RISK MANAGEMENT OF NATURAL PERILS: THE VIEW OF A REINSURER

Natural Catastrophes like the Managua earthquake in Nicaragua 1972 and Cyclone Tracy which destroyed the city of Darwin in Northern Australia in 1974 came as a surprise to the global reinsurance market. Nobody had expected that this global market would be hit by such events which affected only relatively small cities located far away from the big urban and industrial centres in highly developed nations. In consequence, geoscientific units were established to an increasing degree in the global insurance sector, first by reinsurers and later on by globally operating primary insurers and re/insurance brokers in order to improve the techniques of risk assessment for natural perils.

Loss statistics for natural disasters demonstrate, also after correction for inflation, a dramatic increase in the loss burden since 1950 which was well confirmed by recent disasters like the earthquakes in Haiti, Chile and New Zealand in 2010, the Australian floods 2010/2011, and again earthquakes in New Zealand and in Japan 2011. This increase is driven by a concentration of population and values in urban areas, the development of highly exposed coastal and valley regions, the complexity of modern societies and technologies and probably also by the emerging consequences of global warming. This process will continue unless remedial action is taken. Therefore a holistic risk management is needed which starts with hazard identification and moves on to hazard and risk evaluation. Risk evaluation forms the basis for controlling and financing future losses. Natural disaster insurance plays a key role in this context, but also private parties and governments have to share a part of the risk. A main responsibility of governments is to formulate regulations for building construction and land use. The insurance sector and the state have to act together in order to create incentives for building and business owners to take loss prevention measures.

In terms of risk assessment the recent earthquake disasters in the Christchurch/New Zealand and Tohoku/Japan regions have proven that the past is not a good guide to the future, and the same is true for the “risk of change” produced by a changing climate. The Global Earthquake Model (GEM) project initiated by the OECD will be addressed in some detail in this talk as an example to improve risk assessment and risk reduction on a global scale.