted to the changes!

Impact on Insured Losses Concentration of people in Coastal Areas and flood plains Real estate-driven economies Increased property values Demand surge Business interruption Building codes / enforcement Zoning / land use

Munich Re’s strategic areas Management of assets Integration of sustain- ability criteria into investment strategies Examples:  Investments acc. to sustainability criteria  Significant expansion of renewable energy investments  Retail fund investing acc. Dow Jones Sustainability Changed frequencies/ intensities of weather hazards in underwriting and risk management Risk assessment/ underwriting  Tropical cyclones, El Niño/La Niña, … Examples:  Prospective risk management New markets/ new products Pathway to low-carbon, hazard-adaptive economies: new business opportunities Examples:  Micro insurance in developing economies  Climate liability issues  Covers for renewable energies

Evaluating the economics of climate risks & opportunities in the insurance sector Collaboration between Munich Re and the London School of Economics Main areas of research activities - quantifying the costs of a climate-related increase in natural catastrophes -dealing with the uncertainties of climate models -evaluating the potential and consequences of emissions trading systems and the appropriate design of such schemes -estimating the economic impacts of climate change on the BRIC states (Brazil, Russia, India, China) Institute: Centre for Climate Change Economics and Policy at LSE Chair: Lord Nicholas Stern Management: Prof. Leonard Smith Project duration: Subsidy amount:£3m

Creating solutions to sustainability challenges: focus area climate change 34 Coping with climate change requires both mitigation and adaptation measures Greenhouse neutral since October 2003 Reduced emissions per employee by 30% by 2008 (2013 target met) COyou2 program since 2006 Seize business opportunities Advance (our) knowledge about climate change risk Quantify climate change risk Integrate climate change risk into underwriting and risk management framework Raise awareness, actively disseminate knowledge to all stakeholders and advocate a long- term, marked-based policy framework, through Publications, platforms (eg World Economic Forum), Centre for Global Dialogue, speaking engagements Assess and manages the risk Traditional catastrophe insurance Capital market solutions Weather risk solutions Influence the business environmentLead by example

Elements of a Shared Long-Term Solution Stronger homes are safer homes and stronger homes and businesses cost less to insure. Strengthening of building codes and mitigation must be encouraged. Eliminate subsidies associated with insurance. Spread of risk on a global scale is important. Reinsurance, securitization (CAT bonds) can help achieve this objective. Insurance capital should be encouraged to flow into insurance markets. The price of insurance must eventually reflect the risk of that property. State sponsored program for low income consumers Insurance coverage flexibility for consumers

Adaptation Strategies Require that insurance in areas vulnerable to climate affected extreme events is risk based. Require insurers to credit hazard mitigation. Research energy efficient technology with hazard mitigation benefits. Reform the NFIP to reflect climate risk. Require corporate disclosure of climate risks. Require corporations to establish GHG reduction targets. Provide tax credits for certain climate adaptation targets. Tort liability limits for specialized alternative energy initiatives.

Adaptation Strategies, cont’d Don’t insure coastal property built or substantially remodeled after 1988 without certificate that meets the latest building code. Create revolving fund to offer loans to homeowners who want to strengthen their property. Limit the number of times coastal residents receive insurance reimbursement. Offer coastal property owners a one-time, full-assistance package – ceasing public aid for future damage. Reduce Federal aid incrementally from 100 percent to 75 percent to 50 percent for repeat disasters. Purchase or relocate properties near coastal or river areas at risk of climate change. Transfer development rights from coastal properties to areas inland.

Readings Plus At War with the Weather Howard Kunreuther, Erwann Michel-Kerjan The Geneva Reports The Insurance Industry and Climate Change association.com Ceres – From Risk to Opportunity Disneyworld / Renaissance Reinsurance Storm Struck: A Tale of Two Houses Institute for Business and Home Safety ( Willis Research Network Munich Re Swiss Re

“There are Known Knowns. These are Things We Know that We Know. There are Known Unknowns. That is to say, there are Things that We Know We Don’t Know. But there are also Unknown Unknowns. There are Things We Don’t Know We Don’t Know.” Donald Rumsfeld